Hey folks,

These are certainly strange times we live in. I do hope that whether your individual circumstances have improved, or as is more likely, taken a momentary setback, that there is at least an element of excitement puncturing the uneasiness.

And, as ever, if things are looking particularly bad, please reach out.

This is the first, of what I hope will be many letters to OnChain members, and any wider readers who find them interesting. In them I aim to surface some of the insights derived from both my VC activities and my proximity to the exceptional, highly talented family of builders that represent the OnChain community.

As a brief reminder, the mission of OnChain is to empower web3 pioneers in building legendary organisations.

Anyway, enough of the spiel, lets get down to business.

This month’s theme “views from the dip” aims to present some interesting, potentially even useful, comments, that may prove instructive to how you conduct the affairs of your various organisations during uncertain market conditions.

And yes, I am aware that the title sounds like a drake album title; and yes, I am aware of who Drake is (well, just about).

Investors - sitting on cheque books:

If it wasn’t already pretty clear, investors are sitting on their cheque books these days.

It should be noted that much of the capital that is being invested is going into the less risky, later stage rounds with The Block showing a decrease in pre-seed/seed rounds of roughly 30% since April 22.

A lot of liquidity has been removed from the market through losses through DeFi lending protocols and broader contagion effects. In addition, we have heard through our conversations that many more traditional funds (ie those that pivoted into web3) are withdrawing/cutting back from the space as they come under fire from nervy LPs who already had reservations around web3/crypto.

Furthermore, many of those more traditional funds that were moving toward web3, have since put those plans on ice. After all, why bother with potential conflicts with LPs, having to change fund mandates and agreements, potentially raise a separate token fund and having to navigate the uncertainties of cultivating infrastructure for holding tokens with so many opportunities to get into web2 companies that may have been previously inaccessible until they became desperate for cash, and on great pricing conditions – with valuations being revised down across the board.

In addition, do not expect all the cash from the marquee web3 funds that raised at the start of 2022 to release additional liquidity into the early-stage arena. Much of it will likely go into the well-established, ‘safer-bet’ blockchains currently trading at some tantalising prices. Interestingly this is also something several larger web2 funds are also discussing: to start looking at publicly listed tech stocks, some of which are now trading at valuations below their last private round.

The takeaway here is not to make you feel disheartened; we all know the current cloud the market finds itself under will pass. It is more to compel you as a founder to address the realities of the present.

If you are after a crazy valuation on a coming round, if runway is becoming an issue, if you about to go on a hiring spree, then think twice.

Blind optimism has never done anyone any good and tough decisions will have to be made; for some context many companies at Series A onwards are being advised to make cuts (with c.15% as a rough guideline).

Traction, not concepts:

That said, capital is still being allocated, although the bar has been raised considerably with the ball being very much in the investors court. Indeed, we have heard from several specialist web3 funds that valuation expectations for rounds being conducted now have been lowered, in many cases by around 50%.

For the earliest of business, eg pre-product types, we advise this: demonstrate the palpability of your idea as much as possible.

Investors will allocate at these very early stages, but only if they can be convinced there is substance behind the business.

As one investor at a tier 1 firm told us, “it is very hard for companies to raise pre-traction. Build an MVP of sorts, get a twitter/discord following, cultivate a pipeline of interested users, conduct proof of concept tests.”

A great example of this is Moonpass, whose founders (also OnChain members) Moritz and Daniel went and partnered with Copenhagen Business school and the university of Zurich to demonstrate how their models for assessing off-chain data could have forecasted the Terra Luna collapse.

A good set of decks, intricate excel forecast and extensive data room will do little for you if there is no evidence of underlying demand or no tangible sense of what a product will look like.

It is your job to convince the investor of the reality underpinning your vision. At the early stage, we think it is unlikely a founder will raise with just a concept behind them.

Arm yourselves with all the evidence you can to ensure success.

Don’t be afraid to sell the dream:

In addition to selling palpability, don’t be afraid to sell the abstract stuff.

Start off by selling yourself, as an investor I love to know why it is a founder’s calling to solve a particular problem. You have to convince the investor that no one else but you can do what you are doing.

Furthermore, sell the dream. Sell the grand vision for what you are doing, show how it will redefine a category. Everyone loves a story, but VCs, in particular, love the next big thing. Just like you they are trying to build a name for themselves and the bigger the end possibility the more attractive it becomes. They live for the outsized – so show it to them.

There are few VCs that don’t want to find the next facebook.

You must wrap this in good storytelling: what is the evil, what are the virtues inherent to you and your team that will vanquish it, by vanquishing it how do you (and by virtue of this investors) achieve fame and fortune.

But always remember to not lose sight of the fundamentals. Some founders are so convinced by their ability to sell they forget to build conviction through proof. VCs can spot these guys a mile off.

It is a tough line to walk my friends; my advice, drape yourself in evidence and occasionally flash them the dream.

Thinking about your customer mix during a period of economic uncertainty:

One thing I’ve seen VCs pushing back on a lot is the potential shrinking/capitulation of addressable markets during tough economic conditions.

From a web2 example, a classic case I have seen is b2b SaaS (especially when selling into tech companies). These models typically function on a /seat (per employee) basis. If tech companies are about to lay off 15%-20% of their workforce then you are about to loose that same amount in revenue.

So, if you have a narrow window in which to gain traction and/or demonstrate revenue potential, then think very carefully about which customer segments may prove to be more resilient.

In a web3 context I would have a particular concern around any business model that is focused on onboarding more risk averse newbies into the space. Specifically: exchanges, bringing brands into the metaverse/crypto (DCommerce etc), anything DeFi targeting TradFi adoption/onboarding etc. Additionally, any SaaS model should ask themselves some tough questions as addressable markets in several verticals start to wilt. Investors are thinking about this question a lot, and you should too.

In the short to mid term ask yourself which customer segments have the most resilience and will deliver the highest ROI, allowing you to build the proof points and traction needed to keep your head above water.

Fundamentals matter folks:

Another observation from our end is that there has been a subtle shift in the focus of investors. Appetite for the more revolutionary, zealous and ambitious projects and use cases has declined.

Well defined, clearly addressable markets, infrastructure plays, sound unit economics, and, revenue are very much in vogue.

In particular, infrastructure plays are in strong demand as investors look to benefit from the overall growth in the market, rather than having to try and identify riskier bets at the use case level.

A few things in particular stand out for me here for me. As an investor, the issues around Celsius have encouraged me to look at web3 with more of a critical eye for ‘business sustainability’. A lot of the lending platforms like Celsius could never feasibly offer +15% to stakers. In reality, this high APY was simply an excessive CAC resulting in negative unit economics. For me going forward I’ll have a real focus on sound unit economics and proof that a business, at some point in the future, will run in a profitable manner free from the need to be kept alive by external capital.

Until we can fix the human condition and psyche, further dips and crashes are guaranteed; it is the organisations with an irreverence for fundamentals that will be caught out when they inevitably occur.

One other area is time to revenue/time to traction. Investors are aware that web3/crypto organisations take longer, with many of the more ambitious projects having to develop their own infrastructure and ecosystems; that said, it doesn’t mean they like it. Again, I stress that in an environment of weakened risk appetite investors propensity for such projects decreases.

This frustrates me a lot, I think web3 requires these highly ambitious, imaginative and expansive projects in order to show off its potential and incentivise widespread adoption.

To get these projects funded I highly recommend you target the right investors, particularly the web3 native/savvy ilk. In addition, do everything in your power to demonstrate execution ability. With longer timelines to traction, it is imperative to demonstrate you are the team to stay the course. Furthermore, prove that there is a strong underlying need for what you are doing, cultivate a pipeline, build proof points; in other words, provide the foundations upon which conviction can be built.

Web2/TradFi coming into vogue?

Connected to this is a somewhat unexpected trend that I have seen first-hand. Unlike the other commentary and anecdotal points in this letter it is largely a function of things I have noticed; as opposed to outlooks expressed to me from a wide range of investors.

Therefore it could be rubbish and a function of a poor data set/personal bias.

So, is it me, or is there suddenly a lot more love for the ex-tradfi/web2 guys recently onboarded into the space?

I look at the last 5 most recent web3 raises on pitchbook: (hang, 5ire, proof holdings, hologram). In all cases these founders have spent the majority of their career in web2 type technology companies and/or TradFi.

This phenomenon was really crystallised for me by our community member Rashid. Rashid had a seriously impressive career in high finance working as an MD at Deutsche Bank. He has since pivoted from banking into web3 and has built, what we think may come to be, a potentially category defining wallet security business Guardian. Which, for full disclosure, some of the OnChain team have invested in.

He mentioned on a call the other day that it felt like the pendulum had swung toward him.

This is no bad thing. I fully agree that the technologies we build reflect our values, but so long as these new entrants take time to educate themselves on this and surround themselves with web3 natives then this should strengthen, not harm the ecosystem. I return to the Guardian example again, Rashid and his team get the space really well, have gone to great lengths to support our community and the founders within it and have a great mix of more web2/TradFi guys and also web3 natives.

This mix of the old guard and the new guard (you can decide who is who), should hopefully cultivate some great creative abrasion, bringing the execution and more fundamentals leaning skills of the TradFi/web2 guys into alignment with the folk that fully grasp the technology and underlying ethos.

Is there a point here? Maybe. If a correct assumption, it would suggest that demonstrating your ability to execute to investors is key, and having people in your team with experience along this dimension could be useful. More broadly, I’d say that striking the balance between execution and technology principles should also be a priority.

Wrap up:

That’s all for today folks.

I hope this letter hasn’t been too gloomy, but I do think as a founder it is your job to fully appraise all the risk in front of you.

Times may be tougher than usual, but it is through overcoming our biggest obstacles that we build conviction in ourselves and our broader mission.

Have courage my friends and never lose sight of why we are doing this!

Charlie

And for those builders looking for support, you can find it freely provided through OnChain, apply here: