RootData Space Review: How VCs View Investment Challenges and Opportunities in a Turbulent Market
Strive to find new narratives.Recent market fluctuations have been relentless, making investments in both primary and secondary markets face "hell-level difficulty." How can ordinary retail investors find opportunities? Last week, RootData invited six leading VCs and researchers to discuss the theme "Market Frontier - Finding Opportunities in a Turbulent Market," exploring the investment challenges and opportunities in a volatile market.
Host:
Ruby, Growth Manager at RootData
Guests
LaoBai, Investor & Research Partner at ABCDE
Calvin Du, Founding Member & Platform Head at Inception Capital
Layla, Investment Manager at Bing Ventures
Jialiang Sun, Senior Analyst at Sosovalue
Michelle Ye, Market Director at Bixin Ventures
For more details, please refer to X:
The following content is a summary in Chinese from Sapce.
1. Host Ruby: Recently, many VC coins have been abandoned by the market, and people are more inclined to invest in meme coins. What are your views on the long-term investment value of meme coins?
Lao Bai: Meme coins rely on rapid dissemination and a huge wealth effect in the short to medium term, but in the long term, the value of memes depends on their own culture, especially those memes with a "cyberpunk spirit" are more likely to be favored in the long run.
Michelle Ye: Meme coins are very suitable for quickly building communities and generating topics, which helps attract more people into the Web3 space. For example, Dogecoin, Shiba Pepe, and the recent Bera Chain demonstrate how meme coins can become popular quickly. While some individual meme coins may disappear, their overall impact on expanding the Web3 user base is significant. Therefore, I believe they have a place in the long term, but don't expect any single meme coin to last forever.
Layla: The prices of these tokens depend on community consensus. However, in practice, few meme coins can achieve long-term success, and most have a short lifespan. Therefore, it's hard to say whether meme coins make sense as long-term investments. Currently, market activity mainly revolves around short-term trading.
Calvin Du: There are many types of meme coins, some with long-term investment potential, while others may not sustain attention and are not worth long-term investment. For example, meme coins like BONK that generate value through Bonk Bot fees and various DeFi integrations accumulate value, while practical meme coins like SHIB require certain on-chain activities. Event-based meme coins like TRUMP or celebrity meme coins like JENNER are catalyzed by current events, acting as proxies for ideas or figures that attract attention. Meme coins focused on revenue generation or strong utility are more likely to have long-term investment value, especially if they are associated with strong applications, communities, and ideas that can sustain attention for years.
Jialiang Sun: I believe that as investors, focusing on leading meme projects, team dynamics, and celebrity endorsements is crucial for assessing their long-term investment potential.
Some leading meme coins, due to their influence and user base, typically have a higher chance of success. If they can gradually be applied to real-world scenarios, they may achieve more long-term value. For example, Dogecoin, with its large community and wide acceptance, is increasingly being accepted by merchants as a payment method; the Shiba Inu team is continuously exploring innovations in DeFi and NFTs, striving to add more utility and value to their tokens. Additionally, celebrity influence is also an important factor driving the success of meme coin projects. For instance, Elon Musk's public support for Dogecoin significantly increased its visibility and market acceptance.
2. Host Ruby: In this cycle, many new coins often reach valuations of billions of dollars. What do you think is the cause of this strange phenomenon?
Lao Bai: The current market somewhat resembles the memory inheritance of the 2021 bull market; this strange phenomenon is determined by the entire market, not just venture capital, exchanges, and over-the-counter trading markets.
Layla: There are mainly three reasons. First is the influx of capital into the private equity market. After 2020, private equity funds and capital rapidly entered the crypto industry, leading to the emergence of many crypto-native funds. At the same time, traditional PE/VC firms have also joined the competition, creating a very fierce competitive environment.
Second is aggressive valuations. The influx of capital has increased the influence of venture capital in shaping crypto market valuations. As more funds flow into the industry, venture capital firms participate in more deals, and valuations are inevitably pushed higher. Additionally, many projects have extended their fundraising periods, leading to more intense competition among venture capitalists.
Third is the impact of market sentiment. During periods of optimistic market sentiment (e.g., 2020 and the first quarter of 2024), the number of financing activities and high-value projects typically surges.
Calvin Du: First, the high valuations we see are a lagging indicator of the small bull market we saw earlier this year. The total valuation of the crypto space is growing, and Bitcoin has increased significantly. In fact, if you evaluate these projects using Bitcoin, they are similar to previous cycles. Similar to previous bull market cycles, the rise in valuations in this cycle is mainly due to improved sentiment, with founders leveraging interest and competition among existing investors.
I think a more meaningful discussion is how we should respond, as founders, venture capitalists, and exchanges realize that high-valuation, low-liquidity projects do not help industry growth and should start fundraising from lower valuations.
3. Host Ruby: Would you encourage projects to continue using point systems to reward users? How do you evaluate the pros and cons of point systems?
Lao Bai: No. Point systems were effective in the past, but they are no longer effective; at least, resisting point systems has become a trend. Their advantage is that they easily attract attention, but the drawbacks are also very obvious: users have no clear expectations and may become emotional manipulation (PUA) by the project parties.
Michelle Ye: I believe point systems are an efficient way to attract users early on before they participate in the project’s token issuance. The key is to design them well, balancing user participation and rewards. The issue is not whether to use points, but how to design them effectively to maximize their benefits.
Layla: It depends on the overall market situation. Essentially, points are part of the "financial Lego." They have no long-term significance, and most of their ultimate value is related to airdrops. While points may help build expectations for future airdrops and stimulate user growth and total value locked (TVL), this effect is short-lived and usually disappears quickly after the airdrop is completed. Without long-term incentives, TVL and user numbers will plummet, and the project will become a "ghost town."
Calvin Du: I encourage any loyalty program that benefits both the project and users, is transparent, and secure. At the same time, how users can earn points or what behaviors can earn points can be defined very precisely to encourage healthy user interaction. But ultimately, the point system is a tool, not the goal; a good product is the goal.
I believe the advantages of point systems include:
- Targeted incentives and optimization, improving the project's long-term sustainability/real-time behavioral insights and easy flexibility to adapt to target behavior optimization;
- Avoiding regulatory risks associated with token issuance;
- Not directly giving governance or economic ownership of the protocol;
- Having many of the same benefits as tokens but without these drawbacks;
- Points represent the off-chain loyalty program for users, working similarly to tokens; airdrops and yield farming can attract initial users, but they add space and flexibility for the project team regarding how to ultimately handle these points.
- Can serve as a test group before tokens.
The disadvantages of point systems are as follows:
- The discretionary nature is bidirectional: beneficial for the team, but it means users must speculate on reward distribution, whether points will be redeemed, fairness and transparency issues, and changes in reward distribution standards (e.g., the EIGEN scandal);
- This means that in some cases, points may not incentivize target behaviors as effectively as airdrops;
- Additionally, due to the project's significant control over the behaviors that earn reward points, it may not allow for a more natural exploration of the product.
4. Host Ruby: What new concepts do you find most promising or unpromising?
Lao Bai: I am more optimistic about the narratives of Real-Time Blockchain and Blinks, while I am less optimistic about decentralized AI or general AI. The increasing number of Layer 2 solutions has made the space very crowded, which is also a concern.
Michelle Ye: One concept I really like is restaking, like what Eigenlayer is doing. It enhances the security of Ethereum across different applications and chains. This not only increases the demand for ETH but also strengthens the overall ecosystem's security. However, I am skeptical about "pseudo restaking projects" that merely increase leverage without real innovation. These often complicate existing systems without adding substantial value and may increase systemic risk rather than provide real benefits.
Jialiang Sun: I am optimistic about the RWA (Real World Assets) track for several reasons: First, tokenization allows traditionally illiquid assets, such as real estate, art, and bonds, to be traded 24/7 on the blockchain, significantly improving their liquidity. Additionally, the diffusion of RWA has led to the creation of innovative financial products, such as interest-bearing stablecoins and tokens backed by real-world assets. Furthermore, large institutions are gradually entering the RWA space, with entities like Franklin Templeton and BlackRock participating, which can attract more traditional institutional participants.
As for concepts we are less optimistic about, given that the entire blockchain ecosystem is still in its early stages, the development of many concepts remains unclear and heavily relies on developer innovation. In the tech field, supply often creates demand, and many concepts are not well-received by users before being introduced.
5. Host Ruby: Given the current poor performance of the secondary market, what challenges and opportunities will primary market investments face? How are you preparing to respond to these changes?
Lao Bai: I believe the challenges of primary market investments mainly lie in long lock-up periods, difficulty in exiting, and a lack of innovative projects. These challenges can be addressed by seeking more innovative projects, finding more product-market fit (PMF) scenarios, and gaining more reputation.
Layla: It's not just the poor performance of the secondary market; the primary market also faces many challenges. Given the state of the secondary market, fundraising in the primary market has become very difficult, and corresponding exits are also more challenging. Of course, there are opportunities as well. Venture capital is venture capital, and risk comes first. What we can do is conduct thorough research and use that research to support the selection of promising industries and investment targets. The only way to face changes is to adapt to them. Looking ahead, our investments will be more cautious.
Michelle Ye: The sluggishness of the secondary market will certainly make exits more difficult, which is a challenge. Some projects may delay their TGE, waiting for better market conditions. However, this also means that primary market valuations are lower, providing better investment opportunities, which is a good chance. We focus on strong fundamentals and support our projects with technology, marketing, and community-building strategies to ensure they are prepared for a market rebound.
Calvin Du: Our response is to focus more on the founder's market fit; founders must be agile and execute quickly, but they also need to be prepared for pitching. They need to have a deep understanding and appreciation of the complexities in their verticals. The capital deployment and transaction volume of venture capital in 2024 are still below the levels of 2021; venture capital has slightly increased; however, valuations are significantly higher. For early-stage companies, it is advisable to lower valuations to win the competition among early investors and remain humble in the current market environment. We also need to conduct further research to promote more collaboration among our portfolio companies and be more sensitive to valuations. Additionally, it should be clear that market sentiment can change at any time, potentially influenced by interest rate cuts, ETH ETFs, the U.S. elections, and other hot events.
Jialiang Sun: We have recently observed some adjustments in the secondary market, mainly due to short-term factors like the U.S. and German governments selling Bitcoin. However, these are temporary events, and we remain optimistic about the long-term outlook. Last week, we released a report analyzing the recent fluctuations in Bitcoin prices, concluding that buying activity is driven by long-term positive factors, while selling is due to panic over specific events. We expect the market to gradually absorb negative sentiment by early August.
6. Host Ruby: For founders of startups, what advice do you have to help them secure investments better in the current market situation?
Lao Bai: Try to build something innovative in infrastructure or attract a large number of users in applications. Try to get close to the core circle of the ecosystem, especially for Chinese projects to go overseas and reach the core ecosystem abroad.
Michelle Ye: First, clearly understand your strengths and identify unmet needs in the market. Focus on solving real user problems to gain recognition from the market and investors.
Second, plan your project milestones in advance. Outline your funding needs and key events, such as TGE and listing. Having a clear timeline helps manage progress and shows investors that you are well-prepared.
Third, build a strong and capable team with complementary skills. A professional and united team is crucial for executing your vision and adapting to challenges. Regularly interact with investors, listen to their feedback, and be prepared to pivot when necessary.
Finally, maintain regular and transparent communication with investors. Provide updates on your project's progress, including technical developments, market expansion, and financial status. This builds trust and confidence. Stay adaptable and be ready to adjust your strategy to accommodate changes in market conditions.
Layla: Seize trends and adapt to changes. It is common for projects to end up doing things completely different from their initial plans. It is important to observe market dynamics and trends, seize reasonable market and industry changes, and be bold in making changes and trying new things. Sticking to a plan is not the only best solution; appropriate flexibility is necessary to keep up with the rapid changes in the market.
Calvin Du: Find investors who align with your market thesis. When market performance slows down, the venture capital interest of broader investors often diminishes. However, many companies continue to invest in high-conviction projects, regardless of the current market; manage costs and runway; find investors who can provide strategic advantages to help your project reach the next level. Not all venture capitalists are just giving you a check; as the field matures, investors are becoming more sensitive to valuations. Ensure that the valuations you raise are realistic. When investors see that you have been raising for a long time and have even lowered your valuation as a result, it is a weak signal.
Jialiang Sun: Clearly define the specific niche market you are targeting and understand the pain points you aim to address. Additionally, a clear and feasible business model is crucial for demonstrating the profit potential of the project. An effective marketing strategy is also necessary to expand the project's reach and user base.
For crypto projects, it is important to first identify the potential barriers preventing Web2 users from transitioning to Web3. These barriers include unfriendly user interfaces, lack of trust and security, and complex processes. For example, the Ton ecosystem effectively addresses these issues by leveraging Telegram, reducing user barriers.
Moreover, a sustainable token model, strong support, and an experienced team are essential components.
7. Host Ruby: Finally, please share one piece of advice or perspective on future investments from each guest.
Lao Bai: Pay attention to AI, not just Web3, but real AI. It will be the main narrative for the next 5-10 years.
Michelle Ye: Timing and rhythm are crucial in investing. Pay attention to market signals and be prepared to act when the right opportunity arises. Understand your investment style, provide strong post-investment support, and facilitate collaboration among your portfolio projects.
Supporting your projects is not just about funding—help them solve technical issues, marketing, and provide some advice on team management. Encourage internal collaboration within your portfolio to create a supportive ecosystem to maximize their success. Build trust and close relationships with these founders, as the next successful project may come from them or their circle.
Layla: When you can't do anything, spend more time learning and thinking; when you can, take bold action. Ensure appropriate risk management.
Calvin Du: Focus on high-conviction, long-term bets, and act earlier and faster.
Jialiang Sun: We still need to identify a promising track. Based on the current market, I believe the tokenization of real-world assets (RWA) has strong growth potential. The advantages of RWA include liquidity and innovation. Through blockchain technology, ordinary users can access asset classes that are typically unavailable to them, such as U.S. Treasury bonds. This not only enhances the liquidity of these assets but also allows more people to participate in markets traditionally limited to high-net-worth individuals and institutional investors.
