How has due diligence for crypto VCs changed in the wake of the FTX implosion? "Everybody is going to be vigilant.
The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. All right. Joining the show now to discuss the state of VC funding in the wake of Sam Bakeman Fried's trial is the managing partner of Crypto Venture Fund, Dragonfly Hasib Qureshi. Welcome to the show, Hasib. Thanks for having me. That was a great sketch. By the way, I felt like I really felt like I was in the courtroom. It's like, it's like being there. I, I don't know how, yeah, I don't know why we even have cameras. We don't have cameras. We got, I don't even know why Emily goes like we can just happens through these sketches. I can't wait to see him. I can't wait to see him repair the uh the Sistine Chapel. It's such a strange thing that in the US, we don't allow, you know, most courtrooms, uh criminal cases don't allow cameras. It feels so antiquated. Most countries in the world. It's totally fine to bring cameras in the courtroom, but it does give sketch artists uh a steady line of work. That is the one thing I will say, Nick's gonna put them all out of business with his work. Clearly, clearly, we're going to continue talking about the same bank and free trial. Now, during her testimony, Caroline Ellison said that an Alameda balance sheet sent to its lenders was designed to mislead them into thinking that Alameda was healthier financially than it really was. She called it a quote dishonest document. And throughout the trial, we've heard of several different versions of documents that were circulated to different V CS that, you know, didn't tell the complete picture of what was going on for Alameda. Has this changed how you approach your business? How do you approach? I guess due diligence in a Post FTX world? No, it's, it's exactly the right question. A lot has changed since the collapse of FTX. I think there was, there was a baseline of trust, especially among Western V CS that has largely gone out the window. Now, there's a perception that you need to double and triple check everybody else's work. So it's kind of like blockchains, right? It's like verify, don't trust. Uh The other thing is that FTX was a notoriously opaque business in the sense that there were a lot of different entities, there was a very complex corporate structure, that kind of thing is now also frowned upon where people want to see more simplicity. So they can really understand what's actually happening from a structuring perspective. The FDX bankruptcy famously was a nightmare just because of how many different entities, different places with different assets. There were, um, and of course they were all intermingled with Alameda itself and that kind of thing now is an absolute, no, no in the, in the venture world. And so we're seeing a lot cleaner structuring from founders to make it more legible to investors. Exactly what they're investing into and where the assets are sitting. I, I don't know, I'm, like, not totally convinced here because like, as you like, it is a bear market, right? So or some people think it's a bear market. So it's like that's all fine and good for now. But I kind of feel like if there were to emerge another FTX that had like billions of dollars and there was all this FOMO this would all go out the window. That's kind of how crypto works, right? Like when, you know, right now there isn't anything like that, you know, I mean, honestly, right. I mean, do you really think that people have learned their lesson? Here's what I'd say. I think the lesson you can count on is that humans will always be greedy and that that is true for venture firms. It's true for entrepreneurs. That's always the case. However, people do learn lessons, but they always learn the last lesson. So I guarantee you the next big explosion in crypto, there will be other explosions. They will not look like FTX, they will look different and in the same way like with the great financial crisis, you could say like, well, you know, people are always going to be greedy and they are, people continue to be greedy and they continue to be as the bubbles in different places, but it's never quite the same place. And so I agree with you in in principle that there will come a time when investor diligence will get weaker. Again, investors relative to entrepreneurs will have less power, they will have less ability to bargain and they will take the terms that they're given to, that are given to them. But everybody is going to be vigilant. I do not want to invest in the next FTX. So great entrepreneurs will make sure that they follow everything to, to guarantee that they're not FTX. That doesn't mean that there won't be more mess ups in the future. There absolutely will be uh they just won't take the same shape. They, they uh they might not take the same shape but now looking at the current landscape, uh how do V CS view crypto? Really? II, I mean, of course, we we we could say that it may or may not be a bear market. I I disagree with Emily here. I think it's pretty, I mean, it's so bear market that it's like sleeping in a bunch of caves right now. But what, what is, what is happening here? Uh are V CS in general like so afraid of crypto. Thanks to FTX and Terra Lua and, and uh, and Celsius, et cetera. It's just a list of on and on and on problem after problem. Are, are they, are, have they given up yet on crypto or, or like, you know, who's left to play in this space other than Dragonfly? Yeah. So look, we're, we're a crypto native VC. So obviously, we're still in the space. The people who really deeply understand this stuff and have crypto in their DNA, like the A six C cryptos, the paradigms, the poly Shanes, the Pantera, those types of firms, obviously, they're still in the game and they're not going anywhere. The question is really more about the generalists. So if you look at the generalists, Sequoia has really backed off from the space, but they're still active, they're still doing some deals, but you can tell they've really pumped the brakes, you know, they were a big investor in FTX and they've very much paid a price in the public eye. Um You see the same thing from a lot of the crossover growth stage funds. So Tiger Global Softbank Co two insight, several of them were investors into FTX directly. Uh And, and those people have also, you know, they paid a price with their own investors who are upset with them. You know, hey, you guys came in, you bought the top, you didn't know what you were doing and you backed, you know, kind of colossal fraud in the industry. Uh And so people, I think who messed up in the bull market, they are now sitting out because they've more or less had to go apologize to their LP S. Um But there's a bunch of other firms, you know, folks like lightspeed or folks like uh uh red point that are very well established V CS. Um Even the Founders Fund Founders Fund just hired Joe Kruger used to be at Pantera to lead their crypto strategy founders fund is one of the leading uh venture funds in the space founded by Peter Thiel. They're still active in the space. So it's very much a function of one who actually has made money and has a good reputation of actually doing things, right? And two who didn't invest in FTX, that's largely the best predictor of which we c funds are still active and which ones about out and just a percentage wise, what are you guys getting now that, that, you know, when you go into a deal, obviously, every deal is different but how the terms improved since you have fewer players in the space, how is it improved for the venture capitalists? Well, it's definitely the case V CS now have more of the upper hand relative to a year or two ago, a year or two ago. You know, you're a founder and you have a halfway decent project. People are just throwing term sheets at you left and right. People are like Oh, no, no, I, I won't even take a board seat. I won't even do diligence. It was, it was crazy. Uh If you look back at your half ago today, it's a very different environment. Um I would say valuations, especially in the early stage, they're down probably, I would say, you know, depending on the type of deal, 50 60% if not more. Um Obviously, there, there were some deals that were just crazy where you had seed rounds getting done at 100 million, 200 million, that's not happening anymore. Um And you know, series A series B is obviously they, they've, they've come down as well. So I'd say the prices have come down a lot, but the most significant thing is really the way that deals get done, deals are much slower and much more methodical now. And due diligence is a real thing. And founders are responsive to it in a way that they were much more dismissive a year or two ago. If I was to ask uh you know, a year or two ago for founder, like, hey, do you have a data room? They would, they would laugh at me. They say data room, you're the only person who's even said the word data. Um Whereas now it's very standard practice, just like, you know, investing in any other industry, you would expect to have data of, you know, your financial agreements, your balance sheet, your cash flows, that kind of thing. It really was a very different environment a year and a half ago where these things were not necessarily expected, especially in early to, you know, series a type rounds last week on first mover, we had o'leary, we asked if he had any regrets about investing in FTX. Let's take a listen when I looked at the cap table and bain capital involved in all of these companies and believe me, we all look stupid today, but we've seen this movie before. It's not going to change the way we invest. But the point was the promise of crypto still remains. It's still there. Love to get your thoughts on Kevin's comments there. Um I mean, look, Kevin, I think it was revealed in the um in the book that Kevin got paid what like $15 million. So look, iiii I don't think there was a lot of diligence taking place on behalf of most of the celebrity endorsements that uh ftx was receiving and to be clear, I don't think that's on the people who were taking the celebrity endorsements to try to diligence in exchange. It's almost impossible. It's hard for V CS to do it clearly. Sam wasn't letting anybody diligence, Ftx really. So the idea that, ok, well, we should go blame the celebrities, we should go blame the musicians, the sports stars. I think it's a little bit of revisionist history to go back and say, well, ok, these people are morally culpable for things that they could not have possibly known. Um I, I do think that there is blame to go around but it sits more on the side of the V CS who actually were in the position to diligence, these companies and the regulators who didn't step in and really do their homework about what was this company that was going around parading themselves as being the most trusted name in, so to speak, for $50 million. I will show for tun, by the way, I was gonna say $50 million you know, I would, you know, I, I would show for, you know, I don't blame the guy. I don't blame the guy we want to change. I just want to change the topic here for a moment. Um From FDX, I ran into you recently in, in Singapore and, you know, Dragonfly is a very interesting um firm because you guys have sort of Asia in your DNA. I know now it's not like an Asia focus firm, but it started out very much being kind of an Asia specifically China focused firm. And so I feel like you have kind of a good view of, you know, the Asia market US market, I think, you know, there's been a lot of talk these days which is like, it's basically over in the US, at least for now because of regulation and you know, the the the next bull market is going to come from Asia. And I'm just curious, you know, from your perspective, how do you see that from a VC vantage point? So, I'm, I'm a little bit skeptical of the absolutism. Um, although in some way it could be talk in my book to say like, well, you know, everything is move to Asia and we're the big Asia firm, so we're great. Uh I just don't think it's true. I think the reality is that despite the efforts of genzler to try to crush the industry and despite the, the, the attitude of the White House, which more or less, you know, really hates the stuff and wishes it would go away. It's very clear, it's not going to go away in the US. Still, most of the founders in crypto who are building real technology and who are advancing the state of the infrastructure, they're mostly American, uh some, some Western Europe, some Israeli, but most of it is coming from America and I don't think that's going to change anytime soon. Um And even still you look at what gens is trying to do. He's getting a lot of pushback from the courts and it's very clear, Congress is divided on crypto, there's no consensus there. So I, I don't think it's going to be like, oh, ok. Well, the White House doesn't like crypto, therefore it's game over and, uh you know, pack up your bags. It's going to be all Asia from this point on Asia of course, is still a very important part of the market. It's where a lot of the consumers of crypto live. It's where a lot of the adoption of crypto is, but it's not going to be able to go it alone. Uh I think this is very much the case. So crypto is a global technology and a lot of the innovation happens in the West, a lot of adoption, the go to market and as well as the exchanges come from the East and I, I don't think that's going to change. So it's been that way for the last five years and I bet for the next five, it will remain that way. But just to go back to the Asian market where in your view are the hot spot in Asia. I mean, you're, we're hearing a lot of talk these days about, you know Hong Kong. Um I know you have some thoughts about the Japan market. Uh Singapore, I mean, where, where, where are the most exciting parts of Asia? I mean, given what you just said, which is a point that is very well taken. Yeah, so it depends on what you're looking for. So if you're looking for retail trading activity, you can see a lot of it is coming out of Korea, Japan, obviously, China continues to be active as we've learned from a lot of the Binance leaks. Uh Binance still has a very large market share in China. So we know that there's still a lot of activity taking place in China in China, Japan Korea. However, if you're looking for entrepreneurs, which as a VC, that's my bread and butter, um a lot of the entrepreneurial activity is really now concentrated in Singapore. Uh There's a little bit taking place in Hong Kong, but I think it's still quite nascent. There's not as much of a developed ecosystem there. Uh And then, you know, just in Dubai, not too long ago, Dubai is also becoming largely a hot spot in many ways, not just for the Middle East, but also for India, where a lot of the founders in India where, you know, crypto is kind of in this weird situation where it's kind of banned, it's kind of not ban but clearly the government doesn't like it. A lot of them are leaving India and going to Dubai as a better place to build. So I see these sort of megacities coalescing where a lot of the founders and a lot of the real entrepreneurial activity is taking place as if you see that's where I want to be because it's the, it's the center of where all the ideas are coalescing and where a lot of the best founders are, are finding themselves has very quickly. Before we go, you mentioned that many of the entrepreneurs in this space are Americans. Are you seeing your American founders migrate and setting up in places like Singapore or the Middle East because of more clear regulation. Some of them are. But honestly, it's a, it's a, it's a small minority. I think this again is a story that people like to tell. I think it's politically expedient to tell the story because it scares uh, American legislators are like, oh no, we're losing, we're losing our talent to these other shadowy countries or whatever, but I'm just not seeing it right on mass. If you look at where the most of the protocols, most of the big teams that are in New York or that are in sf most of them are staying, most of them are staying pet and even folks who, you know, have been named by the SEC as being potential securities. They're like, look, I mean, even if I go, my friends, my family, my investors, they're all here. Like I'm just going to stay and fight and, um, and to be clear, I think that's awesome. I think, I think it's better for America that the folks who are here who built this great technology that they stay here and they stay on the ground against incursions. I think that are, that are illegitimate. I think it's the idea that everything that we could possibly build in crypto security besides ethereum because, you know, it came about early enough. II I, I'm glad to see that there's that kind of energy and that insistence from a lot of the American founders. I mean, that's very much the American spirit is tending toward a little bit of rebelliousness in the spirit of innovation. That's, that's American in a nutshell. So I'm glad to see it. Dubai is gorgeous though. That's right. It's a really nice place. I see. Thank you very much for joining us this morning and have a good weekend. It was my pleasure. Thank you. That was Dragonfly managing partner Hasib Qureshi.