Author: Mia, ChainCatcher
Retail investors attribute their impending losses to the token issuance strategy of “high FDV (Future Discounted Value), low circulation,” alleging collusion between VCs and project teams. The massive unlocking of tokens has shaken the crypto market.
VCs, on the other hand, cry foul, defining this phase of the primary market as “hellish difficulty.” Li Xi, a partner at LD Capital, claims profitability on paper this year, but it’s purely nominal because VC shares remain unlocked at zero. Apart from a few VCs “hoarding positions,” most are merely “bag holders.”
ChainCatcher interviewed several representatives from the VC industry to explore their current survival status.
Many VCs cite six reasons for their current predicament and express that refraining from investment in the current market environment is the best strategy.
“Nominal Wealth of VCs”
In the current market cycle, the issuance of tokens with “high FDV, low circulation” has become a mainstream trend, while “VC tokens” are labeled as risky in the secondary market.
Previously, DYOR’s co-founder hitesh.eth on X posted a dataset, listing the top ten “VC tokens” currently on the market.
Data shows that despite sustained market downturns, major VCs still show tens to hundreds of times in unrealized gains on these investments.
For VC firms, “paper profits” have long been considered a common and objective presence. Early investors typically receive a proportion of tokens as rewards, which are subject to specific lock-up periods. This phenomenon persists whether in web2 or web3 investments, though the ratios vary significantly across different developmental stages.
However, the uncertainty of unlocks also renders these gains as “paper wealth.”
LD Capital’s partner Li Xi openly states that despite the apparent profitability of projects invested in and launched on trading platforms, these seeming successes are indeed “paper wealth.” This is because VC shares remain unlocked at zero, due to their “high FDV, low circulation” strategy.
For retail investors in the secondary market, the large amount of unlocked VC shares has sparked new fears.
Common token lock-up parameters include distribution ratios, lock-up periods, and unlocking cycles, all of which function solely on a timeline basis. Currently, unlocking periods are set by project teams and exchanges unilaterally. In the current market environment, “unlocked tokens” represent VC’s “paper profits.”
Faced with “paper profits,” the market has also responded with “OTC trading.”
CatcherVC’s investment partner, Loners, states, “If your deal performs well, some funds may be willing to buy your SAFT agreements off you, effectively transferring risk or cashing out early. However, the OTC market’s trading volume is still too small, concentrated mainly in a few top projects.”
Loners believes that as OTC trading matures, matching funds with different risk tolerances may partially alleviate this issue. Alternatively, some may opt for extreme measures such as short-selling hedges, although many institutions lack the expertise for such strategies and may not recommend attempting them.
Lock-up Dilemma
Faced with the massive unlocking of “VC-linked tokens” in the current market, unless market demand increases, potential selling pressure could arise.
Loners shares a similar view, “Extended lock-up periods for project tokens and related resources, during which market expectations for project development are not met, combined with market sentiment, liquidity fluctuations, and the typical peak heat of projects during listing, may result in significant price drops after unlocking.”
Hack VC’s partner, Ro Patel, adds, “If a large proportion of tokens are locked up, affecting the token’s liquidity, this will adversely affect its price, thereby harming the interests of all holders. Conversely, if contributors do not receive adequate compensation, they may lose the motivation to continue building, ultimately damaging all holders’ interests.”
Similarly, Nathan, a partner at SevenUpDao, believes, “For some foundational infrastructure projects, maintaining the same lock-up terms allows them time to develop over cycles. However, for projects focused on traffic or applications, similar lock-ups should not be adopted. You need to encourage and incentivize them to unlock quickly to keep innovating.”
Nathan shares Loners’ view that the design of unlocking terms should be tailored to specific project types. “For industry-critical infrastructure, longer unlocking periods can be accepted, whereas for many application-based projects, overly stringent terms should be avoided, focusing more on product quality to enhance financing efficiency.”
6 Reasons for the Hellish Difficulty of the Primary Market
As market liquidity continues to dry up, the return cycle of the primary market has lengthened, prompting many small to medium-sized VCs dependent on larger VCs to adopt a cautious wait-and-see attitude.
Nathan frankly admits, “For small to medium-sized investment firms, the higher the flexibility in adjustment, the less likely they are to lose out on this matter. You don’t need to invest in 30 or 50 projects a year just to spend LP money at a rhythm for brand or branding reasons, and there is no point in all this for market financial trust.”
Some small and medium-sized VC firms also pointed out that because of their high valuation and strict investment terms, they did not take part in this year’s primary investment.
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