In this episode of The Edge Podcast which took place on April 5, 2024, DeFi Dad, Nomatic, and Marc discuss Marc’s background, this bull run, layer-1 rotations, and structuring VC deals. Read our notes below to learn more.
Background
- DeFi Dad (Host) – Host of Edge Podcast
- Nomatic (Host) – Co-Host of Edge Podcast
- Marc Weinstein (Guest) – Partner at Mechanism Capital
Marc’s background
- Marc says that he started a company with a friend to provide inflation protection for institutional investors. He ventured into odd jobs like tutoring, yoga instructing, and advising startups before entering the events business. He organized ’90s Fest successfully in five markets with Nickelodeon sponsorship, blending digital and real-life experiences.
- He adds that he initially invested in $BTC in 2013 but faced challenges during the Mt. Gox incident. He joined a family office in Los Angeles during the ICO Mania period.
- Marc says that he partnered up with Andrew Kang post-engagement in OTC deals to launch Mechanism Capital without LPs. He transitioned from liquid investing to venture investing; the first deal was Nansen seed round co-leading. He explored infrastructure needs for the DeFi pre-Metamask era; and invested in xDai Wallet and Covalent among others.
- He adds that he diversified investments across multiple verticals including web3 gaming projects like YGG, Merit Circle, and Star Atlas.
Where are we in this cycle?
- Marc says that there is internal dissent regarding market assessment, with varying opinions on the current trend. Despite internal debates, there is agreement that this time feels different due to institutional interest and the ETF front-running the cycle. The ETF launch signaled a shift towards $BTC as an institutional asset rather than just a phenomenon.
- He adds that the “Bitcoin wealth effect” influences smaller assets as holders seek to multiply their net worth across various cryptocurrencies. Market dispersion leads to speculative behavior with attention scattered across multiple assets and chains.
- Marc says that the shift towards speculative assets on platforms like Solana may prevent traditional market rotation dynamics seen in previous cycles. Institutional flows into ETFs indicate a potential earlier market top compared to previous four-year cycles.
- He adds that traditional indicators like Meme coins are no longer reliable predictors of a market top. New web2 companies entering blockchain projects signal changing dynamics in the crypto space.
Top signals
- Marc says that venture capital activity serves as an indicator of market sentiment but may lag behind actual price movements.
- He adds that various indicators are signaling a potential local market top. CPI prints can influence risk assets and the expectation of higher rates.
- Marc talks about the significance of having cash reserves for liquidity during market fluctuations.
Layer-1 rotators last cycle vs this time and Attention Dispersion with new Layer-2s / Layer-1s
- Marc notes the rise of alternative platforms like Solana attracting users away from traditional networks like Ethereum.
- He adds that concerns and frustrations arise regarding investment decisions in the current crypto cycle. There are contrasting choices between transacting across various Layer-2 solutions versus sticking to a single chain like Solana or Ethereum. Notable differences from past cycles where attention was concentrated on a few protocols, unlike the current scenario with dispersed transaction options.
Speculation, memecoins, and nihilism
- Marc says that cryptocurrency is viewed as a 24/7 global casino with $BTC serving as digital gold. Each cycle is propelled by innovative capital creation methods like ICOs and yield farming. He anticipates new asset creation through EigenLayer restaking and TAO subnets leading to market acceleration trends.
- He adds that product-market fit in crypto is primarily driven by speculation-enabling technologies. Accessibility to opportunities within crypto due to exclusion from traditional private deals. Meme coins gained popularity due to democratized access compared to exclusive private rounds.
- Marc says that meme coins utilized by serious founders to garner attention for Layer-1/Layer-2 projects. Evolution of market sectors like meme coins solidifying their position amidst changing investor preferences.
- He adds that market complexity necessitates focusing on specific narratives rather than broad exploration.
Principles for bull run investors
- Marc says that playing your own game is crucial in the crypto industry to avoid spreading oneself thin. Younger individuals should focus on what they are passionate about and willing to dedicate time to without reluctance.
- He adds that different approaches exist in crypto, with traders benefiting early while venture markets offer long-term rewards. Crypto is likened to a metagame where players strategize, choose their strengths, and collaborate for success.
Structuring deals and sizing
- Marc says that conviction plays a vital role in sizing investments appropriately. He highlights the importance of having conviction before determining investment size. While some funds aim for high returns across multiple deals, recognizing winning opportunities can lead to concentrated investments.
Vesting schedules
- Marc says that vesting schedules can impact investments positively or negatively based on their length. He distinguishes between private market deals and venture deals in terms of access, network, and perceived value.
- He adds that private market deals offer arbitrage opportunities pre-TGE with quicker investing schedules. Venture funds evaluate deals based on team quality, market sector alignment, product viability, and competition analysis.
- Marc identifies multicycle builders as ideal founders due to their passion and commitment to building through various cycles. Backing founders with deep industry dedication ensures continuous innovation despite market fluctuations.
Tokens vs equity and why FDV matters
- Marc discusses the challenge of valuing equity versus tokens in startup investments. He mentions Uniswap Labs‘ accumulation of profits as an example of balancing equity and token values.
- He adds that the investment teams face challenges with bad terms from a team since it has a higher valuation due to brand name influence. Debate on token-only deals lacking investor rights; reluctance to argue for investor rights under SAFT as security. Founder-friendly terms in bull markets differ significantly from traditional VC agreements; trade-offs in token-only deals without rights.
- Marc says that issues arise when new investors change terms mid-investment, impacting initial agreements negatively. Unlocking at TGE is considered beneficial for private rounds to manage selling pressure efficiently.
- He makes comparisons between fair launch through unlocking at TGE versus structured lock-ins leading to inflated valuations. It is important to evaluate FDV based on various structures like locked Venture profit or inflationary dilution in projects like $BTC. He mentions the significance of FDV as a metric for Venture investors’ profit realization versus circulating market cap’s relevance based on token circulation dynamics.
Venture rounds are overpriced
- Marc says that there are challenges in selling during vesting periods; needs to find buyers on secondary markets while informing founders about transactions. He mentions navigating sales in OTC markets during the lock-up period and the importance of adhering to transfer rights agreements with transparency toward founders.
- He adds that the layer-1 rotation strategy remains effective for Venture investors, highlighting the consistency in this approach. He emphasizes the need to determine base valuations for different scenarios, such as a bear market, to assess the potential outcomes of investments.
Ways to get liquidity as a VC
- Marc advocates for making highly convex bets with low downsides but expresses concerns about current valuations being inflated without factoring in execution risks.
- He criticizes the pressure for quick closes on deals, highlighting red flags associated with rushed investment decisions that may not align with a founder’s interests.
- Marc acknowledges participating in deals due to FOMO despite recognizing potential red flags, indicating how even institutional investors can be influenced by retail investor behaviors.
Check out these important links
- Watch the YouTube Video
- Follow DeFi Dad on Twitter
- Follow Nomatic on Twitter
- Follow Marc Weinstein on Twitter
Show Information
- Medium: YouTube (Video)
- Show: The Edge Podcast
- Show Title: Why This Crypto Bull Run Is and Is Not Different
- Show Date: April 5, 2024