Musings of a Market Maker
Julia Z. , Ventures & Market-Making Partner at Caladan , has diverse experiences across early-stage startups and economics research, which informs her fundamentals-based perspective. At AlphaLab Capital, which builds technology that powers approximately $2b daily trading in digital assets, Julia leads investments and market-making services for projects at the forefront of blockchain, web3, and infrastructure. She is passionate about social impact and AlphaLab's philanthropy initiatives.
Eve #wealthwednesday Highlight 78: Julia Zhou, Ventures & Market-Making Partner - AlphaLab Capital?
What was your first-ever investment?
My first-ever investment was Shares of Starbucks that I got from being a barista there. I was 16 in high school, and back then Starbucks had an employee share option. That was my very first introduction to what is a share of a company.
How and why did you get into your space? What inspired you?
My career is what? Clayton Christensen would call “Emergent Strategy”, which means continuously experimenting with new opportunities. Not only do I just naturally gravitate toward people who are doing exciting things, but I’ve also always looked for where things are exciting and growing.?
When I graduated in 2007, iPhone and Facebook had just launched and mobile technologies were taking off. That’s the tech environment where I started. I worked for 3 early-stage tech startups between seed and series b, with 5 to 200 people. I spent most of my career increasing the revenues of those companies in a hands-on operational role. In 2018,? two of my closest friends, one with a background in tech, and one in financial markets, founded AlphaLab - a crypto-native quantitative firm. In the beginning, it was a grab bag of tasks-- from operations to recruiting to business development. Eventually, as the company grew and more opportunities emerged, I ended up in the role that I am now - Venture and Market - Making Partner.?
My career path was not intentional. I did not set out a grand plan 15 years ago to be where I am today. It was very organic and mostly about following where market opportunities are and where I can add value and my skills.
What is a quantitative firm or trading? What is AlphaLab Capital?
AlphaLab Capital Capital is primarily a market-maker, which makes it possible for people to buy and sell things easily. AlphaLab Capital is like the money changers at airports. If a person travels to different countries, imagine what it would be like without those little kiosks at the airports. You would have to run around the airport trying to find somebody who agrees to swap money with you. There could be disagreements and it would take so much time. The presence of those money changers and kiosks makes it so much easier for everybody. That's what AlphaLab Capital does in the markets. We stand ready to buy and sell. We make it possible for the market to be more liquid and just like the money changes at the airport, we earn a small spread for doing that service.
Market-making is a subset of Quantitative trading. Quantitative Trading refers to trading done through algorithms. There are no people making these trading decisions. Nobody’s sitting there and sort of clicking the buy and sell buttons. . There’s a variety of different types of strategies that sit under the umbrella of quantitative trading and market-making is one of those.
What role do you play in the wealth space and why is it important?
As a Venture and Market-Making Partner, I have two roles: First, as an asset manager we deploy capital and then earn returns on it. Second, we also fund start-ups, enabling founders to get their ideas off the ground and scale their businesses.
For Venture Capital, we’re a conduit between people who have capital and people who have ideas. It might seem that VC is new, but it’s actually ancient. If you go back to 1500 or 1400, we already had these sorts of royalties and nobles that would fund expeditions. That’s how sailors were able to explore the world and started the global shipping or trading industry. The way that those deals were done is similar to the way that Venture Capital is done.
What is the most exciting thing you’ve learned in this process of funding companies, particularly in the blockchain and finance space?
The most interesting is the concept of decentralized finance as a whole. There are certain things that we all take for granted in normal financial markets and then as the paradigm shifts, and you look backward, we wonder how we ever all lived that way.?
We currently live in a world that is dominated by fiat currency and traditional old rails for moving money around. The global financial system, based on like SWIFT and ACH,? hasn’t changed for a long time. Now, with decentralized finance, we’re looking at a future where what is considered an asset and a store value is no longer going to be determined solely by governments but by billions of individuals coming together to make decisions and validate what is an asset in a decentralized way.
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In the world of decentralized finance, is there a person or a company that’s really inspired you? And why?
One interesting thing that has happened in the past 10 to 15 years is that venture capitalists became publishing houses. Venture Capitalists now think out loud,? putting their thoughts or takes on industries where there’s a market opportunity, their thesis, whether that’s on social media or blogs. Fred Wilson was one of the pioneers and it’s been taken up by many other fantastic VCs. There are a lot of substacks that I subscribe to where I get information - Twitter is also a huge source of information.
What advice do you have for someone getting started?
In terms of investing, it is powerful to understand some key principles. There can be so much noise and information but there are certain principles that always hold true. For example, the scarcity of opportunities and the size of your capital deployment and returns are intricately linked. Outsized returns come from market opportunities that have a moat around them. In public equities, where there is no moat, it is difficult to get returns. Private equity’s returns are higher than those of public equities and Venture Capital is historically the highest-performing asset class within private equity. As you move into private equity, into VC, the amount of information asymmetry increases. People who have access to that information and deals become smaller and because of that, they are able to generate those outside returns.
What’s interesting right now is that information is flowing faster. Cryptocurrencies and early-stage projects are available to larger audiences. The laws of physics of investing are changing. One dynamic to be aware of is until cryptocurrencies were invented, in order to invest in early-stage projects or companies, you had to do it via private equity. Traditionally, private equity had high barriers to entry. You could only invest in companies once they’ve IPOed or on the stock market. Generally, companies have to have at least $100 million in revenue to IPO.
Now with crypto, you have companies that are pre-revenues or pre-product that are launching tokens. These tokens are available on the open market for anybody to buy and sell. It’s a double-edged sword, you have access to these early-stage deals that you wouldn’t have before as an average citizen but there’s an enormous amount of information asymmetry. This leads us to another principle of investing-- Investing is less about intelligence and more about discipline and effort. This includes going through a large number of deals and conducting thorough due diligence. The process of researching and understanding a potential investment can be time-consuming and requires a significant level of confidence in the investment. As an investor, it's crucial to understand your strengths and focus on them, instead of spreading yourself too thin and potentially deluding yourself into thinking you have an advantage where you do not.
How can we stay in touch?
We have a website and an active blog but the best way to connect with us is through Twitter. Follow me on Twitter @MsJuliaZhou.?
Have thoughts on this week’s topic or question for me or Julia? Post your thoughts in the comment section. Until next week.??
DISCLAIMER: The thoughts and views expressed in this video do not constitute financial or investment advice.
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