The Liquidity Dilemma

I hear a lot of new crypto fund managers promote their investment strategy by saying they “act like a venture capital fund but with hedge fund liquidity”.

These managers claim they intend to make token and equity investments (that convert to tokens), selectively capitalizing on short-term gains while staying committed to other projects.

While this approach sounds good in theory, I think the discipline and skills required to be a hedge fund manager are inconsistent with those required to be a long-term venture capital investor and vice versa; hedge fund positions are counted in days, weeks, months or single years and venture capital is a 5-20 year completely illiquid horizon.

I also think this hybrid mindset introduces a tenuous relationship between the people providing early operating capital and projects that have long term ambitions.

When you’re disrupting massive industries with heavily entrenched incumbents — endeavors that often take 5-20 yrs — real-time visibility into your share price is a big distraction. You don’t want investors selling their shares at the first hint of an unexpected obstacle, just as you certainly don’t want founders or employees doing the same.

To me, venture capital is about commitment. Massive disruption takes time and commitment from all stakeholders, not just founders. This is why founders and employees traditionally have a 4-year vesting period with a 1-year cliff on stock grants.

This is why I think the “act like a venture capital fund with hedge fund liquidity” mindset will be caustic to most early projects with big ambitions. Early operating capital needs to expect things will take years to see real progress. Most new protocols aren’t a “build a web app in a weekend” type of thing. We are re-writing entire foundational elements of the internet from the ground up and these things take time.

If you’re a founder or investor and the first thing you do in the morning is open up coinmarketcap.com, you’re in for a bumpy ride.