Spray, Pray, and Go Away: Investing is an Art

Most often, rationality is defined as clear execution under sound judgement and discipline.

When investing, most tend to complement their thesis within a rational decision-making framework, as if that made their analysis "fundamental".

Under the spectrum of business and economic valuation techniques, that might be correct. However, the markets are never wrong, and the world is not always rational.

In the cryptoverse, over and under valuations have significant elements that make them prone to more subjectivity than traditional stocks. Premia and discounts, for instance, are only temporarily perceived, due to high volatility conditions.

Supply curves, energy shortages, structural changes... none of that seems to fit into the narrative presented in the latest quarterly report or newsletter of a trending crypto fund, so one might think that timeliness is what makes the difference.

It can, indeed. Those funds have bought a lot cheaper than any of its followers on Twitter. Let's take Solana, which despite having massively dropped along the rest of the crypto market, it is still at a 40x relative to its price 16 months ago.

Markets always change, but do investors change? Does human nature change? Greed is still greed, and fear is still fear. Let's put some leverage into the mix and let's get ready to test rationality under the stress conditions of the bear market. How about finding talent? Not necessarily for building, but also for investing.

Talk to any CEO and they'll say that recruiting high-quality people is one of their top priorities. In fact, spotting talent early is the key for most ventures in emergent markets. This is by no means an easy task, but whenever the opportunity comes, whether in bull or bear mode, one should be powered with both cash and confidence.

Best way to spot this? Find out what the talent does during downtime. Also, keep in mind that “maximalists” are also born either out of irrationality or out of quantitative analysis.

We are all familiar with the digital gold maxis and the toxicity that can potentially abound from some bold unfounded claims (miners have to pay bills, economic security is a thing…). However, if you are in crypto, you should know that VCs are part of the game too, and that behind their thesis, there is a founding team.

The difference between a senior and a freshman team should not be ignored. Long-term sustainable business are not built out of irrational acts such as reacting to a vampire-attack, promising unsustainable yields... Instead, the yield comes from high velocity markets where the teams who are willing to adapt and learn are the ones who ultimately thrive.

One important thing to note here, specially when assessing senior teams, it is that domain expertise teaches you about "you can't do", not about what "you could do".

Venture capital is hard, it is not only about financial, but also about mental constraints. For example, when you are running low on capital with the combination of caring for people—many people will get crushed by the brutal situation of money running out.

Asymmetric information is the name of the game. If you can convince retail that a project is safer and has less selling pressure than it actually does, you can hit big.

Ultimately, investing is more than just assessing financial statements and valuations. It is also about making calculated bets on the future, which often may not have a quantifiable basis.

Same for financial decisions, it is more than just whether it is fairly-valued today, but whether it has a compelling and achievable long-term vision – an end-game that it can works towards and bring into reality. The holy-grail is ultimately a survival game, where only the paranoid survive. How many VC funds actually sit down and examine their own death?

In my opinion, this exercise is worth exploring: take the worst case scenario, and exacerbate its negative outcome by 3x or 5x. In other words, evaluate your own cause of death: the failure to survive.

Exploration over hesitation is the key at this point. Honesty is the key: there are no guarantees of future success unless changes are made, specially while assessing highly innovative endeavors. Only the strongest survive, and those will be the ones who are willing to justify their own existence by adapting quickly, making smart moves, and not resting on their laurels.

"It is the knowledge that I'm going to die that creates the focus that I bring to being alive. The urgency of accomplishment. I fear living a life where I could have accomplished something and didn't." Neil deGrasse Tyson

When investing, there is no such thing as protection. Anything can certainly die, so the investors must justify their own existence one way or another. When will something die? Probably when it runs out of cash.

The cause of death is unknown and, because of that, all shapes and sizes must be carefully assessed under its proper risk-management framework. There will always be fear of the unknown. This is often neglected and leads many to under-water territories. Starting a company nowadays is not as expensive as it used to be, so many are tricked into believing that venture is not as risky as it was in the past. However, none of that removes the risk of failure.

The risk can certainly be lower because of the existence of more established playbooks. And this is what makes most ventures be afraid of embarking into uncharted categories of investment, where big risks could cause them to miss out on the next generation of venture returns. No big risks also means deterioration: less experimentation, innovation, and creativity.

With such big funds and such fast deployment cycles it is much more difficult to take big bets on riskier technologies. The bear market has come, and VCs just started dreaming too small, and building out their product offerings more thoughtfully. Otherwise, they risk destroying their reputation. Spray and pray no longer works, and reputation has become the new currency in the Venture Capital Universe.

Embrace reality, accept the changing environment and reevaluate with intention rather than regret. Forget about the V-shape recoveries and prepare accordingly. In times of austerity, capital is expensive.

Take the lead and adapt quickly, now it is about survival of the fittest: “it is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” Moving fast means to anticipate events. Proactivity will make you accept the pain of discipline before it is too late, which will be a lot better than suffering the pain of regret.

Confronting the reality of a crash is the hardest step, but the reality is that we suffer more in our minds than we do in reality.