1confirmation Partner: Three Counterintuitive Lessons from Crypto VC Investing
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1confirmation Partner: Three Counterintuitive Lessons from Crypto VC Investing
Three Counterintuitive Lessons I've Learned as a Cryptocurrency Venture Investor Over the Past Few Years
Navigating Web3 tides with focused insightsAuthor: Richard Chen, Partner at 1confirmation
Translation: TechFlow
In my first article, I’ll share three counterintuitive lessons I’ve learned over the past few years as a crypto venture investor. In future posts, I’ll dive into more timely topics like politics.
1. Portfolio construction matters more than picking individual winners
This lesson is the most counterintuitive, but from a data perspective it’s quite simple: if you only allocate 0.5% of your capital to a 100x return investment, you won’t even break even. Because VC returns follow a power law distribution, 100x winners are rare—so whenever you find one, you must make that position meaningful. Concentrated bets > prayerful diversification.
A VC firm may showcase a beautiful grid of logos on its website, but that doesn’t mean their actual returns are impressive. This is precisely why portfolio construction is so important—and why I’m puzzled by funds with over $400 million still writing seed checks.
Some argue that small initial investments are about getting a “shot on goal” and reserving the right to double down on winners in later rounds. But in reality, larger funds come in stronger during later stages and take nearly all the allocation (i.e., the later you invest, the more zero-sum the opportunity becomes). Moreover, if you’re not a lead investor in the seed round, you likely won’t get pro-rata rights, and your ownership will be heavily diluted (I’ve seen cases of up to 90% dilution).
If you take this logic to its extreme—that picking the right company doesn’t matter at all—then the optimal portfolio structure would be to dollar-cost average 100% of your capital into ETH—what we call Beta investing.
But here’s an open secret in crypto venture: at the start of the last cycle, most funds didn’t outperform DCA (Dollar-Cost Averaging) into ETH.
Assume a reasonable cost basis of $200 for ETH—if you had DCA’d into ETH between 2018 and 2020, your fund’s TVPI (Total Value to Paid-In) today would be 15x.
Many point to a famous AngelList study showing that, on average, funds making more investments generate better returns. But I believe crypto is different. Since public market benchmark returns (e.g., DCA into ETH) are already high, you need to focus on asymmetric opportunities to outperform the crowd.
Otherwise, over time, average returns in crypto venture will underperform simply buying ETH. And in the long run, beating ETH’s performance is extremely hard.
Therefore, for every new investment, you should ask: “Will this outperform my ETH bags? Can it even return my fund?” And then make high-conviction bets accordingly.
2. Before product-market fit, a round’s “hotness” has almost no correlation with ultimate outcomes
When you look back at the biggest winners from previous cycles, you’ll notice they were almost never hot seed deals.
DeFi: Uniswap might have been a hot deal, but Aave—back when it was called ETHLend—was available to retail investors on public markets for pennies. In fact, before DeFi Summer, most Ethereum-based DeFi projects weren’t compelling investments at all (whereas new BitMEX competitors were the real hype).
NFTs: While DeFi was booming due to degenerate yields from liquidity mining, SuperRare’s crypto art remained completely overlooked. XCOPY and Pak pieces were still priced in single-digit ETH.
L1s: Ironically, Solana was one of the few “VC chains” that wasn’t a hot deal at the time (unlike Dfinity, Oasis, Algorand, ThunderToken, NEAR, etc.), yet it ended up being the best-performing Alt L1 investment.
This is why maintaining strict control over valuations at the seed stage is crucial. I’m seeing more and more VCs entering seed rounds at pre-product valuations of $60 million to $100 million. The only plausible exception might be L1s, given their high TAM (Total Addressable Market). Otherwise, you can often buy publicly traded tokens with similar potential at much lower FDVs (Fully Diluted Valuations) than these seed-stage startups.
However, after product-market fit, the opposite becomes true: the best investments are in the most obvious winners. This is because humans naturally struggle to internalize exponential growth—we tend to underestimate how much winners can truly dominate and become monopolies.
OpenSea’s $100 million pre-Series A valuation once seemed high, but given their trading volume trajectory, it quickly became a bargain.
This is a great example of dialectics (the synthesis of opposing truths): The best risk-return opportunities are either cheap pre-private companies or expensive post-private ones—nothing in between.
3. It’s hard to pick winners in crowded spaces driven by hot narratives
One trend I’ve observed over the past year is that Web2 founders tend to build in the hottest Web3 narratives—the most crowded spaces.
Many VCs celebrate this as a sign of great talent entering crypto, but I see it more as a signal that elite school grads are entering the space—not necessarily that great founder-market fits are emerging.
Crypto may be different from other industries—in history, nearly all the most successful crypto projects were founded by people without Ivy League/Silicon Valley pedigrees.
I have several concerns about investments based on obviously trendy ideas:
These ideas attract mercenary founders. These founders are good at copying proven successes (e.g., porting Ethereum DeFi to other L1s, adapting existing Web2 SaaS products for Web3 DAOs) and aggressively marketing them. But inevitably, as crypto rotates to the next narrative, many of these founders fade away. For example, we’re now seeing Ethereum DeFi tokens down 70–80% from their highs, while DeFi on other chains becomes the new narrative. Among the Ethereum DeFi projects launched during DeFi Summer 2020, mercenary founders have moved on to angel investing, while missionary founders—with strong product visions—continue building and innovating.
A good way to distinguish mercenaries from missionaries is walking through the “idea maze” with them—can the founder articulate all the prior approaches and explain why their current method is better? If the VC knows more about the space than the founder, that’s a red flag.
These ideas are highly competitive. When a dozen projects are trying to build the same thing (e.g., Solana lending protocols), picking the winner becomes much harder. Most categories remain winner-take-most or duopoly businesses. If you follow a concentrated investment strategy (per Lesson #1), conflicts of interest prevent you from prayerfully diversifying across competitors.
These ideas come with high pre-product valuations. The lowest pre-product valuation I’m seeing for
onto chain X is $40–60 million, sometimes reaching $100–200 million. This risk/reward profile may suit traders looking for quick presales and token launches, but not VCs seeking asymmetric returns.
I can’t offer a complete conclusion, so I’ll end with a timely observation: Funds that raise large vehicles by showing LPs paper gains will, once those gains are realized, underperform ETH.
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