VC coins VS community coins - how the market is changing - Guilherme Jovanovic | YAY Network

Thank you everyone and uh I want to thank the organizers as well for the great organization and for inviting me for this great event. Um about the topic for today, I actually changed the topic. I'm sorry about that. Uh but I thought it will be more interesting. Um

yeah, thank you. Yeah, I thought it would be more interesting um to focus more on what is wrong uh with um VC funds with founders raising capital. So the market is changing. Um you know for example if we look at previous cycles founders could raise capital very easily and u VCs were mostly betting on narratives. They were not really uh looking at value of the projects.

Uh but what happened after that is that most of those projects um ended up dying uh because there was no like great fundamentals and that is still happening today but I will go deeper into it. So this I'll put in the end if you want to connect with me later. Um before we start, I'll just give you a little background about me. So I've been in the crypto space full-time since 2017. Um I started in a fiat to crypto processing.

So that was uh the first crypto startup uh that I started working on. I was there the CEO and uh we managed to basically grow from the scratch uh from zero dollars to $20 million annual revenue. Um after that I decided to exit uh and I launched Y network. So at Y network um we are basically backing uh startups at early stage. Uh we've had uh more than 100 investments.

Uh we've had three unicorns that reached more than 1 billion valuation. Um and um we've also accelerated a few projects. So here are some projects. Maybe you might know them. Uh and here is also our logo.

So this is uh yeah network easy capital. Uh this is our latest fund uh that we started raising recently. So we are opening a $20 million fund this year. uh the main focus will be to invest in both web three startups but also web two. So we want to put some more focus like in AI fintech technologies um and um yeah that will be the main focus for that.

So as I mentioned in the beginning uh there was this formal era where builders basically u raise first and build later. So I I received I remember before uh many founders they come to me they said oh we already raised like5 million $10 million. uh but in fact they didn't build anything they just had ideas um and uh you know this mindset uh I I think it still dominates uh web 3 so it's not um only before but it's still happening uh and it's very scary that it happens also with the big projects uh we see big projects that I don't know raise more than 100 million uh and they are yet to even deploy their technology. Um next uh there is the problem that founders uh try to exit earlier. Uh so on the first one we already saw they first don't deliver products uh but they are raising capital and then after they already raised capital and launched in the market uh they already want to exit their positions.

So they start selling uh their equity uh in form of OTC transactions. Um and uh yeah that's um another thing which is really bad uh for the space because uh basically uh they are destroying retail um and u it's I would say kind of like a slow slow rug uh kind of legal rug in a way um and yeah that that's been like one of the main issues also this year uh if we look back at 2021 I believe even more than 90% of the tokens disappeared. Um so you know very few of them really survived this market conditions. Um and the problem is not just with the founders you know it's the VCs and investors that are encouraging such founders that uh don't care about fundamentals just want to have a quick exit. Uh so it's the problem from the both sides.

Uh lastly um there is another issue that uh founders are raising at extremely high valuations. It seems to me that uh not a lot of people actually know how to calculate um company valuation. I see projects that don't generate revenue uh don't um have any product uh maybe just MVP and uh their valuation can be up to 500 million sometimes 1 billion uh and obviously uh those valuations cannot keep up over time. I can give an example. For example, we invested in layer zero in their latest round and the valuation was $3 billion.

They're basically they can't even move past this valuation. It was extremely high valuation and um even big investors got in in this round and um it just doesn't work. They raised more than 500 million at three billion. It's just nonsense. So this um as I mentioned now um web3 fundraising is about hype.

Unfortunately uh it's not about uh investing in great u uh products in great founders. Um I've been in a lot of discussions lately in like Twitter spaces um different podcasts and all founders tell me the same thing. Um they ask okay can you please tell me how many actual um useful products there are in crypto like okay obviously we have some interesting like defy stuff like I don't know unis swap like loans with a um there might be other few interesting things but if we look at the amount of funding um I wouldn't say that there is like really crazy amazing technology that doesn't already exist uh in web And uh this is one of the main issues that everyone is chasing the hype. Uh people are not actually chasing u great technology, great innovation. Uh projects just copy each other.

Uh VCs just want quick exits. So all in all um there is a lot of things that are wrong at the moment uh uh with um fundraising web 3 and uh yeah I don't want to go through all these points. I think uh they are pretty uh self-explanatory. Um but uh all in all um when you prioritize uh narratives and hype over product uh over uh community uh it just um um cannot be sustainable over time. And in the end of the day uh it's the retail uh who gets burned.

So I I made this uh pyramid to kind of uh show how usually um the investment landscape looks like. So in the earlier rounds um usually uh the angels will be the first ones that will have like the lowest valuation uh to enter the deal. Um and sometimes some VCs might also enter like the very early rounds like preede round or angel round. Uh but anyways VCs and angels are always like typically um the ones that enter at the best prices. Next is syndicates like uh y network we are running the syndicate.

So usually we we don't so often invest in the earliest round uh usually like already the second round like seed round, private round. Uh this is like our zone of comfort. Uh next uh it's like the later stage um like usual like launchpads um also exchanges like they have like Binance launchpad and so on. Uh so typically there um the investors are already getting like the the highest price um and it's mostly retail people who are investing uh through these community platforms. Um and uh the the very last one uh is the people who will actually buy after launch, not before launch.

Uh that's the usual retail people that already buy from the secondary market. And uh that's like the the highest risk. Um you know these people who are on the bottom of this pyramid, they are basically paying for the exit of all the other ones. uh and they are in fact the real believers because they are the guys uh who were following the project uh from the start. Uh they were really excited about it.

They really wanted to buy it. Uh but u because this uh scheme is kind of um broken um and also founders um don't care so much uh about their retail investors. Uh so they just end up being exit liquidity for uh all the previous investors. Here we can see that uh there are some product u misalignments um when it comes to this one. The first one I already went through it.

So raising capital without a product is a nogo. uh having um other like aspects about token utility functionality that is not really working also doesn't make sense but yeah I went already went through all these points so let's move forward here I want to give example um of two projects that in my opinion um actually are doing really well and it's uh one of the few examples um that I and say that um they really care about their product, about their community and they built something really meaningful. So the first one um I'm not sure is is someone familiar with Gonet? You can just raise your hand. Okay.

So Gonet um is actually one of the uh few projects that is currently uh working with the US government. Um they developed a really great uh technology within the deepin space and uh they do everything transparently. Uh they first built a real product they generate revenue and only after uh they decided uh that is time to launch the token uh to raise funds. So they first proved their concept. They show okay this works.

There is demand for it. We are solving a real world problem and then they started raising funds and uh if you look at their chart you can check them after on coin market cap. Uh you will see that the chart looks really healthy. So it's one of the best charts I've seen in the market. Um and I have the pleasure to accelerate this project at the moment.

Um and uh in terms of community uh they also make sure that uh the price is sustainable that the retail doesn't become the exit liquidity. Uh and the second example I'm sure everyone is familiar with Celestia. Uh so they also um really focused on developing the core technology uh to deploy their products and uh to make u um the incentive scheme really attractive for their retail investors. So actually uh a lot of people receive a lot of money from Celestia uh and they didn't mess up their launch like uh many of the other like big names uh that were supposed to have also great launches and great uh uh rewards for their investors. Uh so these are like two examples that I really would like to highlight.

So uh after everything that we have gone through uh this is uh my advice. So I I believe that uh for founders who are currently raising funds uh first of all the first question you should ask yourself is uh do you really uh need a token um that will have a real use case in your ecosystem? Um and uh does it really make sense uh to make um fundraising through the token because this is actually the main uh problem that founders do nowadays that uh they don't know uh what will be the use case of the token and just they just make it okay let's make a DAO uh let's make staking uh and that's basically most of the use cases uh but in fact that's not enough they are just using the token as a means to raise funds uh and obviously that cannot be sustainable. So I've seen great teams, great founders that developed uh amazing uh products but are products that completely have no need to have a token. Uh so that's the the first question founder should ask him uh himself.

Um then build product first. Uh understand if there is real demand for the product. Sometimes it happens founders um they will uh have the idea they will raise the funds and when they build a product they understand okay there is no demand for my product but I already raised funds uh what's next so first test your idea make MVP uh bootstrap uh the project to get to that stage or just uh get small funding from close uh uh connections investors uh relatives it doesn't matter the very First stage uh should really be about uh proving your idea that it works that there is demand for it. Next is about uh growing demand around your product. So you already tested your idea, you see that it works.

Now it's time to put it to work and start making some money uh and try to generate the revenue. That's uh the most important thing that uh for me as an investor I want to see that uh you are a sustainable company. you can generate revenue over time and um you will be a successful business that doesn't depend on bull market, bare market that you'll be able to scale uh in any type of market condition and then it's the time to raise capital when you already proved all these ideas uh and the product and revenue and attraction uh then it's time to raise capital and you are 100% sure that investors will be attracted because you've proven all the points to Um yeah, this is just a very short summary. Uh also I advise founders to burn um their capital slowly. Uh don't invest too much in the beginning.

Uh I see for example some founders they invest in the first uh uh few weeks I don't know like 50k or even sometimes more uh for some kos and stuff like that. Um so yeah better you know to first build a trust build a community organically. Uh if um you know you are not ready for the launch better to delay the launch and make sure uh that when it comes you will really be ready for it.

Thank you. Thank you. Thank you very much for this great great talk. Uh now we have five minutes for questions. I see already we have two questions.

So we can start with Alex.

Great talk. Uh I have a small question about the starting of any startup as we are working in industry which is mostly the R&D. So even initially you need to spend some money to hire the teams of good engineers that can prove and create these MPs and something that I've seen in industry is that these early VCs or however you call them angels and so on they take a lot of cut that they go up to like 30%. And that can kind of kill the the whole idea as even if you build everything right you gave up so many percentage that next investors will not buy in. So from your experience how much do you think in these early phases we should give up the percentages for you know is there any standard on it?

Um well it's uh you should calculate the valuation. Uh so for example maybe you can tell me what valuation are you raising and I can give you

I'm not raising anything.

Okay. Okay. Um so typically I would say for example if you are pre-revenue um if you don't have um product it should be pretty small valuation like maybe even 1 million because you know it's basically an idea and at this stage um I think you should try to raise as little as possible just enough uh to get started to get like the first MVP because once you have MVP you can show a little bit of traction a little bit bit of demand you can already raise the valuation like 5 million for example. So the goal is like for the very like first round you don't give too much equity to anybody. You keep it to yourself.

You just raise a little like just enough uh to create the very first beta version MVP whatsoever.

Great. Thank you. Uh I think there was another question from you the first row.

Thank you. Thank you very much. Um what will be your advice for the projects which were affected by the investors rocks?

Uh you mean about that the investors were selling after launch? Well, you know there is um it's if it's already the damage is done it's hard like to change it right. So you should just uh prevent it. uh and uh the way to prevent it is with the vesting uh and valuation. For example, I was also raising funds in 2021 and u what uh investors are telling me, they are telling me, hey G, I want to invest uh at 4 million valuation and I want like three month vesting for example like they just want basically get lowest price and exit as fast as possible.

Um and uh in this case you already can identify that he's a bad investor because he doesn't care about you. He doesn't care about your project. He just wants uh to get his money as soon as possible. So me personally if if I could go back in time I will decline such investors like I will just say sorry uh this is like a long-term project a long-term horizon. So if you are not ready to wait then uh you shouldn't get any allocation.

And uh as for us for example we are ready to wait sometimes 10 years. We have projects that have a horizon of 10 years. Um so you know it really depends what type of investors you want to on board. Uh but if uh it already happened uh if you already raised funds and basically your investors uh are selling everything uh if they have some allocation left I would propose that you try to give this allocation to someone via OTC. uh maybe someone who might uh uh be a stronger believer uh on your project and uh they are ready to to buy this allocation from the previous investor.

Okay.

And just a short one for the

uh projects which are running without token or starting without token do you see any trend here just maybe are they becoming more numerous or or what? Yeah, I see the trend. Um, you know, the the typical most standard uh investment agreement is called soft. Uh, and now what is becoming popular? It's a safe agreement which is basically a agreement for private equity with token warrants meaning that uh in the agreement it's written okay we are buying 20% equity of the project for example.

uh and in the future if there is a token there is a ratio like 1 one so for each uh equity you get you will also get a token but it's not for sure that there will be a token in the future they just leave the door open okay you are buying equity but in the future if you have a token you will also get the token uh some projects they already for example have some plan uh what will be the token uh other projects don't have a clear plan don't have tokconomics they just said Okay, we will start now with equity um and later on we will do the token.