Author: Mia, ChainCatcher
Edited by: Marco, ChainCatcher
Retail investors attribute their potential losses to the token issuance strategy of “high FDV (Future Discounted Value), low circulation,” alleging collusion between VCs and project teams, massive token unlocks, which have impacted the crypto market.
VCs, however, cry foul, defining this cycle in the primary market as “hellish.” LD Capital partner Li Xi states that this year’s profits are only on paper due to VCs holding 0 unlocked shares. Apart from VC hoarding, most VCs are merely “bag holders.”
ChainCatcher interviewed several VC industry representatives to explore the current survival status of VCs.
Many VCs cite 6 major reasons for their current difficulty in exiting. Some VCs state that refraining from investment is the best strategy in the current market environment.
“Paper Wealth” of VCs
In the current market cycle, the token issuance method of “high FDV, low circulation” has become a mainstream trend, while “VC tokens” are labeled as risky on the secondary market.
Previously, DYOR’s co-founder hitesh.eth posted a dataset on X, listing the ten most typical “VC tokens” currently on the market.
The data shows that despite ongoing market declines, major VCs still hold tokens with dozens to hundreds of times their initial value.
For VC firms, “paper profits” have always been a common and objective presence. Early investors usually receive a proportion of tokens as rewards, which are locked according to specific time structures. This phenomenon exists in both web2 and web3 investments, although proportions vary widely across different developmental stages.
However, the uncertainty of unlocks also turns these gains into “paper wealth.”
LD Capital partner Li Xi publicly stated that despite their projects showing profitability on financial statements, the apparent wealth is “paper rich” because VC shares remain unlocked.
For retail investors in the secondary market, the large amount of unlocked VC shares has sparked new fears.
Common token locking parameters include allocation ratios, lock-up periods, and unlocking cycles, all of which operate solely in the time dimension. Currently, unlock periods are unilaterally set by project teams and exchanges, turning “unlocked tokens” into VC “paper profits.”
Facing “paper profits,” the market has also started to adopt strategies such as “off-exchange OTC” deals.
CatcherVC investment partner Loners said, “If your deal performs well, some funds might be interested in purchasing your SAFT agreements, effectively transferring risk or cashing out early. However, the current trading volume in the OTC market is still too low, concentrated mainly in a few top projects.”
Loners added that as off-exchange trading matures and matches funds with varying risk tolerances, this issue could be partially alleviated. Alternatively, more extreme measures like short selling for hedging could be considered, although many institutions lack the management experience in this area.
Lock-Up Dilemma
Faced with a large number of unlocked “VC token” issuances on the current market, potential selling pressure may arise unless market demand increases.
Loners shares a similar view, stating, “Extended lock-up periods for project tokens and related resources, combined with unmet market expectations during these periods, along with market sentiment, liquidity fluctuations, and the peak hype phase usually concentrated at listing stages, make tokens vulnerable to price declines post-unlock.”
Hack VC partner Ro Patel noted, “If a large portion of tokens are locked up, affecting token liquidity, it will adversely impact token prices, thereby damaging the interests of all holders. Conversely, if contributors are not adequately compensated, they may lose motivation to continue building, ultimately harming all holders’ interests.”
Similarly, SevenUpDao partner Nathan believes, “For some foundational infrastructure projects, the unlock can remain unchanged, providing them with time to develop across cycles. However, for projects focused on user traffic and applications, the same unlocking policies should not apply. Encouraging rapid innovation should be the priority.”
Loners and Nathan also agree that unlock terms should be tailored to specific project types. “Industry-critical infrastructure can accept longer unlocking periods, while many application-based projects should not have overly stringent terms, focusing more on product efficiency to attract funding.”
6 Major Reasons for Primary Market Hellish Difficulty
With liquidity drying up, returns in the primary market are extending, prompting many small to medium-sized VCs dependent on large VCs to adopt a conservative stance.
Nathan candidly admits, “For smaller investment firms, higher flexibility in adjustment means less risk in this matter. Since there aren’t enough high-quality projects available to invest in, you don’t need to invest in 30 or 50 projects a year just to spend LP money at the right pace, nor can the market provide so many high-quality projects for everyone.”
Some small and medium-sized VC firms similarly state they haven’t participated much in primary investments this year due to overvaluation and stringent investment terms. They believe that some new projects lack endorsement from major VCs and are not innovative enough. Additionally, excessively high FDV may lead to TGE prices exceeding expectations, resulting in losses for many institutions.
As more small VCs exit, the market becomes a battlefield where large VCs fight alone due to LP funding pressures.
Despite the challenging investment environment in the current primary market, Nathan optimistically defines it as “temporary and a reasonable phase of development.”
VCs attribute the challenges of this investment “hellish difficulty” cycle to six main factors:
1. Bubble valuations and market volatility: In early 2022, spurred by the USD liquidity dividend, North American VC firms successfully raised substantial funds, driving primary market valuations to irrational levels. Subsequent events like FTX’s collapse and incidents involving figures like Binance’s CZ further disrupted financing and listing rhythms, exacerbating market uncertainty.
2. Industry narratives and application absence: Despite numerous technological and new asset issuance narratives, the market generally lacks applications that can attract users and generate practical utility. This skepticism about projects’ long-term value affects investor decisions.
3. Restricted fund flows and stock market conditions: The market remains in a stock of funds state, with limited fund flows. While there are ETF inflows, there is no inflow into the altcoin market, directly affecting market activity and project financing capabilities.
4. Altcoins and VC coins predicament: Altcoin prices have plummeted significantly, while VC coins face the dilemma of massive unlocks without incremental funding support, causing further market confidence erosion.
5. Fund concentration and exit difficulty: Funds are highly concentrated in a few major CEXs, while most non-popular projects struggle to meet CEX listing requirements and gain favor from investment institutions, increasing project exit difficulties.
6. Lack of hotspots and speculative capital shift: The current market lacks new hotspots to attract speculative capital. Simultaneously, attention on high-risk memes exacerbates market speculation and volatility.
“VC Hoarding” and “Bagholding Big Leeks”
LD Capital partner Li Xi’s summary of the current VC situation as “except for VC hoarding, most VCs are bagholding big leeks” holds true. Nathan defines “hoarding” as a market adjustment phenomenon amid the increasing difficulty of exiting the primary market.
With primary market exit difficulties intensifying, “hoarding” quietly rises. This collective bargaining reduces VC’s risk of losing money at lower valuations.
However, “hoarding” is not flawless. Challenges such as few outstanding founding teams, severe narrative homogeneity, high trial costs, and lack of direct capital exit channels cannot be ignored.
Nathan states, “During a booming primary market, direct investment is more efficient in terms of ROI; otherwise, ‘hoarding’ might be considered.” For VCs aiming for long-term stable development, the ability to “hoard” is necessary, but not necessarily the action itself.
Regarding “hoarding” projects and “bagholding big leeks,” Loners indicates that whether it’s a hoarding project or a legitimate project, capital exit often depends on the secondary market’s performance. However, the core of a project lies in whether its product or service can create positive value for the industry. Without substantial contributions, even with strong backing and support, maintaining market position long-term is difficult.
Nathan believes that if a large number of “hoarding” projects suffer from poor quality and cannot exit capital, influenced by public opinion, hoarders will naturally lose motivation. Conversely, if a project can access better resources and its valuation is reasonable, why not?
