Talk to Folius Ventures Founder: New Web3 Opportunities in B2C. AP entrepreneurs enjoy the advantage
In 2022, the hottest web3 game must be STEPN. Its success also has brought Folius Ventures to fame as its early lead investor. As one of the impressive VC new stars, its representative investment projects include such star projects as Project Galaxy, Scroll, and CyberConnect.
One interesting thing is that its investment is only for Chinese entrepreneurs or entrepreneurs in the Asian-Pacific region. Its founder Jason Kam, Jin Qiu in Chinese, is a Chinese growing up in Hong Kong. Jason, 32 years old this year, is experienced in investment banking, once working for Wall Street investment banks, the New York family offices, and hedge funds, with a long focus on the emerging market in the Asian Pacific region.
Another name for Jason is @MapleLeafCap on Twitter, where he has posted many insights on Web3, Defi, and GameFi.
On the first morning of August, ChainCatcher invited Jason to have an in-depth conversation, when he was joining a blockchain week activity in South Korea. In this conversation, Jason shared the investment strategy and achievements of Folius Ventures, and his ideas on hot topics such as Ethereum upgrading, bear market cycle, and web3 development direction. Besides, he shared his thinking on the dilemma facing Chinese entrepreneurs and the solutions.
Jason believes that the next chapter of Web3 will be focused on B2C, and entrepreneurs in the AP region will have more advantages than their western competitors in the next 5 to 10 years.
ChainCatcher: Can you introduce to us how did you enter into the crypto industry and start your own business?
Jason: My Chinese name is Jin Qiu, and I was born in 1990. I lived in Hong Kong before I entered senior high, and I lived in America since then. In 2012, I graduated from Carnegie Mellon University and worked for investment banks and family offices on Wall Street since then. For the past 4 to 5 years, I worked in a hedge fund in New York, mainly focusing on secondary small-cap companies in emerging markets around the world. I was mainly in charge of China-related companies, for which I have done much research. So that’s all my working experience.
My interest in cryptocurrency occurred in early 2018 when the market turned bear. After that, I opened an account (@MapleLeafCap) on Twitter to do some analyses on crypto through the lens of traditional finance anonymously. During the Defi Summer, I also shared my ideas for my interest in that. Throughout Twitter, I have known many friends in this industry and had very close communication, and it turned out that they were senior managers and even GPs of funds. And then they encouraged me to join this industry, and I decided to resign to focus on this new cause under their support.
I resigned in May 2021 and established Folius Ventures in September same year. Our investors include Framework, Galaxy, and Dragonfly. For investors, we are more like a fortress in the AP region, behind which they also will be there for us. This year, we are also raising the fund, so there will be a considerable amount of capital flooding into the crypto market.
ChainCatcher: What is the main difference between Folius Ventures and other investment institutions?
Jason: Our difference lies in three points:
First, we have a preference geographically. We focus on projects and entrepreneurs in China and the AP region.
Second, though we are called Folius Ventures, we actually take a Cayman hedge fund structure. 2/3 of our underlying investment is on the secondary market, and 1/3 is on the primary market. We have a three-year lock-up period, and a quarterly gate, so this is a mixed investment on the primary and secondary market. Also, we prefer small and mid-sized start-up companies. In the primary market, corresponding to the seed funding round and series A round, the valuation should be less than 200 million dollars. In the secondary market, we hope to buy companies with FDV of less than 500 million dollars. During the whole cycle, we prefer to not take large-cap tokens, like BTC and ETH.
Third, the crypto industry is like a Roujiamo (a Chinese food similar to a hamburger). The meat in the middle is tech-oriented, and our company prefers the bread above and below the meat. The bread is the basic infrastructure and tool with its own SaaS business pattern, able to expand when the industry grows; or the top-layer application, which can bring huge traffic to the industry.
In all, Folius takes a mixed investment strategy in the primary and secondary market, specifically focusing on an early investment in the AP region, with business logic and mobile apps as a great focus.
ChainCatcher: Specifically, what is your investment strategy and style?
Jason: In my last job, I analyzed secondary companies in emerging markets around the world, which have several similarities to many companies in the crypto market today:
First, the crypto market is also an emerging market. It is just in the virtual world.
Second, in an emerging market, normally the enterprise governance is bad. Maybe the shares are controlled by major shareholders, who don’t know how to talk with investors in the secondary market and may do some shady dealing to harm the interest of secondary shareholders. In the crypto market, crypto holders do not have any retroactive rights to the company. In other words, it is important to check the ethics and morality of the founding team or its promise to its interest holders.
Third, for any country going through different development cycles, there should be a common pattern to achieve good performance. Also, many business patterns can be transplanted relatively intact from a post-developing country to a developing country. In this process, these business patterns may be fresh to local investors, and this creates room for arbitrage on price or value discovery. At the same time, the crypto market is not only an emerging market, it is also going through a journey from infrastructure building to the final flourishing of the entire business.
Combining these three points, many of the lessons learned from past investments in emerging markets can be replicated in the crypto market. Personally, my investment strategy consists of considering four main aspects: first, the ethics of the founding team, as this directly determines whether there will be value capture and whether it will last for a long time; second, whether the sector chosen by the project will have long term development; third, whether the business pattern is sustainable under this framework and whether we can gain profit from its turnover; fourth, whether the project has a team and the ability to solve problems.
In fact, this is still how I used to think about investing in the secondary market to make crypto investments. If the industry keeps developing, I think the Web3 market will become more and more similar to the Web2 Internet or Nasdaq companies, and the same methodology once used to analyze business logic is also now applicable.
ChainCatcher: How do you comment on Folius’ investment achievements? Can you talk about your most successful and regretful investments?
Jason: Since the founding of Folius last September, we have invested about 50 times. Half of them are small strategic investments that only take a small portion of and may bring some benefits to the whole portfolio. It is more like we want to befriend the project parties; half of them are more serious investments with considerable amounts, from 250 to 2000 thousand dollars, among which only five tokens were listed, two of five with losses. The rest of the three profitable tokens are STEPN, Project Galaxy, and Sportium, registering returns from about several to 100 times.
The privately offered fund in the primary market accounts for about 20% to 25% of our overall investment, registering a pretty good performance. The secondary market registered about a 10% to 20% loss from last September. Considering the crypto cycle, we take a conservative strategy and want to hold more cash.
From the results, STEPN should be one of the most successful ones. As a mobile to C product, STEPN really reflects why Folius was founded and can bring more traffic into this industry. Also, their team is composed of typical Chinese entrepreneurs with rich experience in Web2. So we were lucky to find such a project.
A regretful case may be Magic Eden. I knew the team from friends when it was first established, but at that time I was just thinking to hire people for Folius, so I did not follow up and make an investment. If I considered it more carefully, I would have invested it. So it is a pity that I missed it.
STEPN, the on-chain game lead invested by Folius Ventures
STEPN, the on-chain game lead invested by Folius Ventures
ChainCatcher: With the market turning bear massively, how will that affect your investment strategy? How long do you think the bear market may last?
Jason: Generally speaking, for the secondary market we will slow down and wait for opportunities; for the primary market, we will keep the pace and continue the investment. The dynamic of the secondary market is sluggish, so we have been very conservative since last September. I hope to invest 15 to 25 middle and small-sized tokens at the lowest point of the bear market with the lowest value, to company them get through the next bull market. In the primary market, we will keep the pace and continue to invest, expecting to invest in 25 to 35 good start-ups in the next 24 months.
I believe, with such high leverage and possible economic recession, the Federal Reserve is very likely to make blunders. One possible fatal mistake may cause a global economic recession to a certain degree, which may happen in the next year.
Before that, the potential change of the FED and the market speculation on it will bring us a good risk rally in the next 3 to 6 months. So this is a process where the market grows first and then drops. Why would we turn from the risk rally to the recession of next year?
Because the FED may change its attitude again after this potential one. It may reckon it necessary to curb the strong market investment sentiment and take austerity policies before the risk assets reach another apex. These would lead to some negative effects.
I think this round of bear markets will end next year, and then governments will again inject fluidity into the market. This will help the market to regain economic growth and bring up risk asset prices. The final bull market may come at the end of 2023 or 2024, with the FED starting to loosen its policies.
Why would we talk about fluidity here? Because I think the web3 industry is a continuation of Nasdaq, and it is an early Nasdaq in a small-cap market. It is on the very edge of risk assets and should be strongly correlated with risk assets.
One thing important is that when the next bull market comes, BTC will decouple with the whole web3 industry, and the crypto cycle in the future will not push forward as a three-to-four-year BTC halving cycle. Web3 will be more and more like a Nasdaq with its style. And when BTC shows fewer advantages, with the halving cycle less obvious, it is hard for me to guess where will BTC go to.
ChainCatcher: Now web3 is a hot topic in many industries, so for your understanding what are the main misunderstandings of web3 from web2 industries?
Jason: The first misconception is that what exists in this industry is right and what’s native is good, which is not true. I talk to a lot of entrepreneurs who feel that there are currently plausible methodologies for Web3 and assume at the outset that they are the right ones, such as that they must go for a community, they must go for some airdrop, and that NFTs must have a whitelist. They think that going into Web3 is the same as they used to go into Web2, with a fixed methodology and strategy.
There is no fixed paradigm in this industry. It is a very free, chaotic, and early-stage industry. Entrepreneurs should think in the spirit of the first principle, not presume that their experience in Web2 is wrong and that something new is right. They should be aware of their great capability of thinking and examining new things and be courageous to come up with some original strategies.
The second misconception is that they must be backed by some big and famous capital. Of course, this may stand in the past B2B era where many projects were still building big infrastructure.s However, for the more and more application-oriented era, capital will not help much besides the funds it can contribute. It is the product founder’s understanding of the product that determines largely whether the product can be successful, rather than the capital endorsement. So in many cases, if you’re going to raise money, I think you should focus more on how to get the product right, which will be more helpful.
The rest of the questions like: are there a lot of Ponzi in the crypto industry? Is the business pattern in the crypto industry not sound? Is it going to be decentralized or not? I think these discussions and thoughts are very healthy.
ChainCatcher: Which directions of web3 are you bullish on? And which are not?
Jason: Four directions I am optimistic with:
The first is entertainment and technology to C products, including Web3-related games, gamified apps, consumer goods, luxury goods, and IPs willing to carry web3 components, with the correspondent representative products as Axie Infinity, STEPN, Yuga labs, and Azuki. The entertainment industry is mostly virtual, able to hold huge traffic. It is also the most profitable, user-retaining, and value-capturing one in web2 and other industries, whose consumers are also the potential consumer group for web3.
The second is digitalized organization. In the web3 world, if you are full of ideas and experience, you can raise funds and distribute profit through the value network of web3. Capital will back up your dream.
The third is the original finance module. If the top-layer business pattern can have a long development, a larger demand for finance will ensue. The finance dynamic not available now will be achieved in the future. For example, the one-stop company supporting insurance, underwriting, and auditing, or the direct non-mortgage lending company.
The fourth is the way web3 logs in. That means an integrated account holds all materials of users and can directly complete the payment. This kind of account system is far better than the scattered web2 account system only with information display available.
Two directions that I don’t like
1. Homogeneous basic finance on-chain products. There is no point to have these similar products on chains. I am not interested in this kind of DeFi innovation only slightly adjusted each time.
2. Develop SaaS tools and infrastructure to serve upper-layer applications. Perhaps these entrepreneurs saw the success of SaaS companies in Web2 and took it for granted that they should do the same at this stage in Web3.
I don’t deny their potential to be successful. But I think it is not very practical and mind-lazy to do infrastructure building when the terminals/apps haven’t been built up. Of course, some requests are clear, and we are also optimistic about some creative and innovative directions on infrastructure and tools. So here I am more talking about some of the patterns hugely depending on the old paths.
Entrepreneurs should promote apps in an integrated manner and find use cases. The real excellent company can navigate the mist and should be an integrated one, without a specific infrastructure to help it.
ChainCatcher: You tweeted, “The next chapter of Web3 should be written by B2C apps.” Why? What should be the direction of B2C product innovation? How can we better connect with consumers and the real world?
Jason: I think it should start from a small app, maybe to hold some existing profit distribution or business patterns from web3, based on which it can iterate. In other words, it should find account systems and profit distribution scenarios both able to apply web3. And then based this to make experiments on business patterns.
Specifically, besides the finance app, we may also make a web3-native browser, based on which to carry web3 wallets and make cash out of advertisement. But the income from advertisements will not all be taken by shareholders but also given to some browser visitors. If anyways people use a website, why not use one that they can gain money from?
Also, we need to find high-frequency scenarios for entertainment or not, depending on users’ interests. It needs our exploration to see whether we can give part of equity to users, and encourage them to invite users and add app advantages fairly and equitably.
ChainCatcher: You have invested crypto app Jambo. What do you think about this kind of super web3 app? Will this become a new centralized product?
Jason: I invested in Jambo because I think it can explore many interesting web3 projects in Africa, which do not exist in China or Southeast Africa.
I think Jambo needs to think that what kind of apps can be greatly embedded into the web3 component to provide a better experience. This needs patient exploration and requires trails app by app. A European team of course cannot be better than a local team. We should also think about what to do. Maybe it is some simple utility payment function or a simple x-to-earn app.
It is hard for me to say whether we will have a web3 super app and how will it look like. In the web2 era, taking the ride of low fee of information transmission, several blockbuster apps with internet effect were able to stand out, dominated huge market share, and built up many other functions. This is how a super app is built. But I am not sure what these kinds of hot apps look like in web3 and I don’t even know whether we would have such a product with a strong internet effect.
As for whether centralization is a problem? At the lowest recourse layer, moderate decentralization matters. If the cost of tampering is not substantially higher than potential gain, then there is no point for this industry to exist.
But for companies, what specific things can be implemented? And what can bring more users to the industry? What kind of products can be made out of web3 components? At the end of the day, it will be more like a spectrum. How will the industry look like is not decided by the current players in web3 and crypto industry but by the final winner: the finalist who can capture the 100 million users. You know, history is written by winners.
So, do not be fixated on what the industry like or what the industry finds traditional. This would make you constrained by conventions, which we don’t need.
Crypto app Jambo invested by Folius Ventures
Crypto app Jambo invested by Folius Ventures
ChainCatcher: How will a web3 app that fits your expectation look like?
Jason: An app with web3 functions should make things based on what users have and make them strongly bound with some financial scenarios. Its financial character does not have to be profitable, but rather it has to be strongly bound to user interests or it should strongly capture values. Compared with a same-level web2 app, a web3 app should be able to hold some very direct and different profit distributing patterns, which deserves the attention most.
It should be a new experiment on minimizing value transmission. What can users try?
First, what I have should bring me many conveniences in different scenarios. For example, if I have an NFT, an accounting system open to everyone, then based on this the business-generated scenarios would be very realistic. In the past, the account of Pinduoduo (an e-commerce platform) is not owned by and open to Tencent, so Tencent is unaware of what Pinduoduo has. But now if people recognize that your NFTs are on the chain, then they can call that out to give you some special product experience.
Second, with many similar products online, we should think about how to attract users. The recourse distribution system of web3 has provided us with the new strategy. People can use the created tokens to generate money, and users can gain profit from this token or say resource distribution system. In this way, the profits that used to be shareholders’ are now shared with consumers. In the end, the cooperative triangle between developers, consumers, and shareholders makes them work together. This is a ground-breaking improvement better than web2 apps.
Of course, the patterns still have much to be improved. Its biggest problem is that it’s very likely to become a Ponzi game. Other problems also need to be solved, for example, the early gamer asks for rent from the latecomer, or the early player can reap the money without making contributions. But I don’t think it is necessarily a bad thing, because we can make many different and fun innovations on this pattern.
If users stop contributing values, then their received income should also be lower, and following this, we may end up being in a pattern where users have to invest in the game, and it takes chance for them to get losses or huge gains. I think web3 apps should try on these two directions. My opinion is not necessarily better than entrepreneurs, and I am waiting for them to tell me the answer.
ChainCatcher: Ethereum 2.0 may update in the next several months. What do you think about its prospect? And how will it change the industry?
Jason: It may be contrary to the mainstream ideas. But the upgrading of Ethereum does not affect the direction of our investment, especially in apps. Ethereum may make a final PoS upgrading, and adjust its frame. So it may be more usable, and convenient for developers. This may cause the price of ETH to fluctuate greatly. But Ethereum has already been facing many competitions, and app layers or companies from other industries can choose chains or resource layers that they think match their needs.
Generally, I think this tech-oriented change and upgrading has no deciding effect on the whole industry’s development and progress. The key would come from the top layer apps.
ChainCatcher: In your Twitter, you said that “People from China or the AP region will not be absent in the next 10 years of Web3, and they would shine in the world.” Connect that with your great support for entrepreneurs in the AP and Chinese market, you seem to have confidence in them. For what reasons, you are bullish on them?
Jason: This also explains much of why I founded Folius. The reason why the Asian-Pacific and Chinese-speaking regions are absent in the web3 industry is that the crypto industry hasn’t reached the break-out point for them. In the past 5 to 10 years, the development of web3 is making foundations, of which the more important are product category and status. So this is a decade of making efforts to build the eco-system, infrastructure, tool, and consensus. In other words, it is a decade of B2B products.
In the western market, there are three generations of engineers from old, mid-age to young, who are good at building the B2B eco-system. But in the AP, the engineers are younger, mainly born in the 80s and 90s, whose career is developing with the tide of the B2C industry in China. In other words, their engineering experience is focused on B2C and apps, which is different from the whole development history of blockchain, and this may explain why they don’t perform well in infrastructure and chain building.
For the next 5 to 10 years, if the crypto industry wants to have long-term development, it definitely will take a to C strategy. At that time, entrepreneurs from the AP and the western market will compete with each other and show their skills. I think the AP entrepreneurs would bear no disadvantage, and rather they may even enjoy an upper hand with their rich experience in products, and aggressive implementation strategy of occupying market shares. More importantly, they work really diligently. Their working hour maybe twice or three times higher than western engineers while cutting costs to half or even one-third of those. In such a fast-iterated era requiring a product-mind, entrepreneurs in the AP region have great advantages.
Unfortunately, their advantages and prospects do not bring them proportional capital support. They can choose to gain investment from domestic traditional web2 institutions. But these institutions are not determined to enter the web3 industry and face constraints on investment. So these investments may fail.
The second is to seek foreign capital. This is hard because foreign capital may not be able to understand and trust these entrepreneurs due to the language and cultural differences. And they may not even have the willingness to seek Chinese entrepreneurs.
The third is web3-native funds, mostly coming from BTC, mining, or scams. They are not aligned with the future direction of this industry, and this kind of crypto-native investors may cost their reputation by chasing short-term returns without pursuing innovation. They may not be a good choice for web3 entrepreneurs who want to do great things.
So although it is a broad e and pro-B2C direction, there is still an imbalance between the capital support from the western and the AP region. This means a huge mismatch between valuation and opportunity, and it deserves our bet.
We always want to work with long-term players and build our brand up with a good reputation. So if anyone is interested and especially want to achieve things, you are welcome to find us.
ChainCatcher: Against the backdrop where people go find opportunities out of Chins, what difficulties should be noted for Chinese entrepreneurs? And what is your advice?
Jason: B2B is a tough nut. If we go from the top-layer apps and consider how to attract user flow. I think the AP entrepreneurs may face three constraints.
First, the need to improve their understanding. Because it takes time for information to flow from the English zone to China, maybe an obstacle to learning and discussing the latest industry news.
Second, the inaccurate understanding of products. If the team used to work in the Chinese market and has never truly understood or made a popular global product, then its understanding of products, or its UI or UX and the final results may divert from the right path. This would be fatal if they are targeting the market beyond China.
Third, the strategy to make a product with some specific and novel features. For a niche and scattered international market currently without realistic application, the GTM and product development pattern that China depends on may not be plausible. A comprehensive product covering all may not work well as a specified product for a targeted group. So to excel in one aspect should be the goal. This new different strategy takes time to adopt.
The third one is a problem facing the AP entrepreneurs commonly. How to solve that? I think we can only improve that from team building, for example, the founding team needs members with global horizons and views. So just to make trails and errors, starting from a small function and then keep going after finding the right point. Entrepreneurs should also talk with high-quality and well-known institutions or investors with a good reputation, the early the better. This would help entrepreneurs to find the right direction.
Entrepreneurs have to think about what are dregs and what are essences in Web3-native scenarios. They should be courageous to abandon the so-called “right thing” in the industry. I think the AP entrepreneurs shouldn’t underestimate themselves because the crypto market needs different minds to cooperate to bring its next-stage development and make the user volume up another order of magnitude. In the next cycle, there will be a flood of opportunities for and capitalization layer.
ChainCatcher: In the AP region which cities do you think are promising?
Jason: Shanghai, Hangzhou, and Singapore. These cities have the highest intensity of existing or potential Web2 entrepreneurs. Shanghai and Hangzhou are rich with capital, start-ups, and industry giants. They also have most of the senior managers say at a level of p8 or p9, and we can expect many great programmers wanting to join in and start their own business.
This year, one of the trends is that entrepreneurs have shown far better ability, mind, and background compared with what they used to be. One reason is that they see more opportunities in crypto while the Web2 industry is hammered badly. There is no special opportunity to start a business in Web2, and VC companies are not willing to invest. People in web2 also face dilemmas. They are also not willing to work out of China for Web2 companies. However, the domestic (Chinese) web2 industry also brings no promise, amid intense competition, the equity incentive may have already dropped badly even to zero.
So under these choices, many AP entrepreneurs may want to jump out of web2 and take chance in web3. It only takes 6 to 24 months for an early idea to come into a start-up, a product, the market share, and even voices based on a leapfrog on quality and quantity.
Authors: Enmin, ChainCatcher
Interviewee: Jason Kam, Folius Ventures Founder
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