This post is about a spectrum under which we underwrite the venture investments at Social Graph Ventures. I call it the token durability and profitability spectrum, and it’s unique to crypto venture investing, due to the early liquidity that can be achieved in token generation events.
Nowadays, 95% of the crypto deals we look at include either a token warrant, a simple agreement for future tokens (SAFT), or just some legal language on the terms on which the early stage investment will translate into a liquid token, if / when the company decides to launch.
This is how we assess these token venture deals: either durable, or profitable.
Durability
A durable investment thesis is where the token value endures over time. It is when the project has a clear road to produce a stream of revenues, which can be used to value the underlying token. The token has a flywheel and aligns stakeholders. The token governs what happens with these revenues, and accrues value directly from them. The token governs the future of the project. This is a very elegant model. Sometimes, a durable thesis never needs to launch a token.
When assessing for a durable thesis, you should ask yourself:
Do I believe these founders are on their life’s mission? Is this going to be their life’s work? What happened in their life’s that positions them this way?
Is the current product having clear traction to justify a stable revenue stream now or in the future?
Is there a token model flywheel that accelerates the trajectory of the project but is also sustainable 10yrs down the road?
There’s a lot more, but these are the basics. If the answer to those questions is positive, you have a durable project.
Profitability
On another hand, you have a profitable thesis. In these cases, as an investor, you’re assessing the potential exit value of the token once the token goes live.
The spear of this thesis is a memecoin. There’s no revenues ever backing the token. Its value is based on attention. The community. Speculation. It comes and goes. There’s not a single reason why it has strong durability, other than a couple of memecoins (or NFTs) that have a strong brand value.
Then, on a similar side of the spectrum, there’s projects with ‘utility tokens’, these tokens don’t really have a logic on how cash flow is tied back to them, the company could generate cash flows, but those may as well go in totality or partially to equity holders. This dichotomy creates a very obscure and hard to price digital asset.
When assessing for a profitable thesis, you should ask yourself:
Will the team be able to create a strong brand and community?
What is the token unlock schedule of this deal for me and others?
What is the narrative behind this, and will it last long enough after the token unlocks?
What valuation am I getting in at, and what valuation do I think it will trade at TGE and different points in time?
One versus the other
As you can see, assessing durability is harder than profitability. The dilemma is that both of these thesis can produce returns for your portfolio. The dilemma is even worse, profitable deals are sometimes faster to return, having a higher IRR than durable deals.
This is similar to tradfi’s value vs. trend investing, but at earlier stages, where markets are even more inefficient, and there’s legal gray space everywhere.
We would love our portfolio to be 100% durable, but it’s hard, and passing on a profitable deal might not be the right call at that time. The opportunity cost of profitable deals in crypto is just too high. This is why we see a lot of ‘VC tokens’ boom and bust. This is why those who are earlier make the most, and if you’re late, you’re done.
All this to say: We try to keep your portfolio as durable as possible, but we don’t pass on “left brain” deals that might be profitable for the portfolio.
This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Social Graph Ventures LLC
