In this conversation, I interview Deng Chao, CEO of HashKey Capital, asset manager investing exclusively in blockchain technology and digital assets. Deng Chao discusses the market developments in the web3 space in 2022, stating that the number of developers and users in the blockchain ecosystem has remained almost unchanged, but there have been significant technological developments in the space.

HashKey Capital's investment thesis for new $500 million fund focuses on web3 infrastructure and tokenization of RWAs

Ishan Pandey: Hi Deng Chao, welcome back to our series “Behind the Startup.” Please tell us about how HashKey Capital viewed the market developments in the web3 space in 2022. Further, according to you, what lies ahead for the industry in 2023?

Deng Chao: Many thanks for inviting me, Ishan. We have been in the crypto space since 2015, and our vast experience has enabled us to succeed in the last year despite the pressures of the bear market and cataclysms. We have continued to actively invest during the bear market. In the second half of 2022 alone, we have invested in dozens of projects. It’s impressive to see that great projects continue to build during this time, and we believe it’s important to support those projects.

As for 2023, the macro environment needs to be more open to volatile assets. However, we need to recognize that over the last year, the number of developers and users in the blockchain ecosystem remains almost unchanged. There have been significant technological developments in the space and yet the fundamentals remain intact. The only change of note is that the macro environment is in a relatively poor position.

Ishan Pandey: Please tell us about HashKey Capital, HashKey Brokerage and other product lines. How does it help in bringing real-world adoption?

Deng Chao: Currently, the HashKey Capital team is divided between Hong Kong, Singapore, and San Francisco Bay Area. We have over $1 billion in AUM and have invested in around 300 projects.  Our extensive portfolio has allowed us to build a strong ecosystem around our companies. We are able to help the founders bridge their startup to a dynamic ecosystem, in which they can find partners and/or clients, as well as connect with businesses from east to west.

Other important business lines in the HashKey Group include HashKey Pro and HashKey Xpert, which offer exchange and brokerage services. Our Hong Kong Exchange business is regulated by the SFC. In addition, we have HashKey Custody, which offers crypto custodian services, HashQuark for Web3 Infrastructure, and ePotter, an institutional liquid staking service.

Ishan Pandey: HashKey recently closed a $500 Million USD fund. What shall be the investment thesis of this new fund, the target markets and the geographies in which the fund will invest?

Deng Chao: We have a dynamic investment thesis backed by our research team, who work in conjunction with the investment team to spot market trends early. With the research collected, we can effectively incorporate it into our investment philosophy that pays close attention to the current market trends and technological developments.

A solid investment thesis is essential for anyone investing in crypto, and it doesn’t matter if you are an individual investor of $500 or a VC with $500 million. The investment thesis is the why. Why are we doing this? Why do our eyes shine when we talk with crypto founders?

In saying this, we are currently focusing on web3 infrastructure, staking, restacking, relayers, data providers, data aggregators, data storage, node-as-a-service, API-as-a-service, on-chain analytics, event triggers, developer tools, DIDs, ZK technology, and finally the tokenization of RWAs - Real World Assets - and use cases for NFTs with RWAs.

In terms of geographies, we are a truly global VC having made investments in most of the continents around the world.

Ishan Pandey: Can you expand on HashKey Capital's approach to supporting young entrepreneurs and startups in the blockchain industry?

Deng Chao: We like to support young entrepreneurs and startups. We feel that in this space, age is just a number. You must remember that Vitalik created Ethereum when he was only 21, right?

We like to invest in early-stage projects for several reasons.  Firstly, we understand that projects in the seed stage have more needs than those in later stages.  Not only can we provide the capital but also give these founders guidance, access to our ecosystem, and make important introductions. On the other hand, it has been statistically proven that the multiples on investments in seed-stage projects are better than Series A or B. So this is a great win-win.

Approximately 50% of our investments are completed in the seed round, and the rest is divided between the strategic round, Series A and B. Truthfully I don’t have the exact numbers regarding the age of our founders, but I’m quite sure the average age is lower than what we would find in traditional venture capital.

Ishan Pandey: What does HashKey Capital see in prospective startups and founders before investing or committing to invest capital?

Deng Chao: We try to look at projects in a holistic manner. No single factor, qualitative or quantitative, will result in whether or not we invest in a project.

Although, it is crucial to consider factors such as the team, product use cases, market fit, market size, community, the revenue model, technology, regulatory entry barriers, who are the other investors, and, most importantly, the network effects.

Personally, I like to see the network effects because it truly is one of the charms of the crypto world. Metcalfe's Law states that a network's value is the square of the number of nodes in the network. Certain projects in the crypto space can leverage this law very well, and we obviously like to support these kinds of projects.

Ishan Pandey: How does HashKey Capital's investment strategy evolve to stay ahead in the ever-changing blockchain and digital asset industry?

Deng Chao: It’s not an easy thing to stay ahead in the crypto space. Technology evolves at the speed of light, and therefore VCs in the space need to adapt to keep up with all the new developments. Thankfully, we have a fantastic investment and research team looking at all the cutting-edge crypto developments. We also have a technical team who have in-depth technical knowledge to carry out all necessary tech due diligence. Lastly, we ensure our investment managers specialize in specific verticals, giving us diverse expertise.

Ishan Pandey: What are some key strategies for entrepreneurs to effectively approach and pitch their ideas to venture capitalists and established players in their industry

Deng Chao: People that work in VC are constantly inundated with decks and pitches. Having the capacity to be concise will not only help grab the attention of venture capitalists, but it will also demonstrate that you are a seasoned entrepreneur.

Concision and brevity are very important soft skills. The power of saying more with less. To make it short, but not shallow. Actually, there’s a fascinating book with this title that entrepreneurs should read: Smart Brevity - The Power Of Saying More With Less.

Ishan Pandey: How can entrepreneurs build trust and credibility with venture capitalists and established players in order to secure a partnership or pilot opportunity?

Deng Chao: Honesty and transparency are crucial. Even if things are not looking good, keep your current and future investors updated on things like your product development, market, and financials. This will build long-term rapport and trust.

In addition, promising entrepreneurs are typically great communicators and keep themselves accountable.

Relationships in the startup world take years to build, and even if the timing may not be right, it is advisable to keep VC informed on your progress, that way you will have a foot in the door for the next fundraising round.

Ishan Pandey: According to you, what new trends and market opportunities are we going to see in 2023?

Deng Chao: In a nutshell, we are keeping close attention to modular blockchains, account abstraction, MEV, DeFi, institutional infrastructure, Web3 infrastructure, DIDs, decentralized data storage, ZK technology, and tokenization of RWAs.

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