“Team is all that matters when making early stage investments,” says David Siemer. “All of our best returns have come from rockstar teams.”
By Rakesh Sharma
In the harsh winter that has gripped cryptocurrency markets, investors are not the only ones feeling the pain. The crash has also affected startups and larger firms, forcing them to downsize and lay off staff to keep up. Even Ethereum venture studio ConsenSys, a fount of funding and innovation in the crypto ecosystem, shed workers and cut costs as the price of Ether fell by more than 90% over the course of 2018.
Could startups and companies have avoided this fate?
David Siemer, founder Wavemaker Partners, a crypto-focused asset management firm, believes so. His company is an investor in leading crypto blockchains, such as EOS, and ICOs, like Filecoin.
As the crypto market plummeted, Siemer watched his investment portfolio flounder. Entrepreneurs who made bank at the height of the 2017 crypto boom watched token prices crash the next year. One of the startups in Siemer’s investment portfolio has already burned through $25 million from its ICO 18 months ago, and has just two months of runway left.
As he witnessed this mayhem, Siemer took it upon himself to launch a treasury management firm. The firm advises startups on money management strategies to ensure that they have enough cash for operations. His firm is far from the only one providing such services to entrepreneurs; treasury management for cryptocurrency startups reached critical mass last year after startups began to realize the magnitude of their losses.
ICO Ranker talked with Siemer about the importance of treasury management, and current token and startup valuations. The below conversation has been lightly edited for clarity.
What led you to start a treasury management service for cryptocurrency startups and companies?
We started the treasury management business five months ago, mostly out of our own frustration. Our portfolio companies were losing money due to the downturn in crypto markets. There was also our personal experience. We found it difficult to get a bank account that paid interest when we started cryptocurrency investing. Back then, we got an Interactive Brokers account and started investing our dry powder in short-term US T-bills. and started earning 2.5 to 3.0% per year. When we realized how rare it was to be able to do simple treasury management, we decided to productize our model for other companies. At first, we worked with crypto companies, but since we’ve had a lot of requests from non-blockchain startups that have the same issue — none of the traditional banks like SVB or First Republic pay interest, either.
What is your advice to cryptocurrency startups and companies for treasury management?
We look at a client’s treasuries holistically, and advise our clients to assume the environment will continue to be rock, and the market will continue to drop. Most tokens are perfectly correlated with cryptocurrency markets. So, we encourage companies, who are token issuers and who still have a large amount of their own tokens in reserve, to actually short the crypto market through a basket of shorts and put options.
This is basic economics. Should the market crash further, then the company will generate additional cash to gain further runway to try to survive the crypto winter. If the market goes up, then the client would lose money on the shorts and puts, but since they typically have a large amount of their own tokens that are almost perfectly correlated to the market, the company is still well off and can begin selling its own tokens into the market.
For example, consider if a founder raised $30 million during an ICO by selling approximately 40% of the company’s tokens. Now the company has $15 million and 60% of its tokens remaining. We would likely advise that they put all $15M into cash, and additionally short and buy puts for an approximately additional 20% of the treasury value. Again, in a down market this client would generate additional cash from these hedges. In an up market, because this client has a large amount of its own tokens, the company is in a great position financially and the losses on the hedge are essentially irrelevant.
What is your view of cryptocurrency startups currently? Do you think they will survive the crypto winter?
I was a junior VC in 1995 and had a fun time watching the dot-com boom. My view of cryptocurrencies is that only 30-40 companies out of the approximately 20,000 that were funded during the ICO boom will survive in a significant way (meaning they will go on to build real, large companies). From what I understand, 15% have already turned the lights off after running out of money or realizing that their projects are not feasible.
Crypto valuations are largely still far higher than is reasonable. We still regularly see projects with zero revenue and no product for a year raising at $30M to $60M valuations. That figure is higher than software companies in the Valley see even with better teams and much less risk. Private company valuations in crypto probably still have another 50% to 80% to fall before they equal typical startups.
Typical early stage b2b software companies, which closely resemble crypto startups in their business model and technology, don’t see more than $10M valuation after a couple of months. In crypto, those valuations were hitting $100M to $200M at the market peak.
Even with the bear market, I believe crypto token valuations are expensive. When looking at the top 200 companies by market cap, there are at least a dozen that still have a token value that keeps them that high even though the businesses are already out of money and shutting down. There’s still a lot of pain to go through. We think we’ll continue to see a flight-to-quality for the top (large cap) crypto companies and further dramatic declines for the long tail companies.
How concerned should retail investors in ICOs be about the crashing market for tokens? As a seasoned investor, do you have tips for them?
With respect to the retail crypto investor market, I am afraid I don’t think your readers will like what I am about to say. I’ve always been horrified watching the retail market for crypto projects. Most of the investors never had a chance. There is almost nothing more complicated than cryptocurrencies in VC and angel investing. It is a combination of math, computer science and advanced networking. I was a programmer for a good amount of time and I barely understand the deepest aspects of it.
At one point, approximately 10% of cryptocurrency investors in Korea had taken out loans or mortgages to invest more into the asset. I don’t think retail investors should invest in cryptocurrencies, and I think it’s shameful that regulators waited so long to step in and demand that only accredited investors be allowed to participate. I’m still shocked that there aren’t more lawsuits against ICO companies that took huge sums of capital from unsophisticated investors and then lost everything in barely a year.
Team is all that matters when making early stage investments, in any sector, including crypto. I made the mistake of falling in love with a product early on in my VC days. I paid the price for it later when the projects failed. All of our best returns have come from rock-star teams.