Written by Rob Hadick, Partner at Dragonfly
Compiled by: Luffy, Foresight News
There has been a lot of discussion over the weekend about venture capital, particularly in the crypto space, but I believe most of it misses the point. Venture capital itself is a market, and venture capitalists sit at its center. The vast majority of these discussions overlook the real decision-making logic of both sides of the transaction.
We have our own clients—the limited partners (LPs)—who enable us to continue operating and pursuing this mission. The best venture capitalists typically invest significant amounts of their own capital, so we are also clients. On the other side are startups. I have a genuine responsibility to the founders of the companies I invest in, and they know how much I value this. But ultimately, every startup I invest in is based on one core question: Can I serve my clients well and make them satisfied?
This isn’t just about delivering impressive absolute returns, as investors don’t evaluate opportunities solely on that basis. They consider many factors, each with varying levels of importance: risk-adjusted returns, reputational risk, regulatory risk, exit liquidity cycles, co-investors, access to core information networks, the ability to invest in assets and sectors suitable for social conversation, and whether they’re partnering with people they get along with. We all know of large funds that have consistently underperformed their peers yet still attract overwhelming capital interest. In a market with abundant choices, this is simply the reality.
So when you see this data, it doesn’t simply mean “institutions are no longer investing.” It only indicates that investors either want to reduce their allocation or are willing to invest in fewer funds only. The total amount of capital flowing into this space is shrinking, or they’re willing to allocate capital only to higher-quality managers. In traditional venture capital, it’s primarily the latter; in crypto, both the amount of capital and the number of funds receiving investment are decreasing. This industry consolidation is not a market failure—it’s precisely the market functioning normally. There are many underlying reasons, but in crypto, the main drivers are risk-adjusted returns and liquidity concerns, along with some institutional reluctance to be associated with certain individuals or events in this space.
Therefore, venture capitalists who wish to remain relevant must ensure their investment strategies align with limited partners’ needs—or persuade them to accept a different direction. You constantly ask yourself: Did I back the right founder? The right asset class? The right sector? Is my risk exposure appropriate? Is the investment stage suitable? The value of venture capital lies in balancing these factors to satisfy limited partners. Of course, what makes LPs happy today may not be optimal in the long term—but that, too, is a decision venture capitalists must weigh.
This means that in this cycle, you must position yourself in stablecoins, perpetual contracts, and prediction markets—even if you didn’t early on bet on the winners like some others did. That 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 firm that makes a large contrarian bet and fails will struggle to raise its next fund; whereas a firm that consistently makes steady, correct investments and returns capital will continue to thrive. Contrarian investing itself exists on a spectrum. When we invested in Polymarket’s expansion project with Founders Fund at the end of 2023 and beginning of 2024, this was not market consensus—many even struggled to understand it, claiming I was burning money on a project with product-market fit that only emerges once every four years. Yet for a venture firm, this still wasn’t an extremely aggressive gamble.
The venture capital industry rewards steady consistency, not heroic gambles. Only those who have proven their ability to act with discipline are worthy of making large bets and pursuing non-consensus decisions.
Some believe the hallmark of a great investment is that you write the first check, and other funds follow—yet the founder doesn’t fit the typical mold of most companies. This sounds romantic, and if the story succeeds, it truly is. But in reality, if a founder doesn’t align with any fund’s investment thesis, it’s far more likely that I’m overlooking key issues than that I’m smarter than everyone else. This isn’t absolute—we have indeed invested in founders overlooked by the market because we believed in our unique judgment—but data shows that the success rate of betting on such founders is significantly lower than choosing those who clearly fit established patterns.
On the other hand, some attribute the current market conditions to founders lacking original ideas—but this, too, misses the point. Founders are driven by complex and multifaceted incentives: Do I like this direction? Can I attract venture capital? Can I turn this into a big business? Am I proud of it? Aspiring founders typically aim for large-scale projects with high potential returns, but this doesn’t mean their ideas must be entirely novel. Labeling such efforts as “copying” is overly simplistic; most great companies weren’t first in their category, but rather 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 meaningful innovation will still emerge in the prediction markets space—and even so, novelty is not the only important factor.
Ultimately, it’s all about market dynamics. Venture capitalists don’t get rewarded for going against the consensus; their returns come from making accurate judgments, delivering what investors want, and carefully considering every branch of the decision tree. This might sometimes be achieved through contrarian thinking, but most often it isn’t. Founders aren’t rewarded for taking bold risks; their rewards come from building products people want to use, that are profitable, and that create value—and securing funding by convincing investors that they have the ability to do so.
Those ideological empty words are just talk. Ultimately, everything is determined by market forces.
As always, we extend a warm welcome to founders at every stage—early, late, conventional, or contrarian.