Author ｜ Mia, ChainCatcher
Retail investors attributed the reason for losing money to the token issuance strategy of "high FDV (future discounted value), low circulation", believing that VCs and project parties conspired to unlock a large number of tokens, which impacted the crypto market.
VCs are "crying out for injustice", defining the primary market of this cycle as "hellish difficulty". Li Xi, partner of LD Capital, said that this year's books are profitable, but it's all paper value, because the shares belonging to VCs are still unlocked at 0. Except for the VCs who "assemble the game", most VCs are "big leeks" who take over.
ChainCatcher interviewed several representatives from the VC industry, trying to find out the current survival status of VC.
Many VCs said that there are six major reasons why VCs are facing exit difficulties. Some VCs said that in the current market environment, not investing has become the best strategy.
VC’s “paper wealth”
In the current market cycle, the “high FDV, low circulation” token issuance method has gradually become a mainstream trend, while “VC tokens” have been labeled as “dangerous” in the secondary market.
Previously, hitesh.eth, the co-founder of the data analysis platform DYOR, posted a set of data on X, counting the top ten typical "VC tokens" on the market.
Data shows that even when the market continues to fall, major VCs still have floating profits of dozens or even hundreds of times the book value of their investments in these tokens.
For VC institutions, "book profits" have always been common sense and objective. Early investors usually receive a certain proportion of tokens as rewards, which will be locked according to a specific time limit structure. Whether it is web2 or web3 investment, this phenomenon has always existed, but the proportion will be very different in different development stages.
However, the uncertainty of unlocking also makes this part of the income become "paper wealth".
Li Xi, partner of LD Capital, publicly stated that although the projects invested by LD Capital and launched on the trading platform all showed profitability in the financial statements, behind this series of seemingly glamorous figures, it was actually "wealth on paper", "because the VC's shares had "high FDV and low circulation" resulting in 0 token unlocking amount."
For retail investors in the secondary market, there are still a large number of VC shares that have not been unlocked, which has triggered new panic.
Common token lock-up parameters include: allocation ratio, lock-up time and unlocking period. All these parameters only play a role in the time dimension. At present, the unlocking period is a one-size-fits-all rule set by the project party and the exchange. In the current market environment, "unlocked tokens" have become VC's "book profit".
Faced with "book profits", the market has begun to come up with a response strategy - "over-the-counter OTC".
CatcherVC investment partner Loners said: "If the deal you invest in is good, some funds will be willing to buy your saft agreement, which is equivalent to risk transfer or early cashing out, but the current trading volume in the OTC market is still too small, and the transactions are concentrated in a few particularly top projects."
Loners said that if OTC trading gradually matures and matches funds with different risk tolerances, this problem will be partially alleviated. Or in a more extreme way, short short can be chosen, but many institutions do not have management experience in this area and are not recommended to try.
Lock-up Dilemma
Faced with the unlocking of a large number of "VC tokens" in the current market, unless market demand increases, it may bring potential selling pressure.
Loners shares the same view: "The unlocking period of project tokens and related resources is long. If the market's expectations for project development are not met during this period, coupled with market sentiment and liquidity fluctuations, and the high premium caused by the peak of project popularity usually concentrated in the listing stage, the token price is prone to fall if there is a lack of new capital injection after the unlocking."
Ro Patel, partner at Hack VC, said, “If the proportion of locked tokens is too large, which in turn affects the available liquidity of the tokens, this will have an adverse impact on the price of the tokens, thereby harming the interests of all holders; conversely, if contributors are not properly compensated, they may lose the motivation to continue building, which will ultimately harm the interests of all holders.”
Similarly, Nathan, partner of SevenUpDao, believes that "for some underlying infrastructure, the unlocking can remain unchanged, giving them time to develop across cycles. But for projects on the traffic side and application side, the same unlocking should not be adopted. You need to encourage and motivate them to quickly unlock and continuously innovate the next one."
Loners also holds the same view as Nathan, believing that the design of unlocking terms should be based on the specific project type. "For important infrastructure in the industry, longer-term unlocking can be accepted, while many application projects should not design particularly strict terms. Instead, they should focus on the product itself and exchange relatively good unlocking conditions for financing efficiency."
6 reasons for the difficulty of the primary market hell
As market liquidity dries up, the return cycle in the primary market lengthens, and more and more small and medium-sized VCs affiliated with large VCs have chosen a conservative wait-and-see attitude.
Nathan confessed, "For small and medium-sized investment institutions, the more flexible they are, 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 brand or to spend LP's money on a regular basis. There are not so many high-quality projects in the market for everyone to share."
Some small and medium-sized VC institutions also stated that due to overvaluation and strict investment terms, they did not participate in too many primary investments this year.
They believe that some new projects on the market are not backed by large VCs and their concepts are not innovative enough. In addition, excessively high FDV may cause the price of TGE to exceed expectations, and "many institutional investors are actually facing losses."
As more and more small VCs withdraw, the market has become a battlefield where large VCs are "fighting alone."
Due to the funding pressure from LPs, large VCs still need to invest despite the challenging investment environment.
Faced with the current investment difficulties in the primary market, Nathan optimistically defines it as "temporary and a reasonable existence for phased development."
VCs believe that the challenges of this round of investment "hell difficulty" mainly come from the following six aspects:
Valuation bubble and market turmoil: In early 2022, influenced by the dollar's easing dividend, North American VC institutions successfully raised huge amounts of funds, pushing the valuation of the primary market to an irrational level. Subsequently, events such as FTX's collapse and Binance CZ occurred one after another, seriously disrupting the market's financing and listing rhythm, further exacerbating market uncertainty.
Lack of industry narratives and applications: Although there are endless technical narratives and new asset issuance narratives, the market generally lacks application narratives that can attract users and generate actual utility. This leads investors to be skeptical about the long-term value of the project, which in turn affects their investment decisions.
Limited capital flow and stock market: The market as a whole is in a state of stock funds, and capital flow is limited. Although there is ETF inflow, it does not flow into the copycat market, which directly affects the market activity and the financing ability of the project.
The dilemma of Altcoin and VC coins: The prices of Altcoin have fallen sharply, and VC coins are facing the dilemma of unlocking a large amount of funds but no incremental funds to take over, which has led to the continuous decline of these coins and further hit market confidence.
Funding concentration and exit difficulty: Funds are highly concentrated in a few leading CEXs, and most non-popular projects cannot meet the listing requirements of CEXs and are difficult to gain the favor of investment institutions, which in turn increases the difficulty of project exit.
Lack of hot spots and shift of hot money: The current market lacks new hot spots to carry hot money. At the same time, when the market's attention is focused on riskier memes, the market's speculative atmosphere and volatility are further exacerbated.
"Gathering" VC and taking over the "big leeks"
Li Xi, partner of LD Capital, summarized the current VC situation by saying, "Except for the VCs who "group together", most VCs are "big leeks" who take over the market, which is indeed the case. Nathan defined it as "'grouping together' is a market adjustment phenomenon under the current difficulty of exiting the primary market."
In the context of the increasing difficulty of exiting the primary market, “grouping” has quietly emerged. In the form of “grouping”, “grouping” reduces the risk of VC losing money to a relatively controllable range with a lower valuation.
However, the “assembly of the game” is not flawless. There are few excellent founding teams, serious narrative homogeneity, high trial and error costs, and a lack of direct capital exit channels, all of which are challenges that cannot be ignored.
Nathan said, "When the primary market is particularly prosperous, direct investment is more efficient in terms of ROI; otherwise, people will consider 'grouping up'." For VCs that hope for long-term and stable development, "the action of 'grouping up' is not necessary, but the ability to 'group up' is necessary."
Regarding the "grouping" project and the "big leeks", it is actually a process of market selection and self-healing. Loners said that whether it is a grouping project or a serious project, from a financial perspective, the exit often depends on the performance of the secondary market. However, the core of the project still lies in whether its products or services can create positive value for the industry. If a project lacks substantial contribution, it will be difficult to maintain its market position in the long run even with a strong background and support.
Nathan said that if a large number of “assembly” projects are of poor quality, capital cannot be withdrawn, and they are swept up by public opinion, then naturally the “assembly” people will lose motivation. If this project can obtain better resources and the valuation is reasonable, why not do it?
Retail investors attributed the reason for losing money to the token issuance strategy of "high FDV (future discounted value), low circulation", believing that VCs and project parties conspired to unlock a large number of tokens, which impacted the crypto market.
VCs are "crying out for injustice", defining the primary market of this cycle as "hellish difficulty". Li Xi, partner of LD Capital, said that this year's books are profitable, but it's all paper value, because the shares belonging to VCs are still unlocked at 0. Except for the VCs who "assemble the game", most VCs are "big leeks" who take over.
ChainCatcher interviewed several representatives from the VC industry, trying to find out the current survival status of VC.
Many VCs said that there are six major reasons why VCs are facing exit difficulties. Some VCs said that in the current market environment, not investing has become the best strategy.
VC’s “paper wealth”
In the current market cycle, the “high FDV, low circulation” token issuance method has gradually become a mainstream trend, while “VC tokens” have been labeled as “dangerous” in the secondary market.
Previously, hitesh.eth, the co-founder of the data analysis platform DYOR, posted a set of data on X, counting the top ten typical "VC tokens" on the market.
Data shows that even when the market continues to fall, major VCs still have floating profits of dozens or even hundreds of times the book value of their investments in these tokens.
For VC institutions, "book profits" have always been common sense and objective. Early investors usually receive a certain proportion of tokens as rewards, which will be locked according to a specific time limit structure. Whether it is web2 or web3 investment, this phenomenon has always existed, but the proportion will be very different in different development stages.
However, the uncertainty of unlocking also makes this part of the income become "paper wealth".
Li Xi, partner of LD Capital, publicly stated that although the projects invested by LD Capital and launched on the trading platform all showed profitability in the financial statements, behind this series of seemingly glamorous figures, it was actually "wealth on paper", "because the VC's shares had "high FDV and low circulation" resulting in 0 token unlocking amount."
For retail investors in the secondary market, there are still a large number of VC shares that have not been unlocked, which has triggered new panic.
Common token lock-up parameters include: allocation ratio, lock-up time and unlocking period. All these parameters only play a role in the time dimension. At present, the unlocking period is a one-size-fits-all rule set by the project party and the exchange. In the current market environment, "unlocked tokens" have become VC's "book profit".
Faced with "book profits", the market has begun to come up with a response strategy - "over-the-counter OTC".
CatcherVC investment partner Loners said: "If the deal you invest in is good, some funds will be willing to buy your saft agreement, which is equivalent to risk transfer or early cashing out, but the current trading volume in the OTC market is still too small, and the transactions are concentrated in a few particularly top projects."
Loners said that if OTC trading gradually matures and matches funds with different risk tolerances, this problem will be partially alleviated. Or in a more extreme way, short short can be chosen, but many institutions do not have management experience in this area and are not recommended to try.
Lock-up Dilemma
Faced with the unlocking of a large number of "VC tokens" in the current market, unless market demand increases, it may bring potential selling pressure.
Loners shares the same view: "The unlocking period of project tokens and related resources is long. If the market's expectations for project development are not met during this period, coupled with market sentiment and liquidity fluctuations, and the high premium caused by the peak of project popularity usually concentrated in the listing stage, the token price is prone to fall if there is a lack of new capital injection after the unlocking."
Ro Patel, partner at Hack VC, said, “If the proportion of locked tokens is too large, which in turn affects the available liquidity of the tokens, this will have an adverse impact on the price of the tokens, thereby harming the interests of all holders; conversely, if contributors are not properly compensated, they may lose the motivation to continue building, which will ultimately harm the interests of all holders.”
Similarly, Nathan, partner of SevenUpDao, believes that "for some underlying infrastructure, the unlocking can remain unchanged, giving them time to develop across cycles. But for projects on the traffic side and application side, the same unlocking should not be adopted. You need to encourage and motivate them to quickly unlock and continuously innovate the next one."
Loners also holds the same view as Nathan, believing that the design of unlocking terms should be based on the specific project type. "For important infrastructure in the industry, longer-term unlocking can be accepted, while many application projects should not design particularly strict terms. Instead, they should focus on the product itself and exchange relatively good unlocking conditions for financing efficiency."
6 reasons for the difficulty of the primary market hell
As market liquidity dries up, the return cycle in the primary market lengthens, and more and more small and medium-sized VCs affiliated with large VCs have chosen a conservative wait-and-see attitude.
Nathan confessed, "For small and medium-sized investment institutions, the more flexible they are, 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 brand or to spend LP's money on a regular basis. There are not so many high-quality projects in the market for everyone to share."
Some small and medium-sized VC institutions also stated that due to overvaluation and strict investment terms, they did not participate in too many primary investments this year.
They believe that some new projects on the market are not backed by large VCs and their concepts are not innovative enough. In addition, excessively high FDV may cause the price of TGE to exceed expectations, and "many institutional investors are actually facing losses."
As more and more small VCs withdraw, the market has become a battlefield where large VCs are "fighting alone."
Due to the funding pressure from LPs, large VCs still need to invest despite the challenging investment environment.
Faced with the current investment difficulties in the primary market, Nathan optimistically defines it as "temporary and a reasonable existence for phased development."
VCs believe that the challenges of this round of investment "hell difficulty" mainly come from the following six aspects:
Valuation bubble and market turmoil: In early 2022, influenced by the dollar's easing dividend, North American VC institutions successfully raised huge amounts of funds, pushing the valuation of the primary market to an irrational level. Subsequently, events such as FTX's collapse and Binance CZ occurred one after another, seriously disrupting the market's financing and listing rhythm, further exacerbating market uncertainty.
Lack of industry narratives and applications: Although there are endless technical narratives and new asset issuance narratives, the market generally lacks application narratives that can attract users and generate actual utility. This leads investors to be skeptical about the long-term value of the project, which in turn affects their investment decisions.
Limited capital flow and stock market: The market as a whole is in a state of stock funds, and capital flow is limited. Although there is ETF inflow, it does not flow into the copycat market, which directly affects the market activity and the financing ability of the project.
The dilemma of Altcoin and VC coins: The prices of Altcoin have fallen sharply, and VC coins are facing the dilemma of unlocking a large amount of funds but no incremental funds to take over, which has led to the continuous decline of these coins and further hit market confidence.
Funding concentration and exit difficulty: Funds are highly concentrated in a few leading CEXs, and most non-popular projects cannot meet the listing requirements of CEXs and are difficult to gain the favor of investment institutions, which in turn increases the difficulty of project exit.
Lack of hot spots and shift of hot money: The current market lacks new hot spots to carry hot money. At the same time, when the market's attention is focused on riskier memes, the market's speculative atmosphere and volatility are further exacerbated.
"Gathering" VC and taking over the "big leeks"
Li Xi, partner of LD Capital, summarized the current VC situation by saying, "Except for the VCs who "group together", most VCs are "big leeks" who take over the market, which is indeed the case. Nathan defined it as "'grouping together' is a market adjustment phenomenon under the current difficulty of exiting the primary market."
In the context of the increasing difficulty of exiting the primary market, “grouping” has quietly emerged. In the form of “grouping”, “grouping” reduces the risk of VC losing money to a relatively controllable range with a lower valuation.
However, the “assembly of the game” is not flawless. There are few excellent founding teams, serious narrative homogeneity, high trial and error costs, and a lack of direct capital exit channels, all of which are challenges that cannot be ignored.
Nathan said, "When the primary market is particularly prosperous, direct investment is more efficient in terms of ROI; otherwise, people will consider 'grouping up'." For VCs that hope for long-term and stable development, "the action of 'grouping up' is not necessary, but the ability to 'group up' is necessary."
Regarding the "grouping" project and the "big leeks", it is actually a process of market selection and self-healing. Loners said that whether it is a grouping project or a serious project, from a financial perspective, the exit often depends on the performance of the secondary market. However, the core of the project still lies in whether its products or services can create positive value for the industry. If a project lacks substantial contribution, it will be difficult to maintain its market position in the long run even with a strong background and support.
Nathan said that if a large number of “assembly” projects are of poor quality, capital cannot be withdrawn, and they are swept up by public opinion, then naturally the “assembly” people will lose motivation. If this project can obtain better resources and the valuation is reasonable, why not do it?
