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 could 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 of some of the biggest names in crypto, including Magic Eden and the Near Protocol.

During the August 4 episode of Manager Meetings, part of the Capital Allocators podcast network, Garg broke down how Electric Capital views crypto investments, why he thinks that Uniswap may be in trouble, and why he believes that NFTs are the key to 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 lay on the right side of the x-axis.

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

“I think it applies to crypto and defi as well. What you see on the far left are folks 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 on the far right would be Bitcoin and Ethereum layer-1’s. It’s really hard to build a new layer-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 placed it is to capture value. Garg said that companies that are firmly on one side of the x-axis or the other will capture value more easily, placing them higher on the y-axis, while companies in the middle won’t. 

“You can visualize a sort of a U-curve, which is to say that 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 have some capex heavy, hard technology problem, you can likely capture a lot of value. If you’re somewhere in the middle, you’re essentially like a systems integrator. You’re piecing these two things together. Over time you’re gonna 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 coding solution.  

But despite its current popularity Garg believes that as time goes on Uniswap will fall out of favor with crypto users, since investors who support a particular crypto project would rather use that project’s native DeFi platform — for example a solana supporter may opt to use the Serum DEX over Uniswap, as it is a solana-native exchange — rather than Uniswap. 

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

He continued: “UniSwap really has to try to move up either the left hand side or the right hand side of the curve, somehow starting with being at the bottom and trying to capture more value.” 

With that framework in mind, Garg went on to explain the factors that he specifically looks for when he considers 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, ultimately we think will not capture that much value despite being very useful. It’s just going to be really tough for them to actually capture significant value defensively over time.”

He continued: “We worry that many of these DeFi protocols will actually just get squeezed and will not capture significant value without some very significant transformations on what they do. And then in that case, the real question ends up being: is it the protocol that’s capturing value, or is it the company built on top of the protocol that’s actually capturing all the value? Do you really wanna be invested in the protocol, or do you really wanna be invested in the company?”

How to find smart crypto investments

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

“Figure out where the developers are and where they’re spending time. And that’s an early signal on where value accrual will happen over the long term, especially if those developers are committed,” Garg said.

Of course, figuring out where developer interest lies is easier said than done. There’s no one-stop-shop report that details what developers around the globe are working on in the crypto ecosystem. So Garg and his team created one themselves.

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

The result of all this hard work is the Electric Capital Developer Report, an annual breakdown of the crypto and web3 projects that are catching developers’ attention in any given year. The report has become an institution in the world of crypto, an essential guide to up-and-coming crypto protocols, which ecosystems are seeing the most developer activity, and what projects crypto investors should be keeping an eye on.

Why NFTs will lead to mainstream crypto adoption

Garg believes that NFTs will play a particularly important role for crypto’s future. 

“The high level here is 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 have declined during the crypto winter, the overall number of transactions of NFTs has stayed roughly 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 NFTs has remained shockingly stable — and that interest will only rise over time, according to Garg. 

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

“If you look at what’s happening with NFTs it’s musicians and athletes and celebrities, these elements of culture and the culture bearers, and these are things that 3 billion people will do,” Garg continued. “Everybody listens to music. Everybody watches sports. Everybody is into celebrities and movies.”

It is worth noting that while celebrity NFTs have grown more numerous — with celebrities like Grimes, 3lau, and Ja Rule entering the space — celebrity-endorsed digital assets have a negative reputation at the moment due to the hype many celebrities had for crypto shortly before the market plummeted. 

But Garg said that NFTs have begun to illustrate some of the real world use cases and utility that they can provide, and that these use cases will only continue to gain traction.

“And that’s really what NFTs are doing. They’re, 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 part of the royalties from his music and that works,” Garg continued. “You’re starting to see real communities form around these NFTs. You can go to conferences. You can go to in-person meetups, where the only way to get in is to have the NFT for that community, or token-gated Discords where you have to have the NFT to get in. The experimentation that’s happening in that universe is amazing.”