Last year, the market value of the crypto market fell from about $1 trillion on November 8 to $840 billion. In the past week and a half, $160 billion evaporated, which is equivalent to Hungary's GDP in 2021. Even more so than the U.S. stock market, the bubble layer of the crypto market is piled high. When the liquidity crisis descended on the crypto market, after the tide, it was more obvious who was swimming naked, and the naked swimmers were likely to be former tycoons.
Speculation can indeed bring huge profits in the short term, but everyone who has taken Finance 101 knows that returns must be proportional to risks. In addition to high-frequency short-term trading, there is another way to survive bull and bear markets. Use value as a weather vane, with an upward arrow pointing directly to the value target.
The author interviewed Belinda Zhou, the founder of Sharding Capital, in Dubai. She is a rare person in the crypto industry who insists on early-stage value investing and accompanying entrepreneurs. I hope this Q&A can inspire readers, entrepreneurs, and VCs.
“It takes a process for a new track/paradigm and real early-stage demand to be recognized by the market, and this process is difficult but correct. This is often the source of the track’s alpha and beta.”
A native crypto kid from Dubai who entered the industry soon after graduation
Author: Hi Belinda, please introduce yourself. How did you get into the VC industry?
Belinda: My Chinese name is Zhou Qiuling, and everyone calls me Belinda. After graduating from Sun Yat-sen University in 2016, I was selected for the Dubai Business Associate program of the Dubai government [Author's note: an elite business program established by the Emir of Dubai. Young people who are selected can get the opportunity to come to Dubai, be fully sponsored by the government, and be sent to business positions in different fields for study, internship and work. The author applied but was rejected~] and was sent to Cambridge, England for a year. After returning to Dubai in 2017, I did consulting and started a business in the field of cryptocurrency. I met many ICO project parties, exchanges and crypto capital. In 2018, I participated in the ICO project as CMO, responsible for market and financing, and exited the project after it was successfully launched.
From 2019 to 2021, I did personal angel investment and served as a consultant for some projects, including Biconomy, Project Galaxy, etc. I can be labeled as a native crypto kid.
Fortunately, my angel investment performance is good, and I also plan to scale up my investment, invest in more projects, and make bigger bets. In 2021, my partner Dawn Yang and I met in an investment project and found that we have common values and love for primary investment. At the same time, we found that our personalities are relatively complete and our abilities are relatively complementary, so we discussed together in July 2021 to prepare for the establishment of Sharding Capital. In July 2022, Sharding Capital was officially announced to the public, and I officially became a VC (said to be the youngest female VC in the cryptocurrency circle).
I am also very grateful for the opportunity that DBA gave me at that time. Later, I found the Crypto career that I have a lifelong passion for.
Author: What do you think are the differences between traditional VC and Web3 VC?
Belinda: Whether it is Web2 or Web3, the first priority of investment is capital injection. However, in addition to capital injection, Web3 VC investment pays more attention to smart money and the ability to accompany the project, so more detailed post-investment support is required. Ideally, Web3 VC also needs to have a certain understanding of token economics, governance mechanisms, blockchain development and smart contracts, community building, encryption regulations, and security risk control. There are three main differences:
First, Web3 VCs hold a relatively small proportion of project ownership, about 5%-20%, and the quota is distributed to contributors, ecosystems, and communities, so Web3 VCs have stronger synergy. Web2 VCs are generally more competitive and don't share deals with each other. In the cryptocurrency circle, we have a term called WAGMI, which means We All Gonna Make It. In Web3 investment, VCs are happy to share with each other, provide resources for projects, expand the popularity of projects, and are more willing to mingle with Twitter/Discord community users. In contrast, Web2 VCs are more detached from the world.
Second, Web3 VCs choose and consider projects from different perspectives. The way traditional VCs think and make decisions is different when investing in early Internet projects and the way the previous generation of traditional investors invest in physical industries, factories, etc. Today, Web3 has brought a new paradigm, so it is necessary to sort out the thinking logic and investment logic from the bottom up. For example, Web2 stocks only have financial attributes, but in Web3 tokens, in addition to financial attributes, they also have functional attributes, so the overall token economic model, functional utility, and deflation ratio must be considered. For example, ETH can be used as gas or loan collateral when using the Ethereum chain.
Third, Web3 investment involves tokens, and you need to pay attention to fund storage and security. Issues to consider include: How to save private keys? How to use multi-signature wallets? Do you need to transfer assets to cold wallets? How to place cold wallets? How to set up a vault? What if you want to earn extra income such as providing liquidity? How to track the entire portfolio if you hold it across multiple wallets? In contrast, traditional VCs don’t need to consider these at all.
Fourth, Web3 investment must keep pace with the times, because the currency circle is changing rapidly, and one must live in crypto to capture the alpha. Therefore, Web3 investors must also spend a lot of time learning and understanding industry dynamics, rushing to the market, and cultivating the ability to discover problems and find product market fit.
A VC that insists on value investing in the crypto world and is based in the Middle East and has a global vision
Author: Sharding Capital had the idea in July 2021 and has invested in many projects since it took shape in July 2022. How much fund have you raised this time? Do you have a preferred check size every time you invest in a new project? Does your company's investment projects tend to be early angel seed rounds, or will you choose to co-invest with other VCs, or follow-invest in mid- and late-stage projects?
Belinda: With a scale of 20 million US dollars, we will use more of our own funds to verify our investment logic and investment strategy in 2021. This year, we have formed our own investment methodology. The preferred check size is between 100,000 US dollars and 800,000 US dollars, with an average of about 300,000 US dollars. We will invest in 60-70 projects in total. Currently, as a fund, we have invested in a single digit.
Sharding prefers to invest in early angel and seed rounds. Investing in Web3 is a consensus, which is also different from traditional VC. We cover a wide range of regions. As Sharding is the first Chinese fund based in the Middle East, with derivatives covering Asia, Europe and the United States, and with its own engineering team to review code and test products, many projects hope to open the door to the Middle East market through Sharding, and many VCs are also happy to share project sources and compare notes with Sharding.
Author: Does your company have any regional preferences for investment projects?
Belinda: There is no absolute regional preference. We have exchanges with projects in Asia, Europe, America, and North Africa! We value projects, tracks, and teams, as well as the efficiency of communication between each other! I often go to different continents for meetings, and Sharding often holds Hackathons and Demo Days with local organizations and universities, so we can discover many early projects. Because we are in the Middle East, we usually stay in Dubai and go to Singapore more often, so we may have more contact with the project pipeline here.
Author: Are there any projects that you “regret” missed? Why is it a pity? What was the reason why you didn’t invest in them at that time?
Belinda: Drift Protocol - Solana Ecosystem Decentralized Derivatives Trading Platform
I missed the first round of financing of $30 million for this project. I was still doing angel investment at the time, and I mainly looked for good projects on Twitter. I found the Galxe project on Twitter. I discovered Drift in early 21, but I didn't invest in the earliest round. Angel investment is mainly suitable for founders who know themselves. If you don't know them, you need to prove yourself, so I contacted Drift at the time and they asked me to open a ticket on Discord. I opened a ticket, but I probably didn't talk to the decision maker and was not taken seriously, so the matter was later left unresolved. If there was a fund at the time, I think it might be convenient to let other VCs make introductions. It was a pity that I didn't invest in this project in the earliest round. Later, the seed round of financing was led by Multicoin Capital, and Jump Capital, Alameda Research and others participated.
This is one of the reasons that inspired us to set up a fund, so that we can participate in high-quality projects earlier. Interestingly, this year, we met the Sharding and Drift teams at the Korean Blockchain Week, and they helped a lot. In the second round, we invested in Drift. Of course, because we invested a little later, the profit and share were not as rich as they would have been earlier.
Author: You said in a special live broadcast on Ethereum that you are optimistic about projects that can capture user traffic and realize cash flow. Can you elaborate on some of the important hard metrics you use to evaluate projects? Are there benchmarks for hard metrics, such as certain data needs to pass a certain ratio, or does it vary from project to project?
Belinda: First of all, let me explain why we are optimistic about projects that can capture user traffic and realize cash flow. In order for Web3 to have better development at the current stage, two basic conditions must be met:
More new users entering the market
More developers entering the market
The first condition is met by some applications that can lower the entry threshold for Web2.0 users, such as the currently popular MPC wallet, some casual games, or some applications that are easy to go viral, such as: Utility NFTs, which can be well combined with Web2.0 IP to create some new marketing paradigms or fan economy, etc.
The second condition is met by some infrastructure, developer platform, or development tools. When some development tool modules are universal, they have the attributes of infrastructure. They are between Layer1, Layer2 and applications, and play the role of service and connection. They exist more in the form of middleware SDK, such as some infrastructure of DAO, or some infrastructure of GameFi and SocialFi.
Some key indicators for capturing traffic-type application judgments:
i) Whether the topicality and fun of the project will resonate with the market (this determines whether the project has the genes to be quickly exposed and popular).
ii) The team’s execution capability and the matching degree between the team’s own quality and the project track.
iii) Timing, the timing of cold-starting the project to market.
Because we invest in the early stages, sometimes the product may not be online yet or the V1 version of the product has just entered testing, so the data indicators will vary from project to project. For products that have entered testing, the data we value is the frequency and time of communication between core team and product-related members in Discord, and the efficiency of product response and iteration when users make good suggestions. This determines the growth rate and quality of early seed users.
Regarding the infrastructure for cash flow, the business model of the infrastructure itself is relatively clear, but it takes a relatively longer time to achieve profitability. This is also because Web3.0 is still in its early stages. So for a good infrastructure, we value two aspects of capabilities:
a) The team’s ability to iterate and develop products is to ensure that the product remains competitive.
b) The team’s capabilities in BD and resources, which determine the adoption rate of B-side customers, and the feedback is how long it takes to achieve profitability.
Author: What about soft metrics?
Belinda: Soft indicators are basically related to the overall quality of the team or the founder. One is the founder's ability to comprehensively understand and judge, as well as the ability to pitch, that is, the ability to digest resources. In the final analysis, investors are more about pushing, guiding, introducing and helping. To truly promote progress, it is still whether the team can digest resources and put them to good use.
In addition, the team members’ ability to get along with each other, their professional skills and the degree of complementarity will determine whether the project can be implemented and its market acceptance.
Author: In the impossible triangle of cryptocurrency: scalability, anonymity (privacy), and safety, we all hope to find projects that are as balanced as possible in all three aspects. But if it is impossible to balance, which aspects will you focus more on and why?
Belinda: I think this balance exists, but it is not achieved at the moment.
Currently, the Ethereum chain focuses on solving the problems of security and decentralization, but we believe that the maturity of technologies such as ZK Rollups will solve the expansion and privacy problems by integrating with Ethereum layer 1. Of course, this will take some time, but we are very optimistic and look forward to it.
Another solution is to restructure the modular layer 1 from the bottom up like Cosmos Celestia, which solves the security, privacy, and performance requirements in a layered and modular way. Of course, the efficiency of this balance also needs to be verified by the market and time. But these two new solutions have great opportunities.
If we really have to choose, we value security and privacy more in the financial application field. We believe it is also necessary to appropriately sacrifice the properties of the first two in the non-financial application field to meet its performance.
Author: What projects are you optimistic about at the moment? Can you briefly introduce them? (Not necessarily those in which Sharding Capital is involved)
Belinda: ZKX, a decentralized derivatives trading solution.
i) They changed the way new coins are listed through the DAO mechanism voting scheme, which is more decentralized compared to dYdX (dYdX is a team decision-making mechanism)
ii) In addition to the ZKX platform incentives, they allow token projects to provide liquidity rewards for trading tokens (increasing the liquidity of new coins compared to dYdX)
iii) Liquidity of mainstream coins provided by StarkWare (officially participated in the investment and commitment)
iv) All protocol revenue will be used to empower tokens (not available for dYdX yet)
v) The team itself is relatively hardcore, and both technology (the technical team has seen their solutions and mechanisms) and business are relatively mature
vi) dYdX is going to leave to build its own application chain. ZKX is currently the best team we have seen in Layer2 to build a decentralized derivatives protocol.
vii) The decentralized derivatives trading market is very large and there are still opportunities for top projects in the first echelon
Author: When do you plan to complete the current funding? What kind of projects are you looking for? Sharding's official website shows many different channels. Will you invest in infrastructure, public chains, etc., or will you focus on certain tracks?
Belinda: The current plan is to complete the investment by mid-2025, with a total of 60-70 projects. The overall strategy is to invest in infrastructure in the early and middle stages of a bear market, with a focus on hardcore technology to Class B projects, and to invest in applications in the late bear market and early and middle stages of a bull market, with research and observation being the main focus in the late bear market.
In 2023, the focus will be on infrastructure that serves application developers, such as middleware, plug-ins, and protocol layers. In 2024-2025, the focus will be on investing in super applications, such as NFTFi, DeFi, SocialFi, DAO, GameFi, etc. The previous infrastructure can also support d'Apps.
Layer1 is not our main focus and does not match the attributes of our fund. In terms of track, for example, DID is a direction we prefer, as are NFTFi and DeFi. We have invested in several DeFi projects before, as well as security and wallet directions, which my technical partner has paid more attention to.
We are optimistic about Chinese entrepreneurship and encourage Chinese to use the efficiency of the cryptocurrency circle to do things.
Author: What do you think about Chinese Web3 startups? Have you seen any good projects led by Chinese?
Belinda: It’s good for Chinese to start Web3 businesses. Chinese people are actually very pragmatic and fast in execution. The only way to defeat martial arts is to be fast. For us VCs, we earn information asymmetry, so efficiency is very important. However, what Chinese entrepreneurs may need to enhance is to improve their international vision, cognition and awareness, and to improve their cognition and ability of “narrative” itself.
I admire Charles Wayn very much. He is the co-founder of Galxe (Project Galaxy) and Bullet Labs. He is a serial entrepreneur that I admire. First of all, he is a powerful idea machine and is very good at thinking. After having an idea, Charles has excellent language organization and narrative skills to output the idea. After the idea is established, the international team he leads has a fast execution speed to digest BD and investor resources. When I was an angel investor, I would introduce cooperative projects to Galxe. Usually, we would set up a group on the same day, and Galxe could confirm the details with the project party on the same day, and start the campaign that week. This execution speed led to an explosive growth in Galxe's users.
Author: Bellinda, I saw that you came back to Dubai to attend Gitex right after attending Asia Token 2049 in Singapore in early October. What do you think are the similarities and differences between the development of Web3 projects and capital in Singapore and Dubai? Did you choose to live in Dubai because you think Dubai is better than Singapore? How do you view the development of Web3 in Dubai and the Middle East and North Africa?
Belinda: Since I frequent both Dubai and Singapore, I personally feel that Singapore is an OG Paradise, which is more suitable for people who have made it. In contrast, Dubai has a more entrepreneurial spirit and atmosphere.
Sharding Capital chose Dubai as a base for several reasons: first, the Middle East crypto market is in its rising stage, with many opportunities and dividends; second, as a founding partner, I have been involved in the crypto ecosystem here since 2017, and I have relatively solid resources in the Middle East, which can help other early projects reach Middle Eastern users in terms of market and brand communication [Readers who are interested can read my previous article: Dubai, home to 200,000 Chinese: another major Web3 capital in Asia]. This differentiated post-investment advantage allows Sharding to have better negotiation premium capabilities compared to other more concentrated and inward-looking American VCs and Chinese VCs based in Singapore.
Moreover, 2022 will be the year of rapid growth for blockchain in the Middle East. The crypto ecosystem in the Middle East is developing at an incredible pace and will prove to be a gold mine for bold investors. The region is at the forefront of emerging technologies and welcomes digital innovation and disruption with open arms.
Actually, there is a lot to say here, but the TLDR version is:
- Friendly policies and regulations attract a large influx of projects, leading to an influx of exchanges and capital. Abundant funds and resources attract more projects, creating a flywheel effect
- Project teams from China, Singapore, India, etc. flocked in
- Politically neutral, attracting teams from Russia, Türkiye, etc. to join
-Local capital and market are friendly to cryptocurrencies, and have a high degree of acceptance of cryptocurrencies, especially USDT
- Mining opportunities for renewable energy
Postscript——WAGMI
After answering my question, Belinda was so considerate to write a title for my new article. The original title was "Dialogue with the founder of Sharding Capital: We are optimistic about projects that can lower the entry threshold for Web2 users and achieve cash flow." This title also fully reflects Sharding's strategy and overall views on the future development of Web3 projects.
The author, who had originally just made an appointment with Belinda for a coffee interview, was fortunate enough to be invited by this elegantly dressed beautiful lady to participate in a cryptocurrency gathering hosted by Belinda and her friends that evening, where she met the founders and helmsmen of some local ecosystems.
The cryptocurrency world is very small, so small that sometimes when I go to a party, it feels like I’m at work, and socializing is all about work, but the small size of the cryptocurrency world also allows people to choose to stick together and choose long-term development (if they want to). Belinda often mentioned a concept in her chats with me, that this circle is very small, and she and her partners still want to develop here in the long term, and don’t want to ruin their reputation because of some short-term projects. Sharding’s recognition of infrastructure projects also shows the value orientation of the fund.
When the author asked, there are very few women in the cryptocurrency circle, female traders account for 5.2% of the total traders, and the number of male practitioners far exceeds that of women, not to mention executives, Belinda answered very enthusiastically that women are also rising. There are also many admirable female executives and practitioners in the cryptocurrency circle. She hopes that women working in the cryptocurrency circle can show their value more, and not just be beautiful and can only work as BDs in large and small companies. Women can show their compound value, let their voices and ideas be heard, and thus expand their voice. Power is in the mindset of women themselves.
Regardless of the bull or bear market, I think long-term holders can believe what Belinda said at the dinner party: all in crypto, we all gonna make it.
