The Lithium incubator program allows talented founders to raise startup capital (funded by Lithium Fund II) so they can stack the odds of a successful launch in their favour, by having a small war chest to fund proof of concept product work, marketing activities, and any legal, KYC and ancillary costs that come with launching a token on one of our Launchpad supported protocols.
In this article, we are going to give our community, and potential incubator companies a behind the scenes look into how the Lithium team select high potential projects from the raft of inbound leads we receive.
There are two approaches when identifying projects worth funding in early-stage crypto projects. The on-chain, community-driven way, and the traditional off-chain methodology. Let’s take a look at both.
Some incubators have leveraged the power of blockchain to provide an innovative way to select which startups are worthy of seed investment. These DAO incubators allow community members to vote on promising startups, with all applications visible to the community. The startups with sufficient votes get funds, the ones that don’t, won’t.
While we can see the value of on-chain DAO processes like this to come to consensus, namely for making micro-decisions in delocalised governments, we think it’s the incorrect approach for identifying founding teams.
There are two reasons we believe on-chain community decision making to be incorrect.
So if we are not utilising the blockchain and DAO to come to consensus, how are we doing it? We are doing it the old-fashioned way, by creating a process where 3 team members, with unique skills and viewpoints, aim to come to consensus on each project that we could back. It’s not sexy, it’s not cutting edge, but this process has worked in the top-tier VC firms for a long time. We are trying to change things at Lithium, but we are also not arrogant as to say when we can learn something from an existing framework that works.
Let’s take a look at what this process looks like.
Most of our deal flow comes from connections within the space, some it just comes directly from our site. Regardless of where our traffic comes from, the first thing we require of investors is to fill in an application form. This captures all the basic data we might need to allow the committee to review the projects, free from charisma and bias.
From a technical point of view, all applications are sent to a Firebase DB, we then have a Zapier integration that sends these applications to Notion. The final step is another Zap that fires these applications to Slack, so the team is notified and can review in their own time.
The first vetting is just building up a picture of the startup and whether we think it would be a good fit for the launchpad or incubation. The absolute minimal hurdle is the startup must have a real use case. Meme tokens or tokens that just act as a value store are immediately disqualified. At this stage, we have a short checklist to identify any red flags, but generally, this review process is quite short, it’s difficult to ascertain the potential of a startup without speaking to the founding team.
One of the founding team will assign themselves as account manager. Typically, we do this by industry, and how busy we are with other stuff. Tom’s expertise is in marketplaces, Ben’s in SaaS and Jake in Defi products, so where possible we try to align this with our leads.
The actual intro call tries to ascertain a few key variables in our decision making process.
It’s probably worth noting here one counterintuitive element of decision-making. Most people believe that the more data points you have the better, if you are betting on a horse, knowing its past race history, its jockey, its form, its height and age, where it was trained, all of this is potentially useful information.
Nassim Taleb et al proved this theory of decision-making to be largely incorrect, in his seminal book ‘Fooled by Randomness’ given more parameters we actually make worse decisions. This is due to the concept of variance. If each variable you consider has a range of say 10%, adding more and more variables just compounds this, the more variables you have, the more likely you are to make poor decisions.
That’s why in our intro we are focusing on just a few key measures of success. Namely founder:market fit, product:market fit, and potential upside (risk/reward).
If we feel there’s good potential we’ll move onto a team call with founding teams. This usually involves the founder walking through their pitch deck (for any founders reading this, we recommend Guy Kawasaki’s ‘the only 10 slides you need’)
We’ll also want to understand the skills and experience of the wider team, ideally through speaking to them directly on the call.
The actual questions we tend to ask are something we obviously won’t share in this article, but if the founder reasons the first principles of their vision and business case, they won’t have much to worry about.
After the team call, they’ll usually be a week or two, where both sides of the table will want more information, to think through on an asynchronous basis. Great startups will have a bunch of potential avenues to raise seed capital, so it’s important at this stage Lithium communicate the unique value we can bring to startups.
We are not looking for business plans or made up numbers. Contrary to popular belief a startup is not a company. It does not usually have cash flow statements, P/L reports. At the seed stage, you aren’t investing in a company, you are investing in a vision, a team, and a market. On this note, the kinds of information we will be requesting is generally around use case/tokenomics or potential issues we see with the project (such as legal or ethical).
In the spirit of more information leading to worse decision making, the next step in the process is usually the final from Lithium’s end. In order for us to make an offer to a startup, all founders must agree. The only exception to this is each team member gets one opportunity a year to back a founding team, even if the other members aren’t on board, if the decision turns out to be wrong, on their head be it.
At this stage, we will outline the term sheet, the process moving forward, and various ways we can help add value, asides from cash.
After the final call, we’ll send over a proposal to the startup. This is created using Notion and specifies services included in the incubation, such as KYC and Code auditing. It also gives founders an opportunity to take advantage of other services we can offer through our ecosystem, such as design work through our partner, Misto.
Hopefully, this article has given you some insight into how we do source and reach consensus on deals at Lithium and why we feel a Tradfi model is far optimal to DAO consensus. This process of course is also a work in progress, as we learn and update our mental models of operating in this never before operated in space, we must adapt our processes accordingly.
On this note, if you are working in the crypto VC world and think you could add some value to Lithium, please reach out to Tom on Twitter
If you are building an interesting early-crypto startup, and could benefit from some seed cash, you can apply to our incubator here.
