Dialogue MEXC Investment Department Leo Zhao: Why invest in SEI, Berachain, TON? What is the solution to the dilemmas faced by Chinese entrepreneurs?

Author: Wu Says Blockchain

Please give a brief self-introduction

I have always had a great passion for venture capital, enjoying the process of growing alongside entrepreneurs and investing in great companies. After graduating from the Mathematics Department at the University of Southern California in 2015, the internet entrepreneurship and venture capital scene in the United States became increasingly vibrant. Therefore, I co-founded an angel investment company called Zuma with my college classmates and seniors, which returned over 6 times the profits to investors within five years.

My Twitter is: https://twitter.com/zhao_eth

During our investment journey, we were fortunate to invest in several high-growth internet companies based in the U.S. One of the projects, called Honey, was one of the hottest startups in Los Angeles at the time. Its main function was to automatically search for and apply the best discount codes available online during online shopping checkout. We invested when its valuation was around $30 million, and it was eventually acquired by PayPal for $4 billion, yielding a hundredfold return from a single project. Other personal investments include high-return projects like ShipBob and Amazon warehousing.

In 2017, I was deeply attracted to the technology of Bitcoin and Ethereum and began exploring the crypto space. Since 2020, I have been serving as a Venture Partner at MEXC.

What is MEXC's investment strategy?

MEXC's investment strategy has undergone a series of evolutions and developments, currently divided into strategic investments and ecological investments.

At the beginning of 2020, our investment team consisted of only two or three people. We recognized that DeFi opened up an epic new market for asset issuance and free trading, so our investment theme primarily focused on DeFi. We invested in projects including Kilt, Flare, Opulous, ImmutableX, Gelato, and POKT Network.

By 2022, we observed a depletion of innovation in the DeFi space, which was flooded with numerous junk projects, leading to a significant shift in our investment strategy. In terms of investment themes, I focused more on projects related to the BTC ecosystem, AI, and trading. Recently, we invested in high-potential projects like BounceBit and BitLight.

On the other hand, we also invested in many top-tier funds in Europe and the U.S. to increase our chances of early exposure to quality projects. The funds we invested in include Polychain, Lemniscap, Bankless Ventures, and 32Bit.

Additionally, I would like to introduce two other important colleagues on our team, Elin and Issa. Elin is responsible for post-investment management, focusing primarily on the Bitcoin ecosystem. Issa is in charge of public chain ecological investments, specializing in connecting with top projects across various public chain projects. For example, her leadership was crucial in collaborating with Telegram's TON project. She also works with multiple ecological funds to invest based on the characteristics of each ecosystem, which is our main strategy for ecological investment.

Overall, our investment strategy is divided into two main lines: one is the strategic investments that I oversee, including all trading-related investments and fund investments; the other is ecological investments, primarily conducted through collaboration with various ecological funds. These two lines form the overall structure and approach of MEXC's investments.

Have you also invested in some top funds as LPs?

We have invested in several top funds in Europe and the U.S., such as Polychain, the first fund of Bankless, and Figment. The main purpose of this is to gain access to the best projects in the market. Information asymmetry is a key factor in the investment field. For example, recently, the Western market has shown insufficient attention to the Ordinals ecosystem, while the Eastern market has paid little attention to the Solana ecosystem. Therefore, we can quickly identify the differences in hot projects between the East and West and make early layouts.

Specifically, through these fund investments, we have been exposed to many high-quality projects early on, such as Sei, Berachain, and Babylon. Many of the funds were invested during last year's bear market, which was a great opportunity. The cyclical nature of funds is strong, so we pay special attention to the investment year. Funds from 2022 may have suffered significant drawdowns, but due to the undervaluation and high quality of projects during the bear market, we believe that projects invested in 2023 will perform well.

The investment scale for each fund is in the millions of dollars, with an investment cycle typically lasting at least five years; some may be as short as four years, but this is relatively rare. In the West, the main cycle for funds is usually five to seven years. For example, with Polychain, they may complete most of their investments within two years, but the so-called "completion of investment" usually only means that about 60% to 70% of the funds have been used, while the remaining 30% will be used to continue supporting already invested projects, such as conducting second and third rounds of investment. Then, the remaining recovery period may take three to four years, so the overall cycle may extend to five to seven years.

Why choose to invest in projects like SEI, Berachain, and TON?

We chose to invest in SEI primarily based on its clear positioning and our understanding of trading-related projects. The main advantage of the SEI project lies in its blockchain architecture specifically designed for trading optimization. At that time, many contracts and trading activities in the market were limited by the performance of existing supply chains, while SEI focused on improving trading efficiency, which aligns closely with our investment philosophy centered on trading. SEI's features include a focus on trading liquidity and high concurrency processing capabilities, while also supporting EVM compatibility, allowing seamless integration with wallets like Metamask. These innovations are all aimed at promoting trading efficiency.

On October 4, 2023, we made an investment of over ten million dollars in TON and established a strategic partnership with it. As part of the collaboration, MEXC also launched TON mortgage services and waived trading fees for TON tokens. Additionally, MEXC Ventures will continue to support TON-based projects (such as the autonomous protocol Megaton Finance, the GameFi platform TONPlay, Fanzee, and Sonet) and will continue to fund mini-applications based on TON. On September 13, 2023, during the Token 2049 conference in Singapore, the TON Foundation publicly announced its strategic integration with Telegram, extending services to a user base of nearly 800 million. Recently, the surge in popularity of TG bots has drawn more attention to the TON network and its ecosystem services. These developments are expected to attract more users and further drive the expansion of the TON network. So far, the TON ecosystem has a rich array of applications covering wallets, DeFi protocols, decentralized exchanges (DEX), games, NFTs, cross-chain bridges, and social features, providing a relatively complete infrastructure.

We also invested in Berachain, another liquidity-centered project. Although its development progress has been somewhat slow, its internal testnet has concluded, and the public testnet is set to launch in the coming weeks. The core of Berachain focuses on unique gameplay centered around liquidity, including staking for yield, project governance, and its own stablecoin features.

The Particle project has also performed well, particularly in social login and public chain integration. They already have millions of monthly active users.

In summary, our investment strategy focuses on two directions: one is projects strongly related to trading, and the other is projects that promote mass adoption. It has been proven that many small projects perish during bear markets, while those with high valuations but strong financial backing, market consensus, and the ability to continuously burn funds, such as Aptos and SEI, can survive and ultimately yield significant returns. Notably, there are not many projects that can continuously carry out ecological activities and hackathons, which is particularly evident in projects like SEI.

Do Chinese entrepreneurs face difficulties in gaining favor from American investors?

Indeed, many excellent Chinese entrepreneurs face some challenges when seeking support from American investors. Firstly, language barriers are a significant issue. Proficiency in English is crucial for communication with American investors.

Secondly, there are differences in the mindset regarding tokens. In the West, the presentation of projects often emphasizes narrative and innovation, and their pitch decks typically do not overly focus on specific details related to tokens, such as unlocking and locking strategies. This approach highlights the project's vision and long-term goals rather than short-term profitability.

In contrast, many Asian projects often center around tokens, focusing more on short-term profit opportunities and token unlocking plans. This practice may leave investors with the impression that the project's vision is limited. American investors and the entrepreneurial ecosystem tend to place more value on the founder's foresight and the project's long-term value.

Moreover, if a project or entrepreneur focuses solely on short-term unlocking plans and token issuance cycles, it may not attract the trust of top-tier investment institutions.

Is the ability to list on mainstream exchanges an important factor when considering investment projects?

It is an important factor, but not the main one. The most important aspect is still the quality of the project itself. Listing is particularly important for certain projects, such as those in the Bitcoin ecosystem, where the high transaction fees on the Bitcoin mainnet lead to widespread expectations that projects will list on mainstream exchanges. Technical standards without liquidity support from exchanges are difficult to gain market recognition. Therefore, establishing connections with exchanges is crucial for a project's success.

However, this is not the primary consideration; the quality of the project itself is the most important.

Are there any conclusive thoughts or directions regarding the Bitcoin ecosystem or the inscriptions track?

I have two main conclusions regarding the Bitcoin ecosystem and the inscriptions track. Firstly, I believe that the popularity of this field will continue, primarily because the increase in transaction fees has brought significant profits to miners. I have communicated with several miners, who are well-funded players and show great enthusiasm for supporting this direction. In fact, the fee income generated from inscriptions sometimes even exceeds the block rewards from mining itself. Therefore, from a financial perspective, the support for this track is very strong.

Secondly, the development of the Bitcoin ecosystem will not be limited to projects like Ordinals. In the future, some real innovations, such as social media like Nostr and other projects like RGB, will become directions for significant asset inflows. These are all areas worth paying attention to and investing in. The direction of asset inflows is crucial for our investment decisions. Additionally, the growth of transaction fees is also an important consideration. There are indeed many influential figures supporting this direction, and users have shown great interest in it. It can be said that every market cycle change is accompanied by a transformation in asset issuance methods, and the Bitcoin ecosystem and inscriptions track are key to this change.

Are there other tracks that could rival inscriptions and experience explosive growth?

One early track we are focusing on is FHE (Fully Homomorphic Encryption). FHE is a type of encryption similar to zero-knowledge proofs (ZK) and has been applied by companies like Google and Apple in data encryption.

FHE is particularly suitable for handling sensitive data, such as medical and health data. Its potential for integration with artificial intelligence (AI) is especially significant, as the key to AI lies in data processing. By using FHE technology, data can be encrypted and sold to multiple parties, generating revenue from each transaction without exposing the data itself. This way, even sensitive data can be safely traded multiple times without revealing the underlying information.

Additionally, we are also paying attention to some upstream and downstream companies related to FHE technology, one of which is called Zama. This track has the potential to achieve significant success in the future through integration with AI.