a Crypto VC breaks down his process

• Avichal Garg is the founder of Electric Capital, a crypto-focused venture capital firm.
• Garg recently explained why DeFi protocols like Uniswap will face problems in the near future.
• Garg believes that NFTs can help crypto go mainstream and explains his investment process.

Even in the midst of a bear market, there is always an opportunity to capitalize on underpriced investments.

Avichal Garg founded his venture capital firm Electric Capital during the 2018 crypto bear market, and in the years since, he has certainly capitalized on the incredible rise of cryptocurrencies. As CEO, he has led Electric Capital in early stage investments by some of the biggest names in crypto, including Magic Eden and Near Protocol.

During the August 4th episode of Manager Meetings, part of Capital Allocator’s podcast network, Garg broke down how Electric Capital views crypto investing, why he thinks Uniswap could be in trouble, and why he thinks NFTs are key to the mainstream crypto adoption. .

How to visualize investing in crypto

Garg told Manager Meetings host Maneesh Gandhi that he thinks of crypto companies as existing on a spectrum, or as he puts it, an x-axis and a y-axis. Companies that have high customer loyalty are on the left side of the x-axis, and companies that have capital-intensive, strong technical infrastructure are on the right side of the x-axis.

According to Garg, an example of a company standing on the far left of the axis would be Apple, with its strong connection to customers, while a company like Intel, which supplies computer processors and has less direct connection with end customers, would be on the far right.

“I think that applies to crypto and defi as well. What you see on the far left are people like Coinbase or Binance or FTX. They own the end-user relationship. They own KYC (know your crypto). They own onboarding,” Garg said.

He continued: “All the way to the far right would be Bitcoin and Ethereum tier-1. It’s really hard to build a new tier-1 and get it off the ground.”

Garg also explained how he views investments on the y-axis, which represents how much value a company captures – in other words, the higher on the y-axis a company is positioned, the better positioned it is to capture value. Garg said that companies stuck on one side of the x-axis or the other will more easily capture value, placing them higher on the y-axis, while companies in the middle will not.

“You can visualize a kind of U-curve, which is if you’re on the far left and you really own the user relationship, you can capture a ton of value. If you’re on the far right, you’ve got a heavy, hard technology problem, you can probably capture a lot of value. If you’re somewhere in the middle, you’re really like a systems integrator. You’re putting those two things together. Over time, that’s going to get squeezed,” Garg said.

Garg said Uniswap stands in the middle of this spectrum. Uniswap, a decentralized crypto exchange (DEX), processes over 100,000 transactions a day and uses ethereum as its encryption solution.

However, despite its current popularity, Garg believes that over time Uniswap will fall out of favor with crypto users, as investors who support a particular crypto project will prefer to use that project’s native DeFi platform – for example, a solana supporter may choose to use Serum DEX over Uniswap, as it is a solana native exchange – instead of Uniswap.

“You’re going to see them try to capture more value for the end user and try to own that interface,” Garg said of Uniswap.

He continued: “UniSwap really needs to try to move up either the left or right side of the curve, somehow start at the bottom and try to capture more value.”

With that framework in mind, Garg went on to explain the factors he specifically looks for when evaluating an investment.

“We’ve always thought that investing at the bottom of that U-curve in the long run is not a great place to be,” Garg said. “So there are some exceptions there, but a lot of these protocols we think ultimately won’t capture as much value despite being very useful. It’s just going to be very tough for them to actually capture significant value defensively overtime.”

He continued: “We worry that a lot of these DeFi protocols will actually just be pushed and won’t capture significant value without some very significant transformations in what they do. And if so, the real question ends up being: is is the protocol there to capture value, or is it the company built on top of the protocol that actually captures all the value? Do you really want to be invested in the protocol, or do you really want to be invested in the company?”

How to find smart crypto investments

Garg and his team at Electric Capital think about their investments from the mindset of a long-term investor and the value a company or protocol can capture over time — but how do they find those investments in the first place? The answer is simple: follow the developers.

“Find out where the developers are and where they’re spending their time. And that’s an early signal of where value addition will happen in the long term, especially if those developers are engaged,” Garg said.

Of course, finding out where developer interest lies is easier said than done. There is no one-stop-shop report detailing what developers around the world are working on in the crypto ecosystem. So Garg and his team made one themselves.

“We built a system that crawls all over GitHub and GitLab and a bunch of open source repositories and finds out where there’s real developer activity and finds out where people are actually writing code and where those people are long-term committed and credits the original developers of those things ,” Garg said.

The result of all this hard work is the Electric Capital Developer Report, an annual overview of the crypto and web3 projects that capture developers’ attention in a given year. The report has become an institution in the crypto world, an essential guide to upcoming crypto protocols, which ecosystems are seeing the most developer activity, and which projects crypto investors should keep an eye on.

Why NFTs will lead to mainstream crypto adoption

Garg believes that NFTs will play a particularly important role in the future of crypto.

“The high level here is that I’ve come to believe that NFTs are probably how crypto goes mainstream,” Garg said.

Right now there are 360,000 NFT wallets, and while the transaction value of NFTs has decreased during the crypto winter, the total number of transactions for NFTs has remained about the same this year. In other words, while the NFT market is suffering through the current crypto winter just like other parts of the crypto world, interest in NFT has remained shockingly stable – and that interest will only increase over time, according to Garg.

“The belief we’ve come to is that the NFT markets are actually going to be more defensible than the cryptocurrency markets. And that’s because the assets you’re buying are by definition unique and distinct,” Garg said.

“If you look at what’s happening with NFTs, there are musicians and athletes and celebrities, these elements of the culture and the carriers of culture, and these are things that 3 billion people want to do,” Garg continued. “Everyone listens to music. Everyone watches sports. Everyone is interested in celebrities and movies.”

It’s worth noting that while celebrity NFTs have grown in number – with celebrities like Grimes, 3lau and Ja Rule getting in – celebrity-endorsed digital assets currently have a negative reputation due to the hype many celebrities had for crypto shortly before the market plunged.

But Garg said NFTs have begun to illustrate some of the real-world use cases and utility that they can offer, and those use cases will only continue to emerge.

“And that’s really what NFTs do. They are, in my opinion, the first real consumer application for a lot of crypto infrastructure, for peer-to-peer payment infrastructure,” Garg said.

“NAS came in and did an NFT sale where the NFTs entitled you to a portion of the royalties from his music, and it works,” Garg continued. “You start to see real communities forming around these NFTs. You can go to conferences. You can go to in-person meetings, where the only way to get in is to have the NFT for that community, or token-gated Discords where you must have NFT to get in. The experimentation that happens in that universe is amazing.”