Dry Goods | How to Assess the Reliability of Web3 Project Financing? What Pitfalls Are There?

Author: Quinn, RootData
Recently, the RootData team has received a lot of feedback asking how you determine the authenticity of financing? What are your entry standards? Some users even criticized that we have included many false financings. This is indeed a very practical and awkward question. As a trusted data platform, RootData must uphold the bottom line in terms of information credibility, but in the current market situation, we have to face some contradictions regarding data comprehensiveness, timeliness, and credibility.

According to usual standards, we generally record investment and financing information based on reports from credible media such as Coindesk, The Block, Decrypt, and Fortune, and we also refer to financing information released by project parties on their official Twitter accounts. This is a common practice among all financing information platforms, with the main differences lying in the comprehensiveness, timeliness, and presentation of the financing records.

In the past few cycles, the amount of financing has been one of the core indicators for most users to judge project quality. However, whenever it involves quantitative data, it inevitably becomes a target for project parties to play tricks. In recent months, several projects have disclosed that they completed financing of tens of millions of dollars, such as Wunder Social recently announcing a completion of $50 million in financing led by Rollman Management; Solix announcing $29.5 million in financing led by Eclip Foundation. Among them, Rollman Management has invested over $10 million in at least 10 projects in recent months.

Many KOLs are also taking advantage of the financing hype to recommend participation opportunities in these projects, which is precisely the goal of the project parties: to attract user attention with high financing amounts and create momentum for themselves. However, upon closer examination, there are many suspicious points regarding these financings, such as the investors being relatively unknown, and the projects themselves lacking highlights or having average team backgrounds.

It can be determined that these financings are a joint scheme between project parties and certain specific institutions, fabricating false financing amounts. In response, the media has published several exposé reports, such as “The Hidden and Strange Capital Game Behind the Most 'Wealthy' Crypto VC GEM Digital” and “Digging into Rollman Management's Capital Game: Hanging the VC Sheep's Head, Selling Marketing Dog Meat”. For such financing situations, we will label them as suspicious financing, and a warning symbol will appear next to the financing amount, which, when hovered over, will display a message: This financing amount is suspicious and will not be included in data statistics, for display purposes only.

However, it seems that this entry is relatively hidden, and many users still question whether we are recording false financings, leading to misleading information. Some users also ask, won't we independently verify the financing? It's not that we don't want to verify, but there are simply no channels for verification. The project financing process is a black box; the project parties and investors are not obligated to disclose specific transfer processes and addresses. Even if we seek confirmation from participants, as interested parties, they will only affirm the project party's statements.

So what can we do? We can only further optimize the entry and product processes, adding multiple review steps for suspicious financing events and significantly prompting users. Therefore, in our recent product adjustments, we have hidden the amounts of suspicious financings, and users will not see these financings in the primary investment and financing channel; they can only see that a certain institution has invested in the project on the project detail page, marked as suspicious. Additionally, users can see the financing news in the news module on the page. For transparency, we will also periodically disclose the handling of such situations.

Just yesterday (23rd), the digital asset trading platform BitradeX announced the completion of £12 million Series A financing led by Bain Capital on the news release platform Finance Feeds, and many Chinese media outlets reported on this. Considering that Bain Capital is a very well-known VC institution, since the news was not published in credible media and there was no attention from any credible individuals on Twitter, we did not record this financing information.

In addition to directly fabricating financing, some more cunning project parties will manipulate the form of financing, such as including "committed financing amounts" or the amount of provided protocol liquidity (TVL) in the financing amount. What is committed financing? Let's take a look at the case of 0G. In November last year, 0G announced it had obtained $290 million in financing, but the article further mentioned that $250 million of that was for token purchases and working capital commitments. The project's CEO, Michael Heinrich, recently explained in an interview that this can be understood as a quota, but not a pre-agreed price; rather, it is based on public market pricing to determine the discount on that quota after the tokens are issued.

In other words, this committed investment has not actually occurred, and the future amount is highly uncertain, but the project party adds such financing amounts to the officially disclosed data, which only indicates impure motives. For this situation, RootData will not record it in the database, only recording the $40 million seed round financing amount.

KernelDAO also exposed a type of black box operation in financing while clarifying the Web3port incident this month. Previously, in May last year, KernelDAO announced the completion of $9 million in financing, with Web3port listed among its investors, but due to Web3port's recent reputational bankruptcy, KernelDAO announced that Web3port had not actually invested for various reasons, and its SAFT had been canceled. This indicates that KernelDAO announced the completion of financing before the actual investment by the investors, so are there other investors or projects with similar situations? We cannot know.

In some cases, project parties will also disclose old projects and old business investors alongside new investors to create confusion. The blockchain gaming platform Balance has been fiercely criticized for this. Balance has repeatedly mentioned in PR that a16z is its investor, leading its $30 million financing, but further investigation reveals that a16z did not invest in the Balance project itself, but rather in its parent company E-PAL, and that investment occurred in 2020 and 2021.

At that time, E-PAL was a gaming companionship platform focused on integrating live streaming, voice chat, and other social functions, with no relation to Web3. Now that the team has transitioned to Web3, it likely means that the original Web2 business is difficult to sustain. The company may map the EPT token to the equity investors of E-PAL, a16z, but this does not represent a16z's recognition of the Balance project. Many users purchased Balance nodes based on a16z's investment background, but now they have been ruthlessly harvested by the project party, which fully demonstrates the critical importance of information quality and accuracy.

So, to summarize, how can we better judge the reliability of Web3 project financing?

First, we can confidently say that after going through so many cases, we have restructured the data entry process and established new standards. Suspicious data will be labeled and independently verified. This means that using RootData can filter out most suspicious financings, effectively improving information search efficiency. If you find any erroneous financing data recorded, feel free to provide feedback to us (email: contact@rootdata.com), and if accepted, we can offer a reward of 20-100U each time.

Second, establish a basic understanding of the investment and financing market landscape, such as which are the leading VCs? For financing amounts over $10 million, only participation from leading VCs has credibility. Leading VCs also do not casually endorse ordinary small projects, and financings endorsed by a large number of well-known VCs generally have high credibility. If interested, you can further research which VC-backed projects perform better in terms of token price? Which VC investments are more likely to lead to listings on major exchanges, etc.?

Third, learn to use multi-dimensional data to comprehensively judge project credibility, such as team background, publishing media, and Twitter follower engagement. For example, financing credibility from media like Bloomberg and Fortune is extremely high, while those only published on press release platforms like Chainwire and GlobeNewswire (which generally do not exceed $1000) have lower credibility. The current trend is that many projects only debut their financing on X platform and do not wish to pay thousands of dollars in PR fees on other media platforms, which requires judging the quality of their X followers.

Now, many Twitter plugins can help users check the basic situation of a Twitter account, and the RootData website also provides such information. In fact, if a project claims to have received investment from a well-known VC on Twitter, and there is no interaction between both parties on Twitter, and the project's Twitter account lacks attention from credible industry figures, RootData will not record such information.

Of course, the most important thing is to learn to demystify financing amounts and VCs. When RootData was first established, the first screen on the homepage, aside from the search interface, dedicated most of the space to financing round information. However, as the industry environment has changed, VCs no longer play a crucial role in the development prospects of projects; narrative and community do. Last year's Hyperliquid's no-VC, pure community model is a testament to this, and there are numerous instances where leading VC investments have led to poor token performance or even project shutdowns.

DYOR, dive deep into the community, and grasp the narrative; this is the ultimate key to cracking the financing black box and achieving significant results.