VC Panel - Lying with snakes? - risks and opportunities coming with external funding

okay so hi everyone uh it's very nice to see you today uh so today as uh seart said we are um going to going to be talking about if taking money from VCS uh is actually going to bed with snakes um there is aot of risks and opportunities obviously with uh doing this uh and uh people say a lot about also bad things about VCS that they take control uh and uh there is also misalign incentives but we'll see so my name is p Koval I uh raised from many VCS uh in my startup Journey uh I think around 10 of them uh and my guests are Blake if you could say a few words about yourself um hi everyone pleasure to be here and thank you for having me uh my name is lenski I'm the head of corporate Innovation at outlier Ventures um we are the biggest web free accelerator globally um I've had the pleasure of running about five accelerators by now uh which means about 40 Projects we invested in um out of the portfolio of 320 and I'm also an angel investor in about 20 projects myself great pleasure to be here and very excited to meet my fellow panelists hello uh my name is Julian zosi uh back in 2016 uh um I uh conducted like a token sale for the Golem project which was like a big thing back then uh that was before um token sales were fashionable so we were like a at the beginning of the extension growth um with that well and I guess this is why I'm here uh at the moment I'm um director of goldm uh Foundation which is spin of of the original colum project and our main activity is Octan which is also like a yet another way of funding things what space cool I'm Mi I'm investor at at Market one Capital which is a classic Visa firm uh we invest in both web 2 and web 3 companies because ultimately we focus our our specialty is focusing on networks um and you have them in both web 2 and web three environments we manage currently under around 140 million uh we know each other with P I think since ramp was called suu in 2018 a a long time ago and I think I I mean not not only me but as am one we passed one or two tires on on ramp which which um you know brought us to to many learnings um yeah thanks so uh the first question without further Ado uh would be to uh M and Blake uh when like let's say I'm a founder and I want to raise capital or take or start new project how should I think about should I take V or should I not all right so of course my snaky opinions are not official opinions of outlier Ventures and not Financial advice I think you shouldn't even start thinking about raising capital in the beginning a lot of people kind of put it first thinking that this is the first step but in my eyes you need to your team you need a rudimentary version of your product you need to get some indications of the product Market fit some traction only then you can start considering it but if the market is craving for what you're offering and you start getting clients in I will always tell you prioritize clients over investors I think a lot of people don't realize that raising money is not just getting cash in your bank that you can then use at will it's actually making a big promise that you have to deliver on that's why I always try to highlight that raising more money even though it looks great in the papers and you know it gives you an ego boost and of course likes on social media in the end of the day that also means you made a bigger promise if you don't deliver on it that means your reputation might be tarnished and it's going to make things harder for you down the line at some point you might need VC funding but I would really make sure not to start with that and focus on fundamentals first and only do it when you really have to yeah I tend to agree I think ultimately it's a very personal question or or maybe not I mean it's a question for funding team whether they want to build a sustainable company or whether they want to you know they cve to to eat the word because I think VC is um is a leverage to to to to to realize your huge ambition right if you want to have you know positive AIT a company you don't need money from from VC or from other actors maybe from some from from from some BAS um so so ultimately it's a question of of where do you want to build this company right and um Ironically in crypto the biggest two projects um that that are out there Bitcoin and ethereum didn't raise VC money um so so it's possible also to achieve great outputs uh with with no VC money historically in web 2 whether this is you know Google um Oracle hundreds of other companies they they they were using VC Capital right VC Capital ultimately is there to to help you go faster to um to also increase economy um risk appetite uh to innovate which from macro perspective bring some Competitive Edge to to economies worldwide right and even though it's extremely inefficient vehicle I mean VC um it's still most efficient Innovation vehicle out there I proof me me wrong I gladly hear that so maybe to be more specific what would be the cases when you shouldn't write BC yeah so I mean especially with current productiv productivity gains I think yesterday there's this report uh uh based on many companies but predim on Microsoft with the code writing boost with with co-pilots Etc and also you got this interview Sal that you know one there there will be one person one billion valuation company uh I I think this area where you need V money is only getting smaller and smaller uh so so that's a bit problematic for the industry I think in the longer term um but but we see plenty of companies that are providing building some tooling um not necessarily on you know whole networks right but supporting uh solutions for for for for already uh um commercially active networks and I think for that you don't need money right or you you you you need very little uh and can be you know friends and fools and family right um which have very different expectations right as Blake mentioned with VC there's there there's this expectation that your company will return the whole whole fund right I mean the power power law applies whether this is Web Two web three or probably also for web four um that because it's so risky you you can't have the same logic as you have in private Equity right that you assume that majority of companies in your portfolio will return to to 3x um you in VC especially early stages you bet that one company maybe two companies out of 20 to 40 in in portfol in the whole portfolio we will return the whole fund right and it's very different Dynamic very different logic and I think it's it's it's critical for first time Founders to understand it when they go to the market right that you have this expect ation typically this expectation results in over 1 billion valuation marks so we have one person State who have not raised from VCS uh Julian uh as you probably all remember he uh raised uh through as you said Ico in 2016 for the Golem project uh back then it was around I think over 800,000 if uh back then valued at 10 m everyone can check by by themselves how much this would be worth today uh julan so like when you look back at this decision uh how you think about it was it right one or uh maybe you should he would do something differently well I I think that needs me to return to the previous question of be H and my answer uh to the previous question is that uh that obviously depends on uh what you want to do so so what's your business model and um in in a web three I think there are things that go pretty well with the Venture funding and and think that do not really uh match U that uh type of funding and you said Bitcoin and ethereum so the the great question is like would ethereum be what it is if it had U uh Venture funding at the beginning I I think ethereum wouldn't be a thing you had like a venture funding that on the other hand like the high highly why is that why why you say that e the same well you know this is of course like a highly speculated like a what e um uh discussion but I think like a like you know in wet three um things are governed by by social phenomenons so so ethereum is where it is mostly because it had so many people building on top of it and that happened because that was like a quite massive uh movement which had momentum from the very beginning and it was because of the type of funding had so with the with the token sale by by the way I hate like Ico term for many reasons whatever I I think itum called like what they did CR fun and and in a way it is what it was so so so yeah so I I don't think they they they would be there uh where they are at the moment where we are on the other hand like a coinbase is like the perfect example of like a highly this successful company which I don't think would be able to like a finance it's growth through like any like a token related um coming back to your question like a it's so loaded and I have to like remind you that since 2019 I'm not the part of the like a COR Golem team uh back then uh we consider token sale as a kind of like a public goods funding uh way of like a writing capital and we didn't have any business model for Golem the company that would eventually bake like its uh shares worth a lot which would be interesting Venture Investments of course we could think about a a business model that um result in something like that but of course that comes as the cost and this cost very often forp type project would be not compatible like what we believe that like a des synchronization you would say a wet three now is is about so so I don't think there was any other way of uh Rising funds back then for that type of project also what we did then was like a a half a year or a year before all the Ico Mania of 2017 um well you know like a lot of people like watch Us and other like a early adapters for that and then followed us which out in um Ico Mania I will like use that term this time um and I don't think it was like a good thing like I think like if things got derailed a little bit um of course the problem both of like a venture funding and of to sales is that like most of the times is driven by gek and you know this is what it is this is like a capitalistic system like this is all like a venture funds invest because they want to return and people like toking because they want um but things can get like get quite tricky uh with that attitude especially when we are talking about like a toen and this whole like wild west which is which it still is maybe not doesn't answer your question yeah yeah thank you so um uh the token sales and iOS still are with us today uh they are less popular than as you said in 2016 during the Ico Mana or 17 um and uh I'm curious how do you think think uh about the those existence of token sales in the web free ecosystem they think this this has its own purpose or um uh this is just the effect of the lack of regulation in the in in the space Maybe Blake because you um I think investment tokens as well to so I think it's a really good question but I think the answer is is both it's both a feature and it's caused by the unregulated environment I like the point that you made about the wild west of technology that we're definitely still are in and that means that you get the smartest bravest people that innovate but it also means you get really smart scammers in the mix or snake or salesman to p on the title of the panel so you have different instruments and web free different ways of raising even if you're doing a tge nowadays it's not the same that you just launched straight into it most likely you took some institutional funding through simple agreements for future tokens before that so TJ is not really what it used to be that is also evolving as an instrument token generation event um investors in web 3 might be more susceptible to Hype Cycles there are moments um let's let's say a couple of years ago they would be throwing money at just a pitch deck but then when the market goes down suddenly they become very prudent and I think it's really important to understand that in web 3 something that is usually very gate kept here it's more democratized and that cause it its own risks but in the end of the day I think the key question if you're considering what instrument to use whether to go for a token and the question that if you cannot answer with confidence you shouldn't be raising VC funding is where the value ACR in your business model you mentioned that for golum you didn't have a clear answer to that question but that was very different times so nowadays if you want to race through a token but it's unrelated to your business model well that might even get you in legal trouble so you need to be very mindful because that race and the instrument you pick will have a lot of implications further down the line because it's an AR regulated environment doesn't mean there is no legal risks it actually means you need a much bigger legal brain to navigate that wild west environment that we're in well we we we didn't have like a business model for the company but not necessarily talken uh so I I believe that um we need a lot of different a funding strategies for for web threee because a lot of things that are created and that needs to be created are not compatible with the VC funding or like a like a capital funding in in in general like a like through the company that you know like a is successful and is worth more um I don't think token um sales are the only answer I don't even think they are the best answer uh the problem is that this is all still like a highly experimental and and we at the moment we are like experimenting to do and like how to fund things in a in a sustainable way that makes sense um so I don't think this is only because of the lack of regulations and just you know people doing stupid because they can uh definitely not and there are a lot of projects with like a great business models that is embedded in tokens or in other like a phenomenas of of of the web three that are just great um and of course some of it is is possible also because this is not regulated as we said this is like a wild west and you have like a smart people innovating and um and in general I think as a as a space if we are to be successful we need new funding models for for things because like a um uh VC funding and also like the token sales do not cover like uh all the like use cases that really needs to be so you're basically starting to compete with the GU here oh I I I don't think so I I I think that if the funding is not compatible then it's not compatible so if your business model like a excludes like a VC funding then you just take a look for like a different sources of funding and then if if you are like a VC compatible that's great you know can you can do that and probably you will be able to move faster you know easier in in many ways yes so to talk or not toen um like for me the the more fundamental question is whether this provides any source of defensibility in the long right because if you if you do talking for virality to to gain some traction early on I think this proved historically to be a wrong approach and you had you know couple of examples of this the even the one that was kind of mixing with and two was was Brain Trust right which is like the recruitment Network and then it was at certain point like great success of a practicality of crypto and five months or six months later it was pretty much dead right so um I think talk um and there's great um piece about not really building Network effects with tokens which should be the case for that's a premise of crypto of those networks by some your Sy uh if you're interested let me know I I will send you a link um um hii focuses on solely for last I don't six seven years on network effects also that's my perspective so it's a bit skewed right um so varty for my opinion doesn't really work if you want to fundraise just for the sake for fundraise that you you know you want to crowdfund right um I I think it's all right but I think it's important that you remember that once you fundrais this way you build in public right and you have to attach um what you your promises to to to to to those that um to to to to the crowd right which in many cases is not the best for longterm position of the company in the market um staying private longer or maybe not even longer because I think in crypto we don't have the the issue of of staying private too long I think it's quite the opposite right so compared to to to Public Market right now um stock exchanges um so so I think if you go too early it it kind of skews your product road map to make your um let's say shareholders happy versus to build best product available and kind of postpone this um this this this reward for another I don't know 5 10 years and to be a monopoly because ultimately we want to be a monopoly right so thank you so let let's go back down to Earth because uh the time is almost up uh so in a few minutes in the room next door uh uh there's going to be a pitching session of the couple of I think 20 startups pitching in front of the VCS uh what would you say to those funders who are you know starting the journey uh thinking about raising Capital uh what pits to avoid uh how to navigate this uh sea of snakes so first advice and then pitfalls right especially for the startups pitching don't try to oversell it because VCS they're being sold to all the time so they will see through that think of it as a conversation with a friend maybe a friend that's not as smart as you and you just have to explain all of it but also remember that overe explaining is also not a good idea give us enough for us to ask questions but every if you overe explain and everybody just nods their heads and they say like great great probably means they're not interested if they're asking hard questions that means they're actually considering investment and to talk about some of the pitfalls some something that might come with VC presence further down the line well you know vs are not doing this as Charity they have their own goals so sometimes they might pressure you to grow where you should actually be looking deeper into your product deeper into gain gaining profitability because they have their kpis to hit another thing you should consider is funer dilution remember that as a fer you might think that you know you have a co-founder you might think that you own 50% of the company but if you run the map that's not actually true because further down the line you're going to have to sell a lot of it for the VC capital and if you sell a lot of it too early that means you're unable to get more money further down the line so again raising too much early not only is a big promise it's actually selling some that will gain value with time and you should be mindful of that and finally I think you need to be really careful about misalignment of incentives around tokens at outlier Ventures we try to be very very very ethical around it if a project comes to us and they're great and they're amazing but the token doesn't fit the business model there is nothing for the token to do there we would never push the funer to do a token or structure token against the interest the long-term interest of the project but there are actors in The Market that are very focused on the early liquidity from token Investments and I have heard some cases that where essentially a big fund comes to a lot of projects at once and they tell them hey can you do a token and they're like well I'm not sure can you do it next month and it's clear that they're thinking about their investing schedules and when they can liquidate the tokens they're not thinking about the long-term interest and then maybe last Pitfall which is on the side of the founder be really mindful how you spend the money especially when you get that first you know big funding you get super excited and I've seen some horror stories I've seen people that their first hire was a Founder PA because now they're so important and then they spend the time spending the money on their travel budget and flexing on Instagram and your investor actually follows you on Instagram so they see that uh and another case also remember um there was a a team that got a rather small ticket but in the country that where they were based it was enough to kind of get them going and the guy even though they were preed they just kind of Imagine they're a corporation now and CEO was paying himself 10 times what he was paying others and he said like no I don't need other funding I'm just going to like get by on this so again you know there are a little sins that can be taking place on both sides of the funding table but I think these are the most common pitfalls to avoid and be mindful of yeah I like to to hear from funders Secrets um when they share a certain Market product what not inside that it's not that's not available to the masses right um that enables you if you have distill this Market Insight whether this is um you know acceptance of certain technology in the market um or or Market observation of Market Behavior observation uh this is competitive Advantage right that enables you to to build on um because you know especially now we part of the reg if our part of the world uh we don't have problems with building Sol products right that's not the issue I think we have much more issue of understanding Market with with communicating with the market than anything else so um that that's what what I like most um second thing would be don't over optimize your early stage round you'll have your growth rounds for this uh when you Comm where where the money is commodity um obviously at early stages you still get you know 90% % plus of of what you're getting from the Investor's money um some of them will connect you with some actor some will will help some with economics Etc maybe hiring but they won't build this company for you right and no matter you have a 16 Z on or you know Regional investors on the rooster right ultimately what you should optimize for is the pace of iteration right this is the only thing that matters in early stages of a company if you can iterate if you're you know 18 in iterating um in seeing what works with the market I think you shouldn't be worried with investor they will find you uh we I think M majority of quality investors right now have certain platforms to track um companies how they grow whether this is employee account whether this is crypto usage activity y yada y right um so so uh if you deliver um then then money will will find you because currently you are the the precious thing in the market not copy right and that's the case for the last 10 years at least right in '90s early 2000s it was quite the opposite and you know funders are coming to VCS uh which from today's perspective this is quite obscure thankfully it's it's like it is uh I much more preferred current environment I will be short so first consider like a delay in going to VC like if you can so there is no rush if you can Rush run if you have use can use different strategies you know you you you can do that later that's number one number two like a especially at the early stage this is like a you know like a like a marriage so you you you have to Peck your investor like carefully they will ask you question but you can also ask questions do that mind like which VC is best for you and sometimes it might be even better to get like a slightly worse deal but from much better VC which is much more aligned with what you can do because especially at the early stage like the help that we see can provide you if they are experts in the in the in in the given area is it might be very valuable so so do not get too excited if you have like a first offer you know this is like a market and and you you you are part of the market you don't have to like a take that because you're offer like a pick your uh suppose and also I have a few words so from my perspective taking VCS uh you also always needs to remember that your it's your business uh you can allow others to invest in it and you always need to remember that uh you are in the end responsible for its success and uh you need to pick right to succeed okay I think we're right on time uh so thank you we don't unfortunately don't have time for questions uh but thank you uh thank you Blake Mi Ulan for uh coming here and thanks everyone thank you