How to Make $1 Billion: An Inside Look at the Mindset of a Millionaire Fund Manager

Author: JOEL JOHN Source: Substack Translation: Shan Ouba, Golden Finance

I reached out to Lattice Fund’s Regan Bozman to exchange views on the current state of cryptocurrency venture capital. What was supposed to be just a follow-up call ended up being a conversation where we shared insights on buzzwords, what LPs consider when selecting a fund, and how founders can get the most value from their backers.

Today’s post will take you into Regan’s journey, from his time as an employee at Coinlist to being a contributor to the DAO, and why he started a fund. Regan demonstrates the same entrepreneurial and adventurous spirit as any founder I’ve interacted with.

Today’s post should give you a sense of the journey from early employee to running your own fund, and the nuances of venture capital as an asset class. Along the way, we explore the motivations of VCs to irrationally commit capital to later rounds, whether internet buzzwords are here to stay, and why founders should do due diligence on their VCs, too.

The Beginning

In 2018, a year after the ICO boom, some $28 billion was raised in crypto ventures. Public interest in tokens began to wane. Instead, people began to flock to platforms that would vet, curate, and list tokens instantly. This was the golden age of Binance Launchpools and Coinlist. Regan’s crypto story began as an employee of the latter, where he witnessed the launch of Filecoin and Solana.

At the time, Coinlist was notorious for being able to make quick returns. Users would often have friends and family sign up for multiple accounts, as each account could only buy a few hundred dollars in tokens. Being a front-office employee at one of the fastest-growing organizations in crypto at the time gave Regan a taste of what scale and speed meant. But he wasn’t at the center of where the wealth was being created.

Cryptocurrency is growing fast. Even in one of the fastest-growing organizations, there’s often a sense of missing out. Regan wanted to move beyond Coinlist. And his steps toward this transition speak volumes about his view on risk. His attempt to start a solo business stemmed from noticing a problem that most startups at the time were facing: a lack of information about venture capital firms.

In 2019, the venture capital landscape in crypto dried up. The 2018 bear market had hammered the industry. Capital wasn’t flowing into venture funds. ICOs were (sadly) dead. So when founders needed to understand who to raise money from, what to consider, and what portfolio a company had, there was very little information available. Regan was maintaining an Excel spreadsheet—a loose CRM system—to help founders understand who was active and who wasn’t.

As a small angel investor with $2,000 to invest, he didn’t have much name recognition. But he could provide value to founders looking to raise money. That Excel spreadsheet was later turned into Airtable and named Dove Metrics.

Dove Metrics slowly but steadily built its position as the definitive source of funding data. At the time, the only alternative source of information was Crunchbase. But they required a paid subscription, and the data often lacked nuances about cryptocurrencies, such as whether funding was for tokens or equity. So Regan gradually began to collate this type of information, and then expanded it into a newsletter and an API for users who needed it.

In late 2022, when Regan's attention turned entirely to Lattice (his fund), Messari acquired Dove Metrics. The product currently powers their funding dashboard.

During that period (early 2020), Regan was working 60 hours a week at Coinlist. It was simply impossible to get involved in early-stage token projects outside of work. This was the era of pandemic lockdowns, and the period when The DAO positioned itself as an alternative place to work. So, over time, Regan withdrew from his work with Coinlist and became a contributor to The DAO.

Unlike Coinlist, which is usually marked by structure and process, DAOs are messy. They run on Discord and are often paid in tokens by anonymous contributors. At the time, Regan was working at Index Coop and Maple Finance.

These collaborations gradually turned into more structured consulting work. Regan's experience at Coinlist, which saw hundreds of tokens go live, was invaluable to tokens looking to launch in the DeFi summer. But he quickly noticed two things.

1. Consulting work doesn't scale because your income is proportional to the number of startups you can work with. And you can only work with a limited number of startups at any point in time.

2. The value that Regan brought far exceeded the angel investment checks he signed.

At the time, most crypto-native funds were in a strange state. On the one hand, many veteran investors who raised funds in the 2017 bull run didn't have any liquidity to speak of. On the other hand, there were Web2 native funds throwing money at industries they had never been in. For Regan, this was an opportunity.

In an age of endless capital, founder empathy and operating experience were the keys that Regan and his co-founder Mike used to differentiate themselves. They set out to raise a $5 million fund. Eventually, that fund grew to $20 million as larger, established firms like Accolade Partners joined. Regan’s strong connections to multiple networks and as a DAO contributor also helped. A new asset class was emerging, and so were new money managers.

It was mid-2021. The fund was established. It was time to deploy the capital.

Expanding Lattice

I wish I could tell you that Regan had made a billion dollars at this point in his investing career. That would make a good story. But that’s not how things work when you start a new fund. He was one of the few investors who put in OpenSea’s seed round, thanks to his network in Silicon Valley. But he had to start from scratch when it came to deploying capital for the just-raised Lattice Fund.

In the early days, Regan and his team only ever put in $100,000. They had to rely on the good reputation they had built up as angel investors in previous years to get into investment opportunities. Venture capital needs power laws to work. A small number of bets that provide abnormal returns drive the majority of a fund’s returns. In other words, those bets that generate huge multiples compensate for the bad bets. But a lot of times this requires scale.

Let’s say you can only put 1% of the fund size into one investment. You need it to give you a 100x return to break even. That’s assuming all other bets go to zero and doesn’t take into account the dilution of investors’ stakes in the companies they invest in over time. That’s usually not the case. In other words, putting $100,000 in a $20 million fund isn’t going to change lives.

But it let people know that Lattice was putting money to work.

From the first fund ($20 million), 40 investments were made, with an average investment of $250,000 to $500,000. A few years later, when they raised their second fund ($65 million), the amount jumped to $500,000 to $1.5 million. One challenge with having a larger fund is that investors often need to invest more to justify the time spent on the venture. Capital is generally not a finite commodity. Time is.

A firm can choose to split its money among a thousand different startups, but doing so also limits its ability to have a meaningful impact on the startups it's involved in. So if you have $65 million to deploy (as Lattice does), and your target stake is 1%, in exchange for 2% of the deployed fund ($1.3 million), you're going to have some limits on the valuations you can deploy.

You can’t own 1% of a billion dollar network by investing a few million dollars. So naturally, companies like Lattice tend to be seed to Series A ($30-150 million valuation).

For Lattice, the focus is on betting on those markets that expand through on-chain business models. Regan believes that the biggest opportunity in our industry lies in applications that provide value to new market segments and the infrastructure that supports these products.

Currently, this focus means an increasing focus on DePin. Earlier, they backed Galxe and Layer3, showing their focus on consumer applications. Lattice is also involved in the infrastructure side of Privy and Lit Protocol.

But there may not be many opportunities to invest at such high valuations at the beginning. Investors like Regan will solve this problem by investing in seed rounds, knowing that additional investment may be needed. Doing so can both give investment institutions more ownership in successful companies and make it easier for companies to get support during the growth stage. Large funds tend to invest in financing rounds of tens of millions of dollars, but for such financing rounds to bring significant returns, the valuation and liquidity of the exits need to reach billions of dollars.

Unlike traditional markets (which provide good exit channels for early supporters through mergers and acquisitions and IPOs), crypto-native projects often rely on token listings to get returns. This explains why funds are flowing to infrastructure projects with multi-billion dollar valuations.

The tokens themselves become the product. Investors ultimately value whether the fund can deliver multiple times the return on capital. Web3 funds typically invest a small portion of their assets in liquid assets, which are tokens purchased from the market through exchanges.

Appreciating Memes

The liquidity of the cryptocurrency market makes it a more difficult market to bet on. Investors need to consider two factors:

• Comparison with Bitcoin and Ethereum: Investors are constantly compared to Bitcoin and Ethereum. Most fund investors usually only hold either of the two. The performance of a fund outperforming Ethereum or Bitcoin is called Beta.

• The impact of macroeconomic factors: Many funds that perform poorly in 2024 may have achieved amazing results in 2021, when speculative interest in altcoins reached new highs due to low interest rates and boredom caused by the epidemic.

The combination of these two creates a situation where funds compete with each other in the liquidity market. Traditional investment cycles are relatively durable, and the liquidity of cryptocurrencies tends to compress cycles into shorter time frames.

As Sid likes to say, the token itself becomes the product. When allocators (such as pension funds or Fund of Funds) look at fund performance, one of the determining factors is the return generated by the fund. Investors ultimately value whether the fund can generate multiple returns on capital.

But when many smart and ambitious people focus on the same digital assets, prices tend to rise. As I write these words, there are over 100 tokens with a market cap of over $1 billion.

This is what happens when unlimited money chases limited quality assets.

So where will the money go? It will go to riskier areas like NFTs, in-game items, yield farming strategies, and most recently, meme tokens. Just a few weeks before we discussed this, Solana was in the midst of a meme coin frenzy. WIF's market cap soared to $4 billion. Therefore, it started to make sense for the fund to invest in meme tokens. Liquidity market traders (and hedge funds) usually respond to market narratives the fastest. Web3 games, AI, SocialFi, etc. are all independent narratives that these fast movers will participate in. As the price of liquidity tokens in these fields rises, whether it is Fetch in the field of artificial intelligence or Degen in the field of Web3 social, angel investors who have traded these tokens will start looking for opportunities in the private market. In their view, there are often valuation arbitrage opportunities between the private market and the public market. They may hold profitable positions and are willing to take greater risks.

When angel investors start chasing a hot new theme, the number of deals and social consensus around the emerging theme will also quickly form, eventually leading more conservative venture capital institutions to start investing in the space. This is the case with Bitcoin L2 and meme platforms like Pump.fun.

When VCs start investing (and eventually run out of money), they will start to convince the slowest but largest limited partners (LPs) to invest. In 2021, there will be funds focused on Web3 games. By 2024, there will be funds focused on Bitcoin L2. Funds will shift their focus from fast sources of money (such as traders) to slow sources of money (such as pension funds).

According to Regan, this shift in attention between assets will also affect management style. In traditional venture capital, funds can patiently wait for companies to slowly find product market fit (PMF). But because liquid markets are where most funds get their returns, investment commitments to startups often come with time limits.

If a startup has a liquid token, then choosing not to sell it at a high valuation could actually be a breach of fiduciary duty. Similarly, holding on to an investment that is clearly underperforming could also be a waste of time. Founders often think that the limitation of venture capital funds is money. But in reality, the limitation is time.

So what happens when it’s clear that founders are underperforming or can’t deliver on their promises? Regan uses feedback as a tool. Communicating to the team that they’re under-executing or that the team’s time could be spent on better opportunities is a way to reduce time invested in startups that aren’t scaling quickly. One way founders can mitigate this is by maintaining momentum.

VCs can accept businesses that lose money. But if a company doesn’t show meaningful traction or direction for multiple quarters, then it’s wiser to stop investing time.

This is where the “meme effect” of venture capital comes into play. Even if funds are not providing real help to the startups they are currently investing in, they need to make founders feel like they are providing “value-added services.” VCs are actively involved when a company is growing. But what if there are multiple companies that are not growing and you still need to prove that you can help?

This is where signaling comes into play. Being active on Twitter as an investor may have little correlation to the help a VC can provide in real life. However, for VCs and founders, it is often one of the best ways for them to communicate with each other.

One ​​thing founders can do is to see through the Twitter role-playing and understand who is the right person to work with by doing a VC background check. Most funds, if asked for some founder references, will be willing to share founder details that can explain whether the funding source is strategic. It is just as important for founders to do due diligence on the VCs they invest in as it is for the VCs to do due diligence on the founders.

Sales Story

Mem assets are seasonal — just like NFTs in the last cycle. Many times, VCs (and funds) can’t hold them directly. So they optimize for startups that could become critical infrastructure. So instead of betting on the next bonk or WIF, you bet on products like Pump.fun that make publishing a meme as easy as clicking a few buttons.

That’s why OpenSea and Blur have been amazing bets in the NFT cycle. Another way funds can optimize for retail interest in meme assets is for portfolio companies to pursue memes as a GTM strategy. But Regan believes the likelihood of it working for startups pursuing this strategy is very low.

So where should founders focus? Interestingly, many consumer-facing portfolios are growing rapidly. For example, Layer3, one of Lattice’s portfolio companies, is currently seeing an all-time high in active users. Infrastructure companies and security audit providers are also seeing a rapid increase in the revenues they generate. These trends have also translated into a sharp rise in valuations.

Throughout the bear market, founders tend to be in defensive mode to save runway. But part of what helps leaders in certain categories stay ahead is the ability to raise money at higher valuations and turn aggressive in a bull market. This is hard to do because once you’ve been in defensive mode for a while, it’s hard to reverse that inertia.

Just like evolution, the market tends to reward founders who respond quickly to change. With increased risk appetite and core metrics such as user numbers, it has become commonplace for founders to raise multiple rounds in a quarter.

How do venture capitalists view such opportunity layout? They break it across cycles. In Reagan’s view, any deal they make in this cycle will not see liquidity until the next cycle. That is, 4-5 years later.

To put things in perspective, about 3 of the 30 deals done by Lattice Fund 1 are currently liquid.

One ​​mental model that Regan uses to explain this balance between liquidity and patience is through the lens of innovation forms. He argues that crypto startups are a mix of technological and financial innovation, with the financial side funding the technological side. You can’t really separate one from the other. So you have to decide whether you want to take advantage of the unique liquidity opportunities in crypto.

Understanding how these incentives work helps explain why VCs sell tokens at specific valuations. Without a return of capital, subsequent financings are difficult. Without a markup, it’s impossible to explain a fund’s performance. As a result, most VCs are torn between exiting a liquid position and playing the long game.

Ultimately, founders know their businesses best. Unlike VCs, they also have a single bet, not a basket of them. So optimizing for liquidity events is often in their best interest. One way to address this challenge is through the gradual institutionalization of cryptocurrency risk.

In the future, we may see large organizations comfortably taking equity stakes in successful businesses. Just as we saw with the growth of the internet, listings will be limited to companies with cash flow and revenue. Or maybe not. We may just be playing in an endless loop of short narratives and memes. No one really knows.

For Regan, his core priorities are simple: don’t cause pain to founders, and double down on winners. This strategy of becoming an empathy enabler has helped him evolve—first from an employee at Coinlist, to a DAO contributor, and now as a partner at a venture capital fund with nearly $100 million under management.