Many retail investors complain that the projects supported by venture capitalists (VCs) are all “high FDV, low circulation,” resulting in tokens facing significant unlocking risks. However, VCs also claim to be facing the “hell-like difficulty” of the primary market and are actually just paper rich. How will this game of wealth and risk develop in the future?
(Previous context:
Don’t be silly: VC dominance is not the problem; the market fears projects without wealth effects.)
(Background information:
Is the surge in VC tokens on exchanges the culprit for the market downturn? Restoring the truth with data.)
Table of Contents
VC’s “paper wealth”
Impact on retail investors
Lock-up dilemma
6 major reasons for the hell-like difficulty in the primary market
“Accumulate projects” and “big retail investors”
In this current cycle, some retail investors attribute the losses of altcoins to the token issuance strategy of “high FDV, low circulation.” They believe that VCs and project teams conspire together, leading to a massive influx of unlocked tokens impacting the crypto market.
VCs, on the other hand, claim to be innocent victims, defining the current primary market as a “hell-like difficulty.” Li Xi, a partner at LD Capital, said that this year, they have had profits on paper, but it’s all just paper value because the share belonging to VCs is still locked at 0. Apart from the “accumulated projects” VCs, most VCs are just buying in as “big retail investors.”
ChainCatcher interviewed several representatives from the VC industry to explore the current status of VCs. Many VCs state that there are six major reasons contributing to the current challenge for VCs to exit; some VCs believe that not investing in the current market environment is the best strategy.
In the current market cycle, the token issuance method of “high FDV, low circulation” has gradually become a mainstream trend, while “VC tokens” have been labeled as “risky” in the secondary market.
Previously, hitesh.eth, a co-founder of the data analysis platform DYOR, posted a set of data on X, listing the top ten typical “VC tokens” currently available in the market.
The data shows that even in a continuously declining market, major VCs still have tens or even hundreds of times the book value of these tokens in their investments.
For VC institutions, “book profit” has always been a common and objective existence. Early investors usually receive a certain percentage of tokens as rewards, which are locked according to specific time structures. This phenomenon has existed for both web2 and web3 investments, but the proportions vary in different development stages.
However, the uncertainty of unlocking also turns these profits into “paper wealth.”
Li Xi, a partner at LD Capital, openly stated that although the projects invested in by LD Capital and already launched on trading platforms show a profitable trend in their financial statements, it is actually just “paper wealth” because the share belonging to VCs is still locked at 0.
For retail investors in the secondary market, the large quantity of VC shares that remain locked triggers new panic.
Common parameters for token lock-ups include allocation ratio, lock-up time, and unlocking cycle. All these parameters only work in the time dimension. Currently, the unlocking period is determined by project teams and exchanges uniformly. In the current market environment, “unlocked tokens” become the “book profit” for VCs.
Facing “book profit,” the market has also begun to come up with countermeasures— “OTC trading.”
Loners, an investment partner at CatcherVC, said, “If the deal you invested in is good, some funds will be willing to buy your saft agreement, which is equivalent to risk transfer or early cash-out. However, the trading volume in the OTC market is still too small, and the transactions are concentrated in a few top projects.”
Loners believes that if the OTC market gradually matures and matches funds with different risk tolerances, this problem will be partially alleviated. Alternatively, a more extreme approach would be to hedge through short-selling, but many institutions do not have the experience in this area, so it is not recommended to try.
With the increasing unlocking of “VC tokens” in the market, unless there is an increase in market demand, it may bring potential selling pressure.
Loners shares the same view, stating, “For some foundational infrastructure, the unlocking can remain unchanged, giving them time to develop across cycles. But for projects on the traffic and application side, the same unlocking method should not be adopted. You need to encourage them, motivate them, and let them unlock quickly to continuously innovate for the next stage.”
Loners and Nathan hold the same opinion that the design of unlocking terms should depend on specific project types. “For important industry infrastructure, longer unlocking periods can be accepted, while many application-type projects should not have overly strict terms. Instead, they should focus on the product itself and exchange better unlocking conditions for financing efficiency.”
With the liquidity in the market gradually drying up and the return cycle in the primary market extending, more and more small and medium-sized VCs reliant on large VCs have chosen a conservative and wait-and-see attitude.
Nathan candidly states, “For small and medium-sized investment institutions, the higher the flexibility of adjustments, the less likely they are to suffer losses in this matter because you don’t need to invest in 30 or 50 projects a year for the sake of branding or spending LP’s money at a rhythm. There can’t be so many high-quality projects in the market for everyone to participate in.”
Similarly, some small and medium-sized VC institutions state that they have not participated in many primary investments this year due to overvalued and stringent investment terms. They believe that some new projects in the market do not have endorsements from major VCs and lack innovative concepts. Additionally, excessively high FDV may cause the TGE price to exceed expectations, resulting in “many institutions actually facing losses.”
As more and more small VCs exit, the market has become a battlefield where large VCs fight alone.
Despite the challenging investment environment, large VCs still need to invest due to the pressure from LPs.
Facing the current difficulty in the primary market, Nathan optimistically defines it as a “temporary and phase-specific rational existence.”
VCs believe that the challenges of “hell-like difficulty” in this investment cycle mainly stem from the following six aspects:
1. Valuation bubble and market turbulence: At the beginning of 2022, influenced by the flood of US dollars, North American VC institutions successfully raised massive funds, driving the valuation of the primary market to irrational levels. Subsequently, events such as the FTX scandal and Binance CEO CZ occurred one after another, severely disrupting financing and listing schedules, further intensifying market uncertainty.
2. Industry narrative and application deficiency: Despite the abundance of technical narratives and new asset issuance narratives, the market generally lacks application narratives that can attract users and generate practical utility. This leads to investors doubting the long-term value of projects, which in turn affects their investment decisions.
3. Restricted fund flow and stock market: The market is in a state of stock funds, with limited fund flow. Although there are inflows into ETFs, there is no inflow into the altcoin market, directly affecting market activity and project financing capabilities.
4. Dilemma of altcoins and VC coins: Altcoin prices have plummeted, while VC coins face the dilemma of massive unlocking without incremental capital absorption. This continuous decline further undermines market confidence.
5. Fund concentration and difficulty of exit: Funds are highly concentrated in a few top CEXs, and most non-popular projects fail to meet the listing requirements of these exchanges and struggle to gain favor from investment institutions, thereby increasing the difficulty of project exits.
6. Lack of hotspots and diversion of speculative capital: The current market lacks new hotspots to carry speculative capital. At the same time, when market attention is focused on higher-risk memes, it further intensifies the speculative atmosphere and volatility in the market.
Li Xi, a partner at LD Capital, summarized the current situation of VCs as “except for the ‘accumulated projects’ VCs, most VCs are just buying in as ‘big retail investors’.” This is indeed the case. Nathan defines it as a “market adjustment phenomenon under the current increasing difficulty of exiting the primary market.”
Under the current context of the increasing difficulty of exiting the primary market, “accumulated projects” have quietly emerged. “Accumulated projects” reduce the risk of VCs through “grouping” at lower valuations, making it relatively controllable.
However, “accumulated projects” are not flawless. The scarcity of excellent founding teams, severe narrative homogeneity, high trial and error costs, and the lack of direct capital exit channels are all challenges that cannot be ignored.
Nathan states, “When the primary market is particularly prosperous, it is more efficient in terms of ROI to invest directly. On the contrary, ‘accumulating projects’ will be considered.” For VCs that want long-term and stable development, the action of “accumulating projects” is not necessary, but the ability to “accumulate projects” is necessary.
Regarding “accumulated projects” and “big retail investors,” it is actually a process of market selection and self-repair. Loners states that regardless of whether it is an “accumulated project” or a serious project, the exit from a financial perspective often relies on the performance of the secondary market. However, the core of a project still lies in whether its product or service can create positive value for the industry. If a project lacks substantial contributions, even with a strong background and support, it will be difficult to maintain its market position in the long run.
Nathan states that if a large number of “accumulated projects” cannot exit due to poor quality, inability to attract capital, and being influenced by public opinion, it will naturally demotivate the “accumulated projects.” However, if the project can obtain better resources and have a reasonable valuation, why not?
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