By Viktor Fischer, managing partner at Rockaway Blockchain Fund
All indicators are flashing red with signals of inflation and growth deceleration, with a 20 percent decline suffered by the S&P 500 in the U.S., Europe logging its worst quarter since the pandemicand Asian markets unable to escape the pressure. Overall, the crypto markets have seen the sharpest drop: as much as 70 percent since the all-time highs enjoyed in November 2021 when the cryptocurrency industry had a market cap of $3 trillion USD.
Despite this downturn, investment sentiment in blockchain and cryptocurrencies remains strong, reporting a record-breaking $9.2B USD in venture funding during Q1 of 2022. In Q2, Andreessen Horowitz launched ‘Crypto Fund 4’, a $4.5B fund dedicated to seed and venture investments in crypto project development.
Additionally, a specific subset of Web3—decentralized finance (DeFi)—has withstood the crypto winter stress test. While centralized finance (CeFi) took a major hit, both reputational and fiscal, DeFi emerged prosperous. Lending protocols such as Aave and Compound automatically liquidated overleveraged positions. Cryptocurrency exchange Uniswap, along with many others, has continued to trade successfully. As stablecoins were falling out of favor, MakerDAO’s maintained its dollar peg through verifiable over-collateralization.
Challenging the Fear Index
The CNN Fear and Greed Index, a compilation of fear indicators that gauge stock market movements, has teetered from fear to extreme fear in the last month and now is on neutral. Morale is low and such volatility makes investors are hesitant in betting more significant capital. However, through its cyclical nature, we’ve learned that all is not lost in a market downturn, and drawing from experience, we can confidently say that these are the times when unicorns are built.
Some of the world’s modern juggernauts were created in a market downturn, think Whatsapp and Instagram — and it is the same in the wonderful world of Web3. The last crypto winter produced Solana, Uniswap and Compound, the founders of which had initial ideas during the bull market of 2017 but persevered and built the products throughout an extended downturn. Hayden Adams of Uniswap began building the proof of concept in October and November 2017, subsequently launching the protocol in November 2018, during a bear market. The case that frothy markets are more adverse for startup builders has merit, as they may be up against lofty but adequately funded ideas.
While venture capitalists may understandably be more conservative with their current investments, market downturns can be a hugely positive financial opportunity with more realistic valuations coming to the forefront and the ability to see what the next wave of builders are creating. This is also a time to not only focus on the provision of capital to a project but to support entrepreneurs by offering value beyond capital inflow.
A Global Collaborative Effort
Of the seventeen market downturns since World War II, the average duration was just under 12 months. This time, it could be up to 24 months until we see any relief from economic pressure. Technology startups and the engineering talent that underlie them have a key role to play in creating value during this period. And of course, making sure to not run of money during that period.
The pandemic has induced many positive changes in workforce collaboration technology, making it possible for globally distributed employees to collaborate with one another on decentralized projects and build products faster. Compartmentalizing the issues and having a developer involved in the problem-solving phase will dramatically improve the quality of the product. Iterating on the product can quickly boost traction and bolster the case for investment. Interactive workshops or hackathons, like those run by the Cosmos community, are effective tools for engaging engineering talent in this way.
In light of market conditions, talent and network expansion have to be cost-effective, but can be difficult. Founders should utilize cost-effective resources such as Braintrust, DeveloperDAO and Encode.club. The Y Combinator Startup Library has excellent quality, freely available materials. Methods of raising capital quickly, such as approaching friendly VCs, close relatives and peers, can be one strategy to ensure financial health. However, cutting costs where possible will also need to be implemented in order to maintain enough runway for at least 24 months.
Web3 founders should also deploy the advantages of blockchain, alternative fundraising strategies, like issuing non-fungible tokens (NFTs) to a fan base are relatively untested but can potentially provide value. While NFTs to date have been used by owners of intellectual property to raise capital, Web3 projects are increasingly exploring raising capital through the issuance of NFTs as membership type tokens that provide benefits to investors. Garage is one such project experimenting with the creation of gated communities whereby NFTs provide bespoke benefits for investors in terms of access to its community and unique real-world experiences in Formula 1. The combination of tokenized equity with decentralized governance gives Web3 projects access to highly efficient forms of capital, in the form of digital tokens, while staying aligned on the shared ethos and growing community. For example, NFTs generated over $23 billion USD in trading volume last year.
Decentralized autonomous organizations (DAOs) deploy an equally efficient method of capital, enabling the concentration of resources that would be otherwise distributed. Compound and MakerDAO are prime examples, with treasuries that allocate funds transparently through a token-weighted voting system. These continued to function without fail during the largest fallout in crypto history. It must be understood though, that like the Lehman Brothers collapse of 2008 where legacy finance failed, this was a failure of over-leveraged CeFi institutions.
The Blue Sky Outcome
As a founder, you either win or you learn. Success will be measured by lessons learned during the crypto winter of 2022. Warren Buffet once said, “Be fearful when others are greedy.” Perhaps, this best highlights the opportunity in the now. To build. To ship. To succeed.
No matter what the product or service consists of, finding the right support and building a supportive network is essential. When market sentiment inflates prices, it is easy to lose touch with business fundamentals. For fear of sounding cliche, this downturn brings us back to basics.
Finding the right partner that can provide the necessary guidance and expertise along with added community engagement can lead to lucrative opportunities. In times like these, founders must take advantage of the accessible and cost-effective technologies available, and most importantly, focus on their long-term vision. After that, there is only one thing left to do: persevere.
About the author:
Viktor Fischer is Managing Partner at Rockaway Blockchain Fund, a venture capital firm backing leading Web3 founders.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
