Famous investor Darren Lau: How should blockchain projects choose VCs? Here is a framework for consideration

Written by: Darren Lau, a renowned blockchain investor
Compiled by: Perry Wang, ChainNews

1/ Now there is plenty of capital. Everyone has money, and they want to invest. The influx of funds into the crypto space increases weekly to satisfy this desire.

But what makes a good fund?

How should cryptocurrency founders choose from the growing list of funds and angel investors?

Let's dive deeper.

2/ This is a framework I think about when evaluating venture capital funds (VCs). It is divided into five considerations:

1. Value-add
2. Capital support
3. Track record
4. Allocation size
5. Human resources

3/ 1. Value-add - Identify the areas in token economics where you need help

Can they help solve these issues? (For example, @Delphi_Digital's collaboration with @AxieInfinity)

4/ Governance:

Do they vote or propose any governance suggestions? (For example, @anjanvinod proposed adding @barnbridge on @AaveAave)

Have they even commented on any projects? Supported any projects?

Some anonymous participants are more active in governance forums than VCs. (For example, @MonetSupply):

5/ Allocation:

How extensive is the VC's influence?

Do they have connections with institutions? Market makers? Exchanges?

Marketers? Podcasters? Newsletter writers? YouTube creators? TikTok influencers?

(For example, @mrjasonchoi with @theBlockcrunch, and @spencernoon with @OurNetwork__)

6/ Technical capabilities:

Do they have technical staff to assist with code reviews? Can they run validator nodes?

Do they have a lab department—building products that support your project? (For example, @hiFramework and @Delphi_Digital)

Can they create custom data dashboards using @DuneAnalytics or @nansen_ai?

7/ Recruitment:

Do they have a hiring committee? (For example, @DeFianceCapital and @MechanismCap)

Do they have dedicated recruiters (for example, @dragonfly_cap) who can help you find suitable candidates for your project?

8/ Network:

Look at their existing portfolio companies:

Will there be synergies? Are there any conflicts?

If so, since the VC has already supported our competitors, why would they invest in us?

9/ Compare them with other institutions in the fundraising round / previous investors:

Do they provide the same added value?

Consider them as part of the same team / hope they can complement each other. Some VCs believe that larger VCs tend to take on all the work—resulting in less added value.

10/ 2. Capital support: Directing liquidity to the protocol

Attract a significant amount of capital with a longer lock-up period to guide the platform!

Most retail liquidity is purely profit-driven:

Projects like @goldfinch_fi raise liquidity. For example, one-year deposits in exchange for fixed-share tokens.

11/ Several Polkadot (DOT) and Kusama (KSM) projects also require VCs to invest their DOT/KSM to bid for parallel chain slots.
You want your VC to be the largest and most active user of your protocol.

12/ 3. Track record

What industries does this VC typically invest in?

What expertise can they provide for your project?

Request a list of their portfolio companies for your reference!

You can also check @dovemetrics for publicly disclosed investment lists.

14/ You want to look for any red flags in their past records:

• VCs trying to change terms
• Trying to take more than their fair share in funding rounds
• Unfulfilled commitments
• Hidden time bombs

Ask other investors in this round for their thoughts. Everyone in the crypto VC space knows each other.

15/ 4. Allocation size

What percentage of the network will you sell to this fund?

How do you adjust your expectations?

Is this a high percentage compared to their previous portfolio?

VCs do not always provide the same level of support: -> A $5 million position is more favorable than a $50,000 investment.

16/ Some VCs view investments as call options.

Not particularly bullish, just committing a small amount as a "support check." If it benefits them, they cash in and promote themselves as having great insight. If the project fails, they only invested a small amount.

17/ 5. Human resources

First, who is managing the fund? What can you learn about them?

Check their Twitter accounts to see what they post. Listen to their podcasts, read their blogs, and understand their motivations.

The best investors in DeFi do this not just for the money!

18/ When looking at the fund overall, consider the size of their team.

As a founder, will your project be staffed with dedicated personnel? Will you receive support from other members of the firm?

It's worth considering this person's expertise / focus in your project.

19/ The corporate culture of the VC is also important.

What is the experience like working at that VC? Investigate or ask whether they spend more time sourcing deals or supporting the companies they invest in.

If you can find former employees of the VC, it’s worth reaching out to them for their candid opinions.

20/ Are you seeking funding from this VC because of the analysts / partners you’ve spoken with, or do you want their entire team and brand?

If it’s truly because of the dealmaker, have them write an angel investor check.

In any case, the current incentive structures of most funds are broken and could become a threat someday.

21/ Finally, think about what kind of people they are.

If there are issues with your protocol, will they be willing to take a call at 3 AM?

If they come to your area, would you want to have a drink with them?

22/ Ultimately, through fundraising, you are selling equity in your company, which can also be seen as selling your child.

Are you really willing to let someone benefit from your hard work without contributing?

Or do you want someone who will fight alongside you in the trenches?

Source: twitter.com