Despite the downturn and wavering trust due to scandals and disruptions, crypto venture capital firms remain active; investors are still writing checks.
DeFi is an area of focus despite market volatility, drawing attention from crypto VCs and the community alike. New use cases, protocols, and projects are emerging.
20-50% of crypto pitches today are DeFi-focused, per investors surveyed – demonstrating a large number of projects seeking funding.
Alex Marinier, founder and general partner at New Form Capital, recommends founders stand out in a crowded space by emphasizing unique technology with clear advantages for specific use cases as well as a defensible moat.
Paul Veradittakit, general partner at Pantera Capital, believes that DeFi is a reflection of traditional finance (TradFi), and founders with knowledge of both TradFi and blockchain technology will have an edge over the competition.
Last year saw two huge industry-shaking events: the Terra/LUNA ecosystem collapse in May and the FTX exchange crash in November. Both had a major impact, causing smaller startups and big players to tumble with them.
Some venture capitalists are shaking up their investing strategies for the future, while others make small changes to stay on course. Learn how active investors view DeFi, what advice they’re giving portfolio companies in this time of scarce funding, and more.
We surveyed people to gain an understanding of their opinions.
- Michael Anderson, co-founder, Framework Ventures
- Alex Marinier, founder and general partner, New Form Capital
- Samantha Lewis, principal, Mercury
- Paul Veradittakit, general partner, Pantera Capital
- David Gan, founder and general partner, OP Crypto
- Mike Giampapa, general partner, Galaxy Ventures
Michael Anderson, co-founder, Framework Ventures
What is the current size of the DeFi market, and how much growth can we expect over the next five years?
We consider the total market cap of DeFi assets, total value locked (TVL), and trading volume when assessing the DeFi market. Though TVL has its shortcomings, we deem it a fair indicator of activity in this sector. Given that an increase in TVL may prompt an upswing in total market cap, we are keeping a close eye on the metric.
We’re tracking sector activity such as trades, volumes and users in comparison to centralized exchanges. Despite the current crypto slump, we still think activity will resume. After numerous CeFi explosions though, next time users enter the space they may opt for decentralized protocols over trusting a CeFi exchange or company.
What challenges did your firm tackle in 2022 and how are you preparing for 2023?
Navigating the many CeFi blowups and failures that have rocked our industry has been a major challenge for us, as investors. Fortunately, we’ve avoided most of these issues by bypassing FTX ecosystem projects.
Framework weathered the storm better than most big VCs, so we’re well-positioned to invest in this new market.
Over the last year, our priority has been ensuring portfolio companies’ soundness, liquidity, capitalization and ability to survive 1-3 years. We’ve helped founders reduce costs, focus on high growth activities and advised them on product/growth strategies & future fundraising in a tougher funding environment.
We stand by our core theses over the past three years and are committing to double down on DeFi, web3 gaming, and other areas. With many firms not investing at this time, we see a great opportunity for Framework to invest selectively.
What advice are you giving your portfolio companies for 2023?
We’re partnering with them to reduce expenses and prioritize survival for the next 1-3 years. We believe in crypto’s potential, but due to uncertain timing of market recovery, survival is key.
We’re encouraging founders to think strategically and prioritize their highest-growth activity when developing projects. Rather than focus on multiple areas, they should concentrate on the one with the most potential.
What percentage of pitches do you receive from DeFi protocols or projects? How can they stand out in the crypto space?
We see 30-35% of pitches lately heavily focused on DeFi.
To stand out, DeFi projects must anticipate the future and show a commitment to compliance. If teams are not planning for regulation or intend to address it later, they won’t be successful.
We’re interested in projects that have a strong connection to institutions or an effective growth strategy with institutions at its core. Retail may not offer enough market exposure over the next two years, making it essential for projects to focus on appealing to institutional investors.
We’re looking for unique projects that stand out from the crowd with a distinct product perspective. We don’t want clones of existing platforms, or copycats of the latest Alt-L1 trend.
What is your approach to investing in DeFi protocols and projects now, compared to previous quarters?
In 2020, DeFi summer saw a booming market that enticed both retail investors and crypto degens. Now, however, the climate has changed drastically.
Retail was decimated last year, and won’t return to pre-pandemic levels for some time. Therefore, we are concentrating on projects that target new institutional users and markets.
We anticipate upcoming regulations, so we prioritize projects that are compliant or at least open to regulation.
What DeFi use cases do you think will become more widely accepted in the future? Which areas of DeFi are now seen as more important than before?
Liquid staking is an exciting development for us now that the Merge has been completed. With Shanghai launch, users will be able to withdraw their assets without concerns about liquidity – bringing more attention to liquid staking projects.
What can bridge the divide between TradFi and DeFi?
We need DeFi products and services that are tailored for institutions, with built-in features like KYC, asset limits and more. This new type of DeFi will create a distinct ecosystem alongside the traditional one we know.
Regulatory frameworks can have a major impact on DeFi, so how do we determine which country or region is leading the way?
By 2023, crypto regulations that have been long-anticipated are expected to be enacted. This could bring much needed clarity and positivity.
It appears the UK is quickly becoming a thought-leader in open-mindedness.
What’s the best way to pitch you? What’s the top thing founders should know before we connect?
We love a compelling narrative. Explain why you’re tackling this issue, why it needs solving now, and how you plan to gain the upper hand over competitors. We prioritize competitive advantage.
Alex Marinier, founder and general partner, New Form Capital
What is the current size of the DeFi market and how much growth do you anticipate in the next five years?
TVL in the DeFi market is estimated to reach $50B. Over the next five years, we anticipate two distinct segments: permissioned and permissionless.
Permissioned DeFi, which blends the advantages of blockchain tech with traditional finance compliance standards, is likely to gain traction among institutional investors. Even a tiny fraction of traditional finance migrating onto the blockchain could create an opportunity worth more than $1 trillion!
DeFi’s permissionless approach appeals to individual users, and with the potential for a combined market of $500B – $2T by 2028, it could become one of the biggest sectors in finance.
DeFi growth is dependent on use case increases, infrastructure developments, regulatory changes and financial advances.
In 2022, what were the most significant issues your firm had to overcome? How are you readying for 2023?
Navigating the high-profile collapses of Terra, Celsius and FTX in 2022 took more time to ensure our founders had sufficient runway during an extended bear market.
This year, we’re helping founders seize growth opportunities and prepare for the next bull market while seeking attractive investments and incubating more projects.
