Three lessons from 1confirmation partners: When facing new investments, consider whether they can outperform ETH.

I cannot provide a complete conclusion, so I will end this article with a hot topic. Funds that show their LPs their book profits to raise large funds, once their book profits are realized, their performance will be lower than ETH.

This article is authorized for reprint from TechFlow, original source.

In my first article, I will write down three counterintuitive lessons I learned as a cryptocurrency venture capitalist in the past few years. In the future, I will cover more hot topics in the article, such as politics.

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1. Building an Investment Portfolio is More Important than Picking the Right Assets

This lesson may seem counterintuitive, but from a data perspective, it's quite simple: If you only invest 0.5% of your capital in an asset with a 100x return, you won't break even. Since the returns on venture investments follow a power-law distribution, 100x return winners are rare, so whenever you encounter one, you must make that investment more valuable. Concentrated investing > prayerful diversification.

A VC firm displayed a bunch of fancy logos on their portfolio page on their fund's website, which doesn't necessarily mean their returns are impressive, but it highlights the importance of portfolio construction. This is also why I find it puzzling that funds of over $400 million are still writing seed checks.

Some believe that small initial investments are for "shot-taking" opportunities and are prepared to significantly increase their investments in winners in subsequent rounds. However, in reality, larger funds enter later with a stronger position and end up getting almost all the allocation (meaning, the later you invest, the more zero-sum the opportunity). Additionally, if you are not the primary investor in the seed round, you are likely to not get your fair share proportionally, and ownership will be heavily diluted (I've seen a 90% case).

If you take this lesson to its logical extreme (i.e., picking the right companies doesn't matter at all), the optimal portfolio structure would be to dollar-cost average 100% of your dollars into ETH—this is what's known as Beta investing.

However, a little-known secret in cryptocurrency venture investing is that in the last cycle's early days, most funds' investments in ETH didn't outperform Dollar Cost Averaging (DCA).

Assuming ETH's fair cost basis is $200, if you DCA'd into ETH from 2018 to 2020, your fund's TVPI (Total Value to Paid in capital) would be 15x today.

Many point to a famous study by AngelList as a counterargument, showing that, on average, funds making more investments have better returns. But I believe cryptocurrency is different. Because the equivalent benchmark returns in the public markets (e.g., entering ETH via DCA) are already high, you need to focus on asymmetric returns to have a chance at outperforming the majority.

Otherwise, over time, the average returns in cryptocurrency venture investing will be lower than simply buying ETH. And in the long run, surpassing ETH's performance is very challenging.

Therefore, for every new investment, what you should consider is "Will this outperform my ETH bags, can it break even?" and make high-confidence investments.

2. The "Heat" of a Pre-Product-Market Fit Fundraising Round has Little to No Correlation with the Final Outcome

When you look at who the biggest winners in history were, you'll find that they were hardly popular trades in the seed round.

DeFi: Uniswap may have been a hot spot in the market, but Aave, even when it was known as ETHLend, was available for pennies on the public market for any retail investor. In fact, all Ethereum DeFi was not attractive enough for investment before DeFi Summer happened (while new BitMEX competitors were super hot).

NFTs: While DeFi was booming with liquidity mining's Degen yields, SuperRare Cryptoart remained completely overlooked. XCOPY and Pak pieces were still priced in single-digit ETH.

L1s: Ironically, Solana, one of the few "VC chains," was not a hot trade at the time (unlike Dfinity, Oasis, Algorand, ThunderToken, NEAR, etc.), yet it turned out to be the best-performing Alt L1 investment.

This is why strict control over valuations at the seed stage is crucial. I'm seeing more and more venture capital firms entering seed rounds of products with valuations of $60-100 million. The only reasonable exception I can think of is L1s due to their high Total Addressable Market (TAM) ceiling.

However, you can even buy tokens that are potentially valuable but have cheaper Fully Diluted Valuations (FDV) than those products' seed rounds.

After the product-market fit phase, the situation flips completely: the best investments are in the most obvious winners. This is because humans have a hard time internalizing exponential growth—we often underestimate how much the winners can truly win and become monopolies.

OpenSea's $100 million pre-Series A valuation seemed high at the time, but considering their transaction volume growth, it quickly became a bargain.

This is a dialectic example (extreme opposing truths). The best risk-return investments are either cheap pre-private companies or expensive post-private companies, with no distinction between the two.

3. It's Challenging to Pick Winners in Crowded Spaces of Popular Narratives

A trend I've observed in the past year is that Web2 founders tend to build the hottest Web3 narratives, which are also the most crowded spaces.

Many venture capital firms point out that this signifies great talent entering the cryptocurrency space, but I believe it represents talent from excellent schools entering this space, not necessarily excellent founders matched with the market.

Cryptocurrency may be different from other industries; historically, almost all of the most successful cryptocurrency projects were founded by individuals without Ivy League/Silicon Valley pedigrees.

I have some concerns for investments with distinct ideas:

**These ideas attract mercenary-like founders driven by profit.** These founders are good at copying what works (e.g., porting Ethereum DeFi to other L1 chains, using existing web2 SaaS products for web3 DAOs) and aggressively marketing their products. However, inevitably, as cryptocurrency shifts to the next narrative, founders' volumes will shrink.

For example, we are currently witnessing Ethereum DeFi tokens dropping 70-80% from their all-time highs, while DeFi on other chains becomes the new hot narrative. Ethereum DeFi projects launched during DeFi Summer in 2020, those driven by mercenary-like founders, have shifted to angel investing, while missionary-like founders with product visions continue to build and innovate.

A good way to measure mercenary versus missionary founders is to navigate the maze of thoughts with them—see if founders can talk about all the methods they've tried before and the better methods they're doing now. If venture capital firms know much more about a certain area than the founders, that's a dangerous signal.

**These ideas face strong competition.** When a dozen projects are trying to build the same thing (like Solana lending protocols), picking winners becomes even harder. Each category largely remains a winner-takes-all or duopoly business. If you take a concentrated investing approach (based on the first point mentioned above), you can't afford to prayfully diversify into their competitors due to conflicting interests.

**These ideas have high pre-product valuations.** The lowest valuations I see now for X chain are pre-product $40-60 million, sometimes reaching $100-200 million. This risk/reward ratio may be good for traders looking for quick flips from presales to token issuance, but not for venture capitalists seeking asymmetric returns.

I cannot provide a definitive conclusion, so I will end with a popular topic. Funds that showcase their paper returns to LPs to raise large funds, once their paper returns materialize, their performance will be lower than ETH.