Key takeaways
- Early-stage crypto valuations have remained elevated despite bear market conditions, creating challenges for investors seeking favorable entry points.
- Developer activity and builder conviction remain strong throughout the bear market, with founders showing longer-term commitment versus previous cycles.
- Foresight Ventures operates an expansive ecosystem including exchange BitGet, wallet BitKeep with 300k DAU, and media platforms across multiple regions.
- NFTs are expected to play a significantly larger role in the next bull cycle with real utility applications beyond fungible token focus.
- Institutional conviction in crypto has substantially increased since 2018 due to demonstrated DeFi utility and GameFi asset ownership capabilities.
Conviction, deal flow and valuations
Ashton Addison: Are you staying focused on Web3 for the next cycle, and what is driving your conviction?▶ 03:02
Tony Cheng: In 2018, conviction wasn't high enough for a lot of institutional funds, and for me too, because we didn't see applications of blockchain apart from payments. Then we saw DeFi summer in 2021. The 2020-2021 run was about fungible tokens, and I think NFTs will have a much more important role next cycle. This time, a lot of institutions, myself included, and a lot of traditional Web2 investors have much higher conviction. You're seeing real utility in DeFi, and in GameFi where people can own gaming assets. You'll also see NFTs used as coupons and tickets. Even with the FTX fiasco, you see developer activity and people still moving into the space during this bear market. That's very positive in our view.
Ashton: Has the downturn reduced the quality of your deal flow?▶ 05:35
Tony: We're seeing fewer projects. The number raising funding now versus a year ago has dropped off a cliff. But the people we speak with have more conviction and are in it for the longer term, whereas a year ago everybody was trying to make a quick buck. Even though liquid public valuations have cratered, early-stage valuations haven't really gone down. You still see seed-stage companies, pre-product and pre-revenue with just a deck, trying to raise at 100 million or 200 million. That worries us, because the only way to make it back in the bull market is to get into rounds at a much lower valuation. Still, the quality of builders has improved significantly, and more of them are trying to build real utility with blockchain.
Ashton: Valuations are holding up. How do you try to get in at better terms?▶ 08:09
Tony: A lot of valuations still hold because there's still money going around in crypto. So we try to add value on the incubation and company-building side to get in at a lower valuation. Foresight Ventures has a large ecosystem. Our main LP is an exchange, Bitget. We have a decentralized wallet, BitKeep, with 300,000 DAU. It's very Asia-centric, a super app that embeds DeFi and NFT trading. We also have the number one crypto media in China, Foresight News, and we've invested in media platforms in Southeast Asia and Korea and are looking at Japan, Turkey and Latin America. We help projects build out the Asia side of their business. We also have a tokenomics design team, exchange traders, market makers and a team that helps you integrate into wallets. That's our argument for a better valuation.
The next cycle is probably not going to be play-to-earn, it's probably going to be play-and-earn.
NFTs beyond the profile picture
Ashton: Are DeFi, GameFi and NFTs the three niches you focus on, and where are you personally spending your time?▶ 11:19
Tony: Our coverage is quite broad. We have a team of 10, and we split coverage by chain and by niche. One person might cover all the innovations on Aptos, and that could span all three categories. Personally, I've been spending more time on the NFT application side. We've been looking at whether we can make NFT indexes, and make NFTs trade more like fungible tokens, so you unlock a lot more liquidity and build a much stronger market. At the exchange and the wallet we work on those products. At Foresight, on the investment side, we look for projects that can help us reach those goals. Then we build strategic investments with them and help them scale.
Ashton: Could blue-chip profile-picture NFTs be tokenized so millions of people can trade a single one?▶ 13:48
Tony: It's a topic we've often discussed internally. For these really expensive PFPs, one of the core values is scarcity. If you allow anybody to buy in, that reduces the value, like with a Chanel bag or a piece of exotic art. So when we think about making NFTs more tradable, we think more about gaming assets and larger-scale NFT applications. For the super expensive ones, we think more about crowdfunding an NFT, buying it with a few friends, but not making it tradable for the masses. For the next cycle, PFPs won't be the only NFT innovation. It's a matter of seeing more NFT usage.
Web3 gaming needs patience
Ashton: Are you investing in the big studios building AAA, Call of Duty-level Web3 games?▶ 15:58
Tony: That's a thesis we've invested around, but with AAA games you have to give them time. Over the past cycle, nobody really had that patience. I don't think many of these games will deliver in the next year or so. Call of Duty-level games take three or four years to build, and Grand Theft Auto took eight or nine. We're also looking at casual games. Think of Angry Birds and the casual games that blew up in Web2. They're really good at onboarding users, and tokenomics is another lever you can pull to acquire users. Their development periods are much shorter, and if you find something viral that gathers a lot of interest, that's a good way to kick-start GameFi user acquisition.
Ashton: Axie Infinity-style models fell apart when token prices dropped. What does the next cycle of games look like?▶ 19:07
Tony: The next cycle is probably not going to be play-to-earn, it's probably going to be play-and-earn. You'll have really good gameplay, coupled with the ability to earn a bit of cash on the side. If you have no earning aspect, you won't get users either. We have to be honest with ourselves: a lot of people in crypto, especially the retail crowd in Southeast Asia and other emerging markets, are in it for the money, and the gameplay often comes second. But if gameplay gets up to 80 or 90 percent of what we expect in Web2, then with the earning aspect on top, everybody gets a much better experience.
We don't have to exit in three or four years, we can take a five to eight year vision.
Timelines and patient capital
Ashton: Do you expect projects that delayed their launches to go live in 2023, and will deal flow pick up?▶ 21:28
Tony: A lot of our portfolio delayed launching tokens. They were supposed to launch in Q1 next year, and they're pretty much all delayed by at least six months, mainly because of market conditions. Our internal view is that this bear market will be there for a while. The most optimistic view on our team is 2024, maybe Q2. In the meantime, a lot of people will keep building, and you'll see spikes in trading activity from one-off news events. But timing the market has never been easy. As long as you see interesting teams, long-term founders and products solving an interesting problem, it's worthwhile to invest even in a bear market. We'll focus quite a bit on applications that build crypto adoption.
Ashton: Is a bear market the right time to invest in good companies?▶ 23:54
Tony: Exactly. It's also much easier to get allocation. Founders are looking for an investor who can help on strategy, operations, market making and tokenomics advice. What we've built in the past year or so puts us in a good position for the next few years. We've never had pressure to raise capital, because our single LP has been super supportive and is very long-term oriented. We don't have to exit in three or four years, we can take a five to eight year vision. That opens up your mind to what's really possible, and you're able to think deeper and longer.
This interview has been edited for length and clarity. Recorded December 2022.
