Lattice Capital Founder: Crypto VC, Seeing is Believing Because of Faith

Author: Regan Bozman, Co-founder of Lattice Capital

Compiled by: Hu Tao, ChainCatcher

This week's "hot topic" on crypto Twitter seems to be a common concern: does the reduction in available funds mean that cryptocurrencies are no longer as attractive? The scale of crypto venture capital is clearly shrinking—there's no doubt about that.

As for why this is happening and what it means, there is more debate. [Rob Hadick](https://www.rootdata.com/zh/member/Rob Hadick?k=MTUxMjA=) believes that crypto venture capital is concentrating on the best founders and the best funds, which is precisely a sign of industry maturity. On the other hand, [Meltem](https://www.rootdata.com/zh/member/Meltem Demirors?k=MTMwMDA=) argues that the reasons for the shrinkage are (a) a lack of high-quality early founders, and (b) the scalable area of cryptocurrencies is too small compared to other high-growth industries.

I don't have much to add to this specific debate. Clearly, there are still outstanding founders in the crypto space building projects. However, compared to 2021, there are now far fewer founders starting businesses in the crypto space, while there are significantly more founders starting businesses in other fields like AI. Is this due to a lack of capital, or is this gap causing the capital shortage? Both may be true.

There is no doubt that this work is also much harder than before. As funds pour in, returns have been compressed. Tokens also face more structural challenges than they did from 2017 to 2021. Since the AI boom, there are far fewer allocators willing to fund crypto venture capital funds. If you don't truly love crypto venture capital, now is a good time to do something else.

Last week, I went to El Segundo to attend Disciplus's Demo Day, focused on industrial technology. I was surprised to find many crypto investors there. It felt like running into another married friend at a bar—we both shouldn't be here. Industrial technology is not Lattice's focus (I personally am an investor in Disciplus), but I wanted to better understand the dynamics of the non-crypto venture capital market.

Understanding how crypto investors are responding to the current market environment is the most interesting question, as it directly impacts the future landscape of crypto capital markets. Clearly, some people are heading to "Gundo" (a nickname for El Segundo). But not everyone is doing so.

Currently, I see three main ways crypto investors are responding: the first is to completely leave and do something entirely different. This could be taking on operational roles in the crypto space or working in fields completely unrelated to crypto. As many zero-interest-rate era funds continue to disappear, the phenomenon of leaving established funds is becoming increasingly common across the venture capital industry. Yes, the assets of super large funds are growing, but their pace of expanding team sizes is unlikely to offset the number of funds that are dying.

Some crypto fund managers are doing well enough that they can now invest in anything they want, no longer constrained by fund mandates. [Kyle Samani](https://www.rootdata.com/zh/member/Kyle Samani?k=MTI5NjI= "Co-founder of Multicoin Capital") is the most public example. Samani reminds us that while poor performance may push people toward this path, there are clearly some exceptionally performing investors who simply feel there are more interesting problems to solve outside.

The second option is to continue doing venture capital within their own funds but expand their investment scope. This is easy for some and not for others. Not all funds active in the crypto space are explicitly focused solely on crypto. My sense is that Meltem's investment scope has always been broader than just crypto, so teams like Crucible can directly shift their focus to other areas.

When Paradigm was established, it clearly positioned itself as a crypto fund—now they are doing "frontier technology." Many funds (including ours) have explicit mandates to invest in digital assets and related businesses. Fund documents often define this broadly, but I believe for most crypto fund managers, there is a very clear consensus with their LPs (limited partners): they represent "crypto exposure."

Therefore, these peer managers either modify their LPAs (Limited Partnership Agreements) to engage in non-crypto business, obtain verbal consent from LPs, or do so secretly. This is clearly a spectrum—you could argue that all AI businesses will ultimately use stablecoins, thus also counting as "crypto business." I'm not saying this viewpoint is correct, just that the boundaries can be quite blurry.

The third option is to stick to the core business. If you believe this industry will grow 100 times in the future, with less competition and lower valuations, then now is a great time to invest. This is the path we have chosen.

Which Door Holds Wealth?

I understand the appeal of the second option, but I remain skeptical. Venture capital is an exceptionally competitive industry and follows a power law growth pattern. There’s a reason Y Combinator captures about 90% of global accelerator returns. Top venture capital funds often get to participate in the highest quality projects, which brings most of the returns. This means that unless you are among the best, participating is meaningless; and becoming the best is incredibly, incredibly difficult.

The most common derivative field in the cryptocurrency space is artificial intelligence. AI is vast, rapidly developing, and will change the world. It is almost certainly the most competitive venture capital market of the past two decades. More and more funds are pouring into higher-valued companies (but these companies have many questions about their business models). You are competing with funds focused on AI, all generalist venture capital funds, and nearly all sources of venture capital on the planet. Therefore, I am very skeptical that most crypto funds truly have any competitive advantage. Of course, there will be exceptions, and some crypto fund managers have indeed seriously considered AI investment strategies. But I believe that most crypto funds will ultimately fade away.

In deep/industrial technology fields like El Segundo, competition may not be as fierce, but challenges still exist. You are about to leave the historically most capital-efficient industry (open-source protocols) and enter a capital-intensive industry. Moreover, these industries require specific technical skills for analysis.

Remaining Opportunities in the Cryptocurrency Space

This brings us back to the cryptocurrency space, which in some ways reflects... the current broader trends in the venture capital market, where a few companies are raising a larger proportion of available funds. The market is diverging. In the past, there were many crypto funds sized between $100 million and $200 million. Now they are mainly divided into early-stage specialized funds under $70 million and large platform funds. The main difference between crypto venture capital and traditional venture capital is that crypto venture capital is shrinking, while traditional venture capital is growing at an astonishing rate.

Our focus remains on seeding. Opportunities in industries or categories that large institutional enterprises have yet to recognize. "The current cryptocurrency market clearly faces many challenges, but I believe that with a little attention, we can find just as many opportunities. In many global markets, cryptocurrency-based financial applications are thriving. The circulation of non-USD stablecoins is still minimal. We may have only completed 5% of upgrading the financial system—therefore, many opportunities await discovery in the future."