How Founders Can Revitalize VC Tokens

To get listed on major exchanges, many crypto projects are over-inflating their valuations at launch, scaring away investors. How do founders get exposure to VC funding without playing the inflation game? CoinDesk columnist Azeem Khan, a VC himself, has some ideas.

AccessTimeIconJul 31, 2024 at 3:59 p.m. UTC
Updated Jul 31, 2024 at 4:02 p.m. UTC

One of the undeniable realities of the past year in Web3 has been the massive surge in memecoins. This has led to a clear dichotomy between memecoins and VC tokens – the tokens of companies backed by venture capital.

While I disagree with the notion that memecoins have killed VC tokens in the long run, it’s evident that the market for many VC tokens is currently stagnating. How did we get here, and what do we need to do to make VC tokens exciting again?

Even more importantly, what could a savvy founder who’s willing to go against the grain do in order to revitalize the VC token market, especially as we’ve started to see memecoins fatigue? To answer that, we need to go all the way back to what would be considered the root of the problem to begin with that brought us to this point.

The problem lies in the intersection of venture-funded Web3 companies and centralized exchanges. For founders and venture capitalists to profit, a successful token launch is essential. Centralized exchanges can be categorized into unofficial tiers based on their volume and liquidity. The goal is to get your token listed on the exchanges with the highest volume and liquidity, as this increases trading activity and improves market positioning. But what does it take to achieve this? It’s a complex process, but I’ll simplify it.

As you’d imagine, the top centralized exchanges are quite selective. Each has different criteria, but one key factor they value is high valuations. High valuations indicate that a founder successfully raised substantial funds, making their token launch seem more promising. The specific valuation that matters is the Fully Diluted Valuation (FDV). This is calculated by multiplying the token price by the total supply, estimating the token’s market cap once all tokens are in circulation. If a company achieved a high FDV, it was seen as exciting and worthy of listing on exchanges with better volume and liquidity. Although other factors were considered, this was a crucial one.

While this strategy was successful in the past, venture capitalists, especially those with excess funds, found a way to game the system by helping more companies raise at high valuations. It worked for a while, and a few people made significant profits, but it also tainted the market. Now, it seems that every company is raising tens or hundreds of millions, often at billion-dollar-plus valuations.

This strategy worked for a while, but it had a major downside: artificially inflated pre-market token values. The practice limited the upside potential for retail investors with only a few hundred dollars to trade. Without sufficient upside, the risk wasn't worth it, especially for short-term traders seeking quick profits. This gap in the market is where memecoins stepped in to replace VC tokens.

In contrast, memecoins have thrived by offering the potential for massive returns, attracting the very investors that VC tokens have lost. These tokens promise potentially massive returns in short periods, something VC tokens haven't been able to match. However, the problem with memecoins is that they lack intrinsic value beyond the meme. As a result, they tend to have shorter lifespans before eventually spiraling into worthlessness.

To revitalize VC tokens, we need to rethink the current approach. This means shifting away from inflated valuations and adopting a model that attracts retail investors. It will require brave founders willing to challenge the conventional wisdom of the past few years. Eventually, a founder will succeed in making retail investors money, sparking a new trend that others will follow. But what does that look like?

Currently, Web3 founders are encouraged to raise more money than necessary to achieve artificially high FDVs. However, a savvy founder can generate hype while raising only the needed funds. This approach keeps valuations lower, making the token more accessible to retail investors and offering greater upside potential.

Admittedly, this strategy requires nuance, such as explaining to retail investors why your token is priced lower than competitors. There will also be other aspects to communicate to the broader Web3 ecosystem. However, once retail investors realize you’ve left value on the table for them, your VC token could see a surge similar to memecoins this year. Given the rarity of original thinking in Web3, others will likely follow suit.

You might wonder how this founder can get their tokens listed on the right exchanges without an artificially high FDV. Centralized exchanges have grown frustrated with the gamification created by venture capitalists and are now pushing back against unnecessarily high FDVs. Exchanges are shifting their focus because their business model relies on users buying and selling tokens. If users don’t see potential upside in a token, they won't trade it, which means the exchange won't profit. Therefore, exchanges are now waiting for projects that offer realistic valuations and genuine value for investors.

In summary, the stagnation of VC tokens amid the rise of memecoins highlights the need for a shift in funding strategies. Moving away from inflated valuations and embracing approaches that engage retail investors can revitalize the VC token market. This change won't be easy, but it's essential for the ecosystem's long-term health. Innovative founders who rise to this challenge will lead the way, creating a trend that balances the interests of both investors and exchanges, ensuring a dynamic future for VC tokens.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

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CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

Azeem Khan

Azeem Khan, a CoinDesk Columnist, is a co-founder of Morph, an Ethereum layer 2, and consultant to the UNICEF Crypto Fund.


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