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Crypto Venture Capital Series Ep. 2: Jason Choi of Spartan Group

Jul 15, 2021 ·

By Tom Shaughnessy

The Delphi Podcast Host and GP of Delphi Ventures Tom Shaughnessy sits down with Jason Choi, General Partner at Spartan Group, one of Asia’s first DeFi focused funds. The two discuss biggest wins and losses, due diligence, traits of successful crypto communities, and more.

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 Music Attribution:

Interview Transcript:

Tom (00:02):

Hey, everyone. Welcome back to The Delphi Podcast. I’m your host, Tom Shaughnessy. I helped lead Delphi Ventures and one of the hosts for the pod. For our second episode in our Crypto VC Series, I have on Jason Choi who’s a GP at The Spartan Group. Me and Jason go way back. One of my first friends in crypto. Jason, how’s it going?

Jason (00:22):

Hey, Tom. Thanks for having me on the show again. Super excited to be here.

Tom (00:25):

Yeah, man. Super excited to have you. So Jason, let’s start at the beginning then. So you wake up at your day, a million ideas hit your table across Telegram, Twitter, analysts, bosses, whatever. How do you curate, how do you filter, how do you know where to spend your time on new place?

Jason (00:43):

Yeah, it is crazy industry to be in. So we try to have processes around it too, to filter through a lot of the noise. I think at a high level, my process, I like to think of it in five steps. So the first screen that I usually do for investments or projects, it’s usually evaluation screen. I’m a big fan of the concept of a margin of safety. I think generally the lower the price something is relative to others, the less chance that it can go down more. That’s not obviously always true because of liquidity reasons, but that’s generally a pretty good screen.

Jason (01:19):

So I typically just look through a list of projects and see if there’s major price movements overnight or over the past month or so. And go on platforms like Token Terminal and look at different multiples and compare different metrics. And after the valuation screen, then usually I’m left with a subset of assets. And then we go deeper into that and just to touch on the other steps in the process a little bit. We look into things like fundamentals, which is what the project is, what it’s been doing, how it’s user numbers trading volume. And if it’s say a lending protocol, we look at its borrowing volumes over the past, say month or seven days.

Jason (01:59):

So metrics like that. Anything that can be quantified, we consider it fundamentals. And then there are also the things that are more qualitative, so like team quality, governance engagement, and so on. And then after that, we look into the third step in the process, which is trend, right? What is the market favoring right now? So that’s less important for our venture fund but more important for our liquid fund where we trade in the secondary markets. So we look at is the market favoring DeFi right now or is it a NFT season or is the market finding interest in Solana projects?

Jason (02:32):

So that’s number three. And then the final two steps are specific to that project. We look into whether there are any catalysts that would cause a rerating in the project, and we also look into the risks of the project in the short-term and in the long-term. So just to sum it up, I do a valuation screen first and then after that, I look into the specific fundamentals and then the trend, then after that if it looks like it could be a good investment, then we dive into the catalyst and the risks.

Tom (02:59):

Jason, you brought up a lot of good points there and I’m glad we’re diving right into it. But when you’re looking at your valuation screen, I guess whether it’s on the VC side or whether it’s on the liquid side, I’ll let you take this either way you want. When is something too good to be true? Like a five or 10 mill valuation VC private deal comes to your desk, or maybe the valuation of some project, like some DEX is just super low versus its peers. Generally, there’s a reason for that. Either there’s a lack of uptake or maybe the competitors just have more traction or something like that. How do you weigh the balance between a really attractive valuation, but maybe it’s too good to be true?

Jason (03:37):

Yeah, that’s a really good point because value trap is definitely real. In crypto there are a lot of projects that consistently trade a pretty low multiples relative to their protocol revenues that just stay there. So that’s why the subsequent steps of the process is important, right? Looking at the fundamentals and trying to understand is a user number actually growing, or the revenue is actually growing as fast as the peer group in the industry. Now on the venture side for things that are pre-product, usually it’s very hard to find five to $10 million evaluation prices. And most of that is because there’s a lot more capital chasing projects than there are good founders. So typically, if there’s a very good project or a very quality team, the price tag has already been up by a lot of funds in this space.

Jason (04:25):

So usually if there is a certain degree of quality to the project, that the valuation is going to be a little tough, especially in this current market environment where these primary markets are still adjusting to the secondary markets reality. But yeah, I think it all goes back to the fundamentals. You check for life project, whether there’s actual growing adoption and for non launch project, you look at whether you want to be working with this team and whether you really believe in this team. I think those are probably the two major factors we look at.

Tom (04:56):

Really good points, Jason, and you’re big on understanding the trends, making sure an investment plays into that thesis. How do you think about trends in a multi-chain world? And let’s say Uniswap, for example, right? Today they launched on optimism, their concentrated liquidity pools are awesome, but when we think about other layer ones and where trading will happen, how do you think through investments on one protocol, while keeping in mind other layer ones other protocols, because the trend is obviously up, but there’s other things to keep in mind, like cross chain, other protocols, stuff like that?

Jason (05:33):

Yeah. So just to clarify, identifying a trend and playing a trend doesn’t mean we try to chase anything that’s invoked. It only enforced me how aggressive I want to be deploying into something. So if the market is not favoring DeFi as it hasn’t been in the past month or so then maybe we have more time to accumulate names that we like at lower prices. Now, if this is back in August, 2020, when the entire market is rerating DeFi daily, then we want to be very aggressive in sizing up the names that we like because the prices will run away from us.

Jason (06:06):

In a multi-chain perspective, I don’t know if that’s a separate conversation then just identifying trends in general, because if you recall there was a period in time earlier this year where a lot of projects were rated up as well. So the way we analyze multi-chain in the context of these trends is that it’s just another narrative for the market to bid up. Now on the venture side, when we look on a five, 10 year horizon, we’re quite bullish on multi-channel reality. So we do allocate a lot of times looking at other chains as well. But because the adoption and the infrastructure on a lot of these other chains are still relatively early compared to Ethereum, we do require a little bit of a discount on the valuation compared to comparable projects at Ethereum when we deploy.

Tom (06:58):

Yeah. My next question for you is going to be along those lines. Are you focused on any specific layer one, are you open to multi-chain world, but it sounds to me like you guys are pretty open to investing across the whole around.

Jason (07:12):

Yeah. We’re very product driven investors. So I like to think that we’re users first and the investor second. We really try to use everything that’s out there and test out everything that’s out there. So for us, a lot of the things that work best now are things that are on Ethereum. Projects that have been live for a while. So that’s where we tend to gravitate and spend a lot of our time, but there’s also a lot of interesting things happening on a Solana and for a while, BSC, even though we haven’t done a lot of venture investments there. So we’re definitely keeping an eye on different ecosystems.

Tom (07:48):

It feels like the multi-chain world today is being welcomed whereas back when both of us got started, it was Bitcoin versus Ethereum and it was very hostile. Are you seeing that dichotomy too or do you think it’s still hostile?

Jason (08:05):

Yeah, I think it depends on who you speak with. There’s certainly always a degree of animosity with early adopters of any chain. There’s a certain degree of different defensiveness that people feel about their investments, about communities that they’re aligned with early on. But even from day one, I’ve thought of chains like Solana, for instance, as a layer to Ethereum, where there are specific use cases that require very performant blockchains and people are willing to compromise a certain trade-offs that could be delegated to Solana. And if you look at the way that chains the Polygon have taken off. A lot of people say that Polygon is layer two, but if you look at their construction, they’re only are one. But still it’s construed as very value additive to Ethereum and complimentary to Ethereum.

Jason (09:01):

And that’s how I view a lot of these different layer ones. I feel like Ethereum has reached a certain critical mass where it’s very hard to topple its network effects over the coming years. So a lot of the layer ones that are coming to market now or maturing right now will probably just end up being defacto layer twos for Ethereum. At least that’s our current working hypothesis and it seems like it’s working true so far.

Tom (09:28):

Yeah. That’s an interesting point. Are there any layer ones that you would just straight up stay away from at this point? Where do you think that any of them potentially have a chance?

Jason (09:37):

Yeah, so because we’re fundamentalist driven investors first, so we try to stay away from anything that doesn’t have adoption. So a lot of ghost chains that are pushing out empty blocks or even chains that are basically just copying code from Ethereum and revitalizing certain Ponzis. So I think BSE is really interesting for instance. I think a lot of retailers really love it and the fees are low enough to attract a lot of retails, but in terms of whether it has a long-term moat for adoption, that’s something that we’re still trying to think about. But because there is actual adoption there, there’s billions of dollars deployed there, that’s something that we cannot ignore.

Jason (10:17):

Now for some of the older chains, not to name specific names, but back in 2017, there were a lot of layer ones that were the reason incredible amount of money that really didn’t amount to anything or anything that’s proportional to the amount of money that they have raised even after three, four years. So those changes, we try to stay completely away from.

Tom (10:35):

ALS, Cardano. I’m happy to name of course, don’t worry. You said it. Don’t worry, man. So I’ll play devil’s advocate for a second. So something like just to give an illustrative example for everyone. Let’s take financial aid, for example. There’s obviously a lot of users, a lot of capital, but they’re running into, or they will run into centralization risks, state bloat, things like this. How do you make venture bets on something that has so much adoption right now, but potentially has clear problems down the road? How do you weigh those differences? Whether it be a venture bet or let’s say a liquid bet.

Jason (11:13):

Yeah. So we haven’t really made any major venture bets in the BSE ecosystem and I think precisely because of that and I think the decision process for venture and liquid is very, very different. So as I said, I think the third step in our process, which is looking at the trend is very important for the liquid fund. So I think one or two months where BSC was attracting a significant amount of TVL and a lot of the BSE projects were getting rerated and projects like PancakeSwap were getting very attractive analyzed revenues. That’s when we want to look into these projects from the liquid fund perspective.

Jason (11:52):

But for the venture funds perspective, we really need to have conviction that these projects will be around in five years because that’s the fund life. So in that case, we will care a lot more about security trade-offs and things like state bloat, as you mentioned, but in the short term we care more about quantifiable adoption at least for the liquid side.

Tom (12:13):

Now, it’s really cool that you have both the venture fund and the liquid fund because it makes like a good dichotomy between how you look at things.

Jason (12:21):

Yeah, it is a challenge. So we started as a liquid farm back in 2018, as you recall. I think over time, I was spending so much time on DeFi and we’re able to get the conviction that okay, “In the long-term this is going to be around and we’re going to help build this world.” So after two years of investing out of liquid fund, we decided to start that venture fund and we launched that a month ago. So pretty excited about that.

Tom (12:48):

That’s awesome, man. Yeah, no congrats all around. I guess shifting gears a little bit, I think we’re both of the opinion that a community for a project is extremely important, but it’s also something that’s very hard to measure. It’s hard to know if people are really here to stay or here to make money. It’s hard to know how large the community should be depending on the state of the project. How do you dive into a project and say, “Hey, this project has a killer community. If it’s a venture deal, liquid deal.” I’ll let you take either side. But we’d love to get how you get sold on whether or not a project has a killer community.

Jason (13:28):

Yeah. So I think the community is often two-sided. You need the team itself to be engaged and you also need the users themselves to be engaged. So I good leading sign is to see how active the founders actually are on community channels. So one of the recent investments that we made, you could think of it like a Zapper but for Asia audiences. It’s called Eight Board. It’s built by a former engineer from Alpha Finance. So one of their signs that was really reassuring to us is going on the telegram group and seeing the founder just answering product feature requests daily, and then shipping these things out almost immediately. So that type of responsiveness is required at least in the early stages of a project to really generate that engagement because users are not just going to suddenly get excited about the product if the team itself doesn’t seem like they’re excited about what users want and about the product.

Jason (14:25):

And on the other side, obviously looking at how engaged your users actually are. One great example I’d love to use is Synthetix. So back in the bear market in 2018, Synthetix discord was one of the most active escorts in all of crypto. And you can see the quality of conversation on there is also very different from that of a lot of the other groups where there are a lot of retailers just asking when token, when moon, when listing. The Synthetix guys were talking about, “Okay, what are the trade offs for liquidity providers here?” So as a lurker in those groups, that’s something that you’d like to see as well. But obviously, that’s a little bit harder for pre-product projects. So you need to take more of a focus on the team itself for those types of bets.

Tom (15:11):

It’s a really good point. Now Synthetix comes up often. I remember it and that’s a really good point on how active the community was in a bear market. I guess the other side of this though, is how do you view the trade off between a founder that’s supposed to ship, ship, ship and be out here in the wild and then eventually the community taking over, or eventually that founder going away. How do you view, or how do you get comfortable with a project where the community starts to take over? Synthetix is a good example where Kain left, came back a little bit. But I don’t think we’ve actually really seen that happen yet, but it is the goal to eventually decentralize this project to the community.

Jason (15:52):

Yeah, it is a weird situation because if you have to explain to your LP, say, “We’re investing in a project that has no leads. It’s run by a random group of people around the world.” It’s definitely a new conversation that I think a lot of investors outside of crypto may not be used to. So how do we get comfortable with that? I think it comes back to the fundamentals, right? So progressive decentralization is something that all projects should strive towards. But I’m also of the opinion that they shouldn’t strive towards it too early on. Just because you ship a product and bring it into the world doesn’t mean the world will just gravitate to your product. It needs a lot of handholding in the early years.

Jason (16:34):

Just like any startup, any company. You shouldn’t seek to decentralize too early on. I know that might not be a popular opinion, but I do think that if you look at the most successful projects, none of them are community run by day one. Even for Uniswap the largest DEX today, a lot of the governance process was quite centralized in the early days because the quorum required to actually vote on proposals was incredibly high. So as a small retail guy, you’re really not able to sway the vote in any way.

Jason (17:06):

So there are a lot of defacto centralization that I think is necessary in the early days of a project and most projects today, and DeFi should not be decentralizing so fast in terms of facing out their team, facing out the foundation. There are only a few projects that I can think of that are maybe mature enough to do this. Maker is one of them, maybe Synthetix. But just given the Uniswap, just launched V3. I don’t even think a project as mature as Uniswap should be looking to completely phase out the team just yet.

Tom (17:40):

Do you think it’s actually a reality though? Like, do you think that these projects will actually be able to decentralize the community? Because I think it’s inevitable, but I think it’s 10 years away. I don’t think we’re anywhere close to… I mean, like DAOs are awesome at the end of the day, most projects have a leader, whether we admit it or not.

Jason (17:59):

Yeah. I think so. I think it’s definitely on the longer timeframe and that’s what I personally prefer as well, but I guess there’s also different models of decentralization. You could face out the LLC or the nonprofit entity and still have to DAO, pay the same salary to the same group of people that were working on the project. So I guess it really comes down to what we mean by decentralization. I think when I talk about decentralization, I’m more thinking about the governance perspective. I think early on the team who has built a product knows what’s best for the project. So I actually trust the team to make a lot of the bigger decisions early on than say, just putting everything to a community vote.

Tom (18:41):

Now I’m with you there. I totally agree. I may have misspoke 10 years, probably too long, but we’ll see what happens. It’s definitely a spectrum. And going back to the founders, I think me and you both agree that the founding team is the most important. They’re the ones driving the project. They’re here, they’re up all night. The space was really fast so you need good stewards. If you can give me an example, what’s a project team that you met, where on the first call you knew right away that you wanted to invest? And obviously it’s to do more due diligence, but what did they say? What got you comfortable? Why were you so enthused with the project and the team?

Jason (19:17):

Yeah. So I guess this is more on the venture side, right? Yeah. So on the venture side, one project that I love to talk about a lot is Alpha Finance. As you know, I’m a huge fan of their team and I think on the first call, I guess it’s moving away from the community point of it. It was less about the community because there was no community in the beginning. This was a pre-product project you know, seed round. But speaking with the founders, you immediately get a sense that, okay, they know exactly what they’re doing. Did they know what the market wants? I think one thing that is often overlooked is market timing as well. So Alpha was building a leveraged yield farming product at a time when yield farming was drawing the most interest from users.

Jason (20:04):

So that’s not the only product they have as you know but seeing how well they understood the market at that time and seeing the product that they prioritize and seeing the roadmap, really gave me a sense that, “Okay, these guys are not just product guys, but they also have great market timing sense.” I mean, obviously looking at the team background where they came from before, some of them have incredibly technical backgrounds CTO Nipun, won a couple of math Olympiads globally. So that’s something that you always like to see in your technical founders and obviously Tascha also came from one of the more successful Oracle projects outside of Tradelink as well.

Jason (20:44):

So yeah. It’s more of a qualitative thing. It’s less analytical than say, “Hey, we have a framework. We’re going to score the team,” and all that. It’s more of a qualitative thing that gets more refined over time as you speak to more teams and you have more feedback loops from projects invested in.

Tom (21:04):

Yeah. I’m with you there. Now Alpha’s a holding of ours. I’m a huge fan of Tascha and Nipun. Building off your example, I mean, one of the things that got me so happy, and I guess enthused with Tascha was just how organized they were, right? Every call, there’s a presentation. Every call they’re professional. If there’s a problem they’re professional. And they’re always shipping and they’re always solving niches in the market. It definitely set the bar high. So to bad for new products being compared to them. Switching gears a little bit, is there anything that a founder can do other than meeting this high bar on a call that would totally turn you off, like instant red flags, things you see that you just don’t like with a founder or you think that are traits that may lead them to not be successful?

Jason (21:53):

Yeah. So when we invest in founders, we want to invest in people who are obsessed, right? People who we know would stick around in bear markets, because as you know, these bear markets can get pretty brutal or we can see 99% draw downs and sometimes it can last years. So I’m seeing founders that we think are able to grind it out in those years is incredibly important. So a few signs we look for are people who have a history in crypto. People who are not just starting projects because something is hot. That’s a very nuanced point because how do you differentiate between good market timing versus opportunism? So that’s really a judgment call. And another sign I think is, I think there is a time and place for community rounds.

Jason (22:39):

So especially for projects that really require a lot of community input. So like Syndicate DAO, for instance, they raised from I think over 100 angels. And before that, they raised a more concentrated round from funds. So I’m personally an angel in Syndicate DAO, and I’m comfortable with that because obviously Ian has incredible track record in this space. And also because of the nature of the project as a community DAO, the community round makes a lot of sense. But for most projects raising from 100 funds or even 50 funds in the same round, it doesn’t really make sense to me. And usually projects do that because they want the bragging rights to say, “Hey, all of these funds investing in us.” But if you look at the skin in the game each fund has, they probably have 10, 50K in a project.

Jason (23:21):

That’s usually not such a good sign. It’s not necessarily a death knell for a project, but it’s reflective of I think a lack of thoughtfulness in finding partners who want to work with. And number three, I think is just the more obvious things, right? If the founders were involved in scams before or have been hopping from project to project. That’s usually a sign that we don’t want to get involved too.

Tom (23:46):

No, those are great counterpoints. Yeah, I’m a huge fan of Syndicate too. We’re investors we run an NFT fund on it. Team is insanely impressive and I agree with you on the community round aspect. One of my questions for you just building off that is just for those that are investing in liquid markets, maybe not the VC side, I guess what are red flags that these people can look for that may not have access to a call with founders, or may have to rely on say Twitter and medium and discord. What can they look for that may turn them off or that they should stay away from if they don’t have access to that team call?

Jason (24:25):

Yeah. So it really, really depends on project from project. There are some teams set over-communicate and over market but that doesn’t necessarily mean that they’re bad projects. They’re just here to show their tokens or whatever. I think a few red flags for people who don’t have access to the team and may not be technical so they can’t be auditing to code is just to go back to the fundamentals. I think the longer a project has been around, the less chance that it has that it is probably a Rockpool. So things that we try to stay away from. Short-term forks on random chains that are accruing billions of dollars in TVL. So things like iron finance. I personally participated in a youth farming from a personal capacity just for fun. Just to understand how it works. But we also knew how it turned out, right?

Jason (25:19):

This is one of the more speculative projects out there that basically dropped by 99%. So we discussed this on my podcast as well, but it’s projects like that. Low effort forks and mean coins that we can’t really justify investing in. I think that a good mental framework is obviously we’re not going to put the entire fund in one trade, but a good mental framework I like to use is, Am I willing to put in 100% of my capital in this project and if not, why not? And usually that’s when you find out the red flags about a project.

Tom (25:55):

Yeah. I was going to ask for the retail side or the public investing side that obviously don’t run a VC fund or a liquid fund. I was going to ask your thoughts on where people should draw the line aping into new place. Like you just applying that like low effort forks copycat projects are a joke and I totally agree with you, but where do you draw the line between, hey, I can make money here, but if something is the opposite of a law effort for, let’s say galaxy brain, it may take time to understand that project to really get a handle on it. Where do you draw the conviction line on having a retail user just aping into something versus understanding it. It’s a hard spectrum.

Jason (26:38):

Yeah. It really always comes back to the team. It’s a boring answer because every you ask a VC, what they’re looking into, it’s always the team, but there’s a reason why they look into that. So I think a lot of yield farms were around back in August, 2020, and a lot of them obviously failed. Things like those food coins like Kimchi, Hotdog, none of those things are around anymore, but for a while those were really profitable. So from an investment perspective, you’re really looking at the people behind the team. Now for anonymous projects, it’s a little bit harder, but one of the earlier yield farms like Yearn just looking at the history of the founder AC, you can know that, okay, this person is legit. This person has been in the space for a long time. He has been building products a lot.

Jason (27:22):

It’s really small things like that, that tells you, “Okay, there’s probably lower risks that this is a scam or Rockpool.” But generally I think Rockpools are like pornography. You know it, when you see it. If it’s a food coin, if its anonymous team and it’s offering 4000% APY, you know it’s probably not sustainable. So we try to stay away from those things.

Tom (27:44):

No, I’m with you there. I guess for the retail audience, let’s say that yield farming eventually becomes legitimate. And already is legitimate, but I mean, we get away from the scams mature as an industry. One of the only opportunities to invest let’s say low market cap valuations for public is generally during the bear market. What conviction would you offer people to get into a 10, 20, $50 million project in liquid markets during say at bear market? Because that’s when you want to build positions, that’s when you want to track the teams. You gave a great example on Synthetix, but it’s hard to build that conviction, especially in smaller projects during tough times.

Jason (28:29):

Yeah. So that’s why the team element was so important. Understanding which teams will really be there to ship new features and build products when there is a bear market. But I think to have that conviction, it’s also harder than just investing in a bull market where any low valuation coin could potentially rally. So that’s when you really need to have a long-term thesis, because if you look at past bear markets, I do think that bear markets should get more compressed as there’s more capital coming in, but if you look at the past bear markets, we’re talking about three, four years off sideways or down trends. So you really need to have a view beyond three, four years. You really need to know, “Okay, this is where I think the world is heading in five, 10 years.” And you invest according to that.

Jason (29:15):

And without that baseline, that north star, it’s very, very hard to have any type of conviction in any project, because if it draws 50% again, then you don’t know if I should be accumulating more, or should I be stopped out of the position. So generally, in a bear market I think people should adopt and not financial advice, but people should adopt a more venture mentality where they look much longer term than say, “Hey, what is a good trade right now?”

Tom (29:40):

No, I totally agree with you, man. The other thing I wanted to talk to you about was just building up the conviction in a project is very hard especially when you want to say concentrate your investments, because in my opinion, concentrating investments is what will change your life and diversifying hurts that when you have small amounts of money. But I’m trying to figure out what do you think the best way is to gain conviction, a project beyond the team? Like you could pick any project you want your portfolio, your PA, but is it becoming a subject matter expert? Is it using the product? Is it grilling the founders on discord? Like how do you get the conviction to put 50% of your personal money in something?

Jason (30:24):

Yeah, this is a topic I love discussing. I was looking into a lot of TradeFi investors about how they think about this. What I thought was really interesting was a lot of fundamental investors like Buffet or value investors like Buffet, they would really know the insights out of a company. They really understand where the value is coming from. And then on the other end of the spectrum, you have guys like Soros who try to do the minimum amount of work, but they size like a madman. They put maybe 5X to short the pound. So it’s a very nuanced line, I think in terms of how to build conviction. It comes back to that five step process. The more boxes we can check, the higher conviction we can get.

Jason (31:07):

So if it has a reasonable valuation, if we think that on a long timeframe, it’s in a favorable trend. Fundamentals are very clear especially if there’s very clear catalyst and very defined risks. If all these five boxes are checked, then I’m very willing to size quite big on it. Now obviously, there’s risk controls as well. If you’re managing outside capital oftentimes you can’t put more than X percent of off the fund in a certain position and that’s for just a risk management thing. But generally, it comes back to that framework. The more boxes we check, the higher conviction we have.

Tom (31:45):

If you’re a retail investor in crypto, or somebody of crypto Twitter, and you’re getting involved in crypto, would you promote to them to be concentrated in their investments or would you promote them to diversify them? I’m trying to figure out the right balance for people. Obviously, straight up gambling is dumb, but I’ve always thought like diversifying as you learn and then concentrating on your winners is usually the way to win, but what’s your take on that for everyone?

Jason (32:13):

Yeah. I wouldn’t promote any financial advice, but I think in terms of frameworks that people can use, it really depends on your risk preference. So it depends on how much draw down you’re willing to I guess stomach and how much upside you’re targeting. Now, if you’re diversified, if you’re holding a portfolio of 50 assets, maybe it still works out because of how correlated crypto is. But like you said, I think a general rule of thumb is concentrate to build wealth and diversify to protect capital.

Jason (32:46):

I think it’s a little bit more nuanced in crypto because correlations are so high. If you diversify within crypto, it’s still might not do that well of a job in protecting your capital. So if you’re going to be taking on such high correlation risk anyway, and everything is at least in the short-term on beta, then it makes more sense to me to be concentrated on specific projects that you actually have conviction in that you’re willing to build bigger size on if prices do begin to fall. But that’s my personal framework. And I know a lot of people favor maybe a larger portfolio of many more positions.

Tom (33:23):

No. Having a framework depending on the person makes a lot of sense. I guess my other question has a comparison to that is I’m always seeing people on telegram. Usually, when markets start to turn a bit, everyone’s like, “Hey, what’s your cash position?” Is it 5%, 10%, 20%? I would love to get your take on directionally what you like to have as a cash percentage. I mean, whether it’s for the fund or whether it’s for a PA, which may apply to more people, but I’ve always kept personally a very low cash position because crypto is so risk on. I’d rather not lose out on a couple multiples and then just sell out on the next 20, 30% debt. I’d rather not miss the bull run, but I’m wondering your take there.

Jason (34:03):

Yeah. So it depends on which phase of the cycle we’re in. So I’d like to categorize… Crypto crypto markets are incredibly cyclical because there’s no strong consensus of valuation framework set. So a lot of the assets that are treated are still highly, highly speculative. I think that’s going to change, but that might be a long process. So there’s the early growth phase where things are being rerated very slowly, but fundamentals are improving. So this reminds me of my bet on Kyber, my penetrate on Kyber versus 0X. I think this was back in 2019 and it took six months for that trade to play out. And so that was the growth phase, and then you have to euphoric phase where everything’s just going vertical. So that was DeFi summer the lesser for two months.

Jason (34:46):

And then after that, you have to blow off top where a lot of the euphoria is immediately subsided. There’s some disbelief and then finally you have to decline where you just enter a long period of chop. And the decline phase is interesting because a lot of people in their minds, when they think about a bear market, they think, oh, it’s just going to be going down for three years. But the previous bear market actually spent 60% of its time going up. So it’s a very hard market to trade. I try to focus on accumulating positions that I like and focus on the fundamentals and not trade every single move. And so going back to your question, how much cash position should I keep or I like to keep? It depends on which part of the cycle.

Jason (35:25):

Now, if we’re in a euphoric cycle, I’d like to gradually take more to cash the higher we go. In a growth phase, I want to be fully deployed and sometimes even levered. Now, obviously in a blow off top, the wish or the goal is that you’re going to be net short into it, or even it’ll completely cash into it. But in reality, it’s very, very hard to do. So you just hope that you’re not max risk when the markets do blow off. And usually top of euphoria signs are pretty easy to predict, but market bottoming is much harder to predict. So I try to not deploy all of my cash very quickly as the market’s decline, because there’s often a little bit of leeway in terms of how far I can go. So yeah, again, long story short, depends on which phase of the cycle I think we’re in.

Tom (36:13):

So you mentioned that blow off top idea. I mean, you and I have seen it a couple of times. We’ve been through a couple cycles here. It’s really hard to, I guess when you’re in that blow off top like when Bitcoin just hit 60K or wherever we topped out at everyone knows we’re there. But nobody has the conviction to really, or not many people have the conviction to take money off the table because they don’t know where it’s going to end. Maybe they don’t want to pay taxes just for the prices to come back in three months. How do you take ships off the table? How do you realize you’re in a blow off top and how do you check yourself when the community at large is bull market risk on?

Jason (36:55):

Yeah. So I think generally signs of euphoria are easy to spot. The difficult thing is knowing exactly when it tops. So I don’t think there is a way to top any type of market tops. We try to stay out of the business of prediction and we try to stick to investing. I think in terms of how we think about taking money off the table, it really comes down to the risk reward ratio. So if we think Bitcoin can go up to 70K, but the downside here is 230K, then the risk reward favors us being less risk on.

Jason (37:32):

So it’s important to keep in mind how much more upside do you think there is versus how much downside there is. I think people tend to just think about the upside in a euphoric market and forget the downside. So they think, “Okay, maybe it does this, or maybe it does that.” And they try to squeeze everything out of the lemon. So that’s one of the personal reminders that I give myself the most is squeeze most of the juice out of the lemon, but don’t try to squeeze all of it because that’s when you get into trouble.

Tom (37:59):

No. I’m with you there, man. That’s a really good point. I mean, let’s switch gears to some fun stuff. I mean, we all have mentors, people, we look up to, people we learn from. I’d love to hear from you the best advice you’ve been given, whether it’s life advice, whether it’s crypto advice or anything, that’s helped you along your journey. It could be multiple pieces of advice, but we’d love for our listeners to hear that.

Jason (38:23):

Yeah. My favorite piece of advice is actually don’t take advice from others because it’s so tailored to their personal experiences. But I think more actionable things in crypto is having some skin in the game, for instance, I think my experience in crypto is much, much more different when it was back in 2016, when I was just reading up on stuff versus after I’ve actually put some capital in Ethereum. You’re actually much more motivated to to learn about it. So I think a general advise for crypto people, create incentives for yourselves to learn about the space, to get deeper into this space.

Tom (39:02):

What are the wrong incentives to you? When you look at a project or you look at a person, what’s enough? Do you ask them like, “Hey, are you incentivized enough?” Or do you look at their specific token allocation? What makes you can convinced that a founder or a driving person has the right incentives?

Jason (39:22):

Yeah. I guess for a founder, it depends on how much allocation they get. It all comes down to incentive alignment. I think for projects, you want to see a longer vesting periods for founders years of vesting period. You don’t want to see any founder allocation that unlocks like 25% of listing. That that’s like a red flag.

Tom (39:43):

Red flag.

Jason (39:45):

Yeah. So long vesting periods for founders, I think in a fund perspective, you want to reward performance, right? People who are bringing in deals, people who are working closely with portfolio companies, people who are consistently pitching profitable ideas. You want to want them a bit more. Yeah. I think generally it depends on the situation.

Tom (40:07):

I’m with you there. Now, fund wide incentives make a lot of sense and project incentives make sense. Is there anything for a team venture deal, liquid play, whatever. Are there any incentives beyond money that leads you to really want to invest in something? When I look at Vitalic, I know he’s here to build right. When I look at Kain, I know he’s here to build, Seb from Zapper, like Carson from Tokemak. I know these guys are here. It doesn’t really matter to me if they have plus or minus a percent of the project. What do you look for beyond money that gets you aligned?

Jason (40:43):

Yeah. I think people who have a long-term view on this space and usually that comes across very obviously, right? So sometimes founders that are in this space for years already, that means they actually have a bullish view in this space. So if you have more opportunistic folks, I think, especially this cycle, there’s a lot of folks from traditional finance that are just coming over. A lot of them are earnest and building very solid products, but a lot of them that we speak with also don’t have much of an idea of what’s happening in DeFi. They just see, “Okay, Uniswap, their XYK model is so stupid. We’re going to make more complex market makers that resemble TradeFi and they completely failed because they completely failed to understand what people in crypto care about and where users are. So I think opportunism is also quite easy to spot. So that’s something that we’re always keeping an eye out for.

Tom (41:32):

It’s a really point. I mean, in my history of crypto, whenever I see something catering to the traditional world, like permission blockchains and 2017/2018, I left. I mean, now I’m changing a bit because with the NFT movement and gaming, we have real ways to target the traditional world with the real aspects of crypto, like decentralization and ownership and stuff like that. So it’s interesting that you bring that up. I love to dive into a couple of examples of maybe a biggest miss on your part, maybe a biggest loss. I have more than I can count. But I would love to learn what you think your biggest miss was, but more importantly what you learned from it to make sure that I guess it doesn’t happen again.

Jason (42:18):

Yeah. So I spent a lot of time thinking about my losses rather than my wins, because the losses could be pretty significant. The misses can be pretty significant. So the biggest miss I’d say in my career was passing on the FTX seed round. So I had the opportunity to meet Sam and his team when they first came to Asia and Macau. And back then they were Alameda Research and they were building this exchange and my initial thought was, “Oh, okay, this is quite interesting that you have a market maker behind their own exchange.” I haven’t seen this model before. I’m quite unfamiliar with it. Don’t feel comfortable investing. So we passed on it. And obviously now FTX is one of the fastest growing exchanges and one of the larger exchanges in the world. So that was a huge miss on our part.

Jason (43:03):

So I think the lesson there is don’t dismiss things too quickly. But you have to balance that with not being too open-minded as well. I think a general rule of thumb that I like to make is when I speak with a founder, you always assume that they’re right about their thesis. You assume that they’ve spent enough time in this thesis to at least have a better idea about it than you do. But you questioned their timing. So maybe FTX at that time maybe it was a bit early but two years later it’s the largest exchange. So I think that advice came from Mark and Jason. I’m not sure, but that’s something that I found to be really useful.

Tom (43:47):

No that’s incredible. I love that candid take and I’ve heard that multiple times. I’m pretty sure Arthur just said it on the first episode too. Just to push back a bit, just to better understand. I mean, when you meet somebody like Sam of an FTX back then, obviously the idea, it could be hard to get into. I totally understand where you’re coming from, but did you get the sense from Sam that this is a really smart fucking guy who’s driven? I always get that sense of him. Like if you meet him and you get that sense, but you also pass, does it go against, or does it violate the investing in founders idea? Like where is that line drawn?

Jason (44:27):

Yeah. Back then so back then we didn’t have a venture fund. So we’ll be investing as a side pocket in the liquid fund. So I think with the liquid fund we were very conditioned to think from a fundamentalist lens, looking at revenue numbers, looking at metrics and I think less condition to think from a venture lens that we’ve developed in the past three, four years since then. So I think that that was one of the mistakes is not having any fundamentals to fall back on and really just looking at the founder, but usually in venture, that’s actually the most important thing.

Jason (45:03):

That’s the thing that you should be looking at aI think we failed to recognize that and we let our lack of comfort with the unique relationship between the market-maker and the exchange getting the way. We failed to recognize that, okay, sometimes maybe just betting on the team is enough and we’ve learned a lesson and we’re definitely taking that lesson to heart with how we’re deploying a venture fund now.

Tom (45:28):

That’s awesome, Jason. No, I appreciate it. I mean, your answer makes complete sense. I mean, when you’re running a liquid fund, it’s just structurally harder to do VC deals, and you’re just not looking through that lens. So it makes sense on why that was passed on that. I guess, switching gears a bit, I’d like to talk about maybe a biggest winner for you. I don’t just mean like money or percent, I mean, something that gave you a sense of accomplishment. Something that you researched and maybe people were against you on it, or maybe you had a unique thesis. I’d love to get into that and why you had such a sense of accomplishment from this one.

Jason (46:04):

Yeah. So I think one of the earlier bets… So there’s quite a few DeFi bets that we made quite early on. One that we made was Kyber back in 2019. I noticed that the revenues generated for Kyber were a fraction that of… No were actually on par with 0X, but the valuation was a fraction of 0x and there was a Tokenomics design on the horizon as a catalyst to contribute to that rerating. So this is a very fundamentalist driven framework for investing that was not very popular, I think, back in 2019. So when we made this bet, it’s not just so much a bet on Kyber itself, but also a bet that fundamental investing will be important, will be relevant. When it finally played out six months later, I think that was… It wasn’t the biggest win we’ve had by far, but I think it was a validation that, okay, looking at fundamentals and investing solely based on fundamentals is something that could actually work.

Jason (47:02):

And that wasn’t very clear back in 2019. We didn’t have Token Terminal or anything like that. That’s that’s why they use today. We didn’t have do an analytics back then to look at revenue numbers. But I do think that that’s the direction we’re heading and that’s a pretty satisfying validation of that idea.

Tom (47:18):

That’s awesome, man. No. You’re totally right. It was so hard to find data back then. I mean, it’s impossible. Yeah. I mean the main data point I had back then was like the MakerDAO stability fee after a call with like 10 people on it.

Jason (47:34):

Oh, yeah. Yep. Those governance calls. I was on that thing like 1:00 AM our time, which is pretty insane.

Tom (47:40):

We may have met on one of those. I don’t remember. It’s been a while, but switching to you, right? You’ve been in the space a long time. The space moves very fast. It takes a lot out of you, but you also learn a lot. How do you handle stress, mental health? How do you get away? How do you take breaks? How do you make sure that you’re here for the long game?

Jason (48:02):

Yeah. That’s such an important point, man, because there’s a lot of burnout and I think when it comes to volatile markets, there are a lot of people that get really, really emotional. So I think one important thing is to have interests outside of crypto, to have relationships outside of crypto. Most of my friends are in crypto. We love to talk about crypto all day, but it’s also important to take a break and take a step back and really appreciate what we’re trying to do here. And usually, the thing that helps me put things into perspective is just to zoom out.

Jason (48:31):

So sure prices might be down a lot, but what are we building here? Where do you think we’re going? That usually comforts me when markets start not to do so well. It’s time to remember what the time horizon I’m playing here. I’m not a scalp trader, I’m not even a trader. I’m not trying to trade on 15 minutes or even four hour charts. I’m really looking at the monthly to the yearly horizon. And once you do that, you filter out a lot of noise, but even then information can still get pretty overloaded. There’s a lot of inputs going on. So yeah, I think just take a break from crypto Twitter, time to time you know, sign up telegram every once in a while. I think just signing out from crypto helps a lot.

Tom (49:18):

No, I’m with you there. You definitely got to take breaks. Definitely got to realize that the 98th play that you’re looking out of the week by not be worth, just getting six hours of sleep. And Jason, I mean, looking at the space, looking at other investors, whether it’s in crypto or outside of crypto and project founders, who’s your idol in the space? Like who do you look up to? Who do you have your tweet alerts on for? Who do you make sure that you go out of your way to read what they post? They may not even be that active. It might not even be somebody knows, but who do you look up to?

Jason (49:53):

Yeah. I wouldn’t say I have idols, but I definitely have a lot of people I look up to in this space. Obviously you, yourself are one of them having built Delphi so early on and you’re building 51% research podcasts back in the day.

Tom (50:05):

Oh, man appreciate that.

Jason (50:07):

Stories like that. Seeing people come up that’s really inspiring to me. I think from an investor perspective, I’m a big fan of what paradigm is doing as well. I think seeing Dan Robinson’s work on Uniswap V3 as one of the chief architects behind a project, that level of involvement with projects is something that we aspire to as well and something that I’m always championing for. Investors like the guys at Dragonfly. I speak with them a lot. I really appreciate how Tom thinks about this space and how good they are at communicating very complex topics to a general audience.

Jason (50:39):

So I read every one of Asif’s blog posts, everyone’s of Tom’s blog posts, and then also the guys at Arca. So they’re very different investors from your typical venture fund, given they’re more of a liquid hedge fund. But those guys are some of the smartest people in the space. So every time Jeff from Arca puts out a blog post about the market, I definitely keep it on alert and I try to read every one of them.

Tom (51:00):

No. I really appreciate the kind words Jason. 50% gave me flashbacks before, Delphi but it was fun. But no, I agree with you. I mean, Dragonfly, Arca, Paradigm are all incredible funds. I mean, Jeff at Arca has such a storied career on Wall Street that he really does bring a unique perspective to the space. I mean, you brought up another point with paradigm, which is, I guess, their specific involvement in projects, right? I mean, as you grow as an investor, I guess, it’s not like a mental debt thing, but you have a lot of portfolio companies to keep up with.

Tom (51:37):

But you also have a very knowledgeable take on the space and your advice is worth it to projects. Your time is very valuable. How do you allocate your time effectively to portfolio companies? I guess where is your favorite area to allocate your time? This is in token economy and strategy. Is it in finding a new CFO for a company head hunting? Like where do you drive the most value and how do you allocate your time?

Jason (52:05):

Yeah. So in terms of our portfolio companies, we support them in a few ways. So we typically get incredibly involved. The earlier we are in the process, the more help the projects need. So in terms of the fundraising side, we help structure the cap table. For instance, the Alchemist Investment, we just decide what funds to bring on, what type of value add they can have. And on the narrative building side or the distribution side, I should say a lot of the projects are great product builders, but they don’t have the means to communicate that product to a wider audience and really bringing their critical massive users.

Jason (52:39):

So that’s something that we bring to our projects with the podcast, with our social media presence, with our strategic connections to different investors, to different projects. We try to help these projects get distribution early on and quickly. I think that that’s something that’s incredibly important. I think the third thing is just being there for the projects at all times. So there was an incident where one of the projects we invested in had a liquidity shortfall, and they really needed someone to just pluck $5 million in the protocol right away. So just pick up the phone at night and then we immediately got onto it. So being there for our projects any time of the day, that’s something that we pride ourselves in as well.

Tom (53:20):

Jason, one term, do you think the VC model exists? I ask myself this question, given we run Delphi Ventures, but I mean just not to bring it back to me. We launched on chain fund on Syndicate. I’m of the opinion that everything is going on chain, everything will be driven by community of investors, not say one or two people, but what’s your take on, I guess the VC model long-term?

Jason (53:43):

Yeah. I think back in 2017, when all these ICO started happening, I was of the view that, okay, all the equity is going to be tokenized and VCs will die within a year. Obviously that, that didn’t work out and regulations come into play. But I do think VCs, even outside of crypto have been evolving, right? If you look at A16Z and not the crypto fund, but the general, A16Z all of them are financial advisers now and they’ve a massive team and they’re power distribution channel. I think a lot of VC firms will become more service oriented. The way I think about the discounts that VCs get, I think a lot of people in crypto, they think, “Okay, VCs are basically just buying tokens at a discount and dumping on the market, but the discount is the price of projects paid for VCs for the services rendered.

Jason (54:29):

So over time for VCs to really differentiate and succeed, you need to have a bigger and bigger service arm. And you start to see that in crypto already where Framework has Framework Labs, obviously paradigm has a research team, and we’re trying to bulk up our portfolio support team as well. Then Penta has the platform team. So all the funds are trying to build a differentiated value add and I think you guys do it so incredibly well as well with your research arm, with your Tokenomics designs. So I do think that’s where VCs are headed more surface providers, less so quote-unquote just capital deployers.

Tom (55:08):

No, that’s a really good point Jason. It definitely, it’s a cool evolution to see how capital gets allocated when you have a community of people around the world that are not only investors, but are investing their time and their knowledge and everything into a project. I mean, basically a lot of the projects in the space are crowdfunded anyway. I mean, just with people’s time and with their efforts. So it really is exciting to see. Just to close out, we have like five minutes left. I’d love to learn, is there any book or any blog posts or any advice you can give people that are just getting started in crypto who want to get up to speed extremely quickly? Like if somebody wanted to get up to speed as fast as they possibly can in three months, what would be your advice?

Jason (55:55):

Yeah. Obviously, listen to this podcast and mine Blockcrunch.

Tom (55:59):

Oh, man. You have a similar podcast.

Jason (56:01):

Shameless self plug. But the thing that I typically send to my friends is just the Crypto Canon from A16Z, which is a compilation of articles from crypto. For more investor oriented friends, I love to recommend them Cryptoassets by Chris Burniske and Jack Tatar. That’s written back in 2017. So some of the topics discussed there are somewhat, I wouldn’t say outdated, but there are newer models that have been proposed since then, but that book also helped me a lot in helping me take the asset class seriously. From my ideological perspective, I know a lot of people love to recommend Sovereign Individual. From a story perspective, a lot of people like to recommend Bitcoin Millionaires. So all those are great books.

Tom (56:45):

I love that. And also to close out we have some time left, where do you think this whole space is going? What do you think in terms of timelines? Trust me, I know we’re going to get this totally wrong, but when do you think we get to the full metaverse? When do you think Wall Street goes away? When do you think crypto hits 100 trillion in value? Like how fast do you think crypto is going to move from here? And I mean, we’ve already come a long way. We’ve already grown really fast, but what would you look for in the next let’s say one to three years.

Jason (57:21):

Yeah. I think pinning a specific time is very hard because humans tend to overestimate what we can do in a year and underestimate what we can do in 10. But the signs I’m looking I’m looking for is different types of people coming into the space. So the thesis that I have is crypto starts with speculators. So you have a lot of local designs that are just yield farming and aping into random tokens and using all these protocols and seeding them with liquidity. That’s the crypto natives and then it bleeds out into the next wave, which is the digital natives. So you have artists, musicians that are coming into the space because of this NFT wave.

Jason (57:57):

And then finally you have the mainstream audience. So you have projects that are trying to maybe bridge liquidity to traditional markets. So Maple finance, Goldfinch are examples of that. I think that that’s how it spreads. You look at people who are very different from ourselves. So people who are not very crypto native start to come into this space and become, not just investors in tokens or speculators in tokens, but actual users of products. That’s a very promising sign for me.

Tom (58:25):

I love that, Jason. Always love hosting you, man. It’s been incredible to see you grow within Spartan and personally, and just crush it. So it’s an honor to have you on. If you guys haven’t checked out Jason’s podcast and you don’t follow him on Twitter, I can’t take you seriously as a crypto person. I mean, You got to check it out.

Jason (58:42):

Thanks man.

Tom (58:44):

Jason, thanks so much for coming on, man. It’s been a blast.

Jason (58:47):

Yeah, definitely. I appreciate that. Thanks for bringing me on.

Show Notes:

(1:52) First Question: How Jason manages his time in the crypto industry.

(6:22) Jason’s thoughts on trends in a multi-chain world.

(10:46) Jason’s thoughts on L1s.

(14:06) How Jason knows whether or not a project has a killer community.

(16:30) How Jason gets comfortable with a project where the community starts to take over.

(19:52) Founders / how Jason sizes up founders / red flags that avoid investing in a founder.

(28:33) Gaining conviction during bear markets.

(30:44) How Jason gets the conviction to invest in a project.

(34:17) Jason’s position on cash.

(38:37) The best advice Jason’s ever gotten.

(40:47) Incentives beyond money that lead Jason to invest in a project.

(42:26) What was Jason biggest loss or miss and what he learned from it.

(46:05) Jason’s biggest accomplishment.

(49:51) Jason’s idol in the space / who Jason looks up to.

(52:03) How Jason allocates his time effectively to portfolio companies / his favorite area to allocate his time.

(53:35) Jason’s thoughts on the VC model long-term.

(56:56) What Jason is looking for in the next one to three years.