On My Mind: Startups that Look Like Funds
Plus, a framework for answering questions about competition
On My Mind
More startups might start to look like funds.
Innovation around markets tends to happen along multiple axes: expanded access, issuance of new (types of) assets, and the creation of novel ways to participate. These factors frequently compound to create opportunities for new managers, who may have unique insights as to how to approach these markets.
Over the past few years, many new markets have begun to emerge and expand. Examples include spot crypto assets, perpetuals, prediction markets, trend trading, permissionless lending, trading funding rates, and a variety of products for exposure to private assets.
What I’ve noticed is that there are roughly three types of startups within these new markets: 1) the exchange infra, 2) apps for accessing the markets, and 3) risk managers. The third bucket is where many startups are beginning to look like funds – and where I see a lot of surface area for innovation!
Some of the ideas I’m most excited about within this category:
Productized trades. A “productized trade” tokenizes a specific strategy – e.g. a pair trade that tries to isolate a specific trend or factor – with the intent of providing a greater set of capital with access to that strategy. Ethena was a pioneer in this category, helping democratize access to the ETH basis trade. The creator of the productized trade can earn a fee from the capital deposited into the strategy, from the profits of the capital, or both. Begins to look a lot like a fund – but one in which anyone anywhere in the world can provide liquidity, and anyone from a solo retail trader to a sophisticated trading group can generate ideas and compete for capital.
Tokenized superforecasters. Some investors are better at operating on prediction markets than others. This is especially true for longer-tail, more niche markets that may expand the set of ways someone can have an edge. Today participation may look like copy trading a superforecaster, but what if retail could invest in those forecasters? I think we will eventually see some of the top traders on Polymarket or Kalshi go out and raise dedicated prediction market funds. But what if the trader is an AI agent? One construction I’ve been excited about is an agent that can tokenize ownership; token holders not only receive a share of the trading profits, but can also help train the agent (via reinforcement learning, providing additional data, and more).
Vehicles that provide access to private assets. I wrote about this last week. Often, the gating factor for exposure to private assets is access. As a result, we’re starting to see innovation around both new asset constructions (e.g. pre-IPO perps) as well as new vehicles that provide access (e.g. Robinhood Ventures I). I wouldn’t be surprised if we see more novel, fund-like structures that focus on 1) buying stakes in private companies, and 2) providing retail with liquid access to the overall basket of those shares.
Onchain vault managers. So far, these have appeared primarily in the form of a) risk managers on lending protocols like Morpho, and b) market making strategy creation on Hyperliquid.
Would these make good venture investments? Well, it depends. The question behind the question is really: what makes a good venture investment? Stellar founders, large addressable markets, and products people want. Those are the same factors to assess here. But on the whole, I’m inclined to believe that at least some of the largest outcomes of the next decade will start out looking more like funds than traditional companies.
Frameworking
“The best defense is a good offense.”
One of the questions I hear people ask founders most often is about competition. What if a larger incumbent in an adjacent field decides to build the product? What if ~insert specific competitor~ decides to copy your strategy? Or even just how do you think about competition?
This week’s framework: the best defense is a good offense.
When you get asked about competitors, start by talking about how you excel. Anchor the conversation on why you’re great, not why your competitor is bad. And besides, if the question comes in the context of a potential investor, chances are low that they’re underwriting the investment on the basis of competition underperforming. What people want to see is why they should believe in you and what you’re building.
Plus, it’s near impossible to know the details of what every potential competitive threat is doing or how they’re strategizing. There can also be a long list of competitors. If you spend 80% of your answer talking about why your product is defensible and differentiated, the remaining 20% can be used to quickly dispense with the actual competition part. For instance: “we do xyz, and our competitor doesn’t. It’s possible so-and-so other competitor could, but it’s against their incentives because…” and so on. But if you spend the first 80% of your answer trying to deconstruct how and why your competitors act a certain way, there’s a much higher risk of burying the lede (why your company is great!).
This framework can be generalized to any type of argument or persuasive setting. When refuting a counterpoint, start by re-anchoring the audience on why your point is great. Persuade first, dissuade second. Play defense by striking on offense.
Content I Consumed This Week
John Arnold on Invest Like the Best. @JohnArnold is likely the greatest energy trader, ever. His fund, Centaurus, averaged over 100% annual returns during the 10 years it was in operation. He then shut it down at age 38 to focus on family, philanthropy, and policy initiatives. I try to read or listen to everything he puts out publicly. This episode did not disappoint.
The Reum brothers on @sourceryy. Hadn’t heard @M13Company on a podcast before, genuinely very impressed by their depth of thinking and insights. Gained a lot of respect for the Reums!
Ed Sheeran on the Friends Keep Secrets podcast. Ed and Benny Blanco made a (very very good) song live. I love seeing how art gets made, so this was genuinely a treat. Well worth the 25 min watch.
Books on the docket: Streetwise by Lloyd Blankfein.