How Investors Can Lower The Cost of Raising A Fund By $50k/team member/yr, Why We're Still 'Meh' On Crypto & Podcast Interview with the Space Foundation - D.F.A. #7

In newsletter #7:

1. How Investors Can Lower Their Cost of Fundraising By About $50k Per Team Member Per Year

2. We’re still super-negative on crypto

3. Podcast Interview With The Space Foundation

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Hope you had a great Thanksgiving, if you live in the States. If you’d like to have grab coffee with D.F.A. Capital as we raise our Fund I, here are the types of folks that we like to meet with:

1. Have a background in SaaS, telecom, agtech and ideally functional expertise in customer relationship management or marketing/sales automation (CRM)

2. You love meeting with founders a few times a year

3. You love sales like we do (we work with sales-focused founders)

To book a time to chat, and learn more about the founders we work with, click here.

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How Investors Can Lower The Cost of Raising A Fund By $50k Per Team Member, Per Year

8 months before we began raising our fund, we began getting calls from lots of different vendors offering to sell us lists of family offices for $10k, and, of course, from that notable vendor owned by a very large Chicago-based financial services firm, who told us we should pay $4k/mo for their database of investors. That’s about $50k per year, per person. If you’re running a 3-person VC firm, it would cost about $150k to use that product to raise a fund.

We politely told them to take a hike and called our friend Nathan who ran a company called Foundersuite which many of our founders were already using to find investors. I asked Nathan, “What would happen if we built a Foundersuite for VCs, private equity, and other investors, so that they could raise funds, but for, say, 5% of what everyone else is charging?”

He really liked the idea. Last week, we launched the waitlist for Fundingstack. If you sign up, and share the link, we’re giving away early access (5 shares), a free month (10 shares) and even lifetime FREE access (100 shares).

There are some pretty big differences between Fundingstack and the incumbent in the market. The incumbent has 2710 family offices, Fundingstack has 6090, and 13325 individual persons from family offices. Fundingstack is also going to have VCs, nearly 60k. Also, at this point, Fundingstack has direct-dials for nearly 62% of investors. It’s also easy for any LP to get removed if they wish - one message, and they’re removed.

We’ve got all kinds of special surprises up our sleeves coming in the next few months, so stay tuned. The goal of Fundingstack is to make raising a fund much easier and affordable for emerging fund managers.

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Why We’re Still Pretty “Meh” on Crypto

When we wrote about why we were negative on crypto and blockchain a couple months ago, we had no idea that the crypto house-of-cards would come tumbling down so fast, or that a whole lot more might be coming, but here we are. 

What can we learn from the FTX debacle? Or, more generally, why does cryptocurrency exist and why is it worth more than $0.00? That’s what we’re going to go over in today’s piece.

If you’re interested in trying to understand the real story of FTX, you can start with a NY Times puff piece, and then delve into details, here, here, here, or here. We’re not going to focus on the FTX details, but rather the larger picture.

There is a widely-held philosophy bordering on religion in the startup and tech ecosystem that centralized, governmental control is very bad, because it stifles innovation, controls the money supply (poorly), and raises the costs of doing business through burdensome regulation. On top of all that, these government efforts require extra taxation.

If we could reduce government control, particularly over currency, it could unleash a massive new wave of innovation, and maybe even reinvent society as we know it.

Along comes the blockchain which has decentralization characteristics that fit perfectly into this philosophical/religious scheme, with the potential to unleash all the tremendous benefits that are bound to happen if only governments weren't in the way. Nirvana! (Not the band, but the state of mind, maybe even both!)

The first people to get the ball rolling may have all been idealists, the true believers, convinced that it will all work out eventually. And who knows, maybe it all would have, if there were no such thing as bad actors in the world. But once the ball got rolling, it was inevitable that complete lack of any kind of regulatory body (whether government or nongovernment) was bound to attract bad actors. And so it has. And here we are.

In our conclusion from newsletter 2, we wrote:

There’s one of two things going on here, and you may need to pick which camp you’re in: 

1. In technology, when something complicated comes along, because most people don't understand it very well, you may simply listen to those spinning a story around the complicated technology and if the story sounds good, and other smart investors are buying the story, you’re in.

2. Alternatively, you could decide you don’t understand the story of how this complicated technology (in this case Blockchain and cryptocurrency) creates value. It might be because you’re just not getting it, or it may be that the story makes no sense. So you pass.

However, crypto isn’t just a complicated technology with a story that was a little hard to understand, benefiting from widely held philosophical/religious beliefs among the VC investor class. In the specific case of FTX, it came with a balance sheet that any junior analyst working on Wall Street or in VC should have thrown up their hands and questioned, “How can I trust this firm to be solvent, when the balance sheet relies on newly invented coins, some of which are valued based on purchases by other similar firms?” That is, if they were even allowed to look at the balance sheet at all.

If you’re in the first camp, and everyone else is doing this complicated thing you don’t really understand with balance sheets that make no sense, there must be something to it. Plus, it fits in with your philosophical worldview. So you join the bandwagon, share the spoils, and save your brain cells for something else you can understand.

We are in the second camp. Perhaps we’re not intelligent enough to understand how Blockchain and cryptocurrency create value. Perhaps we lack the necessary philosophical fervor to truly get it. Or perhaps the story just makes no sense to us because . . . maybe the story makes no sense, period?

Blockchain hasn’t really made any sense to us, and nor has crypto. Yes, we know that Blockchain is a distributed database with some nifty security features, which can support decentralized applications. Yes, we know that crypto is an attempt, using Blockchain, to create a nongovernment currency that avoids any form of regulation. But given these two facts that we do know, why does Blockchain suddenly become an answer to numerous problems?

More specifically related to FTX and cryptocurrency:

What is the purpose of having a cryptocurrency? Why is a cryptocurrency, any cryptocurrency, worth anything but $0.00?

A cryptocurrency token is not backed by a valuable natural resource used to make things like silver or copper. Nor is it backed by gold, which has a long tradition of being a store of value. Nor is it a currency backed by the full faith and credit of any government. So again, we ask: Why is any cryptocurrency token worth anything but $0.00?

We did not understand the answer to this question before. But how about this for an answer:

Crypto can be made worth whatever you want! Without regulatory oversight, it’s easy enough to make a worthless cryptocurrency go up in value for a long time, using time-tested tactics to manipulate prices within unregulated markets. Honest people think they need to buy some of this new currency to get in on the action. And once it’s big enough, institutions join.

The elevator pitch might look like this:

These days, government regulation stifles fraud. Cryptocurrency solves that problem, facilitating the transfer of money from noncriminals to criminals.

So now that we think we understand the story of crypto . . . did they succeed?

Hell yeah! Cryptocurrency has successfully transferred billions of dollars from millions of honest individuals to hundreds, perhaps thousands, of criminals, while also making it easier for criminals to conduct financial transactions.

This was probably not the original intent. But if you start a currency without any form of regulation, you may as well be putting up a sign in your front yard, saying, “Hey bad guys, come and get it!”

Is this the kind of business we want to be involved with? 

No.

We prefer businesses that create value for good actors, not bad actors.

If you’re an entrepreneur with a great cryptocurrency idea, we’re the wrong firm to speak to. Our sales accelerator, SellandRaise, won’t work either because focusing on value and pain is how we teach startup founders to sell. That’s generally not a great fit for crypto.

On the other hand, we’re all ears if you have ideas for real products or services related to creating or using SaaS, telecom, Agtech and/or customer relationship management or marketing/sales automation (CRM).

We might be interested in other businesses or services as well. But if the story or the balance sheet is too hard for us to understand, or we think that financial shenanigans may be part of the business plan . . . pass.

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In Search of Space

A few weeks ago, I was invited to sit down with Shelli Brunswick from Space Foundation to chat about startups, investing and building Fundingstack. The interview was a lot of fun, and it even contains a very large discount code for Foundersuite if you click through to that page. By the way, in case you didn’t get it, the title of this article is the name of my favorite Hawkwind album.

Thanks again for joining us this week, and we’ll see you in a week or two.

Regards,

Adam