From decentralised by Joel John

Hey there,

I reached out to Regan Bozman from Lattice Fund to exchange notes on the state of venture funding within crypto. What was initially a catch-up call turned into us sharing notes on memes, what LPs look for in funds, and how founders can derive the most value from their backers.

The article today takes you on a journey with Regan, from his time as an employee at Coinlist to his days as a contributor to DAOs, and the reasoning behind why he set up a fund. Regan embodies entrepreneurship and risk-taking as much as any other founder I have interacted with.

Today's note should shed light on what it takes to go from an early employee to running one’s own fund and the nuances of venture capital as an asset class. Along the way, we explore the incentives behind VCs deploying capital irrationally into late-stage rounds, whether memes are here to stay, and why founders should also do due diligence on their VCs.And as always, if you are a founder building cool things - get in touch, using the form below.

Let’s dig in!

Inception

It’s 2018, the year after the ICO boom, and some $28 billion has been raised in crypto venture capital. Public interest in tokens had begun waning. Instead, people were aggregating around platforms that would vet, curate, and list tokens right away. This was the golden age of Binance Launchpools and Coinlist. Regan’s story in crypto began as an employee at the latter, where he got to witness the launch of Filecoin and Solana.

Back then, Coinlist was notorious for its ability to give a quick return. Users would often get friends and family to sign up for multiple accounts because you could only buy a few hundred dollars worth of tokens with each account. Having a front-facing seat at what was, at the time, one of crypto’s fastest-growing organisations gave Regan a taste of what scale and speed could look like. But he was not in the heart of it, where riches were being made.

Crypto moves fast. And one often feels FOMO when even at one of the fastest growing organisations. Regan wanted to grow beyond Coinlist. And the steps he took towards making that transition are quite telling of how he thinks of risk. His foray into breaking out on his own started with noticing a problem most startups used to face at the time: a lack of information on VCs.

In 2019, crypto’s venture landscape was as dry as it could be. The bear market of 2018 had battered the industry. Capital was not flowing into venture funds. ICOs were (sadly) dead. So there was very little information available when a founder needed to know who to raise from, what to consider or what portfolio firms a firm had. Regan was maintaining an Excel sheet—a loose CRM of sorts at the time to help founders with information on who was active and who wasn’t.

As an angel investor putting in $2k cheques, he had little to show for clout. But he could give away value to founders looking to raise. The Excel sheet became an Airtable and was branded Dove Metrics.

Dove Metrics slowly but steadily established itself as an authoritative source for funding data. At the time, the only alternative for such information was Crunchbase. But they required a paid subscription and the data often lacked crypto-specific nuances around whether the raise was for a token or equity. So Regan gradually began curating information around such information, then expanding it into a newsletter and an API for users who wanted the information.

In late 2022, as Regan’s focus turned fully towards Lattice (his fund), Messari acquired Dove Metrics. The product currently powers their fundraising dashboard.

At the time (early 2020), Regan was spending 60-hour workweeks at Coinlist. Having the energy to be involved with early-stage tokens outside work was simply not going to happen. This was the age of the pandemic-era lockdown. It was also the time when DAOs were positioning themselves as an alternative place to work. So, over time, Regan quit his engagement with Coinlist and transitioned to being a DAO contributor.

Unlike Coinlist, which was often marked by structure and processes, DAOs were messy. They were run on Discord, often by anonymous contributors with tokens for pay. At the time, Regan spent his time with Index Coop and Maple Finance.

These engagements transitioned into more structured consulting gigs in the following quarters. Regan’s experience seeing hundreds of tokens go live at Coinlist proved invaluable to tokens looking to launch in DeFi summer. But he quickly noticed two things.

At the time, most crypto-native funds were in an odd spot. On one end, many seasoned investors who had raised money in the 2017 bull market had no liquidity to show. On the other, there were Web2 native funds deploying money into an industry they had never operated in. For Regan, this was an opportunity.

In the age of endless capital, founder empathy and operational experience are what Regan and Mike (his co-founder) used to differentiate themselves. They set out to raise a $5 million fund. It ended up being a $20 million fund as larger, renowned names like Accolade Partners joined in. It helped that Regan was closely involved in multiple networks launching, while being a DAO contributor himself. A new asset class was emerging, and so were new money managers for it.

It was mid-2021. The fund was set up. The time to deploy the money had come.

Scaling Lattice

I wish I could tell you Regan made a billion dollars at this juncture of his investment career. It would’ve been a good story. But that’s not how it plays out when you start a new fund. He was one of the few investors to deploy into OpenSea’s seed-round, thanks to his network in Silicon Valley. But when it came to deploying for Lattice — the fund he had just raised— he had to start from scratch.

During the early days, Regan and his crew used to deploy as little as $100k. They would have to bank on the goodwill of their operations as angels in the years prior to be able to get their cheques in. Venture capital requires power laws to be functional. A handful of bets that provide outlier returns drive the bulk of a fund’s returns. In other words, the bets that produce massive multiples compensate for the bad bets. But a lot of that requires sizing.

Say you are able to deploy only 1% of a fund’s size into an investment. You would need it to give you a 100x  return just to return the fund. This is assuming all other bets go to zero and does not account for the dilution of an investor’s stake in the firms they bet on over time. Usually, that isn’t the case. In other words, deploying $100k out of a 20 million dollar fund would not have been life-changing.

But it got the word out that Lattice is deploying money.

From that first fund (of $20 million), 40 investments were made, with average cheque sizes of $250-$500k. Years later, when they raised a second fund (of $65 million), the amounts surged to $500k—$1.5 million. One of the challenges of having a larger fund is that investors often need to deploy more money to justify the time spent on a venture. Capital is often not a limited commodity. Time is.

A firm can choose to split its money into a thousand different startups, but in doing so, it also restricts its ability to meaningfully influence the outcomes for the ventures it gets involved with. So if you have $65 million to deploy (as Lattice did) and your target ownership is 1% in exchange for deploying 2% of your fund ($1.3 million), you kind of have a limit in terms of valuations at which you can deploy.

You cannot own 1% of a billion-dollar network with a couple million deployed. So naturally, firms like Lattice trend to Seed to Series A ($30 to $150 million valuations).

For Lattice, the focus has been on deploying into bets that expand the market with on-chain business models. Regan believes that the largest opportunities in our industry are applications that deliver value to new market segments and infrastructure that powers these products.

Right now, that focus means looking at DePin increasingly. Earlier, they backed Galxe and Layer3 as a sign of their focus on consumer applications. Lattice was also involved with Privy and Lit Protocol on the infrastructure side.

But the number of investible opportunities at that valuation may not be much to begin with. One way investors like Regan solve for this is by going further up the risk spectrum—by investing at the seed stages, with an understanding that they may do a follow-on. Not only does this give Lattice more ownership in a successful firm, but it also makes it easier for the firm to have conviction in deploying in the growth stage of a company. Few things are as strong a signal as a seed-stage investor doubling down on a growth round.

One often sees the inverse of this syndrome of large funds optimising to deploy a meaningful portion of their AUM into startups. When multiple funds have billions under management, rounds need to be tens of millions of dollars to be meaningful. For a round of that size, say beyond $50 million, to provide a meaningful return, the exit should be valued and liquid in the billions of dollars.

Unlike traditional markets, where M&As and IPOs give healthy exits to early backers, crypto-native ventures often see their returns from token listings. This is why capital flocks towards infrastructure projects valued at billions.

It is almost always a function of incentives. These incentives tend to drive some very erratic behavior in our markets. And that is what we discussed next.

The Memetics of Value Add

Funds have had very different outcomes depending on how they are positioned. For instance, a fund that was long on Solana only may have most likely outperformed a basket of DeFi tokens. Or ones with exposure to consumer applications may have been far outperformed by meme assets. The liquid nature of crypto makes it a harder market to bet on due to two functions.

Club the two, and you have a situation where funds are competing to one-up one another in liquid markets. In traditional environments, simply being the fund that helped create a category leader like Spotify or Shopify would establish your brand. There is relative longevity to investment cycles.

Crypto’s liquid nature tends to compress that cycle into shorter timeframes.

As Sid often likes to mention, the token becomes the product. You see, when an allocator (like a pension fund or Fund of Funds) looks into fund performances, part of what determines that decision is the return a fund produces. Ultimately, a fund’s ability to return a multiple of capital is what investors are looking for.

Funds in Web3 often have small portions of the AUM allocated towards what are considered liquid bets. These are purchases of tokens made from the market (on an exchange). The idea behind these capital pools is that liquid markets tend to have mispricings, and allocating money there can give a quicker return on capital.

But when multiple smart, ambitious people are looking at the same digital assets,  prices tend to run high. As I write these words, there are over 100 tokens valued at north of $1 billion in market-cap.

It is what happens when an infinite amount of capital pursues a limited number of meaningful assets.

Where, then, can money flow? It goes further up the risk curve. To NFTs, in-game instruments, yield-farming strategies and, off-late, meme tokens. In the weeks that lead up to our discussion, Solana was in a meme-coin frenzy. WIF was trending to a marketcap of $4 billion. It began to make sense for funds to deploy into meme assets.

Liquid market traders (and hedge funds) tend to move the fastest in response to a narrative. Web3 gaming, AI, SocialFi are individual narratives that these fast-movers deploy into. As the liquid tokens in these sectors run up, be it Fetch in AI or Degen in Web3 social,  individual angel investors that were trading these tokens look for private market deals. In their minds, there is often a valuation arbitrage between private markets and public markets. They may be holding positions that are profitable and willing to take on more risks.

As angels begin pursuing a hot new theme, both the number of deals and social consensus around an emergent theme rapidly begin forming together, leading to a point where more conservative venture backers begin deploying money into it. I would rank Bitcoin L2s and memetic platforms like Pump.fun in this spectrum.

As VCs deploy (and eventually run out of money), they begin convincing the largest source of money which moves the slowest—their LPs. In 2021, there were funds focused exclusively on Web3 gaming. In 2024, there are funds focused exclusively on Bitcoin L2s. Attention flows from fast sources of capital, such as traders, to slow ones, such as pension funds.

According to Regan, this shift of attention between assets affects management style, too. In conventional venture, funds can be patient for firms to slowly find PMF. But because liquid markets are where most funds book their returns, most commitments to ventures are time bound.

If a venture has a liquid token, then choosing not to sell it at high valuations can, in fact, be a breach of fiduciary duties. Similarly, holding on to a bet that is clearly underperforming could prove to be a waste of time. Founders often think the limitation for VC funds is capital. But in reality, it is time.

So what happens when a founder is clearly underperforming or not coming through on their promises? Regan uses feedback as a tool. Communicating that a team has not executed well or that there may be better opportunities to spend the team’s time on is one way of reducing exposure (of time) to startups that are not scaling fast enough. One way founders can mitigate this situation is through momentum.

VCs are comfortable with loss-making businesses. But if a firm shows no meaningful traction or directionality across quarters too often, the smarter choice would be to simply stop spending time on it.

This is where the memetics of venture investing comes into play. Funds have the need to come off as being “value add” to founders for multiple quarters, even when they are not really being helpful to the startups they have currently invested in. When a firm grows, VCs are incentivised to be hands-on. But what happens if multiple firms are not growing and you still need to show you can be helpful?

This is where signalling comes into play. Being active as an investor on Twitter may have little correlation to how helpful a VC can be in real life. And yet, it is usually the single best avenue for VCs and founders to bump into one another.

One way founders can look past the role-playing on Twitter and know who is actually great to work with is by doing VC reference checks. Most funds, if asked for a few founder references, would be willing to share details of founders that can explain whether a source of capital was strategic or not. For founders, it is as important to do due diligence on their VCs as it is for VCs to do DD on founders.

Selling Stories

There is a seasonality to meme assets—much like NFTs had in the last cycle. Too often, VCs (and funds) cannot hold them directly. So they optimise for startups that can be crucial infrastructure. So instead of betting on the next bonk or WIF, you would bet on a product like Pump.fun, which makes issuing a meme as easy as clicking a few buttons.

This is why OpenSea and Blur were phenomenal bets to be made in the NFT cycle. A different way funds optimise for retail interest in meme assets is through having portfolio companies build with memes as a GTM strategy. But Regan believes, the probability that it works for startups pursuing that strategy is very low.

Where, then, should founders focus on? Anecdotally, many portfolios oriented towards consumers are seeing rapid upticks. For instance, Layer3, one of Lattice’s portfolio firms, is now seeing an all-time high in terms of active users. Infrastructure companies and security audit providers are also seeing a rapid uptick in the revenue they are generating. These trends are translating to meaningful upticks in valuations too.

Throughout bear markets, founders tend to be in defensive mode as they conserve runway. But part of what helps leaders in certain categories maintain their lead is the ability to raise money at higher valuations and switch to being aggressive in a bull market. This is hard to do because once you’ve been in defence mode for a while, it becomes difficult to reverse that inertia.

Much like with evolution, markets tend to reward founders who respond rapidly to change. It has become commonplace to see founders structure multiple rounds within a quarter as there is an increase in appetite for risk, and core metrics (such as user counts) are on the rise.

How do VCs think of deploying in such opportunities? They break it across cycles. In Regan’s mind, any of the deals they are doing this cycle, will see no liquidity until the next cycle. That is, 4-5 years out.

For perspective, of the 30 deals done in Lattice’s fund 1, about 3 are currently liquid.

One mental model Regan uses to explain this balance between liquidity and patience is through the lens of forms of innovation. According to him, Crypto venture is a hybrid between technical and financial innovation, and the financial side funds the technical side. You can’t really separate one from the other. So, you must decide if you want to take advantage of the unique liquidity opportunities in crypto or not.

Understanding how these incentives work helps explain why VCs sell tokens at certain valuations. Without money returned, raising follow-on rounds is difficult. Without mark-ups, explaining fund performance is impossible. So, most VCs tread the fine line between exiting liquid positions and playing the long game.

Ultimately, founders know best about their own businesses. Unlike VCs, they also have only one bet instead of a basket of bets. So it is usually in their best interest to optimise for liquidity events. One way this challenge resolves itself is through the gradual institutionalising of venture in crypto.

There may be a future where we see large organisations comfortable simply holding equity in successful ventures. And much like we saw with the evolution of the internet, listings will be restricted to firms that have cash flows and revenue. Or perhaps not. We may just be playing in an endless loop of brief narratives and memes. Nobody really knows.

For Regan, his core priority is straightforward: don’t be a pain to founders and double down on winners. That strategy of being an empathetic enabler has helped him evolve— first from an employee at Coinlist to a DAO contributor and now to a partner at a VC fund managing close to $100 million in assets across funds.

Signing out,

Joel