I've figured out why some crypto rounds are way too big

Welcome back to Cautious Optimism. Today is May 23rd. A big thanks to everyone who wrote in after yesterday’s inaugural edition. More, please! — Alex

Trending Up: Data center spend in Europe, Africa, Asia, North America … Nvidia’s share price after blowout earnings … official memelords … OpenAI telling the truth … the value of journalism … inflation in Mexico … crypto-friendly legislation in the United States … Xiaomi’s EV sales targets for 2024 … SaaS growth rates …

Trending Down: Cybersecurity … OpenAI’s ability to hold onto talent … Tesla’s reputation … Tesla’s sales volume in Europe … OpenAI telling the truth … copper prices … inflation in the UK … the Fed’s balance sheet … defense tech venture investment …

What The Fuck: When Trump Media and Technology Group (TMTG) group reported its first quarter earnings lots of folks mocked its results. With good reason, they were terrible. However, the scale of the Truth Social parent’s Q1 headline-generating loss was skewed by costs related to becoming a public company. What’s more useful is to consider its revenue viz its market cap.

Q1 revenue? $770,500. Market cap as of this morning? $7.88 billion. On a run-rate basis, TMTG is valued at 2556x its current annualized revenues. That’s a lot. I wonder if TMTG could even raise a Series A in today’s venture capital market with its current revenue scale and growth trends. (For reference, Reddit has a price/sales ratio of around 10, which is pricey and driven partly by hopes that its AI-related data business will boom.)

Cautious Optimism: Does not apply here, TMTG is a hot mess.

Up Next: Intuit, Workday, Netease, Autodesk, Bilibili, and Domo earnings.

• For fun, read PDD Holding’s earnings here and earnings call here. The Temu parent company is growing super fast, and is profitable as all hell. People love cheap stuff!

Chew On This

A question I keep coming back to: Why are crypto venture capital rounds often so much bigger than they need to be? For example, why did Yuga Labs raise $450 million back in 2022? The massive capital injection did not help the Bored Ape company find long-term, product-market fit after all.

A more recent example is Eigen Labs’ $100 million raise earlier this year. It’s unclear why crypto restaking requires a nine-figure investment.

Then, this week, Farcaster raised $150 million. Jason and I chatted about the round on This Week in Startups after we signed up and paid $5 to enter the self-described “sufficiently decentralized social network built on Ethereum.” The Warpcast app for the Farcaster protocol is useable enough, and we found its lack of crypto-ish onboarding requirements to be a nice touch.

Still, Dune data indicates that Farcaster’s daily active user count remains under the 100,000 mark. Yes, its DAUs are up from just a few thousand at the start of the year, but Farcaster today looks much more like a Seed-stage social network that has yet to prove it can grow outside of its early demographic niche than, say, the next Twitter. It could become the next social breakout, but it’s raising capital like it already is the next social breakout, which is weird.

Farcaster certainly has breathing room now to sort out its future. The startup said that its new capital will “support [its] work on Farcaster for many years to come.” I bet. Spending that much money will take a long time for a company with a stated full-time employee base of 12.

But if Farcaster is still small in user and employee terms, why did it raise so much? Or more precisely, why was there so much venture capital demand for its shares at this stage? Two reasons:

1. The number of consumer-facing crypto apps that could transcend the casino segment of web3 is not very large; this concentrates venture demand for shares in the crypto shops that could help take blockchain technology mainstream.

2. The amount of cash looking to invest in winning web3 deals is pretty damn large; this means that when an attractive bet comes along, there is pressure to get as much capital into the deal as possible.

Supply, demand. Hence why Paradigm, Haun, a16z crypto, and other venture firms put so much capital into Farcaster’s round, even if the company could have managed with 10% of what it just stuffed into its accounts.

Paradigm’s first fund was worth $2.5 billion. a16z’s fourth crypto fund was worth $4.5 billion. Haun Ventures raised $1.5 billion for its first fund. They have to put that capital to work. So, when a web3 product seems to have legs, well, it’s going to raise a check the size of a small city because there’s a lot of capital wagered on there being lucrative wagers to be made on the blockchain. Even if the startup in question doesn’t really need that much funding.

Liquidity Watch: The Tempus AI S-1 filing is worth reading. It’s a medical diagnostics company that anonymizes the data it collects from tests, and then sells that information. It’s also building AI tools off its data, or at it puts it, “leverag[ing] machine learning to apply an ‘intelligent layer’ onto routinely generated data to proactively identify and minimize care gaps for oncology and cardiology patients.”

It’s in debt, unprofitable, growing quickly, and SoftBank is involved. How the market prices the company could help us understand how bullish the market is on vertical AI products.

More tomorrow!