CoinWorld News Report:
Author: Mia, ChainCatcher
Retail investors attribute their losses to the token issuance strategy of “high FDV (Future Discounted Value), low circulation,” alleging collusion between VCs and project teams, with a massive unlocking of tokens causing turmoil in the crypto market.
In contrast, VCs cry foul, defining this phase of the primary market as “hellishly difficult.” Li Xi, partner at LD Capital, claims that while this year shows profits on paper, they are purely nominal due to VCs holding 0 unlocked shares. Apart from the “hoarding” VCs, most are “bagholders.”
ChainCatcher interviewed several VC industry representatives to explore the current survival situation of VCs.
Many VCs cite six major reasons for their current dilemma in exiting investments. Some VCs state that refraining from investing in the current market environment has become the best strategy.
The “paper wealth” of VCs
During 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” on the secondary market.
Previously, hitesh.eth, co-founder of the data analysis platform DYOR, posted a set of data on X, detailing the top ten “VC tokens” currently prevalent in the market.
The data indicates that despite sustained market downturns, major VCs have realized significant paper gains from these tokens, often tens to hundreds of times over.
For VC firms, “paper profits” have always been an accepted reality. Early investors typically receive a percentage of tokens as rewards, subject to specific lock-up periods. This phenomenon persists across both web2 and web3 investments, albeit with varying proportions at different developmental stages.
However, the uncertainty of token unlocking also turns these gains into “paper wealth.”
Li Xi, partner at LD Capital, publicly stated that despite projects invested in by LD Capital showing profitability on financial statements and being live on trading platforms, these apparent gains are “paper wealth” because the tokens held by VCs are still 0 unlocked.
For retail investors in the secondary market, the substantial amount of unlocked VC shares triggers new panic.
Common token lock-up parameters include distribution ratios, lock-up periods, and unlocking cycles. These parameters only function within a temporal dimension, with current unlocking periods being arbitrarily set by project teams and exchanges. Hence, “unlocked tokens” have become the “paper profits” of VCs in the current market environment.
Facing “paper profits,” the market has also responded with “off-exchange OTC” strategies.
Loners, investment partner at CatcherVC, said, “If your deal is good, some funds might be willing to buy your SAFT agreements off-exchange, effectively transferring risk or cashing out early. However, the trading volume in the OTC market is still too small, primarily focusing on a few top-tier projects.”
Loners suggested that as off-exchange trading matures and matches funds with different risk tolerances, this issue may be partially alleviated. Alternatively, more extreme measures such as short-selling hedges could be considered, although many institutions lack the management experience for such strategies and are therefore advised against attempting them.
Lock-up predicaments
With a plethora of “VC-backed tokens” unlocking in the current market, potential selling pressure may arise unless there is an increase in market demand.
Loners shared a similar view, stating, “Extended unlocking periods for project tokens and related resources may lead to a decline in token prices if market expectations for project development are not met. Additionally, market sentiment, liquidity fluctuations, and the peak hype around projects at listing stages further exacerbate this situation.”
Ro Patel, partner at Hack VC, added, “If a significant portion of locked tokens affects token liquidity, it will adversely impact token prices, thereby damaging the interests of all holders. Conversely, if contributors do not receive adequate compensation, they may lose the motivation to continue building, which ultimately harms all holders’ interests.”
Similarly, Nathan, partner at SevenUpDao, believes, “For foundational infrastructure projects, extended lock-up periods can be maintained to provide them with the time to develop across cycles. However, for projects focused on traffic or applications, the same stringent lock-up should not apply. Instead, encouraging quick unlocking can foster innovation.”
Loners and Nathan share the view that unlocking terms should be project-specific. “For crucial industry infrastructure, longer unlocking periods are acceptable, while many application projects should avoid overly strict terms, focusing more on product development to enhance financing efficiency.”
6 reasons causing primary market hellish difficulties
As market liquidity continues to dwindle, the return cycle in the primary market lengthens, prompting many small to medium-sized VCs reliant on large VCs to adopt a conservative wait-and-see approach.
Nathan frankly stated, “For smaller investment firms, the higher their flexibility in adjustments, the less likely they are to lose out because they don’t need to spend a year investing in 30 or 50 projects just to spend LP money rhythmically. There aren’t that many high-quality projects available for everyone.”
Some small to medium-sized VC firms also stated that they refrained from extensive primary investments this year due to overvaluation and stringent investment terms. They believe that many new projects lack endorsement from major VCs and innovation in concepts. Additionally, high FDVs may result in TGE prices exceeding expectations, causing actual losses for many institutional investors.
With more and more small VC firms exiting, the market has become a battlefield where large VCs fight alone due to pressure from LP contributions. Despite the challenging investment environment in the current primary market, Nathan optimistically defines it as “temporary and a rational phase of development.”
VCs identify six challenges contributing to the “hellish difficulty” of this investment cycle:
– Valuation bubbles and market volatility
– Industry narratives and application absence
– Restricted fund flow and stock market
– Altcoin and VC coin dilemma
– Fund concentration and exit difficulty
– Lack of hotspots and speculative drift
“Gathering” VCs and acquiring “large retail investors”
Li Xi of LD Capital summarized the current VC situation as “except for ‘gathering’ VCs, most are acquiring ‘large retail investors,'” which indeed reflects reality. Nathan defines “gathering” as a market adjustment phenomenon under increasing difficulties in exiting the primary market.
In the backdrop of increasing difficulties in exiting the primary market, “gathering” quietly emerged. “Gathering” mitigates the risk of VC losses by forming groups, reducing them to relatively manageable levels despite lower valuations.
However, “gathering” is not without flaws. Challenges such as scarce outstanding founding teams, severe narrative homogeneity, high trial costs, and a lack of direct capital exit channels should not be overlooked.
Nathan stated, “During peak primary market periods, the most efficient approach in terms of ROI is direct investment. Only then would ‘gathering’ be considered.” For VCs aiming for long-term stable development, the ability to “gather” is essential but not always necessary.
Regarding “gathering” projects and “large retail investors,” this is ultimately a market selection and self-repair process. Loners noted that whether it’s a “gathering” project or a legitimate one, the exit from a financial perspective often depends on the performance of the secondary market. However, the core of the project lies in whether its product or service can create positive value for the industry. Without substantial contributions, even with strong backgrounds and support, maintaining its market position in the long term is difficult.
Nathan suggested that if a large number of “gathering” projects fail due to poor quality, inability to exit capital, or public opinion, it will naturally demotivate “gatherers.” Yet, if a project can obtain better resources and maintain reasonable valuations, why not?
