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All the discussions in our Boba Time series are for informational purposes only and not intended as investment advice. We always encourage our audience to conduct their own research before making any investment decisions. So, let's sip on some delicious boba and dive in!
Lacey: Absolutely, I love boba! It's been a while since I last had it, but I distinctly remember enjoying it in Aruba. My go-to is jasmine milk tea, and I prefer it with white pearl bubbles, although those are harder to find. Talking about it makes me crave it—I think I'll grab some boba after this!
In New York, where I am now, there's a great variety of boba shops. Boba originally comes from Taiwan, as far as I know. It became a favorite of mine back in college, especially during study breaks. I used to have a favorite boba spot in Brooklyn, but then I discovered a Japanese tea shop that turned my tea world upside down. They don't serve boba, but their milk teas, particularly the lavender milk tea, are just extraordinary. The place is called Kijitora. It’s definitely worth a visit if you're ever in New York.
Lacey: Hello, I'm Lacey Wisdom. At Protocol Labs, I've been part of the investment team for almost two years. Our approach here is quite unique. Typically, we're not the lead investor in funding rounds; in fact, we've led only about 10% of our investments. This is partly due to our team's small size – I represent half of our team! I'm based in New York, while my colleague Brad Holden, is usually in SF, currently in Florida.
Our investment focus at Protocol Labs is diverse. We've created numerous foundational infrastructure components, so naturally, our portfolio leans towards infrastructure investments. These investments are high-risk, high-reward, like our backing of Zama for Fully Homomorphic Encryption (FHE) and Gensyn.ai for AI model and inference training. It's these forward-thinking investments that define our strategy at Protocol Labs.
Lacey: The criteria we use are actually pretty broad. Our investment strategy allows us to look at a wide range of projects. If a company, for instance, is leveraging something in a P2P context, we'd categorize it under 'horizon one', which is related to our ecosystem investments. This is our most competitive bucket because we have a deep understanding of our ecosystem. We compare these projects against everything we've seen to determine if they are truly necessary and viable.
In our second bucket, we focus on the broader Web3 market. Here, we look at comparative projects and their market impact. Take our investment in Privy, for example. We assessed the Web3 authentication and user onboarding landscape, considering how many companies were already in this space, their effectiveness, and the potential for improvement. The team's capability to execute is a significant factor in this bucket.
Finally, the third bucket is about novelty and the team. We seek innovative ideas and teams that have the potential to pioneer new technologies. This category is exciting because it's about exploring new territories and investing in groundbreaking concepts. In all these categories, we aim to find projects that fill technological gaps, enhance user experience, and have significant potential in the Web3 space.
Lacey: Definitely. It feels like the bull run is already here, especially with the recent surge in meme coin activity. A vertical that particularly excites us is the Fully Homomorphic Encryption (FHE) landscape. We've already made an early investment in Zama, which focuses on developing fully homomorphic. This year, we've seen a few fhEVMs enter the market For instance, Fhenix and Inco.Network, which we've been in discussions with, raised a significant funding round.
It's going to be fascinating to see how people start building use cases on top of FHE and whether they can overcome some of the challenges we anticipate. The primary challenge is scalability. The block speed in FHE is quite slow and cumbersome, and finality is also a concern. I'm curious to see if use cases like gaming can thrive on FHE as it currently stands, or if there will be developments to enhance its efficiency.
Lacey: It's an exciting time. We're investors in Celestia, and I believe the emerging focus on modularity and the data availability layer is fascinating. Celestia recently launched their token, and it's performing well, which has sparked a lot of interest in the sector. There's a growing trend of data availability projects, likely inspired by Celestia's success. However, there are concerns about the limited functionality of projects like Celestia, especially regarding their compatibility with different types of nodes.
It'll be intriguing to see if a new player in data availability can efficiently work across various node types or if the market will continue to specialize. Another aspect of interest is Celestia's method of reconstructing information from nodes using a probabilistic approach rather than a deterministic one. There's debate over the effectiveness of this method and whether it might lead to data retrieval failures. The challenge is building a deterministic method for reconstructing data at scale without it being too slow or inefficient.
Moreover, the necessity of modularity itself is under scrutiny. There's a possibility that advancements could render the current focus on modularity obsolete if data can be stored efficiently on-chain. This whole sector might face significant challenges now that Celestia is live.
There's also the question of how much developers want to deal with choosing different aspects of their project's architecture. Perhaps they prefer an all-in-one solution rather than selecting individual storage or retrieval layers. How this plays out, especially with the rise of consumer interest in Web3, will be fascinating to observe.
Consumer Web3 is another area that's particularly intriguing. There's a noticeable demand for consumer-oriented solutions, which helped onboard a significant number of users. However, finding a consumer Web3 project that has longevity and isn't driven by transient hype cycles is challenging. The potential breakthrough might come from DePIN (Decentralized Physical Infrastructure Networks) projects, which appear promising. But again, the user experience is a critical factor; consumers are unlikely to engage with complex systems for minimal rewards.
There's also interest in connected vehicle DePIN companies, though consumer receptivity to such technology is mixed, as seen with my own mother's experience. She quickly removed a connected vehicle system from her car when it critiqued her driving style. So, there's a delicate balance to strike between innovation and consumer privacy or preferences.
Looking ahead, the real game-changers in Web3 might involve major financial instruments like mortgages and loans moving onto the blockchain. We're still a way off from these more significant shifts, but there are smaller, more consumer-friendly applications that could emerge soon. It's a space filled with uncertainty and new developments, especially around modular blockchains and data availability layers, and I'm eagerly watching how it unfolds.
Lacey: Navigating the vast and rapidly changing landscape of tech and investments is challenging. It's easy to get swept up in the hype. When everyone is chasing a trend, like a major firm leading a round, it's often a lagging indicator of interest rather than a signal to invest. It's important to research and understand why a particular space is gaining popularity. Is it due to a real breakthrough, or is it just superficial hype?
Take ZK for example. It became a hot topic last December, but it had been around for a long time. People didn't even realize that the Filecoin Network had been using ZK proofs since before 2020. This realization came when the Filecoin Foundation published a detailed piece about their use of ZK proofs.
Another example is the DAO tooling hype in 2021. I saw a deal in DAO tooling valued at $250 million at the pre-seed stage, which was absurd. The valuation did not align with the company's traction, indicating we were in a hype cycle. Investors were valuing pre-seed companies in the hundreds of millions without a functioning product or any revenue.
So, it's about taking a step back to analyze why something is popular and whether the interest is warranted. It's critical to differentiate between what's genuinely innovative and what's merely following a trend, especially in terms of company valuation and traction.
Lacey: Working at Protocol Labs has been a unique and enriching experience, especially when compared to my previous role at a traditional VC, Eniac Ventures in New York. Although Eniac Ventures was amazing and I worked on some Web3 deals there, I was still involved in a broader range of investments like B2B enterprise paths. I wanted to delve deeper into Web3 and have more focused conversations on decentralized technology.
At Protocol Labs, the level of specialization is astounding. Here, people are not just asking high-level questions about Web3; they are deeply immersed in it. We have teams like the CryptoEconLab, blockchain researchers, and other specialists working on specific areas like DRAND (Distributed Randomness Beacon), focusing on concepts like randomness. This specialization is crucial for various functionalities in the tech world, from gaming to security generators.
Every conversation at Protocol Labs is enlightening, and I constantly find myself learning. It feels like I have a vast team of researchers supporting me, not just my direct colleague, Brad, on the ventures team.
Furthermore, Protocol Labs provides comprehensive portfolio support. We have teams that assist companies in managing HR systems internationally, catering to our globally distributed and remote team structures. Additionally, we have created a vendor marketplace that offers valuable insights for a range of needs, encompassing everything from website development to go-to-market strategies and hiring.
Our internal hiring team is also a game-changer, especially in sourcing developers who are in high demand. They assist with high-level hires in marketing, operations, PR, and more. This level of resource availability is something I didn't experience at a smaller VC. At Protocol Labs, the breadth and depth of support we provide to our portfolio companies are truly remarkable.
