Dialogue with Longhash Founder: The Lack of True Innovation is the Internal Reason Why This Bull Market Has Not Yet Started

Interviewer: Arain, ChainCatcher

Guest: Emma Cui, Founder of Longhash Ventures

Organizer: Arain, ChainCatcher

LongHash Ventures was established in 2017. According to Rootdata, the fund has invested in hundreds of projects, including well-known ones like Polkadot, Acala, ICP, Manta, and Safe. Benefiting from DeFi Summer, LongHash Ventures has experienced a period of growth, transforming from "near bankruptcy" into a fund manager with hundreds of millions of dollars in assets under management.

On the evening of September 10, Longhash founder and CEO Emma Cui participated in a Space hosted by RootData titled "Dialogue with LongHash: Changes and Opportunities in Current Market Investment Logic." During the Space, she stated that the cryptocurrency industry is maturing, and Longhash has currently completed a transition from a scattergun investment approach to a concentrated betting style. The current market valuations are relatively high, but the bull market has not yet begun.

"Q4 of this year and Q1 of next year are worth paying attention to, mainly focusing on whether there are truly innovative projects emerging. Additionally, we need to watch the U.S. elections in November and the signals from the Federal Reserve regarding interest rate cuts, as these could lead to market changes," Emma Cui said.

Before entering the cryptocurrency industry, Emma Cui worked at McKinsey. Inspired by a Netflix documentary in 2016, she unexpectedly came into contact with the cryptocurrency industry and joined full-time at the end of 2017. In 2018, she received early investments from Hashkey and Distributed Capital, founding LongHash Ventures.

The following are the main points from the Space:

From Near Bankruptcy to a Billion-Dollar Asset Manager

Arain: Can you briefly introduce yourself and Ventures?

Emma Cui: Long Hash was established at the end of 2017. I personally came into contact with cryptocurrency in 2016. After discovering Ethereum, I became interested in this field and conducted some research. In 2018, I collaborated with well-known OGs in the industry to establish the accelerator LonghashX, securing seed round investments from Distributed Capital and HashKey. We started from the accelerator and have been in operation for about six years now. We currently have two business segments: one is the accelerator, which mainly collaborates with leading foundational protocols to help them build ecosystems; the other is the fund, which consists of two funds: the first was established in 2021 to invest in DeFi, and the second was set up in 2022 to invest in multi-chain infrastructure. Currently, our fund management scale is approximately $150 million, and we have invested in hundreds of projects.

Arain: When did you personally start investing?

Emma Cui: Before entering the cryptocurrency space, I worked in management consulting at McKinsey. Prior to that, I worked at several banks in investment banking and stock trading, so I was exposed to finance early on. I had bought some stocks, but I wasn't investing systematically. The first cryptocurrency I encountered was Ethereum, and it was also the first cryptocurrency I bought.

Arain: You entered this industry through Ethereum. May I ask, when you learned about Ethereum, did you also know about Bitcoin?

Emma Cui: To me, the valuation logic of the two is different. I did read the Bitcoin white paper, but at that time, many people around me were in traditional finance. If I had been able to communicate with some technically knowledgeable people when I first got into cryptocurrency, my understanding of Bitcoin might have been different. At that time, I understood Bitcoin as an idea to replace central banks or the government's right to issue currency, which is very difficult to achieve. Looking back today, that characteristic is precisely what justifies its existence. I believe Ethereum is a tech company, and its concept of a decentralized world computer resonated more with me.

Arain: You mentioned that you were influenced by Vitalik to enter this industry and start your own venture. Was there a specific opportunity that prompted your entrepreneurship?

Emma Cui: Initially, in 2016, I saw a documentary on Netflix about a miner who continued mining Bitcoin at home even when the price dropped from $1500 to $200. He said he believed it would return to above $1000. I found that quite interesting, which inspired me to start researching, and it was through this that I discovered Ethereum. Coincidentally, I had just returned to Singapore from Australia for work at the bank and was looking for cryptocurrency-related activities in Singapore. A founder invited me to attend a meet-up with Vitalik, and there were only about thirty or forty people there, including Mr. Xiao from Wanxiang.

This circle is small, and in the following months, I got to know Distributed Capital through friends. I believe these two are among the early institutions in Asia investing in cryptocurrency, so I was fortunate to have the opportunity to enter the circle.

When we first started the accelerator, we received support from Distributed Capital and Wanxiang because they believed it was a good thing for the industry, providing early support.

However, we entered the market at the end of 2017, right before the bear market of 2018 and 2019. Many veterans in the industry left during that time, but we invested a significant amount in Polkadot and later established the accelerator just in time for DeFi Summer. Time and again, just when I felt despair, the industry showed me a glimmer of hope, allowing me to enjoy the benefits of its growth, and LongHash Ventures has developed to where it is today.

Arain: You are indeed very fortunate, but I believe your persistence is also very important. Throughout this process, you must have many painful memories. Can you share some of those profound painful experiences?

Emma Cui: There are too many painful memories. When we first started the accelerator, funding was extremely tight. Initially, we had just over a million in total funding, but we had to support a team of several people while also investing in projects, which was quite challenging. Therefore, in the first phase, we could only invest $50,000 or $100,000, and sometimes we couldn't invest in promising projects, which was painful. Another thing is that before DeFi Summer, we had only four months' worth of salaries left in our accounts. I was thinking about how to sustain my team, and during this process, some early colleagues left due to mismatched opportunities.

Whenever I felt at my darkest, I just had to hold on a little longer, and it would be okay. After going through several bear markets, my mindset has become more balanced. I believe that even though this current market has not yet seen any new narratives or innovations, looking at the timeline, it is a miracle that crypto assets have reached their current heights in just over a decade.

From Scattergun Investment to Concentrated Investment

Arain: From your initial foray into investing to now, how do you think your style has changed? How has this change affected Longhash Ventures' investment style?

Emma Cui: The change began when we were investing smaller amounts during the accelerator phase, investing $50,000 or $100,000 in early teams, which might only have one or two founders. Later, during DeFi Summer, our investment frequency increased, but the investment scale was still relatively small. By the time we launched our second fund, we started to reference the "80/20 rule" from traditional industries, where 20% of the investment portfolio generates 80% of the returns. At this stage, our average investment amount reached $1-1.5 million, and we began to place more emphasis on examining the founders' original intentions, resulting in a clear change in our investment style.

From an industry perspective, in 2017, there were many industry benefits. In 2018 and 2019, it was easy to invest in seed rounds; as long as the project put in some effort, investors generally wouldn't lose money, and it was possible to make tenfold, hundredfold, or even thousandfold returns. But now, the industry has matured rapidly, and early benefits are disappearing. Investors need to adopt a systematic approach to investing, focusing more on the founders' original intentions and the project's business model.

Arain: Do you have sufficient reasons to reference when investing in a project now?

Emma Cui: The top priority is the founder's original intention and team experience, meaning what problem they want to solve and whether they have relevant experience. The second point is the magnitude of the problem they want to solve. How much benefit can be derived from solving this problem? The third point is how their approach to solving the problem differs from competitors. Is there something innovative or has it become more efficient? We now seek a balance based on these three aspects to find the best combination.

For our early investments, we don't have specific metrics; many are seed rounds, and at most, Series A, so there are no quantifiable metrics to reference.

Arain: What do you think is your most failed investment and your most successful investment?

Emma Cui: The most failed investment is the investment we didn't make because if we invest, the most we can lose is 100%, but missing out could mean hundreds or thousands of times. Over the years, there have been many investments we missed, mainly because in the early stages of the industry, we should have been more aggressive in investing rather than worrying about potential losses, which is a risk that VCs should bear. The most successful investments, like Polkadot, have yielded tens of times returns, and we have also seen success with early investments in DeFi projects like DODO and Astar.

Arain: From the fund's perspective, do you have benchmark targets? Do you have idols in the investment field?

Emma Cui: I think there are many excellent funds in this market, each with its own strategies and advantages, such as HashKey and early Distributed Capital, IOSG, etc., all of which are outstanding. We learn from different funds and their characteristics. Our ideal is to be among the top tier of cryptocurrency funds in Asia. In terms of infrastructure, the West has more advantages due to its many universities and talent, but I believe that as we enter an era focused on application layers, the Asian market will have great potential.

This industry has many exceptionally smart people, and there are many whom I admire, including Mr. Xiao from Wanxiang, who approaches the industry from a very high level.

The Real Bull Market Hasn't Started: Focus on Innovative Opportunities, Especially in AI and GameFi

Arain: How do you define the current market stage?

Emma Cui: Personally, I feel that we are in a stage where the real bull market has not yet started. Of course, I know this is not a consensus, and many people may feel that this bull market has already ended.

However, I believe that the market movements from Q4 last year to Q1 this year are not primarily due to innovations in the application layer of the industry, but rather because Bitcoin and Ethereum spot ETFs were approved, which gained institutional recognition for these assets, opening the floodgates for more institutions to enter the industry. Looking back to 2019, DeFi Summer brought forth many exciting innovations, almost like a bank that operates 24 hours, allowing you to collateralize and take loans.

I believe that in this cycle, we may see some innovations by the end of this year or early next year, which will then kick off the real bull market.

There are also some events that are recognized by the industry that could have a positive impact, such as the elections in November. The fact that crypto can enter the U.S. presidential election discourse is a significant advancement and may lead to favorable policies; even if not, it won't be too bad. We can pay attention to some DeFi projects in this regard because, due to regulatory constraints, the income of some DeFi projects cannot yet be linked to token value. Additionally, we may be entering a cycle of interest rate cuts, and perhaps the market will drop at the start of the rate cuts. Overall, this should bring more liquidity and favorable conditions to our industry assets.

Arain: You mentioned that you like to position yourself during bear markets, and you also said that this bull market hasn't started yet. Can I assume that you think now is a relatively good time to position yourself?

Emma Cui: I believe that the real bull market hasn't started yet, but if you look at the projects, Bitcoin and Ethereum have already risen threefold from their lows, while some altcoins have returned to bear market conditions. From a timing perspective, if you want to position yourself, it might have been ideal in 2022 and 2023, after the collapse of FTX, when the industry underwent many transformative events that led to liquidity drying up. That was a relatively ideal time. Now, there may be some opportunities in the secondary market. Of course, as a primary market fund, I can't say that I won't invest at this time; I should always keep up with the market and look for innovations, good investors, and promising projects to support.

Regarding market conditions, I have discussed with others and believe that Q4 of this year is worth paying attention to. Our fund is particularly optimistic about AI and GameFi infrastructure.

Arain: Have we invested in GameFi and AI-related projects?

Emma Cui: Yes. For AI, we believe there are three aspects: Data, Model, and Compute, which can all be viewed from a decentralized perspective. We have invested in projects like 0G, Hyperbolic, Ionet, Theoriq, and Lumino. For GameFi, we are more focused on infrastructure rather than investing in specific games, as we are not a fund specialized in gaming. Therefore, we prefer infrastructure projects with distribution capabilities, such as YGG, SAGA, and Ronin.

Additionally, we have invested in some other areas, but the main focus is still on infrastructure, such as MEV and Layer 2.

Arain: The market is no longer a place where opportunities are abundant, and everyone needs to be more discerning. Speaking of this topic, the relationship between institutional investors and retail investors seems to be increasingly tense recently. VC in cryptocurrency is often seen as a kind of original sin—what is your perspective on this?

Emma Cui: I believe the spirit of crypto is "we are here for the small guys." When VCs can participate early in a good project and sell at a high price, it creates a sense of "zero-sum game" for retail investors, where "if I lose, you win" and "if you win, I lose." This is a convenient excuse in the current situation of liquidity drying up. Whether institutional or retail investors, or exchanges and market makers, they are all players in the market. Many VC tokens currently have high FDV and low circulation; perhaps institutions have high returns on paper, but the lock-up periods are long, and once these tokens are listed on exchanges, investors may not hold any tokens, leaving only exchanges and market makers with them.

Moreover, institutions may enter a project early at a relatively low price, but this is proportional to the risks they bear. When retail investors see the project, it may already have some data, and they can exit at any time, resulting in a relatively higher price.

Arain: Regarding the current issue of VC tokens having high FDV and low circulation, does the VC side have any counter-strategies?

Emma Cui: This is an abnormal market performance. From the fund's perspective, we do not want projects to enter the market at excessively high FDVs because it creates an inflated perception, especially in cases where there is no revenue. If a project comes in with a $5 billion or $10 billion valuation without fundamental support, the price will drop, negatively impacting the community. We hope projects enter the market at reasonable prices; of course, this is a process of negotiation.

In this market, besides us VCs, there are market makers, exchanges, and other participants, which may lead to a process where bad tokens drive out good ones. If good projects are unwilling to issue tokens, projects without fundamentals may use this method to raise funds or issue tokens. Once they issue tokens, their business model becomes selling tokens, and over time, there will be no buyers left.

I believe that long-term investment-oriented institutions do not want projects to enter the market at excessively high FDVs, as it consumes the market too early.

Arain: Our fund has also invested in many DeFi projects. In the process of decentralization, where do you think the de-VC trend will lead the VC industry?

Emma Cui: De-VC is, in my view, a slogan. Why? Because this industry is very opaque, and it is often unclear whether VCs are involved behind the scenes, making it hard to judge. As for DeFi, we recognize its value because it provides very low-cost and highly efficient financial services to more people. In the VC industry, we currently see financing through DAOs rather than through VCs or funds, which I think is an interesting attempt. It does have advantages in financing, but I haven't seen it bring any significant changes to the VC industry yet. Perhaps it will take longer for it to develop.

Arain: From the data, we also see that LongHash has invested quite a bit in NFTs, but this cycle has seen a dismal NFT market. How do you view the current state and future of NFTs?

Emma Cui: The fund has not directly invested in any NFTs, but personally, I have bought some. Our positions related to NFTs are actually quite small. The fund invests in NFT infrastructure projects, such as NFT leasing and lending within games. Additionally, I do agree that compared to 2021, the NFT market is quite bleak, and this wave has not brought significant upward opportunities for NFTs up to Q1 of this year. There is a saying that Memecoins without NFTs are more convenient for speculation because they are more easily replaceable and have better liquidity. However, I believe NFTs fundamentally differ in use cases, and in the long run, I remain optimistic about NFTs. Any innovative model needs several cycles of bull and bear markets to validate or falsify it; it is too early to draw conclusions now.

Moreover, the last cycle saw NFTs gaining significant attention, with many Web2 companies entering through NFTs.

Current Market Valuations Are High, Investment Profits Are Declining

Arain: Will more institutions entering this market lead to changes in market valuations?

My question is whether the entry of institutions will bring changes to the logic of market valuations or whether the valuations themselves will change?

Emma Cui: There are many types of institutions. One is VCs, which are currently facing a lot of criticism; the second is liquidity funds that only operate in the secondary market; and then there are hedge funds and large funds like Fidelity and BlackRock that directly buy and sell ETFs. Some funds actually do not need to engage with cryptocurrencies directly; they just need a financial instrument. The valuation impact you mentioned is mostly caused by primary market VCs.

In traditional markets, if seed rounds or Series A can reach $5-10 million, that is already at an inflationary level. In recent years, the normal seed round in the cryptocurrency space might reach $50 million, and Series A could go up to $200 million. In cases where projects have not generated revenue, I believe many primary market valuations have been inflated due to supply and demand imbalances.

Arain: Do you not agree with the current market valuations, believing they are too high?

What you just implied is that our institutions and funds are still dominated by primary market VCs, which leads to somewhat inflated valuations. Do you personally not strongly endorse such high valuations?

Emma Cui: The market's occurrence has its reasons; you either participate or you don't, or you participate selectively. Our second fund was relatively aggressive in 2022-2023, and this year we have been very cautious, even if we invest, it is in very small amounts, sometimes just based on relationships. I think positioning during bear markets has a higher chance of success.

The current situation is a necessary stage in the industry's development. New VCs may think that investing will be profitable, but this logic may not hold in this cycle. If these VCs do not make money, they will not be able to raise their next fund, which is a self-regulating process of the market, with a time frame of 2-3 years for adjustments.

There is also a type of financing that is liquidity funds, which believe that buying in the secondary market is cheaper than in the primary market, with shorter lock-up periods. If there are more such funds, they may also push up secondary market valuations. This is a dynamic balancing process.

Arain: I heard that you established a $100 million fund last year. Can you talk about its current progress and future plans?

Emma Cui: We are still investing. This fund allows for capital recycling. This year, we are mainly observing to see if there are any true innovations. We primarily invest in innovative projects that go from 0 to 1.

Our next plan is to provide more support for the projects in our portfolio, such as offering advice, business resources, etc. Next year, we will consider the next fund, of course, depending on market trends and the exit situations of the previous two funds.

In terms of investment focus, with the improvement of infrastructure, such as Layer 2 making costs so low, we can pay attention to some commercial applications.