Rennick: 0:00

It's really not necessary to raise a ton of money. It's really not necessary to have a high burn rate. If you have a high burn rate, just really ask yourself why do I really need this?

Joeri: 0:11

Hello everyone and welcome to the Web3 CMO Stories podcast. My name is Joeri Billast and I'm your podcast host, and today, actually, I'm outside the HCC venue in Brussels and my guest is Rennick Palley. Hi, Rennick, how are you doing? Doing great, doing great. Good to see you here. Yeah, it's sunny weather here in Belgium. Actually. It gives a lot of energy, together with, of course, being at the conference. I always love that. But, guys, if you're now wondering who i Ric, Rennick is a founding partner of Stratos. It's an industry-leading VC firm focused on early-stage crypto projects, with close to $500 million of AUM, and they even hold meme coins. So, Rennick, welcome to our podcast. To start, could you share a bit about your journey in venture capital and what led you to found Stratos?

Rennick: 1:27

Su re, yeah. Great to be here. Thanks Joeri for asking. So. I have a background in math, and engineering and started my career, working in TradFi at a big hedge fund in New York, and I was doing research on fintech and financial inclusion in the world, and that's when I came upon Ethereum in 2015 and visualized what might be possible with it. I was thinking about DeFi and some of the things that we know of today before it was really called DeFi or anyone had popular terminology for it, and that really captivated me and captured my imagination about what was possible with crypto, and so, from that point on, I started investing in crypto personally and just felt that I wasn't going to be able to engage with the industry in the way that I wanted to without getting into investing in crypto on my own. The firm that I was at wasn't interested in investing in crypto, so I founded Stratos in 2016. And, from that experience, decided to launch our first crypto venture fund, focused on early stage projects, in 2020.

Joeri: 2:30

It's interesting to hear the story and how it started, because everyone has a story. It seems that you already have been a few years in the Web3 space, the crypto space right? Yes, yes, yeah. I'm always wondering. In the Web3 VC landscape then, in particular, what is now the dominant focus and how are you, with Stratos, positioning yourself in this evolving space?

Rennick: 2:55

Yes, every cycle brings different areas of interest. Over the last few years, the things that have been a focus for people one is just AI, and how does AI involve itself in crypto and where is the intersection? There's obviously been a lot of different areas of investment there A few projects that have launched, but I think quite a few more that are going to launch over the next couple of years, so that's really exciting. There's been a lot of other innovation on the infrastructure layer so moving from Ethereum to Alt L1s to L2s to now the modular ecosystem and Solana, so there's a lot happening there.

Rennick: 3:38

Bitcoin and Bitcoin innovation has captured a lot of attention and a lot of investment. There's a lot of new things launching there, so exciting to see Bitcoin having a resurgence in that sense. And then the application layer obviously DeFi has been a stalwart of the space. It's been the major product market fit for the last few years, besides stablecoins, and I see that continuing last few years besides stablecoins, and I see that continuing. And with some of the new infrastructure that exists, the ability to create much more feature-rich dpi is just on on the horizon. And I think the last area of interest is just web3, social and some of the other application layer type projects that can be built now that the infrastructure in UX has improved to the point where these things can start to compete with some of the existing Web2 technologies.

Joeri: 4:34

Yeah, interesting that you mentioned that Web3 social, for instance. I get a lot of people approach me because of my podcast, a lot of founders, also investors. They approach me for things like that also because the podcasts are A lot of founders also invested. They approached me for things like that also because of the podcasts are a bit of a KOL. Yeah, interesting to hear that, but, of course, yeah, you cannot accept every project, of course and early stage crypto projects. It's full of risk, I can imagine. So what are the key criteria that you consider before deciding to invest?

Rennick: 5:06

Yeah, and one thing I forgot to mention are meme coins, obviously, which are very popular right now, but typically is not an investment that you would make on the venture capital side. They don't raise money, they just do an airdrop or some sort of pre-launch and that's it. Obviously lots of attention there, but not something that we invest in on the venture side. But it is something that we do in our hedge fund, which we can talk about. But to answer your question about what do we look for when we make early stage investments, there's a couple of things that are really important founders, what is the fit between the founder and the project they're looking to build? Why is that founder the best positioned person in the world to be going out and building that vision? That's something that we look for and I think is really critical. So, whatever it is that you're looking to build, really ask yourself am I the best person to build this? And if I'm not, can I put together a team that really is the best group of people to go after this opportunity?

Rennick: 6:08

The other thing is just what's actually being built? Does this make sense? Is this something that the space needs now? Is this something that, if you look forward two to four years and you say, understanding all the infrastructure that's going to be built in that and launched in that timeline. Is this something that's going to be at the cutting edge by the time you're ready to launch? Or is this something that's a copy paste with small changes versus what already exists? In that case, I think you can make money on those things in the short term, but they're not really what the space wants in the long term and we're generally very long-term oriented, so we look for that as well.

Joeri: 6:44

Yeah, that makes total sense that it's a real life use case and it's a business that can survive and it's not only based on hype. Maybe also interesting is can you mention maybe one or two projects that you have recently invested in and maybe explain what makes them stand out?

Rennick: 7:12

Yeah, I can go back through time and say we use the mindset that I just described in all of our investing. So we were very early investing in real world assets. We invested in Goldfinch, which is really the first real world asset protocol on Ethereum, back in 2020. We invested in Bakkt, which is the first tokenized real-world asset treasury-backed token on-chain. We led the Series A of Fuel in 2021, which is a leading layer two protocol that's set to launch in the next couple months. They're one of the first and earliest alt vm l2s, so really excited to see where that goes. We led this co-led the seed round of dimension in 2022, which is a sequencing excuse me settlement layer on top of celestia, so it makes it very easy to create new roll-ups, which they call roll-ups, which was leading along the direction of people who build projects wanting to control the actual sequencing MEV economics and token issuance of their particular chain, rather than building a dApp on top of someone else's roll-up. All of those things are leading to where we are today.

Rennick: 8:30

Now we're looking at social. Making an investment in social I can't dispose of it yet because it's not done. Also, making an investment in a FHE project which is fully homomorphic encryption. There are two things that we think are going to be of interest over the next couple years, in order to bring high value flows on chain, you need to have security and privacy, you need to have some sort of encryption mechanism that still allows you to validate and create consensus of what's happened on-chain. So FHE is one of the leading technologies to enable that and, looking at opportunities in the Bitcoin space, we still haven't found anything to bet on there. We think that there's going to be a lot of innovation going forward. Excited to see what comes up.

Joeri: 9:19

Yeah, indeed, lots of things are happening, also since the Bitcoin ETF and also this conference, as I see it sold out. You see how many people that are around. I feel like last year on the investor side, lots of founders came to me at Difficult to Raise and now again I see a lot of optimism. You mentioned already meme coins. The search of meme coins has been really a trend. How do you see this phenomenon affecting the overall ecosystem from a VC perspective?

Rennick: 9:49

So, I think the vast majority of VCs and institutional investors do not invest in meme coins, and there's a good reason for that. Most of them are just vaporware. They're scams or rugs, whatever. But there's a very small subset of meme coins that actually represent strong communities and in some ways, it's like the essence of crypto. Crypto was developed to create economics, to create communities, and so this is not something in my mind that is not part of the or not true to the crypto ethos.

Rennick: 11:20

However, there's obviously a lot of negative press around it or people who scratch their head, but I think it's hard to say where does this end? Where does it peak? I don't really know. Some people think that meme coins are in a super cycle and they're going to go even higher than they are today over the next two years. I think it's tough to say, but I do think that, over the longer term, what they represent onboarding channels for more traditional people who maybe are not interested or don't understand crypto today. They either start to become aware of crypto because of meme coins do they think they're funny, or their friends are involved, or whatever or venture-backed projects and developers look at meme coins and say there's some product market fit here. We're going to build tools and apps that make it easier for people to engage with the meme coins, and then those things end up spilling over into DeFi and other opportunities, which then is going to end up improving UX and acting as an onboarding channel for people overall.

Joeri: 12:26

Okay, but then of course, meme coins, as you say. There are a lot of scams and people can lose money. They can win money. How do you balance then the big risk, the high risks, with the possible, of course, big rewards?

Rennick: 12:42

Yeah, I think everyone has a different approach to this. We have a liquid hedge fund that we invest out of. Most of that fund is in majors, but we have a small percentage of the fund that we use to invest in meme coins. Right now we're in most of the blue chip best known meme coins, but before the meme coin craze really took off, we did invest in some of the lower market cap memes. We invested in with at around a cent and have held most of the position all the way up and back down a bit.

Rennick: 13:18

And the way we think about it is one you need to diversify across memes. If you're going to invest in the early stage or the very low market cap of memes just because you really don't know what's going to happen, you can do research and try and figure out what is the dev doing, what is the distribution of tokens, who are the KOLs around it, whatever but you still never know. So you have to diversify. And then the other thing is just risk management and, as the position starts to do well, take some money off the table, cover your basis, maybe pull out a 5X, whatever. Don't be greedy, don't hold onto the whole bag all the way up and back down and manage its size within your portfolio as well. If you've got one meme that's 20%, 50%, whatever of the portfolio, rotate some of that into the majors. It never hurts to buy more Bitcoin in our opinions. Yeah, just manage risk and position sizing.

Joeri: 14:16

Yeah, I like that to say that it never hurts to buy more bitcoin because chances are from a long-term perspective, you know, if you understand the dynamics, that it cannot go down because it's real money. Actually, I had an investment club for years, you know I've been investing in stocks, but also in some more speculative things like options. So it's actually you need to combine, you need to diversify, you need to manage your risk. By the way, someone an earlier guest on my podcast talked about the Buffett, Warren Buffett principles for Web3, so go check that out. Now, looking at Web3 and crypto projects and current market dynamics driving these investments, can you talk a bit about that and maybe how it will change or evolve in the near future?

Rennick: 15:10

Yeah, I think venture capital is generally just highly correlated to the space overall. If you look at the pace of deals that have gotten done recently, it's declined from the recent highs in Q1 of 2024 when everything was pumping. Things now are still higher than they were in early 2023 or 2022. It is a very cyclical industry. It is a very cyclical industry. That being said, I think there's a lot of new stuff that's going to launch over the next couple of years that is really going to move the space forward. So I're going to wait and watch those grow and see what new opportunities arise and then we're going to be investing heavily into the next wave.

Joeri: 16:05

That's awesome to hear and I imagine founders listening to this episode and a lot of them are looking to attract funding, of course, for their Web3 projects. You mentioned already in the beginning the criteria. Maybe advice that you will give to Web3

Rennick: 16:28

Yeah, so a couple of things that I have been talking to founders about recently. The first thing is crypto as, like a hype-based space and asset class, it's going away. People are relying less on hype these days and more on actual substance. So why does your project need to exist and what are the users that are going to use it, and can you show any early traction on people who want it, Other than basically just saying, hey, we're going to do huge airdrop and a farming points program to create vanity metrics, but there's really no need for this thing to exist? I think we're at the beginning of the end of the infrastructure wave that we've seen recently, where people invest in the next EVML2 at a $2 billion FDV pre-launch valuation just because they think, well, look at optimism and arbitrum and there are $10 billion, so we're going to make a quick 5x. I think that's ending, which, frankly, I think is a good thing for the space, because it will incentivize new founders to build new things that people actually want, instead of the next version of the same thing that already exists.

Rennick: 17:45

That's a long-winded answer to say try and build things that people want, really focus on what that is and take your time iterating to figure out what it is. The other thing I would say is, as I mentioned earlier, really try and figure out how to build the best possible team to build what you want to build. And then the last thing is on that point, don't spend too much money. It's really not necessary to raise a ton of money. It's really not necessary to have a high burn rate. You have a high burn rate. Just really ask yourself why do I really need this? Or is this for vanity reasons, to have a big team or to try and ship things faster before there's actual a clear product market?

Joeri: 18:30

That's a good point. I've seen that also with startup that they have a big office, but the space is not necessary when you start. Those are costs that you really should not do, and you should better use the money to invest more wisely in your development. Now, from your perspective, what marketing strategies have been the most effective for early stage crypto projects to gain traction or maybe to attract investments?

Rennick: 18:58

Yes, this is a tough one because it really depends on the product and what the target audience is that you're going after. Key thing is to really ask yourself who are we trying to attract to actually use the project, not to just KOL or build a big audience on Twitter. That helps. You should definitely be active on Twitter and have a presence and be posting about the tech and what you're building and shit posting and doing the rest. That's important. Crypto is a highly community-driven space, so I'm not saying you shouldn't be involved there, but you shouldn't rely on that.

Rennick: 19:35

The key is to say who do we want using the project and how do we find those people? So if it's DeFi, it's going to the DeFi conferences, speaking at events, finding people who can act as whales and build up your early TVL, talking to them and saying what is it going to take for you to want to deposit to my protocol and then make them feel comfortable, introduce their other friends and then slowly but surely build your TVL up organically that way. And then also thought out incentives. Crypto is about economics. So if you have a smart incentive program to help really kickstart your early TVL, that's just as good as a strong marketing program.

Joeri: 20:17

Right, yeah, common sense. That's for me as a marketer. You need to have real value. You need it's all about connections. A word that you didn't mention was community. It's about building community, but, of course, if it makes sense for your project, of course.

Rennick: 20:41

That's all part of the community people who are following your project, people who care about it, having an active discord, talking about what you're doing, and each new iteration of the project ships. All of that is, in my mind, part of community. Community is almost like the overarching concept of marketing in crypto in my opinion, absolutely.

Joeri: 21:02

Like they say, a community is a new marketing. Now maybe on a more personal note what has been, for you, the most rewarding part of your journey with Stratos and what keeps you motivated in this industry?

Rennick: 21:17

Yeah, that's a great question. I love taking time every now and then to reflect on this question. A couple of things I think overall, it's just looking at how far the industry has come. Sometimes people get a little bit pessimistic about the issues that we have and the fact that there's a lot of speculation in the space, but looking back to where things were in 2015 or 2016, it's pretty remarkable where things are today, and so to think about all the major milestones that have occurred and how much better everything is and how many people there are at these events, like you mentioned, that's pretty awesome.

Rennick: 21:56

This was like a crazy idea less than 10 years ago and, yeah, you can compare it to other areas of tech like AI or Web2 or smartphones is that this is a much from a paradigm perspective, a much different kind of concept having these distributed networks and decentralized money that it's going to take longer for this to become accepted and commonplace, but at the same time, it's going to be much, much bigger.

Rennick: 22:25

It's going to be significant in our lifetimes on the order of AI and space travel. So we just need to be patient and take the long term perspective. The other thing is just working with founders and seeing a small version of what I just described. It starts as an idea, there's maybe a couple of people and a pitch deck and then it becomes this massive protocol with tens of thousands of people being involved and on Discord and holding the token and engaging on Twitter. That's really cool and I love to be engaged with our founders and chatting with them and giving them advice and feedback and just asking them questions and just having that relationship is really rewarding as well.

Joeri: 23:10

Thanks, Rennick, for sharing all of that with us. Now, people, if they are curious, they want to know more about Stratos or everything that you are doing. Where would you like me to send them?

Rennick: 23:22

Yeah, feel free to check out our website, stratosxyz. You can see our blog posts where we do some in-depth research on things that we've invested in or what we're thinking about the space. You can find me on Twitter at Rennick Palley. One word Feel free to DM me if you're working on something interesting or if you want to get some feedback or just talk about what we're seeing in the space. Feel free to reach out.

Joeri: 23:50

Perfect. As my listeners know, there are always show notes linked to this podcast episode, so your Twitter handle and website will be mentioned in there. Rennie, it was really a pleasure to have you on the show here outside in Brussels.

Rennick: 24:06

Yeah, thanks a lot for having me. It's been great.

Joeri: 24:08

So, guys, and wonderful episodes again, with wonderful weather. Even if you can't see it, maybe you can feel it it was a really a pleasure to have Rennick on the show, so if you think that this episode is useful for people around you, be sure to share this episode with them. If you're not yet following the show, this is a really good moment to do this. And, yeah, if you haven't given me a review yet, this would really help me to reach an even bigger audience if you give me these five stars. So really grateful for that if you can do that, and, of course, I would like to see you back next time. Take care.