Defiance Partners respond to "Token unlock equals immediate sale": Tokens reflect our investment thesis
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Defiance Partners respond to "Token unlock equals immediate sale": Tokens reflect our investment thesis
VC's thought process and working methods, as well as some reasons for exiting investments.
Navigating Web3 tides with focused insightsWritten by Arthur, Partner at Defiance
Translated by TechFlow intern
Arthur, partner at Defiance, clarifies their methodology for portfolio management and explains the rationale behind exiting investments—responding directly to claims made by @Blockanalia in “Nansen Data Reveals: Crypto VCs, Who Are Diamond-Handed and Who Are Paper-Handed?” (also translated by TechFlow), which labeled Defiance as one of the main culprits behind dumping and called them a top-tier “paper hand.” Arthur emphasizes that Defiance evaluates investments based on fundamental metrics (team, technology, product, valuation, TAM, etc.), not on how early we entered or how quickly we can exit.
Public perception of Web3/Crypto VCs is increasingly polarized. Crypto investors on Twitter always claim VCs are evil, but reality is often more nuanced. So I’m listing our reasons for exiting investments to finally put all such doubts to rest.
First, let’s outline what we believe are the primary responsibilities of a VC.
1) Commitment to portfolio companies — working closely with teams to help achieve product-market fit and drive growth. Ultimately, our success as a VC heavily depends on the success of our portfolio.
2) Staying ahead of industry/market trends — refining our research and market views, and allocating capital and time to the most promising areas.
At Defiance, our investment philosophy combines fundamental analysis with active involvement. Therefore, our default stance is to hold investments after liquidity events, and we actively collaborate with teams as long as our original thesis remains intact.
There are numerous assets we continue to hold with diamond hands even after lockups ended and prices dropped over 90% from peak to trough, including but not limited to $AAVE, $JOE, $LDO, $BNT, $MC. We work closely with these teams and actively participate in governance.
We do not sell unlocked tokens due to market conditions if we still believe the original investment thesis holds and the asset has strong potential for long-term value creation.
Does this mean we never sell?
No.
We always invest with intention, hoping our theses will be validated and tokens will accrue long-term value, allowing us to continue holding. That said, we continuously reassess our views through active monitoring of fundamentals. When we exit an investment (primary or secondary), it's typically due to one of the following:
1) Valuation reaches our estimated fair value — i.e., target price achieved.
2) Portfolio rebalancing — e.g., liquidity management, reducing overweight positions.
However, we must make difficult decisions when:
3) Thesis invalidated — for example, the vertical proves unviable.
4) Deterioration in project fundamentals.
Examples include #1 lack of product-market fit; #2 team stops building or poor management, etc.
These issues are very common in the startup world, and Web3/Crypto VCs don’t increase your odds of startup success.
We evaluate deals based primarily on fundamental indicators (team, technology, product, valuation, TAM, etc.), not on how early we got in or how fast we can flip.
We have never recommended or promoted any project we’ve exited or no longer believe in. In fact, we’ve encouraged many of our portfolio companies to lower their public sale valuations to levels similar to their previous private rounds, in order to reward retail investors who participated early.
We hope this article provides clearer insight into how we think and operate as a VC, and highlights the nuances behind exiting investments. Labeling any investment firm as a "paper hand" based on a single action is extremely reductive. Frankly, it shows just how ignorant someone can be.
We remain optimistic about the future of Web3/Crypto, and look forward to continuing to play a role alongside exceptional teams in building the future.
Lastly, even though spreading defamatory claims about others might bring you more attention and potential sales upside, we’d still like to remind everyone: we’re in a bear market—investors should remember to take profits when appropriate.
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