1confirmation Partner: Reflections on the Crypto VC Landscape in the Bear Market

1confirmation Partner: Thoughts on Crypto VC Landscape in Bear Market

1confirmation partner Richard Chen shared some insights from his conversations over the past few months with LPs and other general partners about the state of crypto VC. Unfortunately, he noted that in the bear market, it has become increasingly common for VCs to retract term sheets and demand refunds from invested companies.

1) Most funds with high TVPI (Total Value to Paid-In Capital) have low DPI (Distributed Paid-In Capital): this is the famous “VC Ponzi scheme” described by Chamath, where funds show their book profits to LPs to raise large amounts of capital and earn hefty management fees. 2) Most funds from 2017-18 have lower DPI than a16z crypto Fund I’s DPI: I can’t share exact figures, but a16z’s ability to multiply the fund size is very impressive. 3) One year funds in the 2021 bull market are among the worst performing funds: a one year fund refers to a fund that rapidly raises and deploys all funds within a year, and then raises the next fund in the second year. 2021 was particularly bad for cryptocurrency venture capital, with seed rounds completed at crazy valuations of over $50 million before product launch, with risk/reward being meaningless. In addition, early investors are forced to exercise their equity on a pro-rata basis to maintain their ownership percentage before seeing any meaningful product traction, leading to deployment of venture capital at a faster pace than expected, and raising the next round of funds from LPs faster than expected.

4) It’s either small seed funds or large index funds, the middle ground is a no-man’s-land: fund size is often a legitimate signal of competition for venture capital firms. Seed funds that raised larger funds without constraints on fund size during a bull market are currently in the middle ground, where the size is too large to get any upside in seed fund investments, and too small to become a well-known brand. They can’t raise funds of such size again in the short term, and reducing the fund size would lower management fees. 5) Unfortunately, in bear markets, VC clawback provisions and requests for refunds from invested companies are becoming increasingly common. So far, I have heard from founders and other investors that five famous cryptocurrency venture capital funds have done this. The worst offenders have done this to at least five different companies. I also notice that the more venture capital firms invest in their public image, the more they feel they can get away with such misconduct behind the scenes.

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Reference: https://www.techflowpost.com/article/detail_12475.html

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