DeCenter talked with Oleg Ivanov, the founder of the CryptoBazar investment fund, which is engaged in investing in blockchain projects at an early stage, about the four types of investors, what they are betting on, and how to appeal to them.
We met with Oleg on a very pleasant occasion, when the publishing house "Mann, Ivanov and Ferber" published his book "How to Find Money for Your Business." Oleg Ivanov has dealt with attracting investments since the early 2000s, as he first sought financing for his own projects, once he raised about $30 million, he decided to teach others how to do it too.
In 2013, we conceived an educational course, in the first part of which we taught projects how to evaluate a business model, how to strengthen the company by hiring experts from the industry, how to prepare materials for investors, where to look for them, how to pitch ideas, and how to speed up solutions. In the second part, we directly submitted projects to investors, began to hold regular events, and began to work in parallel with lending to small businesses under working capital for a short cycle. Over time, the idea arose to design techniques that have already helped hundreds of people raise money, describe these cases, and set out the methodology in the book. This was how the step-by-step instruction on attracting investments was born.
When and how did you make the transition to the ICO accelerator from investing in the real sector of the economy?
In the spring of 2017, when the story of the mad growth of the cryptocurrency sector went off, DeCenter began to conduct its first meetups. At first, I was skeptical about all this, but a number of friends told me: it sounds crazy, but go and see. I went. This was the DeCenter event on Red October. The first thing that impressed me was the huge hall, which immediately reflected the interest in the industry. Second, I saw over two dozen investors from my fund at the event. At that moment I decided that all this should be understood.
Investments in high-tech projects somehow require certain competencies . . .
In order to better understand some technological processes, we have partnered with Andrey Yudin, the former CTO of Mail.ru, who has been in the crypto industry since 2013. In this tandem, we modified the accelerator to work for ICOs. The accelerator worked and showed a good result in terms of the number of people who participated (about 1,000 people in two flows), and the event was well-attended. Then it was time to determine which model to go with, either marketing (to pack ICOs) or funds. The question arose: where, at least in theory, is there an opportunity to earn a capitalization of a billion dollars? Obviously, it is hard to do it on an agency model, so we decided to bet on the fact that we are primarily a fund. We are developing our network, we are looking for promising projects, and we are trying to be on the list of their priorities.
Infrastructurally, which ICOs show the best profitability?
When we began to study the profitability statistics on the ICO topic, we noticed an interesting regularity. The media are very fond of writing about the number of funds raised in ICOs, but nobody writes about how much the investors have earned. With our analytical department, we gathered all the ICOs between 2016 to 2017 and sorted them according to geography, industrial clusters, and profitability. From that, we got a proverbial oil painting. There are infrastructural blockchain projects or protocols that create a new conditional Ether token. They gave a 5,000 percent return on investment by that year. Next were payment systems, and they gave 2,500 percent. Only half as much! Behind them were gaming and gambling at 700 and 800 percent respectively.
Russian projects, according to our observations, are lagging behind in profitability. Projects that bring profit to investors are around the Pacific. South Korea, China, Hong Kong, Singapore, and the Silicon Valley were the most profitable. The rest of the world collects money, yes, and gives some kind of profitability, but these are different stories.
What difficulties can "free money" encounter when investing in blockchain projects?
The brightest teams, which potentially promise high profitability, have a queue of investors. The investors ask: what value, other than money, will you offer me—developers, listings on exchanges, marketing, or community? The second issue: you are willing to invest $2 to $5 million, but the project allows you to invest only $100,000. Projects do not want to attract all of their capital from only two or three big players.
What projects are currently in the focus of investors?
As a fund, we are chasing elite teams that create protocols for a new generation, which, in the future, can become new industry standards. Faster, cheaper, and more-scalable protocols are capable of occupying a certain language niche like browsers or search engines like Yandex.
Are there Russian teams among them?
In Russia, there are, as of yet, no teams capable of creating and scaling protocols on a global scale. There are a couple of projects that are brewing, and God willing, they will grow.
What role does technological evaluation play in assessing investment appeal?
It is one of the decisive factors. We have faced a number of projects that look solid in appearance when assessing the previous experiences of the team, what they are attached to, and what consortia they create within the project. We begin to study what they are trying to accumulate and find out that the team is trying to solve a problem that has already been solved by other projects with more outstanding results. It's like entering the market with a new steam boiler when most automotive companies are thinking about how to increase the capacity of electric car batteries. The second part is the technological limitations of the protocols. Remember the first computer that worked on punch cards? What was the performance? What was the scope? It simply knew how to count quickly. And what would happen if someone invented Instagram for this computer on punch cards? It is the same with blockchain. You understand the needs of business, but the protocol does not make sense. Miners start getting greedy and transaction costs increase. Protocols for the new generation are trying to remove these limitations, but for now, this is the same as trying to speed up a computer working on punch cards.
Which countries generate the most investments in ICOs?
Look at the total money supply. Compare our stock market with the stock market of China, Asia, and Europe. The money supply is greater outside the Russian-speaking geographical area. Hence, the importance of roadshows through which the ICO gets access to a large number of people who are faced with the task of investing in interesting projects. Trying to raise money for a project within the Russian audience alone is an unrealistic task.
Which countries are in priority when forming a roadshow?
Asia. My top picks are Hong Kong, South Korea, and Singapore. China is still a bit moot.
How does the Middle East behave in this respect?
There are no strong funds there yet, especially not strong ICOs. But we understand that there is a lot of traditional money there and there is interest, but historically, Middle Eastern investors require more time in classical financial deals than, for example, Asian investors.
Is it difficult to explain the specifics of investments in ICOs to classical investors?
You have to explain. Any player in this market has an educational and, somehow, evangelical function. It is impossible to work without this educational component. You must explain the specifics in such a way as to sell the idea. This seed will then give rise to some sort of result. We understand that from the point of view of technological penetration, everything is taking place at the level of enthusiasts, despite the fact that large businesses have already been piloted many times by blockchain. The state is also in it. Even in Russia, there are several regions where blockchain is used in individual social programs such as Rospatent, for example. Regulation should mature, however, so that questions regarding mining or the exchanging cryptos for fiat become clearer and more understandable. Why does South Korea shimmer in the news around the whole world? This is the country with the largest number of Ethers per capita. There, everything is fixed, but the rules of the game are clear, and you work based on them.
Should blockchain projects bet on funds, institutional investors, or on a large coverage of private investors to give them the most capital?
There are two camps of projects—responsible bootstrappers and, frankly, money-bloated ones. The difference is in the amount of money that they attract, and in their valuation of the company. At the same time, there can be real stars in the team, and it is clear that sooner or later they will do something worthwhile, but it is not clear to the investor how exactly the star will work within the project. All investors have different experiences and motivations. There are professional investors who have been sitting in the investment industry for years, managing billions of dollars. For them, in principle, a person who can yield five to seven percent per annum is a mega-successful person who can write out huge bonuses and the whole investment community will carry him on their hands. For such players, the strategy is to bet on large projects, like Dfinity or Hedera Hashgraph, since they end up with huge amounts of money. Even Telegram received 1.5 billion dollars of real cash during their ICO. When you look at such projects, you realize that they will not have the 50,000 percent gains, but they have safety margin and an amazing team, both technologically and commercially. Telegram has a starting position of 200 million users. I, as a professional player with a lot of money, will happily bet on these players because of the margin of safety. While the market hangs in limbo, they have enough money to implement their vision. They work calmly and systematically based on their schedule, and they have enough adulthood to implement these tasks and not scowl themselves with buying Lamborghinis and other nonsense.
The second group of investors is standard flippers or speculators. These are people who are chasing airdrops, trying to participate in ICOs, and joining some investment pools to buy things, and at the first hint of a liquidity wave for the tokens, they sell all the assets.
Others are classical adherents who, for one reason or another, have fallen in love with and believe in the project, and are ready to sink with it and support it until the end. This is an ideal audience for any protocol. Without an understandable commercial component or a foreseeable and understandable model, this is a bit of an illusion, but everyone desires such a loyal audience.
The fourth group is the profile players who primarily specialize in ICO investing. There are more and more funds appearing there, and those who made at least one or two projects last year are carrying this baggage as proof that they are capable of something. The amount of money for all is different, from $1.5 to $15 million. At the beginning of the year, the fund strategy worked well, but now there are too many funds and the projects are also interested in what additional value, other than money, funds can offer them.
Which investors should not be sought after?
You need to be afraid of investors who do not want to make money. This is an unstable and short-term construction. An investor who spends his time merely to be called an investor is one who chooses projects, negotiates terms, invests, and earns something because this is his kind of activity. A basic necessity for an investor is the ability to make money. If you cannot do that, you are not an investor. You must go learn. In general, the motive to make a fortune for yourself is a good motive. If we talk about the economic component of the world, then it rests on those who want to earn.
How do you appeal to investors?
Tell them how it will work. Whether in blockchain or not in blockchain, all entrepreneurs immediately forget about this topic. They tell how they will change the world, how they will conquer Russia, and then they will eventually come to China, and end with the fact that "we need so much.” And it's good if they say that, since sometimes the presentation ends simply with exchanges of contacts and the investor can only guess in what volumes and in what format he can participate in the project. Do not talk about the potential profit in tokens or shares of the company. If you plan to get an investment in dollars, then calculate profit in dollars too. Explain what factors that depends on and what your terms are. These are the basic things.
The second part all projects need to remember is that any investment negotiation is actually a sale. You do it so that someone will pay you money for something. If this is a sale, can we sell something to someone without understanding what he wants? How can we find out what he wants? At a minimum, ask questions. How many projects start with questions when sitting at the negotiating table?
Find out the motives of the investors. What specifically does this investor need? Someone wants to fly to Bali and receive a fixed profit every month. Someone counts the percentage of profitability, realizing that the project still needs to be invested in. Someone already knows who he will be able to sell the project to in a couple of years, with what profitability, and what they need to do to achieve this. And someone is looking for a gift for a growing son or daughter and buys a hairdressing parlor as a franchise. Learn about the motives of the investor. Find out what personal needs the investor is satisfying by investing in your project.
When you begin to understand that the investor's motives are primary, and your product is secondary (you are just a tool for achieving its goals), then everything falls into place.