Hello world, and welcome to the thirteenth issue of Thursday Thoughts.
Each week, founders and investors share their thoughts on fundraising trends and strategy.
Dove Metrics is sponsored by The Index Coop - a community-led initiative focused on making crypto investing simple, accessible, and safe. They create and maintain the world’s best crypto index products: DeFi Pulse Index ($DPI), ETH2x-Flexible Leverage Index (ETH2x-FLI), BTC2x-Flexible Leverage Index (BTC2x-FLI), Metaverse Index ($MVI), and Bankless BED Index ($BED).
Euler allows users to create their own markets for any Ethereum ERC20 token and features innovative reactive interest rate models backed by control theory that reduce the need for governance intervention in rapidly moving markets.
They recently announced an $8M Series A round led by Paradigm, with participation from Lemniscap and several world-class angel investors.
Co-founder and CEO Michael Bentley dropped a ton of knowledge about his experience with fundraising.
You started building Euler at Encode Club's Spark Hackathon back in June 2020 - how decisive was it to raise your $800k seed round a few months later?
To be perfectly honest, in June 2020 I had no plans to raise capital for Euler. At the time my daughter had just been born, and I was working on the foundations of what would become Euler mostly during the early hours of the morning, in-between feeds. I was busy at work, the pandemic had established itself, and global markets were volatile. So the last thing on my mind was launching a startup.
By August though, the landscape had changed dramatically. Trailblazers like Uniswap, Compound, and Yearn were establishing themselves as key building blocks in a new kind of financial system. DeFi Summer, as it later became known, was in full-swing. Everyone was excited.
Then suddenly Euler won the hackathon and started attracting attention from potential investors. My co-founders and I knew we had the makings of something special, but also that it was some way off being a polished product they could safely use. So an investment that would allow us to leave our jobs and work on the project full-time made a lot of sense.
With some guidance from Encode, we interviewed a variety of investors and eventually asked Lemniscap to lead our seed round. Valuing our project at that time was tricky. On the one hand, we had little more than a proof-of-concept to offer. On the other hand, we were a strong technical team proposing to develop a DeFi primitive that could shape the future financial system for years to come.
You already raised two rounds for a total of $8.8M but still have to launch - why was attracting fresh capital before going live an important decision?
Raising two rounds of capital before launching a product is fairly atypical and has definitely raised some eyebrows. It is important to stress that investment rounds are not always just about the money though.
Raising our Series A round early has enabled us to bring onboard world-class strategic partners before launch. Our new investors have helped us to hire new talented people, reviewed our white paper, reviewed our code, introduced us to other leading developers in the industry, and much more. As a result, we have a much better product, and we’re far better placed to go to market now than we were before we attracted fresh capital.
You decided to onboard some gigabrains from Paradigm after having discussed topics like Euler’s resistance to MEV - what makes their value add so different from other DeFi investors?
Paradigm’s value-add is that you can go to them and discuss obscure topics like MEV and know that you are talking to someone who is at the top of their game actively researching the topic. All of their partners have a technical background and specialist skills-sets you can lean on. Their whole team is very hands-on and supportive.
Having spent most of my life working at university, I have got a lot of time for their research-based approach. It has clearly paid dividends in terms of their portfolio too. Many DeFi investors take a scattergun approach to the market and inevitably end up investing in their fair share of losers along the way. But Paradigm always seem to get lucky and pick winners. That success helps attract other talented teams who want to get connected and learn from the best.
Lending is now one of the most crowded DeFi verticals - how challenging was operating in a very competitive market when pitching investors? Any advice for founders wishing to stand out by their vision?
Lending and borrowing assets is a key primitive of all financial systems, so it is no surprise that it is among one of the most competitive markets in DeFi. Ultimately this is great for consumers because it means they will have access to a wide variety of products and services offering different levels of risk and return.
In terms of pitching investors, I would advise founders to focus on succinctly communicating what their innovations are, who they are aimed at, and why they will change people’s behavior. Do not lead with a barrage of mechanism and detail. I made this mistake when I first used to pitch some of the cool features we have on Euler. What I realized is that you first need to capture investors’ imaginations with a story. Then show them the substance.
I would advise any budding entrepreneur to read Secrets of Sand Hill Road, by Scott Kupor (partner at Andreessen). There are lots of great tips in that book for how to pitch to potential investors and make your idea stand out.
There have been many talks with your community about tokens allocation - how involved should investors be in helping with distribution? Any tips for founders designing their tokenomics ahead of the fundraising process?
Ideally, DeFi protocols should be run by a decentralized community of stakeholders. Allocating tokens to anyone that helped bring a protocol into existence is therefore probably not a bad idea. People who put time, expertise, and money into developing a protocol already have a vested interest in its success and are likely to be better informed about how to take it forward than an investor chosen at random.
Of course, there are many other stakeholders beyond early investors that might also make good custodians. Chief among these is a protocol’s core users. They know better than anyone why the protocol is useful. They are likely to be well placed to input into how the protocol should evolve over time. So allocating a substantial portion of tokens to protocol users is also probably a good idea in my opinion.
Overall, I would advise anyone fundraising not to worry too much about their tokenomics whilst still in the early development phase. Time would be far better spent focussing on the protocol. Any investor that cares more about the token than the protocol is probably not worth having on your cap table. Indeed, talking about a token too much during a pitch could even put some investors off, because it can give the impression that you have got your priorities wrong.
Many thanks to Michael for sharing such insightful insights.
See you on Tuesday for Dove Dispatch #19,
The Dove Mountain Team