Crypto Venture Capitalist Breaks Down Likely Winners And Losers From Ethereum Merge

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 funds, which have 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 looks for in terms of potential investments. He also shares some insight into investments that he is most proud of as well as a major opportunity that got away. Finally, we touch on who he thinks the winners and losers will be from the Ethereum “merge” and what crypto verticals are poised to succeed next.

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

Veradittakit: There are a few key differences. On the diligence side of things, sometimes you get anonymous founders. In addition, a lot of these deals are not just based in Silicon Valley, they’re global. So you have to work a bit harder to figure out mutual connections and do due diligence on them. I’d say, since a lot of these companies are going to go public and issue a token maybe sooner rather than later, it’s good to evaluate the early community perhaps by jumping 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?

Veradittakit: First, we have a bit more time to evaluate deals. There also seems to be a bit more leverage for investors to create more reasonable valuations, but also structures that make sense. Knowing that tokens are not launched as often during a bear market, a lot of the rounds right now are going to be equity. I’d also say that a bigger percentage of the deals are U.S.-based, because a lot of the sectors that are being focused on right now are around the infrastructure side of things. We’re also starting to see a shift back towards more companies being formed from guys leaving established companies like Facebook and Twitter. Generally, a lot of the deals right now are focused on trying to help institutions come into the space, and we will see a little slowdown in consumer.

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

Veradittakit: We try to invest in the winner in each category that we think is interesting, but we also believe in geographic 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 custodian for a certain geography or exchange wallet–those 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 instance, there are folks who are investing in similar companies in different chains. And that seems to be an interesting diversification and segmentation, where it’s almost like iOS and Android, taking it as 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?

Veradittakit: When we get introduced to a deal, we first try to determine if there’s any sort of validation that we can get through that connection. For instance, what sort of introductions that person has done for us in the past, and how have they gone? What sort of relationship does that person have to the company? Are they already a customer or investors? Those are very strong signals versus just a buddy from college. From there, I’d say it really just goes down to the use case and our competitive positioning. The next check I would do is examine things like what are these guys doing? What market? Is it big enough? Is it conflicted with anything that I’m doing right now? I also look at their technology differentiation, quality of the team and customer service. At the end of the day, it circles back to, “Okay, all this looks great. What can I do? Am I the best investor for them? What can I do to really increase the value of that company, because that also gets me excited to see if I can provide a lot of value to them.”

One major red flag would be a question about an entrepreneur’s character. I think that’s the most important one. Another is when people overpromise and under deliver. I also like for folks to be humble, and if people are a little too over the top in terms of marketing that will cause me to dig in further.

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

Veradittakit: There’s so many within our portfolio that have done really well, and I don’t want to pick favorites. But one worth mentioning, perhaps since I’m on the board, is Alchemy. We led their Series A, and the whole team has been just huge in terms of helping them get to where they’re at right now. They’ve reached a valuation of $10.2 billion, so it really shows that we’re committed to funding great teams that build a product that serves a huge use case and a need for the entire ecosystem. Regardless of what chain, these guys are focusing on the customer and they just ship on the product side. That’s exactly what you need, especially if you’re servicing developers. To be 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.

In terms of ones that we missed out on, I really wish that we invested in FTX early on. 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 up in terms of regulations.

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

Veradittakit: It does seem like the merge is going to happen, and I think that it’s going to bring a lot of visibility and development on Ethereum. The Ethereum ecosystem is going to thrive and folks are going to be looking at Ethereum, Layer 2s. I also think it could be helpful for DeFi and potentially even push some other use cases like NFTs on Ethereum. So, it’ll probably shift the focus a bit more to Ethereum. The other Layer 1s will have to evaluate how that goes and figure 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 in fact securities. What are your thoughts on this recent activity?

Veradittakit: 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 entrepreneurs. I also think there’s also an opportunity to be investing in infrastructure and technologies that are looking at the more regulated world, such as things around know your customer (KYC), security and insurance.

Forbes: Do you have any parting thoughts?

Veradittakit: Number one, I’m seeing so many awesome entrepreneurs coming from traditional tech. It seems like there’s a ton of people coming from Robinhood, Google, Stripe and DoorDash. Maybe some of them got laid off, maybe, maybe not. But now that stock prices are down there’s less of an incentive to stay around and people are choosing to build in a crypto bear market. Plus, a lot of capital has been raised on the venture capital side of things. Many funds have come in and a lot of them are focusing on the seed stage. So I’m seeing a lot of great ideas and a lot of great companies being built.

One area that I’m particularly excited about is NFTs. It’s still super early, but we are going to see a lot more opportunities for both creators and brands to engage with NFTs. I’m also very excited about gaming, but I think we are still too early here. It takes time to build really good games and I think the best games are going to be built by gaming entrepreneurs. But there’s an opportunity for some of the infrastructure to be provided to help those game developers to tap into blockchain. So those are the areas I feel like are primed for more and more disruption. I’m also excited about the opportunity to invest around the world in areas like India, Southeast Asia and Latin America, especially around NFTs and gaming. Those areas are prime for a lot more fiat on ramp options, a lot more payments infrastructure, and then also things around NFTs and games.

Forbes: Thank you.