Dragonfly Partners Discuss the Truth About Crypto Venture Capital: Market Logic Is Far More Important Than Ideology

Writing by: Rob Hadick, Partner at Dragonfly

Translated by: Luffy, Foresight News

There are many discussions over the weekend about venture capital, especially in the crypto space, but I think most of them stray from the core. Venture capital itself is a market, and venture investors are at the center of this market. Most discussions overlook the true decision-making logic of both parties involved.

We have our own clients, the investors (LPs), who enable us to operate continuously and pursue this career. The best venture capitalists often invest a significant amount of their own money, so we are also clients ourselves. On the other side are startups. I bear real responsibility for the founders of the projects I invest in, and they are well aware that I take this very seriously. But all the startups I invest in are ultimately based on a core premise: can I serve my clients well and make them satisfied?

This doesn’t just mean providing eye-catching absolute returns, because the investors don’t consider it that way. They care about many factors, each with different levels of importance: risk-adjusted returns, reputation risk, regulatory risk, exit liquidity cycles, co-investors, access to core information circles, whether they can position assets and sectors suitable for social conversations, and whether they enjoy working with the people involved. We all know some large funds that consistently underperform their peers but are still highly sought after by capital. In a market with multiple options, this is the reality.

So when you see related data, it doesn’t simply mean “institutions are no longer investing.” It only indicates that investors either want to reduce their allocation or are only willing to invest in fewer funds. The total capital flowing into this space is shrinking, or they are only willing to allocate to higher-quality managers. In traditional venture capital, it’s mainly the latter; in crypto, it’s both less capital and fewer funds being invested. This industry concentration isn’t market failure but rather normal market operation. There are many reasons behind this, but in crypto, the main ones are risk-adjusted return and liquidity issues. Additionally, some institutions are reluctant to associate with certain figures and events in this space.

Therefore, if venture investors want to maintain their footing, they must ensure their investment strategies align with the needs of their investors or be able to persuade them to accept certain directions. You’ll keep asking yourself: Did I invest in the right founders? The right asset classes? The right sectors? Is my risk exposure reasonable? Is the timing of the investment appropriate? The value of venture capital lies in adjusting these factors to satisfy the investors. Of course, the choices that make LPs happy now may not be sustainable long-term, but that’s also a decision venture capitalists need to weigh.

This means in this cycle, you must allocate to stablecoins, perpetual contracts, and prediction markets—even if you didn’t catch the early winners like some did. It doesn’t mean you can’t heavily invest in high-risk, contrarian projects, but you must first prove you’re qualified to do so. A venture fund that makes large contrarian bets and fails will struggle to raise its next fund; a fund that maintains steady, correct investments and consistently returns capital can succeed. Contrarian investing is a gradual process. When we invested in Polymarket’s expansion project with Founders Fund in late 2023 and early 2024, it wasn’t a market consensus, and many people couldn’t understand it, thinking I was wasting money on a project with product-market fit only once every four years. But for venture capital, this isn’t an extremely risky move.

The venture capital industry rewards stability and persistence, not heroism through reckless bets. Only those who have proven they can act prudently are qualified to make big bets and contrarian decisions.

Some believe that the mark of great investing is: you write the first check, other funds follow, and the founder doesn’t fit the typical company model. It sounds romantic, and if the story succeeds, it’s true. But in reality, if a founder doesn’t fit any fund’s investment paradigm, it’s more likely not because I’m smarter than others, but because I overlooked some key issues. This isn’t absolute—I and my team have invested in overlooked founders because we believe we have unique judgment. However, data shows that the win rate for betting on such projects is much lower than choosing more obvious founders.

On the other hand, some blame the current market conditions on founders lacking original ideas. That’s also missing the point. Founders’ behaviors are driven by incentives, which are complex and diverse: Do I like this direction? Can I attract venture support? Can I turn it into a big business? Am I proud of this? Ambitious founders usually want to build large-scale, high-potential projects, but that doesn’t mean ideas must be entirely original. Labeling it “plagiarism” is too simplistic. Most great companies are not first in their sectors but are the best. Google wasn’t the first search engine, Facebook wasn’t the first social network, RedotPay won’t be the last unicorn neobank, and Morpho won’t be the last on-chain lending unicorn. I believe there will still be meaningful innovations in prediction markets, but novelty isn’t the only important variable.

Ultimately, everything is governed by market laws. Venture investors don’t earn returns by contrarianism alone; their returns come from correct judgments, delivering what investors want, and considering every branch of their decision trees. This can sometimes be achieved through reverse thinking, but most of the time, it isn’t. Founders don’t get rewarded simply for taking bold risks; their returns come from building products people want to use, that can be profitable and create value, and convincing investors they have that capability to secure funding.

Ideological bravado is just empty talk. Ultimately, everything is determined by market forces.

Finally, as always, our doors are open to all founders at early, late, conventional, or contrarian stages.