Written by: Rob Hadick, Partner at Dragonfly
Compiled by: Luffy, Foresight News
There has been a lot of discussion about venture capital, especially in the crypto space, over the weekend, and I think most of it misses the core issue. Venture capital is itself a market, and venture capitalists are at the center of this market. The vast majority of discussions ignore the real decision-making logic of the two sides of 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 ourselves are also clients. On the other side are the startups. I have a real responsibility to the founders of the projects I invest in, and they know I take this very seriously, but my investments in startups are 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 willing to allocate 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 consolidation is not a market failure, but precisely the market functioning normally. There are many reasons behind this, but in crypto, the main reasons are risk-adjusted returns and liquidity issues, coupled with institutional reluctance to be associated with certain figures and events in the space.
Therefore, venture capitalists who want to remain standing must ensure their investment strategy aligns with the needs of their LPs, or be able to persuade them to accept a certain direction. You constantly ask yourself: Am I backing the right founders, the right asset class, the right sector? 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 right now may not hold in the long term, but this is also a decision that VCs need to 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 go heavily into high-risk, anti-consensus projects, but you must first prove you have the qualifications to do so. A VC who makes large contrarian bets and fails will not be able to raise the next fund; one who is steady, correct, and consistently returns capital can. Contrarian investing itself is a gradual scale; when we and Founders Fund invested in the Polymarket expansion project in late 2023 and early 2024, it was not market consensus, and many even said they couldn't understand it, thinking I was burning money on a project that found product-market fit only once every four years. But for a VC, this也不算 extremely radical冒险 (suàn bù jí duān jījìn de màoxiǎn - wasn't an extremely radical冒险).
The venture capital industry rewards stability and sustainability, not heroic all-or-nothing gambles. Only those who have proven they can act steadily are qualified to make large, non-consensus bets.
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 companies. 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 smarter than everyone else, but rather that I've overlooked some critical issue. This is not absolute; my team and I have indeed invested in founders overlooked by the market because we believe we have unique judgment, but the data shows the win rate for betting on such projects is much lower than choosing more obvious founders.
On the other hand, there is also the view that blames the current market conditions on a lack of original ideas from founders. This同样没有抓住重点 (tóngyàng méiyǒu zhuāzhù zhòngdiǎn -同样 misses the point). Founder 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? Aspiring founders usually want to work on projects with large potential and high potential returns, but this doesn't mean the idea must be brand new and独创 (dúchuàng - 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's all 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 (nìxiàng sīwéi - contrarian thinking), but most of the time it's not. Founders are not rewarded for bold冒险 (màoxiǎn - 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 this ability to raise financing.
All that ideological rhetoric is just talk. In the final analysis, everything is determined by market forces.
And finally, as usual, a补充 (bǔchōng - supplementary) note: our door is always open to all founders, whether early-stage, late-stage, conventional, or contrarian-direction.
