In this episode of the Fundamentals podcast, we’re joined by Evan Fisher, the founder of Portal Ventures – a fund that is accelerating the protocol economy through business fundamentals.

Portal Ventures identifies and supports crypto businesses that will define the next generation of our economy. They advise on strategy, roadmap, go-to-market, value capture, fundraising, and more.

In this episode with Evan, we discuss Portal Venture, their investment strategy, and how they work with the projects they invest in. We cover what makes crypto interesting, and what the most common misconceptions are that traditional investors have about the asset class. 

We also break down the pros and cons of liquid venture, discuss crypto business models, and speak about whether crypto projects are software or marketplace businesses. Finally, Evan shared what he is most excited about in crypto right now. Tune in for a great discussion about the fundamentals of the protocol economy.


Portal Ventures:
Site: https://portal.vc/
X (Twitter): https://twitter.com/PortalVentures
Evan: https://twitter.com/evanbfish


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Timestamps:
00:00 Introduction
00:58 Evan’s introduction & background
02:53 Overview of Portal Ventures
05:12 The problem that Portal Ventures solves for investors
07:40 Is Ethereum a marketplace or a software business?
10:10 The biggest misconceptions that traditional investors have about crypto
13:28 Crypto business models & how does Evan approach valuing early-stage projects that don’t yet have cashflows?
15:27 The pros and cons of liquid venture
18:24 Portal Ventures’ investment underwriting process: sourcing, diligence, decision-making
22:06 What stage does Portal Ventures invest at?
23:25 Does every investment need to be able to theoretically return the fund?
25:30 How does Portal Ventures utilize data?
27:41 How does Portal Ventures work with the projects they invest in?
31:22 A need for more non-technologists in crypto
32:03 Investment case: Blueprint (Concrete)
35:10 What is Evan most excited about in crypto right now?
37:30 The biggest challenge that funds face in this space today

…

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#Fundamentals #PortalVentures #Crypto #TokenTerminal

The following content is meant purely for educational and informational purposes and should not be relied upon as financial, investment, legal, tax, or any other professional advice.

This is the Fundamentals podcast, where we demystify crypto and help you navigate this ever evolving internet native economy.

In this episode of the fundamentals podcast, we're joined by Evan Fisher, the founder of Portal Ventures, a fund that accelerates the protocol economy through business fundamentals.

In this episode with Evan, we discuss Portal Ventures, their investment strategy, and how they work with the projects they invest in.

We discuss what makes crypto interesting and what the most common misconceptions are that traditional investors have about the asset class.

We speak about the pros and cons of liquid venture, crypto business models, and whether crypto protocols are marketplace or software businesses, and discuss what developments Evan is most excited about in crypto right now.

Tune in for a great discussion about the fundamentals of crypto.

Hi Evan, welcome to the Fundamentals podcast.

It is great to have you on today and to speak a bit about Portal Ventures and then also your approach to the whole crypto space.

Now before we dive into the details behind Portal and start picking your brain about how you're thinking about crypto, could you maybe give us a quick overview of your background and how you got to running a crypto fund now?

I grew up a bit of a finance nerd, actually.

So in high school, I would watch CNBC before school started.

I would trade options on Apple in the back of math class.

And then I started my career at Goldman Sachs covering industrials and investment banking.

So the entire other side of the universe.

We saw complex mergers, we saw SPACs for SPACs-worthy, we saw activist defense, et cetera.

I then joined Insight Partners in early 2019.

When I joined, it was really a leading growth equity firm.

And when I left, it was the leading and the largest venture firm globally.

Really exciting time to be there and had the opportunity to invest across really great companies in software, internet, fintech.

I ultimately led the crypto efforts there.

I first got into crypto some time ago through a high school best friend, and I was doing it realistically on the side at first, and then I increasingly realized, wow, There's something here that is more than just interesting products and ideas.

And I realized that at Insight and I also realized, okay, new asset classes typically create new types of investors.

There's a reason Blackstone is not the world's greatest venture fund, for instance.

And the question then just became where and how do I do this?

I think so many people can resonate with the fact that crypto started as a bit of a side thing, you know, you're just experimenting, but then when it clicks, you realize that all right, the opportunity cost is too high.

You just need to go all in into that space.

But yeah, now, Portal Ventures then, what does that look like?

I launched Portal about a year and a half ago.

Continuing with the story from earlier, there were 2 realizations I had when I thought about what I wanted to do.

Number 1 is a lot of funds have gotten way too big, which means they sacrificed agility.

And because crypto is such an emerging asset class, you need that agility because it helps you find risk reward.

It helps you find the pockets that make sense based off the cost of capital.

Number 2 is I realized almost every investor in the room was a technologist.

And if you think about the internet investing, like OG's Mary Meeker, Bill Gurley, they realistically came from Wall Street.

They were internet native, if we want to use that term, but they came from Wall Street.

So I said, okay, this is where the industry is going.

So I launched Portal, the largest investors in FundOne, our partner capital from Insights.

And The idea was, okay, how do we, as Insight, created a firm built on software investing frameworks and principles, how do we do that for protocols?

Because if protocols are the next great business model, the reality is there will be investment firms that master that and generate really impressive returns by doing that before others do.

In terms of where we focus, it's really based off agility.

So that means primarily early stage investment opportunities.

And then we mapped out crypto and said, OK, what's the equivalent of verticals within crypto?

In software and internet, you have enterprise software, consumer software, fintech, a couple of other categories.

In crypto we said, okay, you have protocols and protocol infrastructure, so necessarily token projects.

You have digital assets, which could be CFI, it could be DeFi.

You have blockchain software, you have open internet and then you have consumer.

And so we focus on protocols and protocol infrastructure on digital assets and then on what we call open internet.

And because we're all about frameworks here at Token Terminal, we like to simplify the framing of most businesses in a way that, you know, most crypto protocols connect supply side and demand side participants, just like traditional marketplace companies.

And I've before played with the thought of applying the similar marketplace framework to funds as well, with the supply side being your LPs and the demand side being the projects you invest in.

And as marketplace businesses need to solve a problem for both the demand side and the supply side participants for there to be product market fit.

I wanted to ask you what the main problem is that Portal Ventures solves for your LPs.

I'd actually push back on that framework a bit.

Which is to say, I don't think that most all protocols or funds are marketplace businesses.

Like we can look to Ethereum, for instance.

And it just so happens that the suppliers of that product are not inside of Ethereum itself.

Like Ethereum's not a company, obviously.

Similarly, funds, like I sell a product at the end of the day, and that product is the portfolio of companies that I invest in.

And I guess the big difference is there's so much more value add and thought that goes into this than purely a marketplace.

Amazon handles delivery, for instance, but they're not actually enriching the products, choosing the products, etc.

And so to answer your question directly, there are 2 big problems we solve.

Number 1 is crypto is a new asset class with a lot of noise.

And number 2 is it's a new market structure and a new type of investing.

On the former, we're close enough to crypto that we realistically understand what is real and what's not real.

We say, okay, how do we translate this back to the traditional world?

How do we translate this back to the executive on Wall Street or someone that's used to investing in traditional venture funds?

And we can do that because again, we come from that world.

It makes it easier to understand how do you think about something like Ethereum as a software business, as I mentioned, as opposed to a protocol that has an unclear business model, which is the perspective a lot of traditional investors might have.

To the second around market structure and dynamics, again, the fundamentals come in.

It's the ability to have pattern recognition and say, okay, what is the order of magnitude of an opportunity like this?

Is it, if it works, a billion dollar outcome, a 10000000000 dollar outcome, a hundred billion dollar outcome?

And that's critical because if LPs are investing in us to understand the market, to get, realistically capture that value that's being created, you need to be agile enough to go in at the stage that makes sense, But you also need to understand the order of magnitude of what can be created.

And that's where the risk reward math then comes in.

And good pushback on the framework as well.

Overly simplifying things always comes with certain imperfections.

So yeah, I do agree that it can downplay the complexity of a fund and the product that you are offering to LPs to just speak of it as a marketplace business.

But on the Ethereum example you brought up, you mentioned that Ethereum is selling a software product, which is true, but with that product being BlockSpace that is enabled by the supply side participants, so validators, and brought to an open market that users can pay for.

Wouldn't you say that Ethereum could be thought of as a marketplace business, a marketplace for BlockSpace?

I prefer to look at Ethereum as a software product, and I would look at something like Uniswap as closer to a marketplace.

If we dig into Ethereum itself, the way I view that business is the product they sell is like you said, Blockspace, effectively access to a database.

They sell them at a variable cost depending on how much demand there is for block space at any point in time.

Their cost of goods sold is to the cost of consensus.

And then there's realistically like gross profit and EBITDA margins are pretty close to the same for something like Ethereum.

And you know, the reality is it's neither a pure software business nor a marketplace, but I do think that the lens of a software business makes more sense from a line item perspective.

And it's definitely not easy to categorize these projects according to models we've become used to in the traditional world.

So I do agree with what you said there about it probably being neither.

But do you have a mental model for how to make the distinction between what is a software or product business and what is a marketplace business in crypto?

I think it's a function of how much the protocol is actually adding.

We could ask the same question of why is Amazon a marketplace and Microsoft is a software business?

And Obviously 1 dynamic of it is that Microsoft's building things internally versus externally.

But there aren't really any protocols that are building the product exclusively internally.

Like the nature of a protocol is that it allows machines to talk to 1 another.

So my mental model is around what's actually being added from a value perspective.

And then also what do the margins end up looking like?

Like if the vast majority is going out to the providers of the product, it's probably better to look at it through the lens of a marketplace.

But I think this touches on a really interesting meta point, Which is the reality is it's neither.

Like it's a new business model and it has yet to be defined in proper terms, but it's a new business model and we can take these frameworks.

But just as everyone talked about, you know, like over the last full cycle skeuomorphism, they were like, are products too skeuomorphic?

Do they too necessarily resemble past Web2 products?

We should talk about that too when thinking about business models.

We can learn from the past, but it's something new.

Yeah, that's a great meta point and kind of building on top of that, I want to ask you being classically trained and having a background at Goldman and then inside partners, what would you say are the biggest misconceptions that like traditional investors have about crypto outside of the most obvious ones?

So let's first look at crypto and think about what actually is it?

And that'll help set the level to then go in and say, okay, what are the misconceptions?

Crypto is very parallel to what happened in software.

So if you look at software, 2 things happened.

Number 2, it created new business models.

We started talking about some of the new business models just now.

But the new products and software, things like accounting software, for instance, that was definitively better than just hiring an accountant.

But the business model innovation was around the scalability and the profitability of it.

You know, you can't run an accounting business with human capital and produce 80% gross margins.

And the result was you saw software businesses scale faster than businesses had ever scaled before and do so with profitability that was really unmatched and that created trillions of dollars of market cap.

And so protocols are doing the same thing.

Like Ethereum, Uniswap, they're new products.

They are not possible without blockchains and crypto, but they're also new business models we talked about.

And the power of the business model is similar to software again, in that they scale faster than we've seen before, and they do it with capital efficiency.

So something like Ethereum, for instance, scaled to the equivalent of a billion dollars in EBITDA faster than any business that we've ever seen.

So that's kind of like what's happening here.

If we then look at what investors are getting wrong, It's that they're looking at protocols as if they are software businesses entirely.

And that's to say a lot of people underwrite protocols as if they were a traditional software business or internet marketplace.

Number 1 is the quality of revenue is so structurally different.

Like you can't look at an enterprise software business that has annual contracts with large customers and compare the growth trends of that to the growth in a crypto business because crypto is going to scale faster because there's no sales motion, but it's also less retentive because, well, it's not an annual contract.

That's the first issue in approaching it like a software business.

The second is the stages of de-risking are not at all the same.

If you are investing into a Series A for an enterprise software business, there absolutely needs to be revenue on the board.

And you're going to say, okay, has the revenue validated product market fit of this business?

And then do I believe that by investing capital, they can grow and inflect on revenue?

Now That's not how you evaluate every growth asset though or emerging asset.

Biotech, for instance, by no means is evaluated in that way.

Like there are many series A's that are done in biotech or pharma where all that's been done is the product's been de-risked by building it, passing clinical trials, something like that.

And again, protocols are a different life cycle.

There are protocols where you can actually write a series A check, even if they don't have revenue and it's appropriately de-risked for a number of reasons.

Could be like the team's actually shipped and developed a very complicated technical challenge.

There are integrations that have happened that are creating moats, things like that.

So in summary, the second big issue is that people just are approaching it in the same way they would approach software, de-risking and that's simply not true.

And as you at Portal Ventures are experts in business models, which is also clear in the way you speak about them, how do you approach valuing these emerging assets whose business models might not be that clear yet or there are no cash flows?

To be super clear, it is focused on cash generation and value generation over the medium to long run.

It's simply saying you cannot evaluate the likelihood of a business being very profitable and therefore valuable in the early stages based exclusively on the revenue that it's generating for a protocol.

Now if we look at the business models again, we can say what does this resemble again?

What's the framework to approach this with?

And it usually resembles things that aren't that crazy complicated.

So if we go back to Ethereum, my mental model for Ethereum is it most resembles a software business.

Now, the difference in where it does get more complicated and require more expertise is around the mechanisms by which it's actually generating that revenue.

It's going to market, it's running its value capture, et cetera.

So unlike a traditional software business, Ethereum doesn't sell to enterprises, it realistically gets developers onto the network.

It's like a protocol to developer to application go to market motion.

So you can look at it and you could say, OK, how efficiently are Layer 1s like Ethereum actually acquiring developers?

Are they acquiring developers at a rate that seems to be profitable?

Does it make sense for them to continue acquiring developers?

And then over time, those developers build applications and those applications drive ultimately demand for block space.

So again, it's a simple business model framework, but it's the mechanisms by which it's actually implemented that is entirely unique to crypto and to protocols.

Given that, and 1 of the biggest differences between like traditional venture and then investing in crypto is that crypto is liquid venture and that's been a bit of a struggle for a lot of funds to get at the base or at least cause of confusion for many on how they should approach it.

So could you maybe speak quickly about what you see as the pros and cons of liquid venture and how that has changed the game?

I'll actually start off with the implications for companies before going into the implications for investors.

Because this is something I feel strongly on, which is if you think about the liquidity profile of crypto for companies, it does really weird things to their cost of capital, which is to say, if you're a traditional venture business and you're growing, you're typically doing up rounds.

You can kind of predict what your cost of capital to finance the business and the growth going forward will look like.

In crypto, you're subject to market conditions though.

And so I find there are a lot of projects that actually went liquid too early and that can destroy the project.

Because if you go liquid and all of a sudden the capital markets are not managed, you could find yourself in a situation where you're series A product traction, but liquid markets are valuing you like a pre-seed or seed business.

Which means you can't actually raise enough capital and monetize your equity slash token at a rate that's reasonable to grow the business.

As it relates to investors, though, 2 big things that happen as a result of having this liquidity profile.

And that's again, because these businesses can go liquid, these protocols can go liquid at a stage which is not equivalent to IPO stage.

And so it's the equivalent of maybe being a series B, series C stage company that then is going liquid.

If it's done appropriately, where the token needs to exist, where the story is like appropriate, that the marketing makes sense, the marketing makes sense and that people understand the product, why it's valuable, why it can be big, then you end up with a really attractive time to liquidity.

And that's something I think that LPs are excited about as well.

In traditional venture, you know, you have to wait 10 years from a pre-seed to seed investment, if not longer, to actually realizing and monetizing the investment via an IPO.

In crypto, you could monetize the pre-seed and seed investment in 3 to 5 years.

We are long-term investors, but we have the opportunity to.

And should the market price something such that realistically it's no longer in our return threshold, i.e.

Like we aim for venture like returns, if that starts to disappear, we have the opportunity to take some chips off the table.

The second idea is that you can typically recoup capital as well.

So if you were to invest in a venture stage business that was liquid, Or if you were to invest in private business that then goes liquid, maybe they get to a series B stage.

The series B company can't really go public in traditional markets, but crypto reduces the barriers to realizing liquidity, which means that you actually then have fewer things that you never see capital for, which again changes the math on a portfolio for a crypto venture investor.

Yeah, those are all great points and definitely feels like the pros of Liquid Venture outweigh the cons, but the timing issue around going liquid is definitely 1 that projects need to put a lot of thought into.

But yeah, now moving on to how you source, analyze, and make decisions on deals at Portal, could you walk me through your investment process?

The biggest thing for us on sourcing is we find deals before they are deals.

Number 1 is being thesis driven and thematic.

So Katrina on our team, for instance, did a deep dive in to MEV and into AI earlier this year.

That allows us to have interesting perspectives on categories before they're a thing.

And to meet the founders building there before they're raising.

And it's an advantage that we love having.

It's also something that helps us better underwrite.

Number 2 is spending a lot of time around universities.

That could be researchers, it could be professors, it could also be blockchain organizations.

We help organize some conferences across US universities.

And then number 3 is going to research-oriented events.

That could be the FHE Summit in Tokyo earlier this year, or it could be hosting salons around specific topics.

Maybe it's going to a mechanism design salon, as an example.

And so those 3 vectors help us find the most exciting things.

When it comes to diligence-ing, we're really prepared minds.

We look exclusively where we're excited and have a perspective.

That means that we move fast with opinions and conviction.

If a company works well, protocol is going to work well, you're ideally working with this founder for 10 years into the future.

And so we like spend a lot of time thinking about how they think, what's their perspective on the world, how do they manage challenges, what's their vision, why are they excited to build this?

There are quite literally a million things anyone could do with their time.

Like why are they going to spend 100 hours a week doing exclusively this thing for the next few years?

In terms of the decision making approach, it's then back to the risk for word.

It's saying, okay, what do you have to believe for this investment to return the fund or to generate cap gains that make it worth the cost of capital.

And so there it's saying, you have to believe this is what the market turns into and this is the product they actually have and this is how they execute on go-to-market.

And you look at that and you say, okay, is that reasonable?

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Portal Ventures – Accelerating the protocol economy through business fundamentals | ep.66