Written by: Rob Hadick, Partner at Dragonfly
Compiled by: Luffy, Foresight News
There has been a lot of discussion over the weekend about venture capital, especially in the crypto space, and I think most of it misses the core issue. Venture capital itself is a market, and venture capitalists are at the center of this market. The vast majority of discussions overlook the real decision-making logic of both parties in a transaction.
We have our own clients, the Limited Partners (LPs), who enable us to continue operating and doing this work. The best venture capitalists also typically invest significant personal capital, so we are clients ourselves. On the other side are the startups. I have a tangible responsibility to the founders of the projects I invest in, and they know I take this very seriously, but my investment in startups is ultimately based on one core premise: Can I serve my clients well and make them satisfied?
This doesn't just mean providing impressive absolute returns, because LPs don't think that way. They care about many factors, with varying degrees of importance: risk-adjusted returns, reputational risk, regulatory risk, exit liquidity cycles, co-investors, access to core information circles, exposure to assets and sectors that are suitable for social conversation, and working with people they get along with. We all know some large funds that consistently underperform their peers but are still eagerly sought after by capital. In a market with diverse choices, this is the reality.
So when you look at the relevant data, it doesn't simply mean that 'institutions have stopped investing.' It only means that LPs either want to reduce their allocation or are only willing to invest in fewer funds. The total amount of capital they are deploying to this sector is shrinking, or they are only allocating to higher-quality managers. In traditional venture capital, it's mainly the latter; in crypto, it's both less capital and investment in fewer funds. This industry concentration is not a market failure but rather the market functioning normally. There are many reasons behind this, but in crypto, the main reasons are risk-adjusted returns and liquidity issues, along with some institutions' reluctance to be associated with certain figures and events in the sector.
Therefore, venture capitalists who want to continue to stand their ground must ensure that their investment strategy aligns with the needs of their LPs or convince them to accept a certain direction. You constantly ask yourself: Am I investing in the right founders, the right asset classes, the right sectors? Is the risk exposure appropriate? Is the investment stage correct? The value of venture capital lies in adjusting these factors to a state that satisfies the LPs. Of course, the choices that make LPs happy now may not do so in the long run, but this is also a trade-off that venture capital must weigh.
This means that in this cycle, you must have exposure to stablecoins, perpetual contracts, and prediction markets, even if you didn't early back the winners like some did. This doesn't mean you can't heavily invest in high-risk, anti-consensus projects, but you must first prove you are qualified to do so. A venture capitalist who makes a big contrarian bet and fails will not be able to raise the next fund; one who is steadily correct and consistently returns capital can. Contrarian investing itself is a gradual scale. When we, along with Founders Fund, invested in the Polymarket expansion project in late 2023 and early 2024, it was not market consensus; many even said they couldn't understand it, thinking I was burning money on a project that achieved product-market fit only once every four years. But for a venture capitalist, this wasn't an extremely radical gamble either.
The venture capital industry rewards stability and consistency, not heroic all-or-nothing bets. Only those who have proven they can act steadily are qualified to make large, non-consensus decisions.
Some believe the hallmark of a great investment is: you write the first check, other funds follow, and this founder doesn't fit the pattern of most firms. This sounds romantic, and if the story truly succeeds, it is. But the reality is, if a founder doesn't fit the investment thesis of any fund, it's more likely that I'm not smarter than everyone else, but that I'm overlooking some critical issue. This isn't absolute; my team and I have indeed invested in founders overlooked by the market because we believed we had unique insight, but the data shows that the win rate of betting on such projects is much lower than choosing more obvious founders.
On the other hand, there is also a view that blames the current market conditions on a lack of original ideas from founders. This同样 misses the point. Founders' behavior is driven by incentive mechanisms, and these incentives are complex and diverse: Do I like this direction? Can it attract venture capital support? Can I build it into a big business? Am I proud of it? Ambitious founders usually want to work on projects with large potential and high returns, but this doesn't mean the ideas have to be completely new and original. Dismissing it as 'copying' is too simplistic; most great companies were not the first in their category but the best. Google wasn't the first search engine, Facebook wasn't the first social network, RedotPay won't be the last neobank unicorn, and Morpho won't be the last on-chain lending unicorn. I believe meaningful innovation will still emerge in the prediction market space, but even so, novelty is not the only important variable.
In the end, it all comes down to market dynamics. Venture capitalists are not rewarded for being contrarian; they are rewarded for being correct, for providing the product their LPs want, and for considering every branch of the decision tree. This might be achieved through逆向思维, but most of the time it is not. Founders are not rewarded for taking bold risks either; they are rewarded for building products that people want to use, that can be profitable, that create value, and by convincing investors that they have the ability to do so to secure funding.
All that ideological rhetoric is just talk. Ultimately, everything is determined by market forces.
Finally, as usual, a补充一句: For all founders in the early-stage, late-stage, conventional, anti-consensus directions, our door is always open.
