In this episode of the Fundamentals podcast, we’re joined by James and Vincent, the founders of Modular Capital – a crypto investment firm with a fundamental and thesis-driven approach.

In this episode, we discuss Modular Capital, their investment strategy, the underwriting process, 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, the role that data plays as part of the investment process, and walk through some case examples of investments Modular has made. Finally, we discuss what developments James and Vincent are most excited about in crypto right now. Tune in for a great discussion about the fundamentals of crypto.

Modular Capital:
Site: https://www.modularcapital.xyz/
Twitter: https://twitter.com/Modular_Capital
James: https://twitter.com/jamesjho_
Vincent: https://twitter.com/vincentjow_

Make sure to leave a comment if you have any questions 🙌

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Timestamps:
00:00 Introduction
01:10 First impressions of Base
04:10 James' introduction & background
06:13 Vincent's introduction & background
07:38 Overview of Modular Capital
10:51 The problem that Modular Capital solves for investors 
12:10 What makes crypto interesting from an investor's point of view?
17:38 Biggest misconceptions that traditional investors have about crypto
20:36 Traditional vs. liquid venture: pros and cons
25:34 Is liquid venture more resource intensive?
29:28 What do fundamentals mean in crypto?
31:00 Modular Capital's investment underwriting process
33:15 Data's role in the underwriting process & what metrics does Modular focus on
38:03 Case: dYdX
43:47 Case: Across
47:24 How does Modular work with the projects they invest in?
49:40 What trends or market sectors currently stand out?
56:42 The biggest challenges that funds face in crypto today


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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 James and Vincent, the co-founders of Modular Capital, a crypto investment firm with a fundamental and thesis-driven approach.

Over the next hour, we discuss Modular Capital, their investment strategy, underwriting process 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, the role that data has in Modular's investment process, and we walk through some case examples of investments Modular has made.

Finally, we discuss what developments James and Vincent are most excited about in crypto right now.

Tune in for a great discussion about the fundamentals of this asset class.

I was just checking out our dashboard on bridge deposits to base and That's an impressive curve at the moment.

Just like up only the amount of assets being bridged to base right now is, is pretty impressive and I'm feeling quite bullish on Coinbase.

Have you guys have a chance to bridge to base or play around over there yet?

I've played around with like the Coinbase wallet experience.

I think it's pretty spectacular just in terms of the UI, how friendly it is.

I think you have bridging natively integrated in it to base, polygon, optimism.

I think Friends Tech started getting a good amount of traction as well.

We'll see how sustainable it is, but that's been a pretty common use case on the bridging side.

And then I think from an ecosystem launch perspective, it's probably 1 of the strongest that we've seen from day 1.

You have a lot of the top DeFi apps there out of the gate, you know, so compound, I think Aave just launched today, Sushi is there, Balancer is there.

I think Synthetix just will pass a proposal pretty shortly to deploy there as well.

So just the quality of the applications that prioritized base from day 1, I think is incredibly impressive.

And that whole Coinbase machine and kind of ecosystem, kind of business development capability, I think you've really seen that with this launch.

And I love that the on-chain narrative is now being pushed so heavily by a giant player like Coinbase.

I think 1 of the big differences between now and 2 years ago is if you think about where we were in 2021, these roll-ups didn't really exist yet.

I think people were doing on-chain things on mainnet.

Both Vincent and I have paid a hundred, 150, $200 gas transactions out of our wallet to go do a Uniswap transaction.

And then I think back then, I think Solana also just had infrastructure issues that they had to work through.

They were having outages pretty frequently every few months.

Since then, they've rolled out things like kind of localized fee markets.

They've kind of upgraded some things on the infrastructure side.

So I think just generally the infrastructure to do on-chain activity has matured a lot.

It's come a pretty long way since 2 years ago and I think all that, whether you're in the Ethereum ecosystem, whether you're in the Solana ecosystem, it sets it up a lot better for users to find their way onto these chains.

And then you have account abstraction getting rolled out as well, so people are trying to find more and more ways for users to transact, not have to go explicitly pay a gas fee.

I think that's something that a lot of these rollups are prioritizing.

So just a lot of things like to make it easier for users to transact, be on chain, not have to worry about a lot of kind of backend security type things.

They're definitely feeling the momentum pickup, exciting things happening every day, but today we're going to focus on you guys and Modular Capital and how you are approaching this space.

So James and Vincent, welcome to the Fundamentals podcast.

Now, before we start diving into modular and how you approach this space and what you find most exciting right now.

Would be great if you can both give quick introductions on just your backgrounds and how you got to where you are now.

Was born and raised around Silicon Valley.

Was always super close to and fascinated by technology.

Growing up, just being around the bay, learned to program and code back in middle school.

I had a few engineering internships here and there.

But I think in college, really fell in love with investing and specifically this intersection of investing in kind of technology, which kind of shaped a lot of how we grew up, like Instagram, Snapchat, these things took off when we were in high school, middle school, sorry, high school and college.

Uber became this huge phenomenon when we were in college as well.

And I think that changed a lot of lives for how people have people experienced it.

Shaw, large kind of big multi-strategy hedge fund.

They managed tens of billions of dollars.

I was part of the public markets team there on the tech side.

So covered everything from FinTech payments, kind of tech and internet businesses, some software businesses.

Cut my teeth there for 4 years, coming out of school.

Eventually wanted to move over to kind of private venture markets, just because you get to work a lot more closely with companies in their life cycle as they're kind of growing and building the business.

So moved back to the Bay Area, spent around 2 years at this 10 billion crossover fund called Ultimator Capital, where I was primarily focused on fintech and crypto investments over there, particularly on the infrastructure side.

So as a firm, I'd made investments into companies like Plaid, Checkout, Stripe, Ramp on the fintech side, and then Chainalysis, Fireblocks, FalconX, a lot of these big crypto kind of vendors out there on the crypto side.

At some point, I think we're just seeing how fast the crypto industry was evolving in terms of the infrastructure built out, in terms of the applications that were coming out.

I think the industry, since we had first looked at it back in

as like payment analysts, had just matured a ton.

And Vincent has been a good and dear friend of mine for over 5 years, and the 2 of us wanted to go at it together.

Yeah, so I was in traditional finance for the last 10 years and like James, always fascinated by this intersection between technology and investing.

So I started off my career doing tech investment banking at Evercore and then private equity at Searchlight.

But most recently I spent the last 5 years at Holocene, which is a hedge fund based in New York.

And there I invested in structural winners throughout FinTech, software, and internet.

And me and James actually first met at a FinTech idea lunch back when he was at D.

And given crypto intersected a lot with FinTech, we obviously followed the rise of crypto in 2017, the whole ICO mania.

There's a lot of promises, but there wasn't a lot of traction.

But then again in 2020, but this time was different, right?

There was fundamental metrics you could actually look at.

And coming to the space as a public equity investor, The reason why I was so excited is you had this emerging asset class with really strong technology tailwinds, with really inefficient markets where people were still figuring out their investment frameworks and how to invest, especially on the liquid side.

And in traditional finance, you had hundreds of buy side analysts and dozens of sell side analysts from every single bank covering every stock.

And this lack of traditional institutional coverage was particularly compelling to me as well.

I think both of your backgrounds fit pretty well together.

Now you've kind of merged to make up modular capital.

So moving on to that, can you give the origin story there and maybe just the high level specs of the fund as well?

So I think as we're following just crypto over the course of

I think something that stood out to us, especially coming from kind of traditional kind of public private tech investing backgrounds was just this development value accrual for a lot of tokens in the ecosystem.

I think historically, if you looked at most of the tokens since Bitcoin and after, A lot of people thought about these as currencies, pseudo commodities, people have built supply demand models to how to value them.

Those are all structurally very different frameworks and how you would think about traditional businesses.

I think something like Ethereum as it went through the EIP-1559 upgrade in 2021, that structurally started to burn a large portion of the transaction fee as opposed to giving it back to miners.

And that created this kind of very large structural value accrual for ETH as the token.

And you could actually apply some of these fundamental frameworks to thinking about, okay, what could ETH be worth as an asset?

I think that's certainly true for a lot of DeFi tokens that folks would look at, Whether it's Uniswap, if they were to turn on a fee switch, whether it's products like DYDX that charge 2 to 3 bips for trading derivatives on the platform.

And then there's this explosion of vendors like Dune and Token Terminal that kind of allowed people to kind of understand and sift through some of that.

So that to us felt like this incredible opportunity just in terms of crypto slowly molding more and more into an asset class that has fundamentals, that is driven by fundamentals, and this opportunity to come in and kind of overlay a lot of what we've done for kind of traditional public and private markets into this kind of incredibly exciting and emergent and evolving asset class.

So Vincent and I, we both left our jobs early March

We spent 4 months putting the fund together, kicked off our launch with around 20 mil of capital.

We're long biased on the liquid side, which is the majority of our portfolio.

We look to identify and find around 15 to 20 investments.

We're underwriting these and going through all the type of diligence work that you would traditionally want to do for public investment in Apple or Facebook or DoorDash or any other tech company.

So we're thinking about business, the structural tailwinds, the market opportunity, the competitive landscape, market structure, how do you monetize, all those things, as well as getting to know the team, which is a pretty big part just given how early these protocols are in their life cycle.

We have up to 30% of the fund that can opportunistically invest in venture.

And for us, That's a good way of identifying certain things that are just kind of not publicly listed yet or in the token markets for us to also build into the portfolio.

Thank you for that comprehensive overview there.

Now, we as investors, we're pretty used to pushing the project we invest in on product market fit.

In these sessions, I actually kind of like to flip the script and push for understanding the product market fit of funds in the space.

So starting there, the first question would be that as you're running Monteo Capital, you set that up and got the first 20 mil committed.

What was the core problem that you solved for LPs to get that capital in?

Yeah, if you think about where we are in the market evolution for crypto, I think we're in a very unique moment, right?

If you think about crypto over the last 5 years, venture made a lot of sense as there were a lot of these 0 to 1 build outs, especially on the infrastructure side.

If you think about where we are today, you still have the ability to generate venture like returns, but in the liquid markets, and you finally have enough asset selection to construct a portfolio.

And functionally, you're investing in series A to C companies, which still have 10 to 50X growth potential.

On top of this, protocols have already shipped their products for the most part.

You also have the opportunity to monitor fundamentals and traction in real time, as well as liquidity to scale your position as you see your thesis play out.

And as I talked about earlier, there's still a lot of really inefficient dynamics when it comes to the liquid markets due to the fact that there's not a lot of traditional institutional coverage.

So we think that this is the largest opportunity today, especially on the lower market cap protocols where we spend a lot of our time.

And I mean, you covered a lot of the great points there on what makes crypto interesting from an investor's point of view.

And to kind of dig even deeper into that, what would you say, like, when you look into the space, what are the top things that excite you about this asset class as an investor?

I think when we take a step back, there's a few very unique things that blockchains specifically solve for that I think are kind of new paradigms and new step forwards.

I think the first is this removal of trust with middlemen in the equation.

I think historically, if you look at financial services, if you want to send a wire payment internationally, a lot of times what might happen is it might have to jump through kind of anywhere from 3 to 10 different banks.

And then each of those middlemen in the process are taking a cut with a fee.

And that's because these banks don't all sit on some same ledger where they can kind of directly communicate with each other.

If you look at something like global payments, people pay anywhere from 1 to 3 percent for card payments because you need these middlemen like Visa MasterCard sitting in the middle to intermediate that.

I think with a lot of crypto applications, is that you have the underlying application infrastructure that's built.

But once that is deployed, there really is no middleman and that transaction can happen very seamlessly.

So if you try to go swap USDC to Eurostables on Uniswap, that transaction is going to cost you kind of less than 5 or 10 biths because there's no intermediary outside of this offer application that sits in the middle.

I think the second really unique thing is this composability element that I think is really important and near and dear to the crypto ecosystem.

You look at how traditional tech applications are built.

They're all siloed from each other by default, whether it's Google or Facebook or Twitter.

And it requires that specific application developer to create kind of a set of APIs to expose what they want to expose to the external world.

Those developers need to spend a significant amount of time to maintain that interoperability layer.

If you think about crypto applications, as long as they all sit on the same ledger or smart contract platform.

They're all composable and interoperable by default.

You can have a lending protocol like Aave and Compound where if they need to have liquidations happen that can be facilitated through Uniswap to go kind of sell certain assets.

You can have something like Lido which creates this liquid staking receipt that you get back.

And now that's something that you can put into a lending protocol, right?

To kind of both be able to stake your Ethereum, but also continue to have liquidity on your asset.

I think you can go on and on with a variety of what these use cases look like.

But because you're interoperable by default, you allow the market forces to go be creative and kind of ultimately find its way to applications that make sense.

And that massively accelerates the pace of innovation.

I think the last thing is crypto solves for this inertia of coordination at scale.

And I think you've seen a lot of really interesting use cases of that where the product's only useful if you get a large enough number of either capital or participants to come together and to all do something together.

Historically, these network effects can be very difficult to build, but if crypto acts as a way to structurally accelerate that, that can be something that's entirely kind of digital.

In the case of DeFi protocols that need to bootstrap liquidity to get started.

I think there's a lot of successful cases of that with trading protocols like Uniswap or DYDX, lending protocols like Abian Compound, where initially you had some set of incentives to attract sufficient liquidity to the platform, but once you have enough liquidity, you can kick off the flywheel of kind of users either trading or kind of borrowing assets.

So think about something like Helium, where the network's only useful if you actually have millions of kind of IoT hotspots that are part of the network.

Or think about something like what Akash and Render are trying to do with building this decentralized GPU network where people can lease back excess GPU supply that they aren't using.

So kind of blockchains act as this kind of mechanism to solve for these types of coordination points that traditionally can be quite difficult to kick off.

I think most importantly in all this is that the combination of these not only creates a lot of opportunities for financial applications and use cases that unlocks, whether it's stable point payments, whether it's on-chain trading, lending, kind of staking type infrastructure.

But you're also seeing these applications permeate to things that are not just strictly financial, right?

So when you think about something like what Akash and Render are doing, that is competing or kind of opening up a new market, right?

Where you're structurally adding more supply for people that kind of want to train or kind of run model inferences with GPUs.

Or you think about something like Helium, that's very orthogonal, That just relates to going after an opportunity that traditional telco providers would go after.

And I think that combination of these sets of core primitives, but also being able to tack on industries that are both financial, which is a very large industry in and of itself, but also these non-financial use cases.

That was an incredibly appealing opportunity to us.

I think the characteristics of this asset class are so lucrative that especially once you start digging into the details, it's kind of hard to focus on anything else.

But still at the same time, for us, these things might seem obvious, but you'd notice that from the outside in, if we take a traditional investor's perspective, there's still a lot of confusion.

It's a bit hard to grasp how multifunctional these assets actually are and what is going on there.

So as you both have a plethora of experience outside of just crypto as well, What would you say are the biggest misconceptions that investors outside of the space have about this asset class?

We talk to traditional investors still all the time.

So I think the 3 primary misconceptions about crypto right now are first, people are still very surprised that crypto protocols are real businesses and can generate fees, right?

If you think about crypto over the last 10 to 15 years, it's been primarily dominated by Bitcoin, which was this digital gold, this great macro asset.

Only really over the last 5 or 7 years, have you really seen fundamentals emerge and ways to invest through that?

And James talked about this earlier, but we had this page in our deck where we showed Ethereum versus the leading tech stocks, right?

And at the peak, Ethereum was 600 billion market cap, generating

billion in fees, trading at 30x, returning 15% through dividends, 85% through buybacks.

So walking them through this sort of example, as well as protocol specific examples, such as a Lido or a GMX, further highlights the point that these are actually productive assets.

And then second, to your point, people still think this is all very conceptual and are often surprised.

There are real products you can go try out, right?

You can go on Audius, which is this live streaming music platform where creators are better able to connect with their fans as 10 million users, right?

Brave is this privacy preserving browser where the user opts into advertising and earns a revenue share.

Braintrust, you can go hire freelancers at a much cheaper cost.

And James talked about Render and Akash trying to build these decentralized GPU marketplaces.

People think crypto is all circular and isolated.

These themes that we're talking about can be so disruptive over the next 5 to 10 years to all these traditional sectors.

And I think as more and more institutions wake up to this, they will need to add crypto protocols to their coverage, right?

The internet analysts will cover Spotify and Fiverr, but also Audius and Braintrust as they continue to take share.

The semis analysts will cover Nvidia, but also Render and Akash as they create this on-demand secondary market for Nvidia chips.

Gaming analysts will cover EA and Take-Two, but also Alluvium and Sandbox as they introduce these new innovative ways to monetize gamers.

And what's most important is they're going to be using similar investment frameworks that they use in traditional equities to this new asset class, further highlighting the focus on this fundamental analysis that we're talking

Now, 1 big characteristic change in this asset class from a venture fund perspective is the liquidity aspect and a traditional VC fund, it's a very clear path from pre-seed to seed, a VC and keeps going on.

It's either IPO or an acquisition at some point in the long-term future.

Liquidity brings a lot of, maybe more optionality to that mix.

And how do you think of it from an investor's perspective?

Because James, you also mentioned the beginning there that you have about 30% of the fund reserved for venture, which isn't necessarily then that liquid yet going on.

I don't know if you do outside of on-chain investment, So in the more traditional space, but if you're playing around with both, what do you see as the pros and cons of both traditional and liquid venture?

I think from our side, so structurally venture and liquid tokens, behaviorally, they seem quite different to investors.

From our perspective, we think about it more from where in the life cycle of a protocol are you investing in?

And I would say that's the primary lens we think about this through.

If you think about early stage venture, you get to be there at the earliest days of a company's founding.

It might be just the initial founding team with a couple of people.

The valuations are low, but at the same time, there's also significant amounts of risks that you're taking on as an investor.

That can include team risk, whether it's the founding team or them having to make a lot of key hires to build a product.

A lot of times you might have a prototype of the product, the product hasn't shipped yet.

So even though you might have a thesis or a kind of inkling of what the product market fit might be, that's something that still needs to be proven.

If the product ships, A lot of times like you're taking on the facts that hasn't been battle tested yet and there might be contract bugs along the way.

But in addition, you're also locked up on your investment for a significant amount of time.

If you make an equity investment, the IPO process can take 10 years or longer.

And if it's a protocol, usually you're talking about 3 to 5 years of combined kind of lockup to invest in along the way.

If you think about the liquid side, functionally, these are really just, they're still quite early in their life cycle.

I think if on the early stage of enter side, you're thinking about pre-seed, seed, maybe series A, a lot of our liquid investments in tokens, we really think akin to something like a series B or series C investment into liquid markets.

I think on the more mature side, oftentimes we're protocols that are worth half a billion or a billion in market cap.

They're usually generating some large amount of cash flows.

It means we can go on token terminal and find very robust transaction, kind of fee, revenue, unit economic type analysis to dissect the protocol.

It usually means there's some kind of very stable amount of product market fit that you expect the protocol to be at.

And that could be something like the IDX, where they're the largest decentralized derivatives exchange that people trade on and they do hundreds of billions in annualized volume.

It could be something like Lido, where they have nearly 90% of share in the liquid staking market and roughly around a third of total stake for Ethereum.

Or it could be something like Maker where you have billions of issuance for a stablecoin and you're generating kind of 9 figures of revenue.

By then you're usually thinking about the business on some multiple of cash flow.

It could be 20 times, 30 times, 60 times, but there's some sort of mature fee metric that you really start to begin thinking about.

There's also liquid token investments that are earlier in their lifecycle.

So they're a little bit past where you are on the venture side in the sense that the product has shipped.

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Modular Capital – Crypto investment firm with a fundamental and thesis-driven approach | ep.67