Haseeb, Partner at Dragonfly: 13 Harsh Truths No One Will Tell You About Starting a VC Firm

Author: Haseeb , Managing Partner of Dragonfly

Compiled by: Peggy, BlockBeats

Editor's Note: Amid the recurring refrain of "crypto is dead," author Haseeb Qureshi (Managing Partner of Dragonfly) draws on his own experience to review the journey of a crypto VC from scratch to large-scale development, discussing specific issues such as fundraising, positioning, winning deals, post-investment support, and team building.

This article breaks down the operational logic of VC from a practical perspective: how to understand "non-consensus judgment" under the structure of power-law distribution of returns, how to view hit rate and heavy investment strategy, why "winning the deal" is more important than "choosing the right project", and why this is a business that requires long-term patience.

This is a direct and concrete sharing of experience for anyone who wants to understand how VCs work.

The following is the original text:

I have a bad habit: whenever I accomplish something, I can't help but write down how I did it.

We just completed fundraising for Dragonfly Fund IV, a $650 million crypto VC fund (at a time when almost half the media outlets are once again declaring "crypto is dead"). We currently manage approximately $4 billion in assets, have about 45 people in New York, San Francisco, and Singapore, and have become one of the largest VC platforms in an industry that "most people didn't make it through."

So when a few people asked me to write about how Dragonfly got to where it is today, I thought about it and said: Okay, why not?

To be honest, if someone had given me a blueprint on "how to build a VC firm from scratch" when I first started Dragonfly, it would have been incredibly valuable. But the reality is—almost no one tells you that.

Honestly, this article will probably only be useful to 0.01% of readers, so spending so much time writing it might be pointless. But whatever. If you're considering starting a VC firm, or if you happen to be like me 10 years ago—this article is for you.

When I first entered the crypto VC field, most people thought the industry was already "dead." That was in 2018, the ICO bubble had just burst, and the entire industry was in freefall. Most of the people who entered the industry with me at that time had already left.

But I've always believed that encryption is something destined to exist for a long time—it's the kind of concept that, once you truly understand it, you can never "pretend you didn't understand." So, when people ask me why I'm so optimistic about encryption, my answer is actually quite simple: if I didn't believe in it, I would have left long ago. Now it's too late for me; this optimism has spread to the back of my head.

Therefore, when Bo and I met and decided to build Dragonfly together, we didn't expect the market to be very enthusiastic. But every VC has to start from scratch.

Lesson #0: Your First Fund – You Have to Risk Your Life

For venture capitalists, there is only one lifeline: money.

To have a fund, you must first be able to raise money. If you don't have access to funds (or don't have a partner to help you raise funds), then you're not ready to start a fund yet.

For your first fund, you must first raise money from friends. Your boss, your boss's boss, anyone you know who is wealthy and influential—even if you're just a nodding acquaintance.

If your reputation isn't tied to this fund, then you're not taking enough risk. I've seen too many first-time fund managers fantasize about "preserving their reputation even if the fund fails."

This is a fantasy.

If you don't go all-in, you have absolutely no chance of success. If you fail, yes, you'll lose face and you'll lose money from some important people. But if you want any chance of success, you must use every resource at your disposal to make your first fund a success. If you're not willing to do that, then you shouldn't even be trying to build a VC firm.

Once you've secured seed funding from those who have "good reason to bet on you," you need to move on to larger pools of capital: family offices (for ultra-wealthy families), funds of funds (funds that invest in other funds), and institutional funds (university endowments, foundations, sovereign wealth funds).

It generally progresses from easy to difficult, and from low to high.

Okay, now you're starting to pitch your fund to these incredibly wealthy investors. But here's the problem: as someone running a fund for the first time, what gives you the right to manage their money?

There is only one answer: you must have a clear and articulate advantage.

Lesson #1: Find a subdivision angle where you are better than anyone else, no matter how small it is.

When we founded Dragonfly, crypto VC was still a very small field. But even so, there were already several dominant players: Polychain, Pantera, and a16z. In our eyes, they were invincible behemoths.

So, initially, we couldn't possibly lead any investments. Nobody wanted our money. We had to find a angle that could "squeeze into the funding rounds." Just like with startups, the new fund had to be focused.

The initial idea was: Bo is in Asia, and I'm in the US, so we'll create an "East-West connection." Crypto is global, and we can be a bridge between Asia and the US, helping founders on both sides access each other's markets.

This positioning isn't enough for us to be the lead investor. No founder would want "East-West Fund" to be the lead investor. But it's strategic enough to secure us a small seat—and that's enough for us to start pushing our way in.

Lesson #2: Do the dirty and hard work

As it turns out, almost no one was competing with us for this kind of East-West arbitrage. At first, I was puzzled: why wasn't anyone taking advantage of such an obvious opportunity?

Later I understood the answer: because this was just too damn painful.

This means we have to operate a fund across Asia and the United States simultaneously, with extremely high workloads every day; more coordination, more late-night Zoom calls, more language barriers, and almost no normal life.

If success could be achieved without taking this path, who would choose it? But we had no other choice. So we persevered. We worked harder than others, and we were more jet-lagged than others.

Many people imagine venture capital as an elegant profession: summer vacations, quarterly team-building skiing trips. We did none of that. No money, no time, no breathing room. The closest we came to "winter sports" was during those intense, intensive winters.

Lesson #3: Optimize Like a Startup

Once you have a starting point and are able to enter different rounds of investment, the next step is to establish a feedback loop. Investing is essentially a feedback loop, and the tighter the loop, the better.

Investors demand that startups be highly data-driven and quantifiable, but they themselves often don't do so at all.

You should record everything: your discussions, the projects you missed, use AI to record and analyze your fundraising and investment committee meetings; review the biggest deals in the industry, figure out why they succeeded, and summarize them into theory; study the great investors before you, and the commonalities of their success. Now with AI, all of this is much easier than before.

But most investors don't care about these things. They basically invest based on "gut feeling." Success depends more on their luck and how well their network works.

Luck may be useful temporarily, but it is not a strategy, nor will it compound like cold optimization.

Lesson #4: Talent is Everything

VCs generally have poor management skills, I mean organizational management. One-on-one communication, training systems, KPIs, division of responsibilities, transparency, all-hands meetings... many VCs do these most basic things terribly.

I later understood why: VCs don't "screen management capabilities" like companies do.

Poorly managed companies will eventually go bankrupt; but VC is a power-law industry. As long as a few people can generate power-law returns, the fund can survive, even if the overall management is a mess.

But in the long run, good management is an advantage in itself. It retains the best talent and allows them to grow into the next generation of core members. VCs are notoriously bad at "generational succession" and internal promotion; many partners are even afraid to hire young people smarter than themselves.

At Dragonfly, we attracted and retained a group of people who would have otherwise gone to bigger, better platforms. We gave them stability, a voice, and independence, demonstrating through our actions that we valued them—and this is a key reason why we were able to outperform our competitors.

Lesson #5: Be Foolishly Ambitious

What I find incredible is that most new VCs, when asked "What kind of organization do you want to be?", can't give a clear answer. "We want to invest in good companies and be the best partners to the founders."

Ugh. It's like an entrepreneur saying, "My goal is to maximize shareholder value."

Have a real ambition, and say it out loud.

When we were first founded, our ambition was simple: to defeat Polychain.

That's all. Back then, Polychain was the benchmark for crypto VCs. Later, when we actually started to surpass it, I realized we had to upgrade our goal: to become a Top 3 crypto fund. This goal drove us for a long time. Now, in my opinion, we're already in the Top 3, so the goal became Top 2, and then Top 1. As for where we are now, I'll leave that for the readers to decide.

Lesson #6: First pretend you did it, then you really have to do it.

With your first fund, you have no brand. So you have to use the little social endorsement you have to immediately fabricate a brand image.

We jumped into popular projects whenever possible, even if the amount was small. We collected logos and used them to exchange for more logos. In Fund I, we wrote tiny checks for many popular companies: dYdX, Anchorage, Starkware. The money was insignificant, but these names gave us the wedge to keep going.

We called ourselves a "research-driven fund." By "research," I mean writing blog posts like, "Wouldn't it be crazy if we did this?" We called it Dragonfly Research, and at the time, that was considered research.

We say we have the strongest connections in Asia. That's true in theory, but initially we didn't know what others wanted from Asia. We were telling stories and figuring things out on the ground, gradually systematizing our approach. At first, we were just pushing the story forward—and it actually worked.

Lesson #7: Trends are not your friends

Resist the temptation to chase trends. Crypto is rife with foolish fads: NFTs, TCRs, P2E, chatbot tokens, VC-backed meme coins…

Our most successful investments often come from avoiding frenzy—and investing heavily when others abandon a sector. We didn't touch Terra, Axie, or Yuga; we invested in Ethena's seed round after Terra crashed; and we invested in Polymarket before the 2024 election hype.

Each cycle has an irresistible narrative. You'll feel the pressure from the team, LPs, and Twitter. But most of the hype ultimately proves to be a waste of money.

The real challenge lies in the psychological aspect. When you turn down a project that everyone else is scrambling for, only to see its price increase fivefold the following week, you feel like a fool. But chasing trends often results in a "portfolio of projects that were popular 18 months ago"—the worst possible allocation.

Your job is to invest in things that will be important 3–5 years from now, something that hot markets almost never have.

Lesson #8: Mastering Your Distribution Capabilities

People used to say that a16z was a "media company with VC business," which was a joke then, but now it's a fact.

VC is essentially a storytelling business. You have to build an audience and make the entire team a source of information. Encourage members to build personal brands and reward them for speaking out. A VC's brand, unless you're Sequoia, is almost entirely tied to specific individuals. It's a people business.

Some funds actually ban employees from tweeting, which I find completely incomprehensible. If you expect founders to be social media savvy, why can't you be one yourself?

Lesson #9: Cultivating Power

This is a crucial step for a fund to go from a novice to a heavyweight player.

As Dragonfly gained influence, many doors began to open automatically. Exchanges, banks, market makers, and even projects we hadn't invested in would proactively seek to build relationships with us. Initially, I thought this was a distraction: why not look at new projects instead of chatting with established institutions?

Later I realized: the essence of VC is branded money. You win a deal because the founders believe your money is better than others. In reality, the money is all green.

Marc Andreessen once said: "The job of a VC is to lend their brand and power to people who don't yet have it." Therefore, you need not only a brand, but also influence. Founders want to know if you can bring them into the room and if your words carry weight.

As a fund grows, you must evolve from a simple investment institution into a platform. The best founders want more than just capital; they want you to truly help them move things forward. We built a platform team at Dragonfly, providing support from token design and exchange listings to executive recruitment. It's not sexy, and it doesn't directly generate returns, but it compoundes. Once the flywheel is spinning, it's very difficult for competitors to replicate.

Lesson #10: Almost all money comes from a very small number of transactions.

There is a simple matrix that can describe the essence of VC investment.

Many popular projects are actually deals based on "consensus correctness." That is, most people believe this company will win, and it does ultimately win. These kinds of deals are usually not bad, but it's difficult to make much money from them because they are often already heavily bid on by the market, driving up the price significantly.

Almost all the money you actually make comes from those "non-consensus but correct" trades. The reason is that these trades are often structurally undervalued in terms of pricing, and the probability of getting a return of 100 times or more almost entirely comes from this.

Venture capital returns follow a power-law distribution, and mathematics is ruthless. In a typical fund, the returns from the first three projects often exceed the sum of all other projects. This means that the vast majority of your trades, individually, are not significant. What truly matters is whether you bet on those one or two projects that define the entire fund's lifecycle.

This leads to a counterintuitive conclusion: your hit rate is almost unimportant. What truly matters is how many "powerful" hits you land. Therefore, when looking at any project, you should ask yourself: Is it possible for it to become a "fund-returner"?

If the answer is no, then why would you make this investment?

And there's that equally harsh conclusion: consensus trading almost never produces this result. If everyone thinks a project is great, the price has already factored that in, and your upside potential is capped. Truly groundbreaking investments are often those projects that other smart people would think you're a fool to invest in.

Lesson #11: If you can't win this trade, everything before is meaningless.

The VC value chain can be broken down into four stages: Sourcing => Selection => Winning => Supporting.

Finding projects is the first step for a new VC. You must build a truly sustainable engine for finding projects.

Judgment is what most people consider the most important ability ("selecting items"), but in reality, it only accounts for a small part of the whole game.

Winning the deal is the most crucial element. Even if you have the world's best sources of projects and the sharpest judgment, it all means nothing if the founders choose someone else. At the highest levels of venture capital, the truly scarce resource is "entry opportunity." The best founders are often oversubscribed, and they can freely choose their investors. Therefore, you must give them a reason to choose you. This brings us back to brand, platform capabilities, and the relationships and reputation you've built over the years—all the previous lessons ultimately converge here.

Post-investment support is the final step, but it also reinforces the earlier steps of "finding projects" and "winning deals." Support determines your NPS (Net Promoter Score) and the sustainability of this cycle. If you truly stand by the founders, they become your best salespeople: introducing you to the next great founder and endorsing you in small groups. This industry is small and closed, and reputations spread extremely quickly. An angry founder can ruin a dozen or so of your future deals; while a truly satisfied founder can open doors for the next decade.

Lesson #12: Venture Capital is a Business of "Slow and Steady Wealth"

You will see many people rise rapidly in this industry, becoming meteoric successes.

You have to outlast them. Some people make money too fast and too much; some get lazy and start to believe they "should be this successful." The crypto industry is particularly ruthless in this regard. Every cycle creates a group of people who become rich overnight; and in every cycle, most of them disappear. Traders who made 50x returns retreat to Lisbon; founders who raised funds at absurd valuations quietly shut down their companies. Ultimately, the tourists all leave.

You're not a tourist. In venture capital, measuring progress takes many years. There's no such thing as "overnight success." Much of the value in your fund will likely remain unrealized years later. This means you yourself become the embodiment of that famous New York Times article—

That's okay.

Your job is to steer the ship steadily. Debris, wreckage, high tide, low tide—these will all happen. You must always be there, with your team, with your founders, with the entire ecosystem. Your compensation is to serve as long-term capital.

Therefore, it must be done in the long term.

Lesson #13: When fundraising is going smoothly, go for fundraising.

Just as founders hate fundraising, so do VCs, and it's not an easy task for them either.

Fundraising as a VC and fundraising for founders are completely different cultural systems. I come from a middle-class background. When I was a professional poker player, I thought I had met "rich people." Later I realized—we were not even in the same league.

Fundraising is an art in itself, and it is highly dependent on who you are dealing with.

Fundraising from family offices is fundamentally about relationships. These are multi-generational wealthy families, each with its own unique operating logic, and building trust takes time. They heavily rely on social endorsement.

Institutional funds and funds of funds are a different breed altogether: process-oriented, due diligence-intensive, and more interested in forms than dinner. They want to see performance, processes, and a sustainable advantage.

To become a truly excellent fundraiser, you must learn to speak both languages ​​fluently.

But generally speaking, there's only one prerequisite for successful fundraising: you have to be online or already have returns; if you don't have returns yet, then you have to tell a really good story explaining where the returns will come from.

Finally, and most importantly: timing is everything.

LPs almost always buy high and sell low. So you should do the opposite. The principle sounds simple, but it's extremely painful to put into practice.

Your best fundraising window often appears when the market is at its hottest and LPs are most excited—which is precisely when you should be most cautious about your investment strategy. Conversely, when the market hits rock bottom and everyone is depressed, that's when LPs least want you to invest—but that's exactly the mistake.

The top-tier VCs have learned to raise funds when conditions are best and to invest when asset prices are at their peak. And these two things almost never happen simultaneously.

These are some of the lessons I learned while building Dragonfly. I've certainly missed some, and there are undoubtedly many more lessons I haven't yet learned.

Building a VC firm is a business with constantly evolving rules. Each cycle brings a new set of roles, and there will always be mistakes you could have completely avoided, yet they still lurk around the corner.

But the underlying principles remain unchanged: stake your reputation; find your strengths; do the dirty work that others are unwilling to do; hire people who are better than you and treat them well; and—be patient.

Venture capital ultimately rewards those who persevere long enough to see the other end of the cycle.

This is certainly not "the ultimate answer to how to build a VC." But it's the kind of article I really wish someone had written for me back then. I hope it's helpful to you. If you're doing something cool in the crypto space, feel free to reach out and chat with me.

Disclaimer: This article does not constitute any investment advice. Setting up a VC fund is difficult, and you'll likely fail. But who knows—maybe you should still give it a try.

Good luck.