Good Companies and Good Deals
They aren’t always the same thing
Working in private equity, I came to understand something fundamental about investing.
There are good companies and there are good deals.
Sometimes they are the same thing. Sometimes they aren’t. Often you have to pass on a great company because it’s too expensive.
I’m long on cryptoassets. I’ve got a meaningful portion of my personal net worth invested into the ecosystem. I’m a believer the long-term utility value and innovation crypto has to offer. There are lots of good companies and projects, many that I follow closely.
Yet, there are increasingly fewer good deals.
We are obviously in a period of extreme excitement around cryptoassets. Capital is pouring into the ecosystem. Valuations of tokens are skyrocketing. Average Joes and institutional players are both trying to cash in on what they think is a gold rush. It’s difficult to separate long-term investors from speculators.
I’m both excited and skeptical. In some areas, I’m just plain worried.
I’m excited:
- I’m excited to see cryptoassets becoming real assets worthy of long-term investment.
- I’m excited to see cryptoasset values increasing, rewarding stakeholders for their support.
- I’m excited projects have found alternative funding mechanisms (ICOs) to fuel further innovation.
- I’m excited so many talented people are being attracted to the space.
I’m skeptical:
- I’m skeptical that fundamentals can keep up with the current rate of price appreciation.
- I’m skeptical whether there are good reasons to raise funding through a public token for the vast majority of crypo projects.
- I’m skeptical about the market’s current ability to assess good projects from bad ones.
- I’m skeptical that all of these good projects with high valuations are also good deals
And I worry:
- I worry that perverse economic incentives are driving much of the development in cryptoassets right now
- I worry what happens when regulatory bodies (SEC et al) crack down on people taking advantage of those perverse incentives
- I worry that a lot of people will lose a lot of money betting on bad projects
- I worry that any strong fundamentals will be obscured by over-speculation in the short-to-medium term
Sentiments will ebb and flow. Yet, the fundamentals of investing remain the same, in cryptoassets and elsewhere. Through it all, I try to remind myself:
Bet on strong teams with aligned, long-term incentives.
Invest in projects that can deliver at scale with similar or better economics as substitutes. Don’t fall for business model novelties (e.g. it’s X decentralized).
Seek reasonable valuations that allow for a return on investment at a given risk profile.
If not, don’t play this round. Wait until you can.
