VCs who are locked in 'paper wealth' and encounter the 'hell difficulty' cycle

Retail investors attribute the reason for losing money to the token issuance strategy of "high FDV (future discounted value), low circulation". They believe that VCs and project parties colluded to unlock a large number of tokens, which impacted the encryption market.

The VCs are "crying injustice" and defining the primary market of this cycle as "hell difficulty". Li Xi, a partner of LD Capital, said that this year's books are all profitable, but all of them are paper values, because they belong to The VC share is still unlocked at 0. Except for the VCs who are "building games", most VCs are "big leeks" who take over the business.

ChainCatcher interviewed many representatives of the VC industry to try to find out the current survival situation of VC.

Many VCs said that there are 6 major reasons why VCs currently face exit difficulties. Some VCs said that in the current market environment, not investing has become the best strategy.

VC's "paperwealth"

In the current market cycle, the "high FDV, low circulation" token issuance method has gradually become a mainstream trend, and "VC Tokens" are labeled as "dangerous" in the secondary market.

Previously, Lianchuang hitesh.eth of the data analysis platform DYOR posted a set of data on X, counting the top ten typical "VC tokens" currently on the market.

Data shows that even when the market continues to decline, the book value of major VC investments in these tokens still has a floating profit of dozens or even nearly a hundred times.

For VC institutions, "book profits" have always been common sense and objective. Early investors usually receive a certain proportion of tokens as feedback, and these tokens will be locked according to a specific time limit structure. Regardless of investment in web2 or web3, this phenomenon has always existed, but the proportion will be very different at different stages of development.

However, the uncertainty of unlocking also makes this part of the income “paper wealth”.

Li Xi, a partner of LD Capital, publicly stated that although the projects invested by LD Capital and listed on the trading platform all show profitability in the financial statements, behind this series of seemingly glamorous numbers is actually "paper wealth" , "Because the shares belonging to VC have "high FDV and low circulation", the amount of token unlocking is still 0."

For retail investors in the secondary market, there are still a large number of VC shares that have not been unlocked, which triggers new panic.

Common token locking parameters include: distribution ratio, locking time and unlocking period. All these parameters only play a role in the time dimension. Currently, the unlocking period is set by the project team and the exchange across the board. For the current market environment, "unlocked tokens" have become VC's "book profits".

Faced with "book profits", the market has also begun to develop a response strategy - "over-the-counter OTC".

CatcherVC investment partner Loners said: “If the deal you invest in is not bad, there will be some funds willing to purchase the saft protocol in your hand, which is equivalent to risk transfer or cashing out in advance, but the current transaction volume in the OTC market is still "It's too small, and the transactions are concentrated in a few special top projects."

Loners said that if over-the-counter trading slowly matures and matches funds with different risk tolerances, this problem will be partially alleviated. Or more extreme, you can also choose the form of short-selling hedging, but many institutions do not have management experience in this area and it is not recommended to try it.

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 also holds the same view: "The unlocking period of project tokens and related resources is long. During this period, if the market's expectations for project development do not meet the standards, coupled with market sentiment, liquidity fluctuations, and the peak of project popularity, it is usually concentrated in the listing stage. The high premium makes it easy for the token price to fall if there is a lack of new capital injection after the project is unlocked. "

Hack VC partner Ro Patel said, "If the proportion of locked tokens is too large, it will affect the availability of the tokens. Liquidity, which will adversely affect the price of the token, thereby harming the interests of all holders; conversely, if contributors are not properly compensated, they may lose the incentive to continue building, which ultimately will harm the interests of all holders."

Similarly, SevenUpDao partner Nathan believes, “For some underlying infrastructure, the unlocking can remain unchanged, giving them time to develop across cycles. But for projects that focus on the traffic side and application side, the same unlocking should not be adopted , you need to encourage them, motivate them, and let them quickly unlock the next innovation."

Loners also holds the same view as Nathan, believing that the design of unlocking terms should be based on specific project types. “For important infrastructure in the industry, longer-term unlocking can be accepted, while for many application projects, the design should not be particularly stringent. Instead of focusing on the product itself, we should exchange for relatively better unlocking conditions for financing efficiency."

6 major reasons for the difficulty of primary market hell

As market liquidity dries up, the returns on the primary market will increase. The rate cycle is lengthening, and more and more small and medium-sized VCs who are attached to large VCs have chosen a conservative wait-and-see attitude.

Nathan confessed, “For small and medium-sized investment institutions, in fact, the higher the flexibility of adjustment, the less likely they are to suffer losses in this matter, because you don’t need to go out for the sake of the brand or to spend the LP money according to the rhythm. If we invest in 30 or 50 projects a year, there will not be so many high-quality projects in the market for everyone to share.” Some small and medium-sized VC institutions also said that due to excessive valuations and strict investment terms. , did not participate in too many primary investments this year.

They believe that some of the new projects currently on the market are not endorsed by big VCs and the concepts are not innovative enough. In addition, the excessively high FDV may also make the price of TGE exceed expectations. "Many institutional investments are actually facing losses."

As more and more small VCs withdraw, the market has become a battlefield where large VCs “fight alone”.

Due to the investment pressure from LPs, large VCs still need to invest despite the difficult investment environment.

Facing the current investment difficulty in the primary market, Nathan optimistically defined it as “temporary and a reasonable existence of staged development”.

VCs believe that the "hell difficulty" challenges of this round of investment mainly come from the following 6 aspects:

• Valuation bubble and market turmoil: In early 2022, affected by the US dollar water dividend, North American VC institutions successfully raised huge amounts Funds have pushed primary market valuations to soar to irrational levels. Subsequently, FTX thunderstorms, Binance CZ and other incidents occurred one after another, seriously disrupting the market's financing and listing rhythm, and further exacerbating market uncertainty.
• Lack of industry narratives and applications: Although technology narratives and new asset release narratives emerge in endlessly, the market generally lacks application narratives that can attract users and produce actual utility. This causes investors to be skeptical about the long-term value of projects, which in turn affects their investment decisions.
• Restricted capital flow and existing market: The market as a whole is in a state of existing capital, and capital flow is restricted. Although there is an inflow of ETFs, there is no inflow into the copycat market, which directly affects the activity of the market and the financing capacity of the project. .
• The dilemma between altcoins and VC coins: The prices of altcoins have fallen sharply, and at the same time, VC coins are facing the dilemma of large amounts of unlocking but no incremental funds, which has led to the continued decline of these currencies and further undermined market confidence.
• Difficulty of capital concentration and exit: The capital end is highly concentrated in a few leading CEXs, while most non-popular projects cannot meet the currency listing requirements of CEXs and find it difficult to gain the favor of investment institutions, thus increasing the exit of projects. Difficulty.
• Lack of hot spots and deviation of hot money: The current market lacks new hot spots to carry hot money. At the same time, when the market attention is focused on higher-risk memes, it further intensifies the speculative atmosphere and volatility of the market.

"Set up" VCs and take over "Big Leeks"Li Xi, a partner at LD Capital, summed it up by saying, "Except for "Save up" VCs, most VCs are "Big Leeks" who take over. The current VC status quo, and this is indeed the case. Nathan defines it as "'sit-up' is a market adjustment phenomenon due to the increasing difficulty of exiting the primary market. ”

Under the current background of increasingly difficult exit from the primary market, “gambling” has quietly emerged. In the form of "grouping", "building a game" reduces the VC's risk of losing money to a relatively controllable range with a lower valuation.

However, "building a game" is not without flaws. There are few outstanding founding teams, serious homogeneity of narratives, high trial and error costs, and a lack of direct capital exit channels. These 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, 'gambling' will be considered." For VCs who hope for long-term and stable development, "The action of 'building a game' is not necessary, but the ability of 'building a game' is necessary."

Regarding the "game-building" project and "Big Leek", it is actually a process of market selection and self-repair, Loners He said that whether it is a Zanju project or a serious project, from a financial perspective, 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, even if it has strong background and support, it will be difficult to maintain its market position in the long term.

Nathan said that if a large number of "stacking" projects are of poor quality and capital cannot exit and are swayed by public opinion, it will naturally make those "stacking" lose motivation." And if this project can obtain better resources, The valuation is also reasonable, why not?

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