Crypto Venture Capitalist breaks down likely winners and losers from Ethereum merger

Paul Veradittakit joined Pantera Capital as a partner in 2014, where he focuses on the firm’s venture capital and early stage token fund investments. He helped launch Pantera Venture Funds and the firm’s token fund, which has made more than 100 investments. Paul also sits on the board of Alchemy, Blockfolio and Staked, is a mentor at The House Fund, Boost VC and Creative Destruction Labs, and is an advisor to Audius, Ampleforth and Set Labs.

In this interview, we discuss how Pantera is approaching this new bear market, the best ways to build diversification into a portfolio, and what he’s looking for in potential investments. He also shares some investment insights that he’s most proud of, as well as a big opportunity that got away. Finally, we touch on who he thinks the winners and losers will be from Ethereum’s “merger” and which crypto verticals are poised to succeed next.

Forbes: How would you say being a crypto venture capitalist is different from being a traditional VC?

Veradict Kit: There are a few key differences. On the flip side of things, sometimes you get anonymous founders. Additionally, many of these deals are not just based in Silicon Valley, they are global. So you have to work a little harder to find out interconnections and do due diligence on them. I would say, since many of these companies are going to go public and issue a token sooner rather than later, it’s good to evaluate the early community, perhaps by hopping on Telegram or Discord servers. Deal structuring can also be different and we want to find the right alignment between equity and tokens for each specific deal.

Forbes: How is investing in a crypto winter different from investing in the crypto bull market?

Veradict Kit: First, we have a little more time to evaluate deals. There also seems to be a bit more leverage for investors to make more sensible valuations, but also structures that make sense. Knowing that tokens don’t launch very often during a bear market, many of the rounds right now will be equity. I would also say that a larger percentage of the deals are US-based, because a lot of the sectors that are being focused on right now are around the infrastructure side. We’re also starting to see a shift back towards more companies being formed from guys leaving established companies like Facebook and Twitter. In general, a lot of the deals right now are focused on trying to help institutions get into the space, and we’ll see a little bit of a slowdown in consumers.

Forbes: What is your approach to building diversification into your portfolio?

Veradict Kit: We try to invest in the winner in each category that we think is interesting, but we also believe in geographical diversification. When we invest in layer 0, 1 or 2 protocols, we take a global perspective. But once you start getting into the infrastructure side of things – the caretaker of a certain geography or exchange wallet – they can be geographically specific, especially when they involve regulations and fiat on ramps. It’s also interesting to see that there seems to be some diversification across platforms. For example, there are people who invest in similar companies in different chains. And that seems to be an interesting diversification and segmentation, where it’s almost like iOS and Android, it takes like completely different ecosystems and huge market sizes.

Forbes: What markers do you look for in a potential investment? Also, are there any red flags that immediately make your Spidey senses perk up?

Veradict Kit: When we are introduced to a deal, we first try to find out if there is any kind of validation that we can get through that connection. For example, what kind of introductions has that person made to us in the past and how have they gone? What kind of relationship does this person have with the company? Are they already a customer or investors? Those are very strong signals versus just a buddy from college. From there I would say that it really just comes down to the use case and our competitive position. The next check I want to do is investigate things like what are these guys doing? Which market? Is it big enough? Does it conflict with something I’m doing right now? I also look at their technology differentiation, the quality of their team and their customer service. At the end of the day, it circles back to, “Okay, this all looks good. What can I do? Am I the best investor for them? What can I do to really add value to that company, because that also makes me see if I can add a lot of value to them.”

A big red flag would be a question about an entrepreneur’s character. I think that is the most important thing. Another is when people overpromise and underdeliver. I also like people to be humble, and if people are a little too over the top in terms of marketing, that will make me dig further.

Forbes: Are there any deals you’re really proud of or deals you regret passing on?

Veradict Kit: There are so many in our portfolio that have done really well and I don’t want to pick favourites. But one worth mentioning, perhaps since I’m on the board, is Alchemy. We led their Series A and the whole team has just been tremendous in helping them get to where they are right now. They’ve reached a $10.2 billion valuation, so it really shows that we’re committed to funding great teams that are building a product that serves a large application and ecosystem-wide need. Regardless of the chain, these guys focus on the customer and they only ship on the product side. It’s exactly what you need, especially if you serve developers. Being able to go in there, be the right partner for them and be able to provide so much value to them – everything from hiring to business strategy.

As for the ones we missed, I really wish we invested in FTX early. We ended up having some exposure through some acquisitions of portfolio companies like Blockfolio, but at the time we weren’t quite sure how things were going to shake out in terms of regulation.

Forbes: Do you think the Ethereum Merger is going to happen in September? If so, which tokens are poised to rise or fall as a result?

Veradict Kit: It seems like the merger is going to happen and I think it’s going to bring a lot of visibility and development to Ethereum. The Ethereum ecosystem is going to thrive and people are going to look at Ethereum, Layer 2s. I also think it could be useful for DeFi and potentially even push some other use cases like NFTs on Ethereum. So it will probably shift the focus a bit more to Ethereum. The other Tier 1s need to evaluate how things are going and figure out what their differentiators are going to be post-merge.

Forbes: The SEC has been very active in recent weeks, especially when it comes to claiming that many tokens available for sale on exchanges are actually securities. What are your thoughts on this latest activity?

Veradict Kit: We’re going to continue to try to help educate and push regulation forward. Clarity is better than being in a state of unknown, especially for our founders. I also think there is an opportunity to invest in infrastructure and technologies that look at the more regulated world, for example things around know your customer (KYC), security and insurance.

Forbes: Do you have any parting thoughts?

Veradict Kit: Number one, I see so many amazing entrepreneurs coming from traditional tech. It seems like there are a ton of people coming from Robinhood, Google, Stripe, and DoorDash. Maybe some of them were laid off, maybe, maybe not. But now that stock prices are down, there is less incentive to stick around and people are choosing to build in a crypto bear market. In addition, a lot of capital has been collected on the risk capital side. Many funds have come in and many of them focus on the seed stage. So I see a lot of great ideas and a lot of great companies being built.

One area that I am particularly excited about is NFTs. It’s still very early days, but we’re going to see many more opportunities for both creators and brands to engage with NFTs. I’m also very excited about gameplay, but I think we’re still too early here. It takes time to build really good games, and I think the best games are going to be built by game founders. But there is a possibility that some of the infrastructure could be provided to help these game developers make use of blockchain. So it’s these areas that I feel are primed for more and more disruption. I am also excited about the opportunity to invest around the world in areas such as India, Southeast Asia and Latin America, particularly around NFTs and gaming. These areas are ideal for a lot more fiat on ramp options, a lot more payment infrastructure, and then also things around NFTs and games.

Forbes: Thank you.