Author: Mia, ChainCatcher
Original Editor: Marco, ChainCatcher
Retail investors attribute their losses to the token issuance strategy of “high FDV (Future Discounted Value) and low circulation,” suspecting collusion between VCs and project teams. The substantial unlocking of tokens has shaken the crypto market.
VCs, however, plead innocence, labeling this period in the primary market as “hellish difficulty.” Li Xi, partner at LD Capital, notes profits on paper this year are substantial but illusory due to VC shares still being unlocked. Apart from cautious VCs, most are merely “bagholders.”
ChainCatcher interviewed several VC representatives to understand their current survival status.
Many VCs cite six main reasons for their current struggle with exits. Some VCs argue that refraining from investing in the current market environment is the best strategy.
“Paper Wealth” of VCs
In the current market cycle, the issuance of tokens with “high FDV and low circulation” has become a prevailing trend, while “VC tokens” are tagged with a “high-risk” label on the secondary market.
Previously, hitesh.eth from the data analytics platform DYOR posted a dataset on X, listing the top ten typical “VC tokens” currently in circulation.
Data reveals that despite ongoing market downturns, major VCs still report dozens to hundreds of times returns on their token investments on paper.
For VC institutions, “paper profits” are a conventional and objective reality. Early investors typically receive tokens as rewards, subject to specific lock-in periods. This phenomenon spans both web2 and web3 investments, though ratios vary across developmental stages.
However, the uncertainty of these unlocks turns these gains into “paper wealth.”
Li Xi of LD Capital publicly acknowledges that despite profits reflected in the financial statements of projects invested in and launched on trading platforms, the apparent prosperity is fragile. This is because the high FDV and low circulation lead to zero unlocks for VC tokens.
For retail investors in the secondary market, the large amounts of unreleased VC shares provoke new waves of panic.
Common token lock-up parameters include distribution ratios, lock-up periods, and unlock cycles—all temporal factors. Currently, the unlocking period is arbitrarily set by project teams and exchanges, turning “unreleased tokens” into VC “paper profits.”
To counter “paper profits,” the market has also resorted to “off-exchange OTC” strategies.
Loners, investment partner at CatcherVC, explains, “If you’ve invested in a good deal, some funds might be interested in buying your SAFT agreements, effectively transferring risk or cashing out early. However, the current OTC market volume remains too small and concentrated in a few top-tier projects.”
Loners suggests that as off-exchange trading matures and matches funds with varying risk appetites, some relief may be found. Alternatively, more extreme measures like hedging through short selling are possible, though not recommended due to the lack of institutional experience in this area.
Lock-up Dilemma
Facing the large-scale unlocking of “VC token” on the current market, potential selling pressure may emerge unless demand increases.
Loners shares a similar view, stating, “Extended unlocking periods for project tokens and associated resources often lead to market disappointment if projects fail to meet development expectations. Coupled with market sentiment, liquidity fluctuations, and the peak popularity of projects during listing, token prices can drop post-unlocking without new capital infusion.”
Ro Patel, partner at Hack VC, adds, “An over-concentration of locked tokens can impair token liquidity, negatively affecting all holders’ interests. Conversely, if contributors don’t receive adequate compensation, they may lose the drive to continue building, which also harms all holders’ interests.”
Similarly, Nathan, partner at SevenUpDao, believes, “Long-term unlocking should remain unchanged for some foundational infrastructure projects to allow sufficient development time across cycles. However, for projects focused on user traffic and applications, stricter unlocking terms are inappropriate. These projects need encouragement and incentives to innovate quickly.”
Nathan and Loners agree that unlocking terms should vary by project type. “For crucial industry infrastructure, longer unlocking periods may be acceptable. For many application-oriented projects, overly stringent terms hinder financing efficiency, requiring a focus on product quality for better unlocking conditions.”
6 Reasons for Primary Market Hellish Difficulty
With dwindling market liquidity, prolonged cycles of returns in the primary market have led many medium and small VCs reliant on large VCs to adopt a cautious wait-and-see approach.
Nathan explains, “For smaller investment firms, higher flexibility reduces risks in such scenarios. You don’t need to invest in 30 or 50 projects a year just to follow LPs’ fund distribution rhythm, especially when there aren’t enough high-quality projects available.”
Some small to medium-sized VC firms have refrained from significant primary investments this year due to overvaluation and stringent investment terms. They argue that new projects lack endorsement from major VCs and lack innovative concepts, causing many investments to face losses due to unexpectedly high FDV at TGE.
As more small VCs withdraw, the market becomes a battlefield where large VCs fight alone under pressure from LPs to invest despite challenging conditions.
Despite the difficulties in the current primary market investment, Nathan optimistically defines it as a “temporary and phase-dependent rational existence.”
VCs identify six main challenges contributing to this cycle of “hellish difficulty” in investments:
1. Bubble valuation and market volatility: In early 2022, thanks to USD liquidity, North American VC firms raised substantial funds, driving primary market valuations to irrational levels. Subsequent events like the FTX crash and issues with Binance’s CZ severely disrupted market financing and listing schedules, further intensifying market uncertainty.
2. Industry narratives and application absence: Despite abundant technological and new asset issuance narratives, the market generally lacks applications that attract users and generate practical utility. This skepticism toward the long-term value of projects influences investment decisions.
3. Restricted fund flow and stock market: The market remains in a state of stock funds, with restricted fund flows. Although there are ETF inflows, there are no inflows into the cottage market, directly affecting market activity and project financing capabilities.
4. Altcoins and VC coins dilemma: While altcoin prices have plummeted, VC coins face the dilemma of extensive unlocking without incremental funding reception, leading to continued declines and further undermining market confidence.
5. Capital concentration and exit difficulty: Funds are highly concentrated in a few top CEXs, making it difficult for most non-popular projects to meet CEX listing requirements or gain favor from investment institutions, thereby increasing project exit difficulties.
6. Lack of hot spots and retail shifts: The current market lacks new hot spots to accommodate retail shifts. Meanwhile, focusing on high-risk memes further exacerbates market speculation and volatility.
“Pooling” VCs and bagholding “big leeks”
Li Xi of LD Capital characterizes the current VC landscape as being dominated by “pooling” VCs and big leeks, with Nathan defining “pooling” as a market regulatory phenomenon amid increasing difficulties in exiting the primary market.
Under the backdrop of escalating difficulties in exiting the primary market, “pooling” has quietly emerged. Operating in clusters reduces the risk of VC losses to manageable levels under lower valuations.
However, “pooling” is not flawless. Issues such as scarce excellent founding teams, severe narrative homogenization, high trial costs, and lack of direct capital exit channels must not be ignored.
Nathan suggests, “During periods of intense primary market activity, it’s more efficient to invest directly in terms of ROI. Conversely, pooling becomes a consideration.” For VCs aiming for long-term stable development, the ability to pool is essential, even if not always necessary.
Regarding “pooling” projects and “big leeks,” Loners indicates that whether it’s pooling projects or legitimate projects, financial exits often depend on the performance of the secondary market. Nonetheless, the core of a project lies in whether its product or service can create positive value for the industry. Without substantive contributions, even with strong backgrounds and support, maintaining market position in the long term proves challenging.
Nathan notes, “If a large number of pooling projects fail to exit due to poor quality and become entangled in public opinion, pooling participants will naturally lose motivation. If a project can access better resources and has reasonable valuation, why not?”
