The current cryptocurrency VC has started to defend its rights

Author: Deep Tide TechFlow "In the past few days, I chatted with some peers, and it seems that the VC scene in the crypto world is basically dead this round. Fortunately, we didn't invest much in the primary market but shifted our focus to the secondary market.

"Talking to market makers, they sympathize with us VCs. In the first year after a project launches, VCs can't get any tokens; only market makers do. The project and the exchange have tokens, but when the price is driven down, it's the VCs who take the blame and are mocked as 'VC tokens.'"

At a crypto event in Hong Kong, LD Capital founder Yi Lihua spoke up for crypto VCs, stating that VCs are the biggest scapegoats in this round of the crypto cycle, not only losing money but also being scolded by others.

As we enter 2024, several senior crypto VC practitioners have left their positions to join project teams or the secondary market, with only one reason: not making money.

Now, crypto VCs face multiple dilemmas: they can't find suitable investment projects, and the projects they are interested in have sky-high valuations; exiting old projects is difficult, and the entire altcoin secondary market severely lacks liquidity, with some investment projects immediately showing a paper loss of 50%-90% upon launch; even if they are lucky enough to invest in good projects, the token lock-up period is extended for years, and everything remains uncertain…

Many crypto VCs rely on external LP funding and need "brand packaging," even if they are already half-dead, they still have to pretend to be doing well.

When project teams can't obtain liquidity from the secondary market, VCs become the exit liquidity.

This round of crypto VCs is already on the path of defending their rights.

VC Rights Protection in Progress

"Do you know what despair is? It's the day ZKX launched," investor DAVID expressed his embarrassment about having participated in such a project.

The investment cost of ZKX Token was $1, but on the first day of trading, it plummeted from the opening price of $0.6 to $0.2, resulting in a direct paper loss of 80%. However, this was not the end; ZKX continued to decline, once dropping to $0.000618, nearly going to zero.

A few months ago, ZKX was considered a somewhat famous star project, a leading derivatives platform on StarkNet, having received investments from well-known institutions like GCR, Amber Group, Crypto.com, Hashkey, StarkWare, and OrangeDAO, with a total financing amount of $7.6 million.

On July 31, ZKX founder Eduard announced directly that due to the inability to find a feasible economic path, the platform would be shut down.

All investors were caught off guard, as if struck by a bolt from the blue.

Perlone Capital partner Jin Kang angrily denounced ZKX as a scam on X.

The team closed the project just six weeks after the TGE; they suddenly changed the token unlocking plan during the TGE; the actual circulating tokens exceeded the official documentation during the TGE… Jin Kang stated, "If this isn't a scam, then what is?"

Under Jin Kang's call, many ZKX investors decided to unite for rights protection. As of now, the rights protection group has gathered 42 relevant individuals, and everyone is contributing ideas.

Some investors are well aware that under the current SAFT agreement framework, it is difficult for investors to reclaim their funds, so they proposed to pressure the Starknet Foundation, hoping to obtain subsidies for investors.

During the rights protection process, some external teams also contacted investors, expressing a desire to take over and restart the ZKX platform, providing new trading methods for the existing ZKX community.

ZKX is just a microcosm of many current rights protection cases among VCs. Some investors told Deep Tide TechFlow that they have currently suspended primary investments and shifted their focus to "post-investment management," inquiring about the development status of invested projects. For projects that have no operational progress, they will engage in "rights protection" to reclaim their investment, most of which are old projects they invested in during 2022, including well-known institutions like Coinbase Ventures, which once rode the wave of concepts like the metaverse but have now lost their luster, with social media also ceasing operations…

However, rights protection is not easy…

Difficulties in Crypto Rights Protection

Rights protection in the crypto world is harder than reaching the sky.

Yi Lihua, who has years of experience in crypto rights protection, also stated that there have been many projects for which rights protection was attempted, but few succeeded.

Investing in the primary market is about being willing to gamble and accept losses, especially since most crypto primary investments adopt SAFT/SAFE contracts, with investment entities being offshore organizations like BVI, which have legal flaws. Investment institutions are spread across various countries, making it extremely difficult to rely on legal means for rights protection. For VCs, rights protection often involves collective action, uniting with other investors to exert pressure on project teams, appealing to emotions and reason, but the initiative still lies with the project teams.

Yi Lihua noted that in most rights protection cases, the founders of the project teams directly ignore you, and there's nothing you can do about it. Some founders are somewhat face-conscious and are willing to refund half, which is already quite good.

A VC partner involved in the ZKX rights protection candidly admitted that even with a common need for rights protection, the interests and demands of different institutions are too dispersed. Some VCs' investment amounts are not particularly large, and they are not willing to "go all in" to fight for this matter.

Moreover, most VCs want to maintain a basic level of dignity, so they are generally reluctant to tear their faces with project teams unless absolutely necessary.

On the contrary, individual investors who can set aside their pride and boldly pursue rights protection tend to have a higher success rate. Crypto rights protection has evolved from an initial focus on who is more reasonable to a game of "who is more shameless and persistent."

Not only VCs, but many crypto KOLs are also on the path of rights protection now.

Crypto industry practitioner ALEX once collaborated with several KOLs to participate in a KOL round for a certain crypto project.

When ALEX approached the project and expressed a desire for a refund, threatening to mobilize KOLs to FUD them otherwise, the project team cheerfully welcomed the KOLs to FUD the project, claiming it would bring attention and hype to the project.

Crypto VCs: A Vulnerable Group?

Leo Tolstoy said, "Happy families are all alike; every unhappy family is unhappy in its own way."

In the crypto industry, happy VCs are almost identical, while unhappy VCs each have their own ways of losing money.

According to some VC practitioners' descriptions, projects awaiting rights protection can be categorized into three major factions.

Projects like ZKX, which immediately fell below the issue price upon launch and subsequently announced the cessation of operations, are classified as "Rug Pull Faction."

The second category is the "Abandonment Faction," which treats listing as the endpoint and then allows the token price to plummet, crashing to the ground, with investors not receiving any tokens and already facing over 90% paper losses.

At this point, project teams often claim, "The market is bad, but we are still working," while investors wish to protect their rights but cannot find suitable "reasons," feeling helpless.

The third category is the "Zombie Faction," where project teams choose to remain dormant for a long time after fundraising, crossing one bull and bear market after another, still silent, leading people to suspect that the project teams only want to witness history in the crypto industry.

Although some of these projects may keep their social media updated to inform everyone that they are still alive, in terms of narrative, operations, and technological development, they are like zombies; despite still having a breath, they are no different from being dead.

Whether traditional VCs or crypto VCs, they all follow the 80/20 rule, where a large number of projects will fail, relying on 20% of successful projects to cover costs and generate profits.

However, in the crypto world, even if VCs hit a "good project," it is not as profitable as everyone imagines.

A certain VC partner stated that he invested in a gaming project during the seed round, which was developing well. However, after it launched on a T1 trading platform, the project team unexpectedly requested to modify the contract, claiming that it was to meet the exchange's requirements, extending the token lock-up period.

Although the current paper value is still profitable, it cannot withstand the continuous decline of altcoins, having dropped over 80% from its peak since launch. When the tokens are eventually unlocked, what the market will look like is anyone's guess. This partner lamented, "Now the VC lock-up is almost stricter than A-shares and U.S. stocks."

LD Capital partner LI XI also stated in July, "This year, all the portfolios launched by LD Capital are profitable on paper, but they are all Paper Value, with 0 unlocks. Stop saying VCs are making money. The money has all been taken by project teams and exchanges. Aside from the VCs who are organizing the rounds, most VCs are just the ones taking the losses. The primary market in this cycle is already hellishly difficult."

Not only do project teams modify lock-up conditions, but some also change the cost price of VC investment tokens, forcibly increasing costs; some project teams may even repurchase previous amounts midway. If they exit according to the latest round valuation, it would be considered decent, but some may demand a discounted repurchase…

Therefore, many VC practitioners feel that they are the vulnerable group in this industry. To use a somewhat pretentious term, in the four-way game among project teams, VCs, exchanges, and retail investors, VCs lack "leverage," have no say, and can only passively compromise.

For retail investors, VC tokens have now become a derogatory term, with investors' attitudes towards VCs shifting from following to disillusionment, and even to disgust.

According to previous research conducted by Deep Tide TechFlow, the influence of "well-known VC endorsement" in investment decisions is only 31%, even lower than KOL recommendations. For project teams, most VCs lack unique value-added contributions, and they don't even have the ability to make independent decisions, let alone lead investments. They only ask, "Which other institutions have invested in you? If xx has invested, then we will participate a little."

This year, with the primary market presenting hellish difficulties, many crypto VCs have begun to transform: some are trying to deeply engage in the incubation and construction of a project to increase their voice in the project, becoming more involved VCs; others simply abandon the primary market and shift to the secondary market…

But all the complaints may ultimately boil down to one point: the market is bad; a major bull market can resolve most conflicts.

The market needs a "Shanzhai season" to rescue the trapped crypto VCs.

It would be great if it comes, but what if it doesn't?

The crypto market is ever-changing, and besides project teams, perhaps crypto VCs also need to actively seek change.