Author: YettaS

The biggest feeling I had from attending Consensus HK this time was that VC is too difficult, which is not an exaggeration, and it forms a stark contrast with the P Marshals. Some VCs failed to raise funds for the next round, some VCs lost half of their staff, some VCs turned to strategic investment instead of independent investment, and some VCs even considered issuing Meme to raise funds...

Many VC peers also chose to leave the field, with some joining project parties and others transforming into KoLs, which seem to be more cost-effective choices. In the changing situation, everyone is looking for a new way to survive. And I'm also thinking, what's the problem with VC? How can we break the deadlock?

First, we have to admit that regardless of China or the US, the best era for VC as an investment asset class has passed. The chart below shows the return data of several Lightspeed funds, with the best fund achieving a 3.7X DPI return by investing in Snap, Affirm, and OYO in 2012 (DPI is the distributed profit index, which does not depend on valuation and measures the actual cash return), of course, it's completely incomparable to directly buying BTC, and since 2014, even breaking even has become a challenge.

Chinese VCs have also experienced a similar trajectory. Relying on the demographic dividend, the rapid growth of mobile internet and consumer internet has spawned companies like Alibaba, Meituan, and ByteDance worth hundreds of billions. 2015 was the last glorious moment, and then, tightening regulations, tightening liquidity, declining industry dividends, facing growth bottlenecks due to changes in the industrial cycle, and limited IPO exit channels have led to a sharp decline in the returns of VC firms, and a large number of practitioners have left the industry.

Crypto VCs are no exception either, as changes in the macro environment, evolution of market structure, and declining capital returns have all posed huge survival challenges for VCs.

It's all about cost and liquidity

In the past, the value chain of VC investment was clear: project parties brought innovative ideas, VCs provided strategic support and resources, KoLs amplified market voices at critical moments, and finally value discovery was completed on CEXs. Everyone provided different values at different stages and took on different risks, and received corresponding returns, which was a "relatively fair" value chain.

For example, as a VC, the value we provide has never been as simple as just investing some money in the early stage. How to help the project party connect with the key resources in the ecosystem as soon as possible to drive business development, provide timely advice when the market direction changes, help the project party adjust its strategy, and even help build the core team. And in order to have a long-term binding with the project party, not to mention when the TGE will be, even after the TGE, we also generally face one year of lockup and 2-3 years of vesting, to a large extent we all hope to play a non-zero-sum game PVE with the project party.

However, in the current market environment, the core contradiction is that liquidity is extremely scarce, market competition is intensifying, and the VC model is unsustainable.

The changing landscape of capital flow: where does the dilemma of VC come from?

The main driving force of this bull market is the US Bitcoin spot ETF and the strong entry of institutional investors. However, the transmission path of capital has undergone major changes:

1. Institutional capital mainly flows into BTC, BTC ETF, and even Index, but does not spread to the broader Altcoin market;
2. Lacking real technical/product innovation support, Altcoins cannot maintain high valuations.

This directly leads to the VC model being highly FUDed in the current market environment. Retail investors believe that VCs enjoy unfair advantages, can acquire tokens at lower costs, and have access to key market information, and this information asymmetry has led to the collapse of market trust and further depletion of liquidity. In the PvP environment, retail investors demand "absolute fairness". In comparison, the strategy of secondary funds will not be in strong opposition to market sentiment, because retail investors can also enter the market with the same tokens, after all, they have been given the opportunity of absolute fairness.

The current overwhelming FUD on VCs is a counterattack of "absolute fairness" against "relative fairness" under the tight liquidity.

The rise of Meme financing model

If I saw Meme as a cultural phenomenon last time, this time we need to see it as a completely new financing model. The core value of this financing model is:

• Fair participation mechanism: Retail investors can track information through on-chain data and obtain early tokens under a relatively fair pricing mechanism;
• Lower entry barrier: During the DeFi Summer, we supported many solo devs who drove value capture through product innovation. Now, the Meme model further lowers the threshold, allowing developers to "have assets first, then have products".

This logic itself is not problematic. Looking back, many public chains conducted TGEs without a mature ecosystem or mainnet, so why can't Meme use the same approach, first attracting enough attention and then pushing product development?

Essentially, this evolutionary path of "assets first, products later" is the sweeping of the populist capitalist wave across the entire financial ecosystem. The prevalence of attention economy, catering to the public's desire for quick wealth, breaking the monopoly of traditional financial institutions, lowering the capital threshold, and transparent information disclosure, these are unstoppable trends in the new era of populism. The GameStop retail investor battle against Wall Street, the evolution of fundraising methods from ICO to NFT to Meme, are all financial interpretations of the tidal wave of the times.

So I say, Crypto is just a microcosm of this era.

The role of VC in the new model

No financing model is perfect. The biggest problem with the Meme financing model is the extremely low signal-to-noise ratio, which brings unprecedented trust challenges:

• Extremely low signal-to-noise ratio: Fair launch makes the cost of asset issuance extremely low, and a large amount of garbage will flood in.
• Lack of information transparency: For high-liquidity Meme projects, everyone in the market can enter early, which means that whether the project will be built in the long run has become less important, what matters is how to profit in the game.
• Soaring trust cost: High liquidity means high gaming. The first day of circulation means that we have no mechanism to bind interests with the Founder to achieve long-term win-win, everyone can become opponents at any time, becoming each other's exit liquidity, this trust structure is dangerous and unsustainable.

I fully agree with what @yuyue_chris wrote about the differences in mindset of different participants:

• Those who play Meme think: Narrative > Token Structure ~ Community or Emotion > Product Technology;
• The primary market thinks: Narrative > Product Technology ~ Token Structure > Community or Emotion;

The Meme model is essentially a darker on-chain world than the VC model. Due to the lack of product and technical support, "absolute fairness" is often just a facade. Look at Libra, the cabal behind the market carefully plans each public positive news, and in the end, we become the precisely targeted victims. They can always predict your prediction, and in the highly gamified environment, the real long-term Builders become hard to discern.

I don't think VCs will disappear, because this world is full of huge information asymmetry and trust asymmetry, for example, the cooperative resources that ARC has access to are impossible for an ordinary Dev to obtain.

But facing this wave of populist capitalism, it is unrealistic for VCs to simply continue to make money by lying down and exploiting information asymmetry as in the past. Adapting to change has never been easy, especially when the market paradigm is being completely reconstructed and the methodologies that have been effective in the past are being rapidly eliminated. The rise of Meme financing is not accidental, but the result of deeper liquidity changes and trust mechanism reshaping.

When the high liquidity and short-term speculation of Meme collides with the long-term support and value empowerment of VC, how to find a balance between the two is a problem that VC must currently face. On the one hand, Primitive is grateful to have this freedom and flexibility to cope with market changes, but recognizing structural changes and transforming its investment strategy is no easy task. However, regardless of how the market changes, one thing remains unchanged - those with foresight, strong execution, and a willingness to continuously build are the excellent founders who ultimately determine long-term value.