Author: Mia, ChainCatcher
Retail investors attribute their losses to the token issuance strategy of “high FDV (Future Discounted Value), low circulation,” believing that VCs and project teams collude, resulting in a substantial unlock of tokens that have impacted the cryptocurrency market.
VCs, however, plead innocence, defining this cycle of primary markets as “hellish difficulty.” Li Xi, partner at LD Capital, stated that this year’s profits are on paper only, as the shares belonging to VCs remain unlocked. Apart from VCs who accumulate, most are merely “greater fools” buying in.
ChainCatcher interviewed several representatives from the VC industry to explore their current survival status.
Many VCs cite six main reasons for their current difficulty in exiting. Some VCs express that abstaining from current market investments has become the best strategy.
The “paper wealth” of VCs
In the current market cycle, the issuance of tokens with “high FDV, low circulation” has gradually become a mainstream trend, while “VC tokens” have been labeled with a “dangerous tag” in the secondary market.
Previously, hitesh.eth, co-founder of the data analytics platform DYOR, posted a set of data on X, listing the top ten “VC tokens” currently on the market.
The data shows that despite sustained market declines, major VCs still record tens to hundreds of times the book value in profits from these tokens.
For VC firms, “book profits” have always been a common and objective presence. Early investors typically receive a certain percentage of tokens as rewards, which are subject to specific lock-up periods. This phenomenon exists in both web2 and web3 investments, although the ratios vary significantly across developmental stages.
However, the uncertainty of unlocks also turns these gains into “paper wealth.”
Li Xi, partner at LD Capital, publicly stated that although projects invested in by LD Capital and already launched on trading platforms show a profit trend on financial statements, this seemingly glamorous series of figures is indeed “paper wealth,” due to VC shares being at 0 unlock.
For retail investors in the secondary market, the significant amount of unlocked VC shares triggers new panic.
Common token lock-up parameters include distribution ratios, lock-up periods, and unlocking cycles. All these parameters solely function within a time dimension. Currently, unlocking periods are determined by a one-size-fits-all approach between projects and exchanges. In the current market environment, “unlocked tokens” represent VC “book profits.”
Faced with “book profits,” the market has also begun to adopt countermeasures— “off-exchange OTC.”
CatcherVC investment partner Loners stated, “If your deal performs well, some funds might be willing to buy your saft agreements off-exchange, effectively transferring risk or cashing out early. However, the OTC market’s trading volume is still too small and concentrated on a few top projects.”
Loners mentioned that as off-exchange trading matures and matches funds with different risk tolerances, this issue may be partially mitigated. Alternatively, more extreme measures like short hedging are possible, although many institutions lack the management experience and thus are not recommended to attempt.
Lock-up predicament
Faced with the massive unlocking of “VC tokens” on the current market, potential selling pressure may arise unless there is increased market demand.
Loners shares the same view, stating, “With the long unlocking period for project tokens and related resources, if market expectations for project development are not met during this time, combined with market sentiment, liquidity fluctuations, and the peak project heat typically concentrated around listing phases, token prices may drop post-unlocking.”
Hack VC partner Ro Patel said, “If the proportion of locked-up tokens is too high and affects the token’s liquidity, it will adversely affect all holders’ interests. Conversely, if contributors do not receive appropriate compensation, they may lose the motivation to continue building, ultimately damaging all holders’ interests.”
Similarly, Nathan, partner at SevenUpDao, believes that for some foundational infrastructure projects, maintaining the existing lock-up may provide them with the time to develop over cycles. However, for projects more focused on traffic and applications, a similar lock-up should not be adopted. Instead, encouraging and incentivizing rapid unlocking for innovation should be prioritized.
Loners and Nathan also share the opinion that the design of unlocking terms should be tailored to specific project types. “For critical industry infrastructure, a longer unlocking period can be accepted, whereas many application projects should not have overly stringent terms, focusing more on the product itself to achieve better financing efficiency.”
6 reasons for the hellish difficulty of primary markets
With the gradual depletion of market liquidity, the return cycle of primary markets has extended. Many small and medium-sized VCs, dependent on large VCs, have opted for a conservative wait-and-see approach.
Nathan candidly admits, “For small and medium-sized investment institutions, the higher the flexibility of adjustment, the less likely they are to lose out on this matter because they do not need to spend LP money in a rhythmic manner for branding purposes, investing in 30 or 50 projects a year, which are not feasible with so many quality projects available in the market.”
Some small and medium-sized VC institutions also state that due to overvaluation and stringent investment terms, they have not participated significantly in primary investments this year.
They believe that some new projects on the market lack endorsement from major VCs and are not innovative enough conceptually. Moreover, the high FDV may lead to TGE prices exceeding expectations, resulting in actual losses for many institutional investors.
As more small VCs withdraw, the market becomes a battlefield where large VCs fight alone due to the pressure from LP contributions. Despite the challenging investment environment, large VCs still need to invest.
Faced with the investment difficulty in the current primary market, Nathan optimistically defines it as “temporary and a reasonable existence in the phase development.”
VCs believe that the challenges of “hellish difficulty” in this investment cycle mainly stem from the following six aspects:
1. Bubble valuations and market volatility: In early 2022, due to the impact of the USD liquidity dividend, North American VC institutions successfully raised substantial funds, driving primary market valuations to irrational levels. Subsequently, events such as FTX’s collapse and incidents involving figures like CZ from Binance have severely disrupted the market’s financing and listing pace, further exacerbating market uncertainty.
2. Industry narratives and lack of applications: Despite the abundance of technical and new asset issuance narratives, the market generally lacks narratives that can attract users and generate practical utility. This skepticism towards the long-term value of projects affects investment decisions.
3. Restricted fund flows and stock market: The market is in a state of stock market capitalization, with restricted fund flows. While there are ETF inflows, they do not flow into the altcoin market, directly affecting market activity and project financing capabilities.
4. Altcoins and VC coins’ dilemma: The prices of altcoins have plummeted significantly, while VC coins face the dilemma of large-scale unlocking without incremental funding to support them, causing these currencies to continue to decline and further undermining market confidence.
5. Fund concentration and exit difficulties: Funds are highly concentrated in a few top CEXs, and most non-popular projects cannot meet CEX listing requirements or gain favor from investment institutions, increasing project exit difficulties.
6. Lack of hotspots and speculative shifts: The current market lacks new hotspots to carry speculative funds. Moreover, when market attention focuses on high-risk memes, it further intensifies market speculation and volatility.
“Accumulation” VCs and picking up “greater fools”
LD Capital’s partner Li Xi summed up the current VC situation as “aside from ‘accumulation’ VCs, most are picking up ‘greater fools’,” and indeed, this is the case. Nathan defines this as a market adjustment phenomenon amidst the increasing difficulty of exiting the primary market.
Under the backdrop of increasing difficulty in exiting the primary market, “accumulation” has quietly emerged. “Accumulation,” in the form of “group-hugging,” reduces the risk of VC’s losses to a relatively controllable range with lower valuations.
However, “accumulation” is not without flaws. Issues such as few outstanding founding teams, severe narrative homogeneity, high trial costs, and lack of direct capital exit channels should not be overlooked challenges.
Nathan states, “During the boom of the primary market, the more efficient approach from an ROI perspective is direct investment; conversely, ‘accumulation’ is considered only when the market is less favorable.” For VCs aiming for long-term and stable development, the ability to “accumulate” is necessary, although the action itself may not always be.
Regarding “accumulation” projects and “greater fools,” it is actually a market selection and self-repairing process. Loners states that whether it is an “accumulation” project or a legitimate project, the exit from a financial perspective often depends on the performance of the secondary market. However, the core of the project still lies in whether its product or service can create positive value for the industry. If the project lacks substantial contribution, despite strong background and support, it will struggle to maintain its market position long-term.
Nathan adds that if a large number of “accumulation” projects cannot exit due to poor quality and are caught up in public opinion, it will naturally demotivate “accumulators.” However, if these projects can access better resources and have reasonable valuations, why not?
