Beware of "populism" in token fundraising; crypto VCs are not as evil as you think

Author: Cobie

Original Title: 《（3，3）》

Compiled by: Linqi, Chain Catcher

For more than a year, there has been an overwhelming sentiment in the market that "evil VCs have an unfair advantage, and they have been dumping tokens on us." This sentiment has become so popular that it has turned into an effective marketing and community-building tool for crypto projects.

It's hard to blame retail investors for resonating with this populist rhetoric. It feels a bit like VCs have cheat codes. First of all, VCs have access to the best deals, making it easy for them to profit. Some VCs have different cheat codes; they simply show up at the right place at the right time, accompanied by the appropriate audacity or boldness. Finally, the SEC has given all VCs the biggest cheat code: they scare entrepreneurs into seeking funding only from professional investors.

Ordinary retail investors can only buy into overpriced IDOs or purchase on the secondary market. Most of the market is like this.

There is enough data to show that the chances of retail winning are close to zero, and it is clear that some aspects of this "game" system have been manipulated to counter ordinary people.

They don't even want to hide it, proudly posting their portfolios on their websites, bragging about making 100x returns by investing in a certain token, without realizing that the data is a downward line, and the insiders are the ultimate winners.

But in many ways, retail traders in the frog nation share the same motivations as crypto VCs, who in turn share the same motivations as crypto YouTubers: they want to make money. Their purpose in buying is to sell it to others later for a profit. Crypto VCs, anonymous investors, frog retail traders, etc. They exist in a competitive market, influenced by the same incentives.

Venture Capital Firms

Crypto VCs have two extremes: the first is legitimate co-builders and long-term thinkers who are crypto-native. They are the ones who continue to build alongside their portfolio partners and keep builders alive during bear markets.

The other extreme consists of startups that only exist under the conditions of a bubble-filled bull market. They have no theory, vision, or belief. They only fund short-term investment projects, aiming to quickly flip for profit during a bull market. They invest in things like "Polkamon." They fund technically unsound projects to buy relationships with important market participants.

This is a spectrum, so it is somewhat vague, and sometimes funds or VCs move in one way or another along this spectrum. In my view, the latter type is a demonic entity composed of sociopaths. The former type is indeed very rare.

Thanks to the excellent transparency of blockchain, you can see the positions held by VCs. For example, many "reputable" VCs sold their L1 competitor tokens too early. Some long-term diamond VCs still hold 100% of the positions they established years ago, and this investment approach is no longer about price.

Of course, you can also see which VCs funded projects that are either technically unsound or fundamentally worthless. Some projects funded by well-known VCs seem more like a joke than an investment in my view, because they know they will profit once these projects are listed on Binance. Others choose to invest only in those projects they believe have long-term value and can promote industry progress.

The main difference in the incentive structures of the two extremes of VCs is investment horizon.

If you want to maximize returns over a 20-year timeline, you need access to the top 1% of quality deals for at least the next 15 years. This means your position is extremely important in the eyes of the founders.

Since everyone can see in real-time which funds are selling, a VC's "belief" becomes a metric that retail can measure. Since retail investors are also core users of crypto protocols, the VC's standing in the eyes of founders will also be influenced by the thoughts of retail investors.

If a VC is known for frequently dumping tokens, retail will become suspicious of the projects these investors support.

However, if a VC wants to maximize their returns in 2 years, reputation becomes less important. There will be no need to seek the top 1% of quality deals over twenty years. There will be no need to care about the founders' opinions, nor will they genuinely care whether retail knows if they will immediately dump their tokens on a single market after unlocking them.

Thus, it is not surprising that late-entry VCs belong more to the latter category. These fast-money VCs entered the market after seeing others make substantial profits, inspired by this. They have no long-term belief in the industry and therefore do not need a long-term reputation.

Origin of Scams: Fundraising

In a bull market, founders can almost guarantee profits for VC investors by creating predatory token economics that favor early supporters.

Visionary and steadfast investors are willing to take on long-term risks: they accept longer investment return periods and provide generous funding for founders and projects they believe are important for shaping the future. Gaining the support of these investors is often quite difficult.

However, raising funds from profit-driven investors is much easier. A project can have multiple available levers. If a founder wants to raise $5 million, the next day, all they need is a platform, with no other preparations required.

Think of it this way.

Imagine you have the opportunity to invest in a project valued at $250 million, with your tokens locked for 4 years. They will conduct a massive airdrop, so a large supply will be distributed for free and used as incentives in the first 10 years. If you compare the project valuation, your investment could yield 20x returns. But you are taking on significant risk: no one knows what the market will look like in 4 years, no one knows if the team can deliver, and airdrop recipients may just sell it. A $250 million valuation is still quite high for a product's early proposal.

Now imagine you have the opportunity to invest in a project valued at $10 million. Most of your tokens are locked for 3 months, but you receive 20% of them on the first day. In comparison, a $10 million market cap is really small. In fact, you only need to achieve a fully diluted valuation of $50 million on the first day to sell that 20% of tokens and recover your initial investment.

Moreover, the project will conduct an IDO at a 20x price on a popular YouTuber's launchpad. This is quite a good deal. Not to mention, the project also became an advertisement video for another popular channel on YouTube, and three of the most influential people are participating in the seed round! This is lower risk because the market conditions in 3 months are easier to imagine than in 4 years, and everyone in the market holding this token has a higher cost basis than you.

In the former example, you need to be confident that this team can execute its mission and that their product is very important.

In the latter example, it feels like "a pie falling from the sky." All you need to do is hope there is enough liquidity to sell your 20%, achieving it risk-free, without needing to deeply believe in anything.

Founders can offer these "risk-free profits" to ensure they can raise funds. The information provided to the market about the quality of the team and project is zero. Investors simply apply simple math to determine that their odds are good enough.

Ordinary People

Thus, it is not surprising that populist rhetoric began to resonate with market participants. Now, projects can attract disillusioned market participants to effectively build a community. Come on, join us. To hell with lawyers, VCs, banks, and exchanges; the whole system is rigged. You can make money with us.

Community, users, and attention are the most important parts of building a crypto project. Founders find they have their own cheat codes.

But since the incentives are the same, you can also apply the extreme psychological models of VCs to any other market participants. They are all just people trying to make money with different cyclical goals.

Projects that use anti-VC rhetoric as a community growth mechanism cannot escape the influence of the market's adversarial incentive structures. When your favorite anonymous Twitter author tells you to screw the "suits," you shouldn't be surprised.

Of course, you shouldn't be surprised when your favorite YouTuber doesn't have your best interests at heart. They certainly won't bear asymmetric risks in the market for the tokens they pitch to you. It's free: you are the product.

Incentive Structures

Explaining the incentive structures behind financial products and complex crypto schemes is a superpower in a market filled with retail investors and increasingly murky token economics.

"Show me your incentives, and I will show you the results" ------ Charlie Munger

Most cryptocurrency projects, regardless of their industry or marketing style, can be simplified into useful variables for you to choose in the market. If you understand the other participants in the market and their incentives, there are no surprises.

However, crypto market participants seem to implicitly carry a significant (3,3) mentality. This is the only financial market where someone exercising their right to sell an asset is seen as a betrayal of the community.

Perhaps it comes from the same place as "wagmi" or "hodl." Or perhaps its roots lie in the reason we ultimately enter these markets: everyone is in it together, escaping the tyranny of the old power structures that bind us.

It allows bad actors to abuse these ideals, as they simultaneously fund "let them eat cake" token seed rounds while tweeting "wagmi." They don't actually believe it, but what they know is that the token economics will profit them regardless.

"Don't trust, verify" became a popular saying in Bitcoin for a reason. I believe many market participants would benefit from this mindset.

If you don't understand the economic incentives of those investors in the same field as you when making decisions, I hope your bets do not exceed what you can afford to lose.