Julius Zegelman, a business angel and cryptoexpert, explains why he started investing in cryptocurrency startups, what difficulties he encountered in the process and how at the initial stage to understand which project should be invested and which not.
How I came to such a life
I have been involved in technology startups for a long time, the beginning was laid while studying at the University of California in the 90s. Then I and my comrades saw how quickly the sphere of technical business was evolving. The startup, which only appeared yesterday, became a public company in a few months and brought significant funds to its founders.
A classmate and I decided to make our own startup, for which we attracted another familiar programmer. We created a project, developed it and then sold it a few months before the collapse of the market for Internet companies in 2000.
Surprisingly, everything worked out. Although we did not make a lot of money, the spirit of entrepreneurship settled in me and has not gone anywhere until now.
I started working in cryptocurrencies in 2014, then I became one of the co-founders and director of a company that develops trading bots. She also created analytical tools for the bitcoin market. In the course of my work, I managed to get to know many significant players in the cryptoindustry. I invested in the projects of some of them, some of my new acquaintances became my own client in the law firm Velton Zegelman. And so it all started.
How do I determine the prospects of a crypto project
Traditional investments and crypto investments are similar in many ways, but there are also differences. Thus, the volatility and liquidity of cryptocurrencies and tokens is higher than that of conventional securities. In addition, cryptocurrency startups can have much more profitability than regular companies. Not everyone is shooting, but this is normal in venture practice. In my opinion, if 3 out of 10 projects are being sold, this is a good indicator. The main thing is that those that have sold show a return on the entire portfolio and return the entire investment with a profit.
I do not have a specific direction for investment or specialization in a particular industry. I'm more interested in the opportunity to help the project with its connections and its relevance in the market. If a startup has an idea, perspective, reliable business model, then it can be of any orientation.
As for the duration of waiting for “feedback”, that is, profit, I work with both short-term and long-term projects. Both that and others bring money, just in each case it is necessary to pay attention to certain aspects of the ideas proposed by the founders of crypto startups.
When evaluating a project, I rely on the knowledge and experience gained during my work. I often engage third-party consultants to evaluate technology. Intuition is also worth trusting - for an investor, having a “sixth sense” is a very important quality.
Project prospects are determined by the following criteria:
- A clear and realistic business model.
- Existence of existing and serious scalable blockchain technology.
- Fame and success of the team leading the project and its individual participants.
Crypto projects are good in that you can invest relatively small amounts in them. I do just that - I invest $ 25- $ 50 thousands in different startups. I am looking for companies either myself or through friends. I also use indirect investments, providing the startup with the necessary connections, giving advice, helping with legal services through my own company, and then introducing it to investors who already invest financial resources.
I note that now there are few aggressive investors on the crypto start-up market. In most cases, entrepreneurs are waiting for the moment when the current strong market volatility will end and there will come a period of calm, and possibly growth.
Some cases
Project failure
There were quite a few situations where intuition helped me save money, and at the last moment I decided not to invest. One of them happened with a project from the travel industry.
The first impression of him was good. It seemed that they had revenue, an interesting method of promotion and technology, the CEO was very convincingly selling. But for some reason I had doubts. Everything seemed too beautiful, but there wasn’t much understanding of how the project would move forward. The team devoted more time to fundraising and speaking than to business development.
Then I took a break for 1-2 of the month, I decided to wait. There was a clear impression that everyone was busy traveling to conferences, and nobody was involved in the product. After 2-3 months, I asked for new metrics, and they turned out to be the same as they were originally. The project did not grow; sales were few. A year later, it closed. I know several investors who have lost money there.
The conclusion is simple: a project can be attractive, its "sign" - to shine. But they say correctly that "not all that glitters is gold." There is no room for rash decisions.
Successful Investments
All the projects that “shot” after I invested in them corresponded to the following “three pillars” of success:
- Strong team
- Clear business model
- Prototype and implementation
Actually, these are classic venture selection criteria, applicable both to ordinary investments and to investments in crypto projects.
I can name the companies, investments in which were justified for me. This, in particular, ShapeShift (crypto-exchange for business users), Protocol Labs (product Filecoin for storing data on the blockchain) and Cindicator (analytical service). As an example, I'll write down why I decided to invest in Cindicator.
The startup is doing predictive analytics using the wisdom of the crowd. It collects the opinions of thousands of experts on the question posed by the client of the company (for example, how much the bitcoin rate will increase in the next two months), processes the answers using a multilayer neural network and gives a list of the most relevant predictions, ranked by probability. I invested in this project because:
- Representatives of his team were previously known to me as specialists in the field of neural networks and machine learning.
- Cindicator had a very realistic business model.
- The model was partially implemented, the company was making money at the time of investing in it.
Thanks to the idea and its successful implementation, the startup was able to raise $ 15 million during a private token sale. Investors were attracted by two points - the technology itself, its relevance and the token.
Unfortunately, there are very few such startups. In fact, almost all projects entering the ICO do not meet the criteria stated above. It often happens that when searching for information about the team of the next "Uber killer" Google does not find anything about the founder of the project, except for personal photos from the rest.
High-quality projects occupy, according to my estimates, less than 15% of the market. The rest are either pure scam, or start-ups created by guys with burning eyes and hearts, sometimes with good ideas, but with a complete lack of experience and understanding of the industry.
What is the difference between crypto start-ups in Russia and the USA
I work immediately on two “fronts” - in Moscow and San Francisco. Over the years, I have developed a clear understanding of what the difference is between crypto start-ups and investors here and here.
The main thing is that in the USA, ICOs are paid much less attention as an end goal. More - the development of the business itself, where financing is a means and not an end in itself. In San Francisco, networking is an integral and very important part of the job.
At the same time, there are not so many cryptocurrency professionals here. According to my observations, crypto investors overseas are mainly venture investors who have been working in the traditional market for a long time.
As for Russia, here everything is a little different. First, entrepreneurs focus on ICOs, hoping to build a hardcap. For many domestic startups, making a profit, developing a company is something secondary. First of all, all efforts are put into raising funds, often without much understanding of what to do next. Not everyone works that way, but I would say that this is almost a traditional scheme for Russia.
Investors in Russia are both venture investors and outsiders who are interested in new opportunities for themselves. In Moscow, there are a large number of professionals who understand the blockchain and cryptocurrencies. Probably more than in San Francisco.
Some recommendations for crypto investors
I would like to give some advice to those who plan to do crypto investments tightly:
- Be sure to pay attention to the "foundation" of the startup, that is, its business model and the proposed principles of work. If in the current economic situation the project is not feasible in the next year or two, it is too ambitious to think that the situation will change to fit the business model, and not vice versa.
- Trust your intuition and experience - do not invest in companies that seem to you at least a little suspicious, or whose team representatives for some reason you do not like.
- Wait a while before investing. Remember - "keep your head in the cold." This is just about entrepreneurs;
- Pay attention to the specifics of doing business in the country in which you plan to invest. A project can be successful in one country and fail in another.
- Carefully study the technology that will be fundamental to your project. Behind beautiful words that describe the idea of a certain project, emptiness may be hidden.
- In 2018, it is worth paying more attention to the actions of institutional players - they gradually enter the cryptocurrency market and begin to invest, although they act cautiously.
In the end I will say that you should not be afraid of volatility. Cryptocurrencies and blockchain will develop in any case, so that the market will grow. We are at the beginning of an interesting and long way forward to the global widespread adoption of blockchain technologies and tokenization.