I often get asked what we look for at Delphi Ventures as we hunt for new investable projects. The dream would be to have unlimited time to due diligence every project and founder, but given the ever-increasing speed of the space, investing in crypto and DeFi often requires you to vet projects extremely quickly. Let’s dive into what’s important.
This is far from an exhaustive due diligence list, but four key areas I look for in any new project are the team, community, its products, and its tokeneconomics.
Founders are the lifeblood and energy behind every project. Their ability to remain proactive, and overcome obstacles in near real-time given the pace of crypto is of vital importance to their success. Founders have to be able to tell a memorable story and gain the trust and love of their communities and have the technical chops (or a co-founder has, or the project is able tor recruit someone who does) to out build the competition.
While there are numerous examples of anon founders (Bitcoin, Thorchain, Tezos, Saffron, etc), having a team with a public face could grow increasingly important as these members have social skin in the game and can’t just pack up and leave as easily. Anon founders can push the boundaries that constrain known founders, but extra caution has to be taken to understanding their history and motivations. The exception here is when a project needs an anon founder to push the envelope where regulations may hamper known founders.
As a project grows, it’s vital for founders to open the door and sign their own resignation for responsibilities and cede these to an incentivized community which could crowdsource the future of a project in real-time, growing faster than one or a few founders ever could by maintaining their throne.
Vitalik invented Ethereum and never called himself a CEO, opening the door and his arms to an immeasurable amount of projects and teams that have driven the platform forward. Kain of Synthetix has publicly demonstrated how his power is fading (and he’s glad the community is taking over), allowing the community to take over and drive the project forward. One key example was when Kain was against lowering the collateralization ratio for Synthetix but the community passed it anyway. As a rule of thumb, avoid god founders who are cemented to their tunnel vision thrones. The emperor wears no clothes.
Products that feel like magic, that you want to run and tell your friends about, are the ones you want to back with everything you have. Winning teams continually ship new code to drive entirely new experiences, while losing teams copy/paste code and are always behind the 8-ball.
You can’t innovate if you’re always busy hitting control-c, control-v, and tweeting about how they are a better version than X.
The best teams today ship code that fills a need, or has some semblance of growing into product-market fit as a new market develops. I.e. Alpha Homora has built its entire strategy around niche DeFi projects (leveraged yield farming, perpetuals, and more) and has amassed $850M in TVL in three months. Yearn made history by automating yield farming and vaults for its users. These projects both addressed needs in the marketplace (leveraged YF and automation) that people could use (and in some cases abuse). These teams ship new code and continue to iterate. A project is never perfected, instead perfection is a constant velocity of continuous improvement and iteration.
The other side of this is copy cats that copy/pasted a code and at the most edited a few numbers (Litecoin). The majority of Layer 1’s in existence that raised billions between 2017-2019 had no plan on how to out-compete Ethereum’s community. They had scalability and no one to use it.
The rule of thumb here is to focus on founders shipping new and shiny code. It’s rarely perfect at first launch, but new experiences drive value and copied experiences drive boredom.
Community is the pulse of a project. I often ask founders if they knew they would have to be basically Discord customer service reps in the early days of their project and most didn’t expect to be. A community’s velocity is the ultimate pulse check on the up (or down) trajectory of a project as the community itself is the project now, and what it will become down the road. If you could DCF a community we could all stop trying to invent new crypto valuation tools.
Nailing a community is tough because a lot of it comes back to the product as people want the feeling that they are backing a cutting edge new use case. It’s important for them to share their enthusiasm, especially through memes. A great project also attracts smart people (builders, finance, marketing, and more) who work to continually iterate on the products and the project itself. Vitalik built ethereum, but two dozen teams are building Layer 2s and Andre built yearn, but Banteg and crew have also delivered enormous value. We will save token econ for the next section, but nailing tokenecon and incentives is key for building a community (SNX’s one year vested rewards are a key example).
The normal things still persist; founders have to be attentive to their communities and community members need to know their feedback and comments will be taken seriously. This is important so community members feel included but also so the projects improve.
Communities should evolve over time, I can tell you the Yearn community has changed from more of a “number go up” project in the Summer of 2020 to implementing new vaults that are redefining finance in a matter of months. Yearn effectively evolved its community from a hard cap token (was gospel this summer) to raising the cap to support the future of the project. That’s called EQ and IQ growth fellow farmers.
These communities also have to be inclusive; a historical example is how Ethereum’s community always welcomed devs with open arms, whereas bitcoin had more of an exclusive feel to it since it is harder to build on, so it only attracted a smaller dev community. The reality is just because something is hard to do doesn’t mean it’s worth it, there are hundreds of magical DeFi projects on Ethereum that couldn’t be built on bitcoin. A more recent example (h/t to Aswath) is SushiSwap and Uniswap, where the former is opening the community and the latter made the bar so high for change (1M UNI held or delegated to create a proposal, or $20M) the broader community was effectively funneled into something they can actually influence, SushiSwap.
Uniswap may have released its work to the world, but this was a one-way bridge as users couldn’t reciprocate and get involved. Uniswap builds at the speed at which it can hire, whereas Sushi grows at the speed of how fast it can incentivize its community.
Community members want upside. We’re all here for the tech, but making your early adopters rich can go a long way for their on-going support and backing of a project. Joe Lubin built ConsenSys (and a large swath of Ethereum’s key infrastructure) while driving Ethereum forward and Mehow has driven the Thorchain community forward. Both did not originally invent their core projects.
Tokenecon is immensely important for the success of a project and its community. A project’s ability to create value and its ability to capture that value are two very different things and generally nailed when founders think of both together (token plays a crucial role in my protocol) vs trying to backfill utility after the fact.
If a project is unable to capture value through its token, it is usually a ticking time bomb as the virtuous cycle can break given the success of many projects is contingent on its token value (treasury holdings, token’s value-driving usage, and adoption, token’s value as security in node value, etc). It’s also hard to attract a community if the value they are helping to create, isn’t rewarded back to the token they hold.
There are many examples of tokens that were successful given their value capture was hardcoded in from the get-go (RUNE as a bonded asset to secure the network and as a pair asset in every pool) or could be added later on (Uniswap fee capture switch). Although there are projects where token value capture is limited at best, Gnosis has a suite of amazing products and Gnosis safe secures over $1B in assets, but value capture by its token is limited.
As a rule of thumb, make sure the token itself is absolutely crucial for a project and it is being rewarded and distributed to incentive the right actions. There are a variety of ways for a token to obtain value (claim on fees, claim on a treasury, a crucial economic factor to the project itself or a specific factor within) and no one way is correct as it varies depending on the project itself. I.e. Staking works for Ethereum, fees work for SushiSwap, and bonding/pool asset works for Rune.
There are other checkbox things to look for on tokenecon, such as ensuring that the core team has its tokens vested over time, a treasury is in or will be headed to a multisig vs single founder control, a token’s treasury is efficient instead of sitting idle and token holders are receiving rewards from usage outside of only the project’s native token. I.e. RUNE earns fees from trades of any asset, Uniswap earns fees on a multitude of assets and Yearn’s fees are driven from vault users. This is instead of just only rewarding users with a native asset with no other fund flows within the project itself.
For VCs, not every project needs a token to be successful. While the door is open for both Zapper and DeBank (two DV portfolio companies) to release a token, they don’t necessarily have to capture the value of being the front pages of DeFi. Regardless, the longer a project can grow without a token the more optionality they maintain for growth in releasing one later, as long as they aren’t foregoing a critical juncture to release a token for growth now.
Releasing a project to the world is important as you only get one shot at a first impression. Spotting the core tenants of a powerful release is important since it allows you to act earlier.
The best releases are first showcased as a club for VIPs only (invite-only private beta or discord) but then quickly are released to the world for everyone to get involved in.
Grassroots projects drive an unmatched ethos vs purely VC funded projects as the community has a sense of ownership and there are clear ways for users to get involved.
We have to be honest with ourselves in that most of crypto may be in it for the money, as well as the tech, so projects should lean into mercenary capital and attract it early on (i.e. high yield farming rewards to attract capital is fine to bootstrap initial adoption) but make sure you don’t give it all away too soon or you’ll be looking for more down the line.
A good rule of thumb is to seek out early launches that are focused on releasing a well thought out, magical vision to the world vs those early projects that are seeking to only pump the price of their token. The former lasts and the latter deflates.
Conviction is earned, never granted. Every attribute of a project, founders, products, and tokenecon exist along a spectrum and are never binary. As you continue to diligence a project and the project itself starts to deliver (or not deliver) your conviction will grow and you will be more comfortable with taking a larger position. If you want to learn more about this, listen to Ian Cassel whose success is also driven by averaging up in your winners.
Conviction leads to concentration which extends the opportunity of creating life-changing winners and leads to generational wealth creation. Putting 1-2% of your money (assuming just starting out) in a flyer won’t change your life since the sizing is too small and its designation as a “flyer” demonstrates you would easily sell it for other things along the way.
The sweet spot usually involves a few aspects that are blurry, but there is a logical path as to clear up the picture.
Announcing Our Investment In A New Team
Delphi Ventures is proud to share we have invested in Alpha Finance Labs. Tascha and Nipun check the boxes of being charismatic, technical and extremely professional, and relentless founders who are focused on shipping new code (Alpha Homora, AlphaX, AHV2, and more). They have fostered a killer community and their token could achieve clear value flows in the future. We will share more on Alpha in the coming weeks but encourage everyone to try Alpha Homora V2.