Venture capital has been the main driver for a large number of blockchain startups. Founders know how competitive it can be to secure valuable venture capital funding to keep the lights on and employees paid in the crucial early days of a new venture.
In a series of new interviews, Cointelegraph spoke with the heads of the most active funds investing in cryptocurrencies to understand their perspectives, hear their successes and failures, and find out what excites them about a new project in the Web3 space. .
This week Cointelegraph spoke with Yida Zhao, founder and managing partner of Shima Capital. He founded Shima Capital in 2021 and since then the fund has been very active, investing in nearly 100 projects. Gao is also an assistant professor at MIT.
Cointelegraph. Shima Capital was established relatively recently; However, the company has already invested in some of the most popular projects in the cryptocurrency industry. What investment do you consider to be your most successful to date?
Yida Gao. It's like asking a parent to choose their favorite child. I would say it's too early to make that decision, as you mentioned. We definitely have a few that have done well and gained traction, such as Wombat Exchange, Berachain, Magna, Monad Network, and more. We have also incubated several projects that we will announce soon. For now, we are proud of all the portfolio companies that have led this ongoing market. So the fact that they are still standing means that they were able to overcome one of the most difficult situations they will ever face.
KT: Who were your early investors and how did you convince them to invest in such a risky industry?
Y.G. Although some of our investors have been mentioned in previous announcements, we have taken a more friendly approach and prefer to respect their privacy. However, I've been working in finance and risk for a decade, so I have experience in both traditional investing and Web3 investing. I believe that the ups and downs of the market and its emotions have played a major role in gaining the trust of the world's most successful investors.
ct. At the beginning of Chima Capital, how did you manage transaction flow?
YG: Although Shima Capital itself was new, and still is to some extent, in the industry since 2015, it has tried to build a strong global network and reputation in the industry. In addition, we have a world-class team in Chima who individually adds credibility and additional value to our organization. Our slogan “Breaking down walls for our founders” also seems to help attract deal flow.
About the industry
ct. Given the recent volatility in the cryptocurrency market and high-profile cases involving companies such as Celsius, 3AC, Alameda Research, and FTX, how do you justify the risks to your investors?
Y.G. Most of our investors have been investing in Web3 and cryptocurrencies for some time and are aware of the risks in this industry (or any industry, for that matter). We provide regular quarterly updates to our shareholders and also receive frequent emails, text messages or phone calls with them. We believe it's about building relationships and trust, and I work hard and love Shima Capital to maintain strong relationships and build lasting trust with everyone we work with.
ct. FTX has been considered the industry's safe bet for some time, but recent events have raised questions about the need for regulation. What type of regulation do you think could prevent scenarios like FTX, Alameda, and 3AC from happening again in the future?
Y.G. We invest in projects that we believe are sustainable and responsible, with or without formal regulations. At Shima Capital, we are registered with the SEC and work daily to maintain SEC compliance. It is questionable whether regulation can prevent the above scenarios, but as long as we continue to act in good faith for the benefit of all stakeholders, our industry will not only survive, but thrive.
ct. What is your vision of the ideal alignment between the cryptocurrency community and governments? Moreover, what is the impact of a possible tightening of US regulations on the development of the industry?
YG: As I mentioned before, there can be a friendly coexistence between regulatory bodies and the broader Web3 industry/community. As long as we all try to act responsibly and as long as regulations do not become too restrictive, the industry will continue to grow rapidly and innovate.
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ct. One of the biggest challenges in the cryptocurrency industry is the lack of common use cases. For many, this industry remains synonymous with illegal activities such as money laundering and terrorist financing. What do you think needs to happen to change this perception?
YG: I think we're already making big steps in this direction. DeFi has come a long way in recent years, and the infrastructure has also evolved to support smoother user experiences. We have also completed projects in the gaming and consumer verticals. This can mean a lot of different things to different people, but at its core, it's about making digital property rights available to everyone and owning their assets, like playable characters, for example. And with more well-known non-crypto brands joining Web3 in one way or another, it brings more credibility.
ct. Are NFTs a thing of the past or do you see them evolving into something new? What do you think is the next big thing?
Y.J. Like anything new, there can be ups and downs during the life cycle. In the case of NFTs, we've actually been seeing an increase in the volume of NFTs since then, with more and more big brands joining in. Recent developments are moving more towards NFT financing, or NFTFi, which is another area we've been focusing on. We believe NFTs can maintain this new momentum and regain their popularity. But to open the door to other sectors, we're seeing the growth of real-world assets, or RWA, and renewable financing this year, along with more innovative chain ideas like terraforming.
ct. The recent rally was driven by the “Summer of DeFi.” What catalyst do you think will spark the next bull run?
YG: Don't we all wish we had that answer? But the truth is that there are many factors that will allow this to happen, some internal to cryptocurrencies and others external, such as regulation by governments. If I had to pick two possible "summers" they would be RWA and Web3 games.
ct. Given the recent collapse of several major banks, many are concerned about the existing financial system. How do you see the future of finance and economics, and what new standards do you think will emerge and when?
Y.G. It's much easier to figure out what went wrong after something happens, but unfortunately, there's no crystal ball here. I believe that a world of traditional and blockchain-based financial systems can likely exist in the new future. Traditional banks have been exploring blockchain technology and cryptocurrencies for years, so it's only a matter of time before they gain popularity. The grand opening will be clearer regulations in industry leaders such as the United States.
ct. The world is excited about AI and ChatGPT. Some believe that AI will “steal jobs,” while others believe it will make our lives better and easier. What is your opinion? Also, what significant changes do you think AI will bring to the cryptocurrency industry?
YG: At this point, AI and ChatGPT are great idea generators and editors. For example, you can type the query “Web3 Marketing Practices” and it will generate 10 ideas. Some are good, some are not so good. Same with editing. Add web copy or an article and ask the AI to critique it for you, and it will do it. But that's why we'll always need employees. There is literally a limit to what ChatGPT knows (September 2021 is the final result of its knowledge base so far). Anyone can use AI as a starting point, but we will always need humans to modify, improve, add and remove. Areas where cryptocurrencies can help include democratizing data classification with token incentives, data testing, and testing AI inference calls to prove model verification.
Holding companies
ct. How does Shima see the ideal startup? Is it the idea, the personality of the founder, the team, or traction that comes first?
Y.G. Honestly, we take everything into account. We have to believe in the product first, but we also have to believe in the founder's vision and the team's ability to execute on that vision. A completely new idea will not be a hit among users right now, but the path to that success should be clear. During due diligence, we look at the entire package, which is generally divided into three categories: team, product and market. As a core foundation, we care more about the team because the product and market can always change in this fast-paced industry.
ct. Shima Capital has invested in several DeFi startups. How do you assess the risks associated with DeFi investments and what steps are you taking to mitigate those risks?
Y.G. There are many risks of investing in Web2 as there are in Web3, including DeFi. The important thing is to understand that there are risks, whatever they may be, and to identify and weigh them as best you can before investing. We spend a lot of time conducting due diligence and researching all aspects of the business, from the concept to the team to the inherent risks, and then we make an informed decision. For DeFi in particular, it is also important to review smart contracts whenever possible to ensure there are no known errors. (De.fi is a good tool for automatically scanning common vulnerabilities in smart contracts.)
ct. What's the best way for startups to get your attention?
YG: Everything you mentioned in this interview. A clear idea, founders are in a unique position to market that idea, and a clear marketing strategy presented in a clear pitch.
ct. Does Sima invest only in stocks or in land as well? Under what circumstances?
Y.G. We primarily invest in SAFEs [simple equity futures contracts] with token collateral, but sometimes we also invest in tokens. Conditions under a specific agreement.
CT: What is your fastest growing portfolio of companies and what is the key to your success?
Y.G. We have a few companies that have done well in the cryptocurrency market such as Wombat Exchange, Berachain, Magna, and Monad Network. Choosing one from a long list is extremely difficult, because the definition of rapid growth will vary across economic models. In order to succeed, we believe that the founding team is the primary key to success. This includes the team's ability to identify high-potential markets and implement aggressive strategies to capture that market.
TM: How do you find the best deals?
Y.G. We have a deep network of connections in the venture capital world and strong industry relationships, from OG angel investors to stock exchanges and other strategists. Our investment team also actively underwrites deals through hackathons, demo days, campuses, and even Twitter. We're always looking for the next big project.
ct. Many prominent investors such as a16z and Shima are investing in Web3 games. However, many metaverse and Web3 projects seem bloated. What drives investors to remain bullish on Web3 games and virtual environments?
YG: You need to look beyond the buzzwords and ads and focus on the underlying technology and, above all, the user experience. With games, the only thing for gamers is the gaming experience. If it's a good game, they won't care about the technology used to build it. Most gamers won't be able to tell you how Web2 games are currently made, but they will be able to tell you which games they like to play and why.
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The user experience trumps all others, whether it's Web3 or not. Some reasons to be excited about Web3 games include their ability to shorten development cycles through short feedback loops between developers and their gaming community, interoperability of digital game assets/IP, and new user acquisition strategies in a post-IDFA world. Advertiser IDs displayed by Apple] and new game mechanics such as fully blockchain games connected only through blockchain technologies.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk and readers should conduct their own research before making a decision. 