Interview with Leo Zhao, Head of Strategic Investments at MEXC

Author: WuBlockchain

The views expressed by the interviewee are personal opinions and do not represent the views of WuBlockchain or constitute any financial advice. Readers are advised to strictly comply with local laws and regulations.

Please provide a brief self-introduction.

I have always been passionate about venture capital, enjoying the growth journey alongside entrepreneurs and investing in great companies. After graduating from the University of Southern California with a degree in Mathematics in 2015, I ventured into the booming fields of internet entrepreneurship and venture capital in the United States. Together with college classmates and seniors, I co-founded an angel investment company called Zuma, which returned over 6 times the investment to investors within 5 years. My Twitter handle is: https://twitter.com/zhao_eth

In our investment experience, we have been fortunate to invest in several high-growth internet companies based in the United States. One of them, Honey, was one of the hottest startups in Los Angeles at the time. Its main function was to automatically search and apply the best discount codes available online during checkout for online shopping. We invested when it was about $30 million and eventually it was acquired by PayPal for $4 billion, bringing returns of over a hundred times. Other personal investments include ShipBob and Amazon Warehousing, among others.

In 2017, after being deeply attracted to the technology of Bitcoin and Ethereum, I began to explore the cryptocurrency space. Since 2020, I have been serving as a Venture Partner at MEXC.

What is MEXC’s investment strategy?

MEXC’s investment strategy has undergone a series of evolutions and developments, currently divided into strategic investment and ecological investment.

In early 2020, our investment team consisted of only two or three people. Seeing that DeFi opened up an epic new market for asset issuance and free trading, our investment themes mainly focused on DeFi. Projects invested in included Kilt, Flare, Opulous, ImmutableX, Gelato, POKT Network, and others.

In 2022, we saw the innovation in the DeFi field dry up, with a large number of junk projects flooding the market, so our investment strategy underwent a significant change. In terms of investment themes, I am more focused on BTC ecology, AI, and trading-related projects. Recently, we have invested in high-potential projects such as BounceBit and BitLight.

On the other hand, we have also invested in many top-tier funds in Europe and the United States, increasing our opportunities to access quality projects in the early stages. The funds we have invested in include Polychain, Lemniscap, Bankless Ventures, 32Bit, and others.

In addition, I would like to introduce two other important colleagues on our team, Elin and Issa. Elin is responsible for post-investment management and focuses mainly on the Bitcoin ecosystem in terms of investments. Issa is responsible for public chain ecosystem investments and focuses on connecting with various top projects in the public chain space. For example, the cooperation with Telegram’s TON project was led by her. She also collaborates with multiple ecological funds to invest according to the characteristics of each ecology, which is the main strategy of our ecological investment.

Overall, our investment strategy is divided into two main lines: strategic investment, which I am responsible for, including all trading-related investments and fund investments; and ecological investment, mainly carried out through cooperation with various ecological funds. These two lines constitute the overall architecture and thinking of MEXC’s investment.

Have you also invested in top funds to become LPs?

We have invested in several top funds in Europe and the United States, such as Polychain, Bankless’ first fund, Figment, and others. The main purpose of doing so is to gain access to the best projects in the market. Information asymmetry is a key factor in the investment field. For example, recently the Western market has paid insufficient attention to the Ordinals ecosystem, while the Eastern market has less focus on the Solana ecosystem. Therefore, we can quickly discover the differences in hot projects between the East and the West and make early layouts.

Specifically, through investments in these funds, we have had early access to many high-quality projects. For example, Sei, Berachain, and Babylon, among others. Many funds were invested in during the bear market last year, which was a good opportunity. Funds have strong cyclicality, so we pay special attention to the year of investment. Funds invested in 2022 may have suffered significant drawdowns, but due to the undervaluation and high quality of projects during the bear market, we believe that projects invested in 2023 will perform well.

The investment size of each fund is in the millions of dollars, with investment periods typically lasting at least five years, and some may be as short as four years, although this is less common. In the West, the main investment period for funds is usually five to seven years. For example, in the case of Polychain, they may complete most of their investments within two years, but the so-called “completion of investment” usually only uses about 60% to 70% of the funds, with the remaining 30% being used to continue supporting invested projects, such as conducting second or third round investments. Then, the remaining recovery period may take three to four years, so the overall cycle may be extended to five to seven years.

Why choose to invest in projects such as SEI, Berachain, TON, etc.?

We chose to invest in SEI primarily based on its clear positioning and our understanding of it in trading-related projects. The main advantage of the SEI project lies in its blockchain architecture designed specifically for trading optimization. At that time, many contracts and trading activities in the market were limited by existing supply chain performance, and SEI happened to focus on improving transaction efficiency, which is highly consistent with our investment philosophy of focusing on trading tracks. SEI’s features include a focus on trading liquidity and high concurrency processing capabilities, while also supporting EVM compatibility, enabling seamless integration with wallets such as Metamask. These innovations are aimed at promoting transaction efficiency.

We made a multi-million dollar investment in TON on October 4, 2023, and established a strategic partnership with it. As part of the cooperation, MEXC also launched TON staking loan services and waived transaction fees for TON tokens. In addition to continuing to support TON-based projects (such as autonomous protocol Megaton Finance, GameFi platform TONPlay, Fanzee, and Sonet), MEXC Ventures will continue to fund mini-applications based on TON. On September 13, 2023, during the Singapore Token 2049 conference, the TON Foundation publicly announced a strategic integration with Telegram, expanding its services to a user base of nearly 800 million. The recent surge in popularity of TG bots has sparked more interest in TON network and ecosystem services. These developments are expected to attract more users, further driving the expansion of the TON network. So far, the TON ecosystem has a rich array of applications, covering wallets, DeFi protocols, decentralized exchanges (DEXs), games, NFTs, cross-chain bridges, and social media, among others, with relatively complete infrastructure.

We’ve also invested in Berachain, another project centered around liquidity. While the development process is somewhat slow, its internal testnet has concluded, and the public testnet is set to launch in the coming weeks. Berachain’s core lies in its unique gameplay focused on liquidity, including staking for earning rewards, project governance, and its proprietary stablecoin functionalities.

The Particle project has also performed admirably, particularly in the realms of social logins and integration with public blockchains. They already boast millions of monthly active users.

Overall, our investment strategy is concentrated in two directions: projects closely related to trading and those facilitating mass adoption. It’s been proven that many small projects perish during bear markets, while those with high valuations but robust financial backing, market consensus, and the ability to sustain capital burn, such as Aptos and SEI, manage to survive and ultimately yield substantial returns. It’s worth noting that there aren’t many projects capable of consistently conducting ecosystem activities and hackathons, a trait particularly evident in projects like SEI.

Do Chinese entrepreneurs face challenges in gaining favor from American investors?

Indeed, many excellent Chinese entrepreneurs encounter difficulties when seeking support from American investors. Firstly, language barriers are a significant issue. Proficiency in English is crucial for communicating with American investors.

Secondly, there are differences in mindset regarding token management. In the West, project presentations often emphasize narrative and innovation, with their pitch decks typically not dwelling too much on specific token details like unlocking and vesting strategies. This approach highlights the project’s vision and long-term goals rather than short-term profitability.

In contrast, many Asian projects often revolve around tokens and focus more on short-term profit opportunities and token unlocking plans. This approach may leave investors with the impression that the project has a limited vision. American investors and the startup ecosystem tend to value the founder’s foresight and the project’s long-term value.

Additionally, if a project or entrepreneur solely focuses on short-term token unlocking plans and token issuance cycles, this may not inspire trust from top-tier investment institutions.

Is listing on mainstream exchanges an important factor to consider when investing in projects?

It’s an important factor, but not the primary one. The project’s quality itself is paramount. Listing on exchanges is particularly crucial for certain projects, such as those within the Bitcoin ecosystem, where the high transaction fees on the Bitcoin mainnet lead to widespread expectations for projects to be listed on mainstream exchanges. Without liquidity support from exchanges, it’s challenging for projects to gain market acceptance. Therefore, establishing connections with exchanges is vital for a project’s success.

However, this isn’t the primary consideration; the project’s quality itself is the most crucial factor.

Are there any conclusive thoughts or directions regarding the Bitcoin ecosystem or the Ordinals track?

Regarding the Bitcoin ecosystem and the Ordinals track, I have two main conclusions. Firstly, I believe that the momentum in this field will continue, primarily because the growth in transaction fees brings significant profits to miners. I’ve conversed with several miners, who are well-funded players showing great enthusiasm for supporting this direction. In fact, the fee income generated by transactions sometimes exceeds the block rewards from mining itself. Therefore, from a financial perspective, the support for this track is quite robust.

Secondly, the development of the Bitcoin ecosystem won’t solely revolve around projects like Ordinals. In the future, genuine innovations, such as social media platforms like Nostr and other projects like RGB, will also become directions for significant asset inflows. These are areas worthy of attention and investment. The direction of asset inflow is crucial for our investment decisions. Furthermore, the growth in transaction fees is also an important consideration. There’s considerable support for this direction from prominent figures, and users also show great interest in it. It can be said that each market cycle change is accompanied by shifts in asset issuance methods, with the Bitcoin ecosystem and the Ordinals track being crucial in this transformation.

Are there any other tracks comparable to the Ordinals that might see explosive growth?

One track we’re keeping an eye on is FHE (Fully Homomorphic Encryption). FHE is a cryptographic technique similar to Zero-Knowledge Proofs (ZK), which has been applied by companies like Google and Apple in data encryption.

FHE is particularly suitable for handling sensitive data such as medical and health data. Its potential is significant when combined with artificial intelligence (AI) since the essence of AI lies in data processing. With FHE technology, data can be encrypted and sold to multiple parties, with each transaction generating revenue without exposing the underlying data. This means that even sensitive data can be safely traded multiple times without revealing the core information in each transaction.

Additionally, we’re also monitoring some upstream and downstream companies utilizing FHE technology, one of which is a company called Zama. This track has the potential to achieve significant accomplishments by integrating with AI in the future.