Ishan Pandey: Hi Xinshu, welcome to our series “Behind the Startup.” Please tell us about yourself and the story behind IOSG Ventures?
Xinshu Dong: I’m an entrepreneur turned investor in crypto. Co-founded two projects in the past, dabbled with quite different aspects in the crypto space, and having great fun so far. I launched the first sharding-enabled public chain Zilliqa and worked on various use cases that range from digital advertising to security token offering (STO).
Then I worked on Bitcoin mining and proof-of-stake (PoS) validation. Most recently, I joined IOSG Ventures last year to focus on investments. I had always been very curious about how investments work in general and in the crypto ecosystem in particular, so IOSG Ventures was a natural choice for me. It’s been great exposure working alongside the most innovative projects and ambitious founders daily.
A bit more on IOSG Ventures. We are a community and research-driven venture fund focusing on early-stage blockchain and crypto projects. We see ourselves as a member of the community and engage on a weekly basis with them – sharing our research insights and market intelligence with them.
As the fund and portfolio expand, we continue to remain connected to our founders, industry KOLs, academic researchers, crypto enthusiasts and investors to bring our value-add to portfolio companies. We invest significantly both in the infrastructure layer as well as applications, including being one of the largest investors of Near and Polkadot in Asia and one of the earliest investors from Asia in DeFi applications such as 1inch, Gelato and Centrifuge.
Ishan Pandey: The latest trend in handling projects seems to be a too-quick-too-soon model with no proper corporate structure led by arrogant entrepreneurs. How does this affect the long-term success rate in startup companies?
Xinshu Dong: I think this is both a positive move and something that calls for concerns. Crypto provides a fast iterative platform for innovation and adoption. DeFi gained huge traction and completely revolutionized the way people deal with money and assets within just a few months. It’s amazing and hard to imagine something like this could happen outside of crypto. But on the other hand, we are really early and I’m not sure whether the current way that many projects operate will be sustainable in the long run.
For instance, anonymous teams are an interesting development in the spirit of decentralization. However, when a huge amount of money suddenly arrives, governance, accountability, and overseeing the treasury become crucial to protect all stakeholders’ interests in the ecosystem. There have been several high-profile incidents of exit scams, rug pulls, or money grabs, etc. You would almost certainly need some checks and balances, or even saviours, in those circumstances to prevent the projects from becoming completely obsolete. Some projects emerged stronger by decentralizing the project’s control and bringing value-add stakeholders, such as Sushiswap.
I feel fundamentally these are things inevitable in the earliest stage of a new space where everything is really moving too quick, too soon. For projects to survive and thrive beyond the initial hype, we need to keep experimenting with and iterating different governance models. Overall, I think we just need to slow down a bit—longer vesting for tokens and even longer cliffs for all token holders. We are taking time to design a proper governance structure that suits the project from early on.
Additionally, fundraising for the right reasons and carefully evaluating and selecting investors for long-term partnerships. These are some of the apparent aspects that all of us can consider.
Ishan Pandey: What policies should startups adopt to generate a robust structure in terms of handling projects that generally have a very short life cycle?
Xinshu Dong: Well, we always look for long-term projects to invest in. I think with proper decentralized governance; we can see that projects can really outlive the initial period primarily driven by the founding teams. To achieve that, a few things matter:
1) fair and widespread token distribution;
2) design an inclusive governance structure with proper incentives; and
3) actively recruit community members to join the project in marketing, technical development and governance.
Ishan Pandey: How should new-age entrepreneurs upskill themselves to better manage a successful startup, especially in the ever-changing and ever-growing crypto space?
Xinshu Dong: Very good question. I believe the skillsets required to potentially succeed in the crypto space are very different from those in more traditional entrepreneurship. There are 3 most important aspects that any new entrepreneurs in crypto should keep in mind – the speed of execution, avoiding working in silos and focusing on the community from Day 1.
For one, the pace is just vastly different. A day in crypto is at least a week in many other businesses. With COVID travel restrictions, largely instant and constant communications via Zoom etc., are the new norm, which further accelerates the speed to get things done. That’s why entrepreneurs must get up to speed and keep the focus on delivering.
Secondly, avoiding reinventing the wheel has gotten to a new level. With open sourcing and composability among crypto projects, entrepreneurs need to be very aware of the space’s developments and leverage on other tools, APIs, and projects to build their own projects as much as possible. Working in silos is completely obsolete and will be considered incompetency.
One last point I’d like to make is that the community is at least equally important, if not more. Crypto has brought almost all stakeholders into this broad concept of community, including your users, investors, liquidity providers, fans, researchers, etc. Gaining their sustained trust and confidence will keep the momentum going and ensure sufficient manpower, talents, and business development and financial resources for the projects’ long-term growth.
Ishan Pandey: What qualities do you look for in a ‘Founder’ or ‘Startups’ while investing in projects?
Xinshu Dong: We want to see the clear value add to the ecosystem. It doesn’t have to be a completely new technology they’re building. In fact, a fork project with a clear new angle in servicing a particular type of users much better will give us more confidence than a project being built from scratch but doesn’t have a clear differentiation than existing ones. In more formal terms, this is about product-market fit, timing, initial traction, etc.
We also want to see a clear conviction from the founders. Crypto or not, building a startup is a hard battle to fight, which sometimes can be extremely challenging and tiring before achieving real successes. Founders need to have a strong will and get ready to fight the tough fight to get where they are headed.
Also, different projects also require different perspectives in evaluating them. Equity deals place more emphasis on long-term value accrual, so the team is everything. Token deals are more susceptible to product-market fit and community sentiments. Overall, I think evaluating projects can’t be 100% scientific and it’s a mix of formal due diligence, track record, personal experience, and timing.
Ishan Pandey: How effective will decentralization be in fighting censorship? What are some challenges that decentralized governance might face in terms of regulatory and compliance mechanisms?
Xinshu Dong: I think decentralization is the way to go in the fight against censorship. But having that alone isn’t enough. For instance, there’ll always be differing views even within a decentralized community regarding what would be censored (say, child pornography or so-called national security). But I’m sure despite these challenges, decentralization will be an infinitely better platform than autocratic censorship.
In terms of regulatory and compliance mechanisms, I believe this will just be one instance to manifest the disruptive nature of blockchain technology. I believe that those who can’t figure out what additional benefits blockchain brings to an organization than Cloud servers are putting blockchain in a box and thus missing the point. By all means, blockchain by nature is disruptive and will face lots of conflicts and challenges with regulation and compliance. The first immediate challenge is how to regulate crypto assets and transactions without stifling innovation, which is the more accessible part. The second challenge is how to analyze the impact of decentralized governance and organizations in terms of accountability, liability, fiduciary duty. This is the hard part and will affect almost every single aspect of laws and regulations as we know them. The third challenge will be before the first and second challenges are solved by solutions that make sense. What do we do as the crypto community?
Ishan Pandey: Elon Musk has openly endorsed the meme culture and has created quite the buzz around meme crypto Dogecoin. I recently read that you too have invested in Doge. How do you think this latest trend will affect the blockchain ecosystem?
Xinshu Dong: I started to appreciate such movements, especially after WallStreetBets. There are just too many possibilities for how crypto will become mainstream, and public endorsement by influential figures such as Elon Musk and Mark Cuban is an effective channel. I think this will undoubtedly encourage more people to pay attention to blockchain or crypto, which in my view, is an all-positive move.
However, by no means we should focus on making new meme coins. Doge is good and perhaps good enough ;)
Ishan Pandey: What are your views on the recent developments in the crypto space, especially since this year has witnessed the crypto market attaining an all-time high primarily owing to the Bitcoin boom?
Xinshu Dong: Among my friends, many of us actually are both encouraged and alerted by the fact that the market has been going up so quickly. We all need to make sure that we keep bringing new value to add to the space to remain relevant. I think if we believe eventually mainstream will adopt crypto, now is probably the best time to start working on new ideas for entrepreneurs. We are still early, but the clock is ticking. On the other hand, we will certainly have to exercise caution for investors as bubbles start to build up and focus on valuable long-term projects.
Ishan Pandey: What, according to you, are the implications of the recent boom in DeFi? Further, what regulatory and technology challenges are still left to be addressed by the DeFi industry?
Xinshu Dong: I think the first and foremost implication is the reaffirmation that adoption is key. DeFi witnessed one of the fastest growth in its volume and user base. How that was achieved or what kind of volume and users dominate, etc., are certainly important questions to ask, but not as important as the fact that they skyrocketed. We need more products that have a great product market fit to unlock blockchain’s huge potential gradually.
I don’t see real challenges with DeFi from the technology perspective. Some of the current issues, such as high gas fees, can be readily resolved by the adoption of layer 2s or other faster chains in the near future. The lack of clarity around its legal and regulatory front is certainly a challenge, and we will need to be ready to make swift adaptation as new regulations come along.
Ishan Pandey: What advice will you give to budding entrepreneurs who want to build applications for the cryptocurrency industry?
Xinshu Dong: 1) Become a power user first and use different existing products at least for some time. 2) then, after sketching out an initial idea, validate it with people in the community, get their help, build prototypes and iterate quickly based on feedback. That’s the way to go for crypto products. 3) Money is everywhere. People who claim they can help you with marketing or community are everywhere. Choose your partners wisely. Check out their track record, get references from people they worked with, and compare between a few. 4) Please take enough incentive for yourselves as founders. That’s not just for the good of yourselves but also the long-term good of your projects.
Ishan Pandey: What are some new trends and products that we should be on the lookout for in the DeFi space in 2021?
Xinshu Dong: I think a lot of innovation will emerge, fewer at the grand scale, but more on refining existing mechanisms in lending/borrowing, automated marketing making, cross-product or cross-platform aggregation, as well as coming up with products offering more competitive rates. The infusion of DeFi into other blockchain applications such as games, collectables, and social networking, is also worth looking out for.
The purpose of this article is to remove informational asymmetry existing today in our digital markets by performing due diligence by asking the right questions and equipping readers with better opinions to make informed decisions. The material does not constitute any investment, financial, or legal advice. Please do your research before investing in any digital assets or tokens, etc. The writer does not have any vested interest in the company.