Welcome to the fourth edition of the Analyst of the Month.
We're excited to share the stories of Vincent and James. With their deep background in traditional finance and their experience investing in fintech, software, and internet companies, James and Vincent are bringing first-principle thinking into crypto investing.
Read on to learn more about their journey from TradFi into crypto, the story behind starting Modular Capital, and their thesis on RWAs and DePin.
Without further ado, please meet James and Vincent!
James: I was born and raised in Silicon Valley. My parents were immigrants from Taiwan. I was always quite fascinated by technology growing up. I self-taught myself to code in middle school and completed a few software engineering internships through high school. I went on to attend undergrad at Harvard, and it was during those years that I really fell in love with the intersection of technology and investing. That was around when Airbnb, Uber, Snapchat, Dropbox all rapidly scaled, and I witnessed how impactful and transformative technology could be.
After college, I started off my career in 2016 at D. E. Shaw in New York, a $50 billion multi-strategy hedge fund, covering public companies across technology, internet, payments and fintech. I cut my teeth there for 4 years, had a fantastic time and incredible mentors, but eventually wanted to move over to private venture markets, where I could work more closely with companies as they’re building earlier in their lifecycle. I moved back to the SF Bay Area in 2020 to join Altimeter Capital, a $10 billion technology crossover fund. I primarily focused on fintech and crypto investments for the firm.
Vincent: Like James, I was always fascinated by the intersection of tech and investing. I started off my career doing technology investment banking at Evercore in 2013, where I worked on cross-border telecom transactions. Then I joined Searchlight where I worked on buyouts across both technology and consumer. I spent over 5 years at Holocene, a long/short equity fund, where I focused on fintech, software and internet.
Vincent: As a public equity tech investor, I felt like crypto was a natural extension of what I loved. I had always loved researching and investing in companies on the forefront of technology – across fintech, software and internet. Even though I had always been impressed by the fast-moving fintech companies disrupting the traditional financial sector, the innovation I saw coming out of crypto was like nothing I had seen before. Given the permissionless and composable nature of crypto, there was no other space where I saw teams innovating and experimenting at such a rapid pace globally. Even in this bear market, DeFi TVL (total value locked) is nearly 100x higher than 4 years ago in 2019.
From an investing perspective, I saw the unique opportunity to define the investment process in this space. Fundamentals were a new concept – there are thousands of protocols to sift through, most of which represent Series A-B equivalent companies, and investors are all figuring out which investment frameworks to apply. Coming from a world where you had hundreds of buyside analysts and dozens of sellside analysts covering every stock, the lack of traditional institutional coverage was very compelling to me.
James: Crypto felt like a natural extension of our backgrounds in public equities and venture. Notably beginning in 2019, we began to see durable financial applications that were built, the likes of Uniswap, dYdX, Lido, and Maker. Each of these are billion dollar protocols and outcomes, even amidst this crypto bear market. More importantly, blockchains grew to being used as primitives for entirely non-financial use cases such as Filecoin (storage), Akash (computing), Hivemapper (mapping), Braintrust (freelance marketplace). Over the next decade, blockchains have the potential to be enormously transformative as a primitive that accelerates social coordination, eliminates middleman, enables open-source and composable innovation, and democratizes asset ownership and distribution. We had an opportunity to define fundamental investing in this category and build a new type of investment firm.
Vincent: We first met at a fintech idea lunch in New York when James was at D.E. Shaw and I was at Holocene. Even though we were at different investment firms, he quickly became my closest thought partner. We talked every day about all things fintech public and private. As crypto started to intersect with fintech, we dug deeper and deeper together. We eventually knew we wanted to do this full time and launched Modular Capital in 2022.
James: I recall Vincent pitched short Green Dot (prepaid card company) and I pitched long PayPal (online payments processing). Both played out exactly as we presented. Funny enough, those pitches were quite emblematic of how we see the world. I tend to be the optimist and like to see the world as it could be. Vincent is my more skeptical half. It’s a great match and partnership in a space like crypto where there are dual realities; while there are extraordinary venture-like returns and outcomes to be made, there are also plenty of frauds, scams and hacks. This balance of viewpoints is important to our investment process and underwriting.
What really excites us about crypto is that it is a blend of all the above and represents liquid venture. Not only do you have to evaluate these businesses through a Series A-B lens and dream what these businesses can achieve in the next 3-5 years, but you also have to think about valuations and fundamentals in real time. Given you have the liquidity to add to your position, you have to constantly think about the risk / reward and continuously underwrite your positions and portfolio.
In general, we find that large cap liquid tokens ($1B+ FDV) tend to be well researched and understood. Instead, where we like to spend our time is on smaller cap protocols (<$200M FDV) that are very unfollowed or uncovered. While one has to turn through a lot of vaporware, its possible to find compelling opportunities – protocols that are down significantly (70-90%+) vs. their last private round, have ample cash and runway, stronger fundamentals than when they raised, and a strong team that continues to ship. To be clear, we are not value investors by any stretch – what we are looking for are smaller market cap protocols that have strong fundamentals, reasonable valuations, with venture upside and potential outcomes.
In addition, while there has been better and better sell side coverage, we think there is room to go here and have been publishing our theses on our website here: https://www.modularcapital.xyz/blog
While we are generalists, we are spending a lot of time at the intersection of crypto and the real world. Much of the external criticism of crypto is that the use cases are circular. For example, defi protocols give out token incentives, which juice usage and activity, which increases the token price and value of incentives, and repeat. Unfortunately, this type of activity is not sustainable and eventually finds its way down, without a source of exogenous repeatable usage and demand.
Historically one constraint has been the infrastructure layer has been inadequate to support mainstream applications. For instance, Ethereum gas prices were >$100 for a Uniswap transaction through 2020-21. However, this has begun to shift with more affordable and higher throughput blockspace (Ethereum L2s, Solana, app chains), improved UI/UX (account abstraction, gas-less transactions, social recovery wallets), and enhanced privacy (zero knowledge proofs).
There are two categories we believe have inflected over the past year and have been focused on – 1) Decentralized Physical Infrastructure (DePin) and 2) Real World Assets (RWA). Both of these categories take advantage of the maturation in crypto infrastructure, along with finding unique applications of crypto that tie with daily use cases.
Helium was the first major protocol in DePin to take off in 2020-21. While they were incredibly successful in bootstrapping network supply, their IoT (internet of things) network failed to find meaningful demand. Despite this, Helium pioneered a model that showed 1) token incentives could bootstrap marketplace supply and 2) structurally reduce supply side costs by eliminating of ongoing operating expenses (labor, rent), activation of unutilized resources (devices, land, time), or labor/wage arbitrage (people’s value of their time vs marketplace rates)
We are seeing this next generation of DePin projects take lessons from Helium and focusing on 1) monetization earlier and driving value back to the token and 2) distributing tokens aligned with network and demand value:
Few projects to call out:
Historically, DeFi has offered very attractive yields in lending, whether that was overcollateralized lending (Compound at 7%), undercollateralized lending (Maple at 10%) or just juiced emission driven yield (OHM at 7000%, UST at 20%). During that time, traditional financial assets had very low yield (money market funds yielding near 0%, 10 year treasuries yielding 1%). Speculators came into crypto en masse chasing this speculative yield.
At the same time, we saw stablecoins hit product market fit, with stablecoin supply growing from $4B at the beginning of 2020 to $120B today.
Since then, we’ve seen DeFi yields compress dramatically across the space, with Aave and Compound yielding 1-3% on USDC. As defi yields and treasury yields cross, we have seen the rise of protocols looking to bring traditional assets on-chain as investors look to utilize their idle stablecoin balances. Tokenized treasuries yielding 5% has grown from $0 to nearly $700M year to date. There are a myriad of benefits of tokenizing traditional assets, including reduction of transaction costs, increased transparency, and composability and fungibility of assets.
We believe tokenized treasuries represent just the first foray into bringing real world assets on chain. Over time, this will expand into other credit products and financial instruments.
Artemis is integral to our investment process. We use Artemis Sheets on a daily basis for all our excel-based workflow, whether that involves updating fundamental metrics (TVL, volume, revenue) or prices. We use Artemis Dashboards to dive deeper into fundamental data across L1/L2 ecosystems, and category specific applications (perpetuals).
Some of the more recent products like Blockchain Activity Monitor (BAM) help us identify new and upcoming protocols that are seeing an inflection in usage, and the latest Chart Builder allows us to easily visualize and compare protocols in an easy, no code way.
We are huge fans of the Artemis product and team!
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