Mostly the reason I have zero faith in crypto venture capitalists as an institution is that their primary value add is marketing, their due diligence is a joke, and they are functionally equivalent to the shills we all mock.
One of the very first whitepapers I ever analyzed was for the Basis protocol. This protocol was for a multi-token algorithmic stablecoin. It had problems. One was when they fundamentally misunderstood the differing role of the Federal Reserve and the US Treasury. The other was that it looked very much like a security. I pointed out both issues. The protocol nonetheless raised millions from a vast array of venture capital firms. The blatant mistakes and issues were less important than the potential returns. I still contend that the stability model would have failed as well. Which actually since someone else took the concept and decided to launch ‘Basis Cash’ we can see evidence of:
Luckily for Nader Al-Naji all of these mistakes and failure did not affect his ability to raise more money. This time he somehow raised millions for his ‘not a company’ Bitclout, a decentralized social media that seems to violate Twitter Terms of Service and uses people’s images to promote the shitshow of a project without their consent. Just a real dick move all the way through. VCs will make their money though. I’m sure he’ll have no problem raising for his next project in 3 years.
Let’s look at another recent example where I bumped up hard against the failure of crypto venture capitalists to actually do due diligence on the protocols they invest in. FEI protocol is a new algorithmic stablecoin protocol. While writing my analysis of it I realized that there basic math errors in the whitepaper.
Despite these basic errors, the protocol had no issue raising millions from top venture capital funds in crypto, and had over one billion dollars in their bonding curve before launch.
Despite this apparent success, they also failed to stay stable. The first several weeks resulted in all the incentives being turned off and peg was consistently broken. They still have their direct incentives turned off.
The issue in large part is that these venture capital firms are not incentivized to do due diligence. Their responsibility to their partners is to make money, and there is plenty of money to be made in investing in projects with major flaws. They do not have a financial responsibility to the retail traders they dump on, but do have a finance responsibility to their partners, so they take massively discounted presale amounts and then dump it on the retail traders for massive gains.
It’s hard to criticize the venture capitalists when they seem to so effectively be doing what they’re supposed to, earning money, just realize that having VCs invested is no indicator of quality. Often they have done no more due diligence than the average anon Twitter account in your mentions screaming #XRPTOTHEMOON.
Update 12/21/21: Just wanted to add this video because I think it points to why so many VCs are drawn to crypto, they can get exit liquidity so much easier than traditional finance.
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4 thoughts on “Why I Have Zero Faith in Crypto Venture Capitalists”
Survivorship bias: people who did due diligence exited the space. Trustless decentralized finance is the cold fusion of finance: nice idea, doesn’t work.