Thursday Thoughts #17 (Angel Investing - Tom Schmidt from Dragonfly Capital)
Thoughts on building a network with founders, what he is excited about, investor risk profile, and more
Hello world, and welcome to the seventeenth issue of Thursday Thoughts.
Each week, founders and investors share their thoughts on fundraising trends and strategy.
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Tom Schmidt started his crypto career as a Product Manager at 0x in January 2018. He joined Dragonfly Capital in December 2019 and has been angel investing in the space for several years now.
Tom kindly sat down with us and shared how he thinks about investing.
You are working as a General Partner at Dragonfly Capital - how different is your approach to support founders?
I think people think of two main differentiating factors when they think about Dragonfly vs. other VC funds. The first being our network and reputation in Asia. Asia is still a major hub for crypto and in many ways is larger than the US or Europe when looking at exchange volume, enterprise value, or even DeFi users as dYdX pointed out. We have a deep network here, with many of our team members, our LPs (including Sequoia China, which invested in our Fund 2), and most importantly, portfolio companies being some of the top names in this region. GTM here is very different from GTM in the West, and we help teams navigate the complexities of building a strong community and presence in Asia.
The other thing that we’re known for is our technical focus and research. Pretty much everyone on the team is technical and previously worked in the crypto industry in a technical or operational role, and I think that shines through in our interactions with entrepreneurs. We speak their language and can help them see behind corners and move faster than they would normally be able to. We’re known for being strong product partners, helping teams think through technical and design decisions in the early stages. I think this contrast is especially stark when comparing to other funds, which tend to be much more finance and trading heavy. Of course, a lot of this shines through in Dragonfly Research, where we publish a lot of our original data analysis and thoughts on tech.
VC funds have different considerations than angels (time horizon, target investment pace, number of portfolio companies) - to what extent does your risk profile vary between those two positions?
I think the equation is pretty comparable. Once you get over the initial hurdle of figuring out whether you like the team and product, the question is mostly how the deal fits into your existing portfolio -- in terms of number of commitments, sizing, avoiding conflicts, etc. -- but also whether you think the deal is appropriately priced given many of the above. I rarely write angel checks, especially crypto angel checks as I’d much rather get allocation for Dragonfly instead, but I tend to do it in very early stages where I really like or know the founder and the product is something I would personally use. In this way, it’s almost less of a pure financial decision and more of a way to support people I love and manifest things I want to see in the world or products that have made my life better.
As pointed out by Viktor Bunin, angel investors usually get in very early deals and do not necessarily get pro-rata rights to participate in follow-on rounds - would you put $10K into a follow-on round for an existing portfolio company where you can get a 10x, or $10K into a new company that you believe has a chance to be 100-1,000x? Why?
For a late-stage follow-on round, I would almost always prefer to invest via Dragonfly instead :)
Beyond that, I think it really just comes down to your motivation for investing. If it’s purely a financial decision for you, I would use something like the Kelly Criterion to determine sizing and allocation for your personal portfolio. But for scenarios where I really love the team or product and want to be a part of the journey -- for example, I recently joined the Series B of Eight Sleep after being an early adopter and long-time shill -- it’s mostly just about making the price and terms are within reason.
How often do you leverage your exposure to so many founders due to your role at Dragonfly for your angel investments?
I’ve been lucky enough to have been in the industry for a while now and met many great people who later turned into founders who later turned into Dragonfly portfolio companies. I think one reason why founders approach me to be an angel investor is simply because of this network, both inside and outside of Dragonfly, but broadly speaking, I just enjoy connecting people for mutual benefit. If a team is looking for a bot runner or market maker for their new DeFi protocol, it’s easy enough to connect them with Flashbots or Kronos / WooTrade in the Dragonfly portfolio where all parties benefit.
In July 2020, you published this great post titled "Request for Crypto Startups" - what would it be composed of as of today?
I think we’ve actually invested in teams in every single one of those categories! I think the naming was a bit off -- “decentralized capital formation” became DAOs and “creator monetization” became NFTs -- but the intent and products were still there.
We still have a ways to go on some of these though, so I think more experimentation is desirable. The problems are far from solved, though I like the direction the space is moving in.
I think I’d add a section on identity. Increasingly, crypto is not just about financial applications, but social applications and digital expression. However, the way we view and express this social layer is pretty antiquated and clunky today. It’s almost like back in the 90s with people having to type in the IP address of your friend’s basic HTML website to see what they’re up to today! Showtime, one of our recent investments, is letting people curate their own NFT profiles, and ARCx is letting users get credit for building up reputation on-chain, but I think there’s still much more to be explored here.
I’d also add crypto gaming. Candidly, I think almost every single crypto game on the market today is bad. These are not good games that stand on their own legs but look more like complicated MLM schemes, and this is evident in the usage patterns and user behaviors that we can see through on-chain data. I’m keen to see games that are not only AAA quality and stand on their own as good games, but that also embrace crypto beyond just “putting items on a blockchain”. Imagine a game where instead of the core team constantly putting out new content and gating what is and isn’t canon, a DAO allows anyone to build and contribute to the world and get rewarded for doing so. This is essentially the Loot vision, but I think it expands beyond Loot (and of course, I would love to see an actual game as well!)
I’m also interested in games that are uniquely enabled by crypto. Taking something like Valorant and putting the game economy on-chain is cool, but Valorant doesn’t need this to be successful. I think something like Dark Forest is a great example, where you can create truly trustless, global, PvP games that ideally allow users to also use the financial side of crypto to bet or win money. The fact that a DAO came together organically to win Dark Forest is one of the coolest things I can imagine, but I bet it will not be the first time we see something like this. Watch this space.
Thanks again for your valuable insights.
See you on Tuesday for Dove Dispatch #23,
The Dove Team