Written by: Rob Hadick , Partner at Dragonfly
Compiled by: Luffy, Foresight News
There was a lot of discussion over the weekend about venture capital, especially in the crypto space, but I think most of it missed the point. Venture capital is a market, and venture capitalists are at the center of that market. The vast majority of discussions ignored the real decision-making logic of both parties involved in the deal.
We have our own clients, our limited partners (LPs), who allow us to continue operating and sustaining this business. The best venture capitalists often invest significant personal funds as well, so we are clients ourselves. On the other hand, there are the startups. I have a real responsibility to the founders of the projects I invest in, and they know how much I value this. But ultimately, all the startups I invest in are based on one core premise: Can I serve my clients well and keep them satisfied?
This doesn't simply mean providing dazzling absolute returns, because investors don't consider things that way. They care about many factors, each with varying degrees of importance: risk-adjusted returns, reputational risk, regulatory risk, exit liquidity cycle, co-investors, access to core information circles, the ability to invest in assets and sectors suitable for social discussion, and working with compatible people. We all know some large funds that consistently underperform their peers, yet are still highly sought after. In a market with diverse choices, this is the reality.
Therefore, when you see relevant data, it doesn't simply mean "institutions are no longer investing." It only indicates that investors either want to reduce their allocation ratio or are only willing to invest in fewer funds. Their total investment in this sector is shrinking, or they are only willing to allocate to higher-quality managers. In traditional venture capital, the latter is predominant; in the crypto space, it's both a decrease in funds and a decrease in the number of funds invested in. This industry concentration is not a market failure, but rather a normal market functioning. There are many underlying reasons, but in the crypto space, the main reasons are risk-adjusted returns and liquidity issues. Additionally, another reason is that institutions are unwilling to be associated with certain individuals and events in this sector.
Therefore, if venture capitalists want to maintain their position, they must ensure that their investment strategy aligns with the needs of their investors, or at least persuade them to accept a particular direction. You'll constantly ask yourself: Did I invest in the right founder, the right asset class, the right sector? Is the risk exposure reasonable? Is the investment stage appropriate? The value of venture capital lies in adjusting these factors to a state that satisfies investors. Of course, choices that please LPs now may not be so in the long run, but this is still a decision that venture capitalists need to weigh.
This means that in this cycle, you must invest in stablecoins, perpetual contracts, and prediction markets , even if you didn't bet on the winners early on like some others. This doesn't mean you can't heavily invest in high-risk, contrarian projects, but you must first prove you're qualified to do so. A venture capitalist who makes a large contrarian investment but fails will be unable to raise the next fund; while a venture capitalist who makes steady, correct investments and consistently returns capital can. Contrarian investing itself is a gradual process. When we and Founders Fund invested in the Polymarket expansion project in late 2023 and early 2024, it wasn't market consensus, and many people couldn't understand it, thinking I was burning money on a project that only achieves product-market fit once every four years. But for venture capitalists, this isn't considered an extremely aggressive gamble.
The venture capital industry rewards stability and consistency, not reckless heroism. Only those who have proven themselves capable of steady action are qualified to make high-stakes bets and non-consensus decisions.
Some believe the hallmark of a great investment is writing the first check, followed by other funds, and that the founder doesn't fit the typical company model. This sounds romantic, and if the story succeeds, it certainly is. But the reality is, if a founder doesn't fit any fund's investment paradigm, it's more likely not because I'm smarter than others, but because I've overlooked some crucial issues. This isn't absolute; my team and I have indeed invested in founders overlooked by the market because we believed in our unique judgment. However, data shows that betting on such projects has a far lower success rate than choosing more obvious founders.
On the other hand, some attribute the current market situation to a lack of original ideas among founders. This also misses the point. Founders' behavior is driven by incentives, which are complex and diverse: Do I like this direction? Can I attract venture capital? Can I make it a big business? Ambitious founders typically want to work on projects with a grand scale and high potential returns, but this doesn't mean the ideas must be entirely original. To label it as "copying" is too simplistic. Most great companies aren't pioneers in their respective fields, but rather the best at them. Google wasn't the first search engine, Facebook wasn't the first social network, RedotPay won't be the last unicorn bank, and Morpho won't be the last on-chain lending unicorn. I believe meaningful innovation will continue to emerge in the prediction market space, and even then, novelty isn't the only important variable.
Ultimately, everything is governed by market forces. Venture capitalists don't get rewarded for going against the consensus; their rewards come from making correct judgments, providing the products investors want, and considering every branch of the decision tree. This might be achievable through contrarian thinking, but it's not the case most of the time. Founders aren't rewarded for taking bold risks either; their rewards come from building products that people want to use, that generate profit, and that create value, and from convincing investors that they possess this ability to secure funding.
All that ideological rhetoric is just empty talk. Ultimately, everything is determined by market forces.
Finally, as usual, let me add: Our doors are always open to all founders, whether they are in the early or late stages, following the rules, or going against the consensus.
