The Predicament of VC: Liquidity Transformation and Trust Mechanism Restructuring

Author: YettaS

The biggest takeaway from this trip to Consensus HK is that VC is extremely difficult right now; saying it's a lamenting scene would not be an exaggeration, especially in stark contrast to the P marshals. Some VCs are unable to raise the next round of funding, some have lost half their team, some have transitioned to strategic investments and no longer invest independently, and some VCs are even considering issuing memes to raise funds…

Many VC peers have also chosen to exit; some have joined project teams, and some have transformed into KOLs, seemingly opting for choices with better cost-effectiveness. In this changing landscape, everyone is searching for new ways to survive. I am also pondering, what exactly is wrong with VC? How can we break the deadlock?

First of all, we must admit that, whether in China or the U.S., the best era for VC as an investment asset class has passed. The chart below shows the return data for several funds from Lightspeed, with the best fund achieving a DPI of 3.7X by investing in Snap, Affirm, and OYO in 2012 (DPI is the distributed return multiple, which does not rely on valuations and measures actual exit returns). Of course, this cannot be compared to directly buying BTC, and since 2014, even breaking even has become a challenge.

Chinese VC has also experienced a similar trajectory. Relying on demographic dividends, the rapid growth of mobile and consumer internet has birthed billion-dollar companies like Alibaba, Meituan, and ByteDance. 2015 was the last shining moment; subsequently, tightening regulations, reduced liquidity, declining industry dividends, and changes in the industrial cycle have led to growth bottlenecks and limited IPO exit channels, resulting in a significant decline in VC returns and a mass exodus of professionals.

Crypto VC is no exception. With changes in the macro environment, market structure evolution, and declining capital returns, VCs are facing enormous survival challenges.

It's All About Cost and Liquidity

In the past, the value chain of VC investment was clear: project teams brought innovative ideas, VCs provided strategic support and resources, KOLs amplified market voices at critical moments, and value discovery was completed on CEX. Everyone provided different value and bore different risks at various stages, receiving corresponding returns, creating a "relatively fair" value chain.

For example, as VCs, the value we provide has never been as simple as just investing money early on. It's about how to help project teams quickly connect with key resources in the ecosystem to drive business development, provide timely advice when market winds change, help project teams adjust strategies, and even assist in building core teams. Moreover, to establish a long-term bond with project teams, we often face a one-year lock-up and 2-3 years of vesting after TGE, and to a large extent, we hope to play a PVE non-zero-sum game together with the project teams.

However, in the current market environment, the core contradiction lies in the extreme lack of liquidity, intensified market competition, making the VC model difficult to sustain.

The Changing Landscape of Capital Flow: Where Does VC's Dilemma Come From?

The main driving force behind this bull market is the U.S. Bitcoin spot ETF and the strong entry of institutional investors. However, the transmission path of funds has undergone significant changes:

1. Institutional funds primarily flow into BTC, BTC ETFs, and even Indexes, but do not spread to a broader altcoin market;

2. The lack of genuine technological/product innovation support makes it difficult for altcoins to maintain high valuations.

This directly leads to the VC model being highly FUDed in the current market environment. Retail investors believe that VCs enjoy an unfair advantage, able to acquire tokens at lower costs and possess key market information. This information asymmetry leads to a collapse of market trust and further liquidity depletion. In a PvP environment, retail investors demand "absolute fairness." In contrast, the strategies of secondary funds do not strongly oppose market sentiment because retail investors can also enter the market with the same tokens, after all, they were once given the opportunity for absolute fairness.

The current overwhelming FUD against VCs is a counterattack of "absolute fairness" against "relative fairness" under liquidity scarcity.

The Rise of Meme Financing Models

If the last time I viewed memes as a cultural phenomenon, this time we need to see it as a brand new financing method. The core value of this financing method lies in------

• Fair Participation Mechanism: Retail investors can track information through on-chain data and obtain early tokens under a relatively fair pricing mechanism;

• Lower Entry Barriers: During DeFi Summer, we supported many solo developers who relied on product innovation to drive value capture. Now, the meme model lowers the barriers further, allowing developers to "have assets first, then products."

This logic itself is not problematic. Looking back, many public chains conducted TGE without a mature ecosystem or mainnet; why can't memes use the same approach to attract enough attention first and then advance product development?

Essentially, this evolution of "assets first, products later" is a wave of populist capitalism sweeping through the entire financial ecosystem. The prevalence of attention economy, catering to the public's desire for quick wealth, breaking the monopoly of traditional financial institutions, lowering capital thresholds, and ensuring information transparency are all unstoppable trends of the populist new era. The GameStop retail battle against Wall Street, the evolution of fundraising methods from ICO to NFT to memes, are all financial interpretations under the tide of the times.

So I say, Crypto is just a reflection of this era.

The Role of VC in the New Model

No financing model is perfect. The biggest issue with the meme financing model is its extremely low signal-to-noise ratio, which brings unprecedented trust challenges------

• Extremely Low Signal-to-Noise Ratio: Fair launches make the cost of asset issuance very low, leading to a flood of junk.

• Insufficient Information Transparency: For high liquidity meme projects, everyone in the market can enter early, which means that whether the project is built for the long term has become less important; what matters is how to profit in the competition.

• Soaring Trust Costs: High liquidity means high competition. The first day of circulation means we have no mechanism to bind interests with the founder for long-term win-win cooperation; everyone can turn into opponents at any time, becoming each other's exit liquidity. This trust structure is dangerous and unsustainable.

I strongly agree with @yuyue_chris's analysis of the mindset differences among different participants:

Those playing with memes believe: narrative > token structure ~ community or sentiment > product technology;

The primary market believes: narrative > product technology ~ token structure > community or sentiment;

The meme model is essentially a darker on-chain world than the VC model. Due to the lack of product and technological support, "absolute fairness" often serves merely as a facade. Look at Libra; every meticulously planned public benefit from the cabal behind the market ultimately turned us into targets for precise harvesting. They can always anticipate your anticipation, making it difficult to identify true long-term builders in a highly competitive environment.

I do not believe that VCs will disappear, as this world is filled with significant information asymmetry and trust asymmetry. For example, resources like ARC are absolutely not something an ordinary dev can access.

However, in the face of such a wave of populist capitalism, it is unrealistic for VCs to simply leverage information asymmetry to make easy money as before. Adapting to change has never been easy, especially when market paradigms are completely restructured, and previously effective methodologies are rapidly eliminated. The rise of meme financing is not coincidental but rather the result of deeper liquidity changes and trust mechanism restructuring.

When the high liquidity of memes and short-term competitive thinking collide with the long-term support and value empowerment of VCs, finding a balance between the two is a challenge that current VCs must face. On one hand, Primitive is fortunate to have the freedom and flexibility to respond to market changes, but recognizing structural changes and adjusting investment strategies is no easy task.

But no matter how the market changes, one thing remains constant------what truly determines long-term value are those visionary founders with strong execution capabilities who are willing to continue building.