Bear Market Crypto VC Landscape: False Paper Gains, Increasing Demands for Portfolio Company Refunds
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Bear Market Crypto VC Landscape: False Paper Gains, Increasing Demands for Portfolio Company Refunds
Unfortunately, it's becoming increasingly common in bear markets for VCs to withdraw term sheets and demand refunds from portfolio companies.
Navigating Web3 tides with focused insightsAuthor: RICHARD CHEN, Partner at 1confirmation
Translation: TechFlow
First, we need to define two key metrics.
DPI (Distributions to Paid-in Capital). This is the cash distributed to LPs after management and performance fees are deducted. It's by far the most important metric for LPs because it can't be faked—it’s the truest measure of a fund’s performance.
TVPI (Total Value to Paid-in Capital). This is the total value of all fund assets marked to market price, also known as "paper returns." Venture capital firms have significant discretion in how they mark their assets (see below), so TVPI is often inflated. Sophisticated LPs can easily dig deep during due diligence and see through misleading TVPI figures.
1. Most funds with high TVPI have low DPI.
This is what Chamath famously described as the "VC Ponzi scheme"—showing LPs strong paper returns to raise massive follow-on funds and collect hefty management fees.
Especially in crypto, VCs have wide latitude in deciding how to mark their books. For example, a VC invests in a project that launches a token with multi-year lockups and minimal exchange liquidity. Many will mark their investment at the current spot price without any discount, even though they can’t actually sell to realize those gains. This is why shiny new L1 VC chains keep raising funds.
Therefore, it's prudent to achieve solid DPI over time to demonstrate that your returns are real. Having a high TVPI is fine, but you should let it fluctuate with the market and appropriately write down investments when necessary.
2. Most 2017–18 vintage funds have lower DPI than a16z Crypto Fund I.
Obviously, I can't share exact numbers, but the fact that a16z multiplied its fund size by X times is highly impressive.
a16z is a strong brand, and investing in a16z is like “nobody ever got fired for buying IBM” for large institutional LP investment committees that must reach consensus on decisions.
For lesser-known funds, if their returns might be worse and LPs take on more reputational risk, why would LPs choose them over a16z? This is especially true for individual GPs currently fundraising for their second fund while their first fund underperforms.
3. The 2021 one-year funds were among the worst-performing.
"One-year fund" refers to funds that raised and deployed all capital within one year, then returned to LPs the next year to raise another fund. By talking to institutional LPs who’ve been investing in venture for decades, I couldn’t find a single historical example of a one-year VC fund performing well.
Any institutional LP will tell you that vintage year is the most important factor in fund returns—not access to good deal flow or skill in picking great companies. But as a VC, you can't control the macro environment. Your job is to identify the best founders and themes within your domain expertise and deploy capital slowly across multiple vintages to diversify macro risk.
For crypto venture capital, 2021 was an especially terrible year. Seed rounds closed at insane valuations above $50 million pre-product, making risk/reward completely nonsensical. So many startups were fundraising that VCs felt pressure to deploy. Additionally, startups raised follow-ons quickly, forcing early investors to pro-rata before seeing meaningful product traction to maintain ownership. This caused capital deployment to accelerate beyond plans and forced VCs back to LPs faster than expected to raise the next fund.
4. Either be a small seed fund or a large index fund—the middle is a dead zone.
This is a great example of dialectics (truth in extremes). Seed funds are "snipers," getting in first at attractive valuations, where risk/reward is so favorable that one successful investment can return the entire fund. Large funds are "aircraft carriers," indexing the market and holding meaningful stakes in most post-product-market-fit companies.
Fund size often serves as a legitimate signal in public VC competition. New managers feel peer pressure to raise billions in AUM, but the fund size game usually favors established brands. Seed funds that raised larger funds without restraint during the bull market now sit in the awkward middle—too big to get allocation and upside in seed deals, too small to become household names. They can't raise another fund of that size anytime soon, and downsizing cuts into management fees.
Just because you can raise a bigger fund doesn’t mean you should.
5. Unfortunately, VC clawbacks and refund demands from portfolio companies are becoming increasingly common in bear markets.
Clawing back a term sheet means a VC agreed to invest on certain terms, but after the crypto market crashed during the legal paperwork process, the investor pulled out of the deal. This doesn’t require a formal signature—refer to YC’s handshake agreement as an industry standard. Either way, it sets founders back months, forcing them to waste time fundraising again in a worse environment.
Demanding refunds from portfolio companies means VCs funded companies during the bull market but now regret it and want their money back. It’s not as bad as clawing back a term sheet—since founders clearly aren’t obligated to agree—but it still tarnishes a VC’s reputation for being "founder-friendly."
So far, I’ve heard from founders and other investors about five prominent crypto VCs doing this. The worst offenders have done this to at least five different companies. I’ve also noticed that the more a VC spends on their public image, the more they seem to believe they can get away with such bad behavior behind the scenes.
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