The Harsh Truth of VC: From Industry Hype to Rational Reversion
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The Harsh Truth of VC: From Industry Hype to Rational Reversion
Hopefully, as the cryptocurrency industry develops, there will no longer be a need for VCs.
Navigating Web3 tides with focused insightsBy Jademont, CEO of Waterdrip Capital
Recently, there has been extensive discussion about the role of venture capital (VC) in the cryptocurrency space. On one hand, the community voices strong criticism toward so-called "VC coins." On the other hand, we see increasing reports of VCs fighting for their rights or shutting down. In reality, the VC industry has always had a high淘汰 rate—this is not a new phenomenon.
A Joke: VC During the ICO Boom
Let me start with a story. In 2018, Mars Finance hosted a contributors' conference in Chongqing, handing out awards to industry practitioners. Almost every attendee received an award. One category was “Outstanding Token Fund,” which ranked the top 40. The stage could barely fit all the winners. Why were there so many awardees? Because 2017 was the year of the ICO boom—the birth year of crypto VCs. At that time, just in Shanghai alone, there were over 100 VC firms. The barrier to entry was extremely low: as long as you had an offshore entity capable of signing documents and wiring funds, you could call yourself a Token Fund. Nationwide, there may have been hundreds of such VCs. Under these circumstances, making it into the top 40 wasn't bad at all—we were just an average participant. When we moved offices in 2022, we came across our old award materials and surprisingly found that we had risen from the top 40 to the top 10. This isn’t arrogance—it's simply because more than 30 VCs on that list are no longer active. I estimate that if we last a few more years, we might even break into the top 5. Of course, new institutions keep emerging, but each time I look at that award list, I’m reminded of how brutal this industry can be.
Misconceptions About VC in the Community
In fact, retail investors hold many misconceptions about VCs, often viewing them in black-and-white terms. On one hand, when the community sees a hot project backed by VCs, they assume crypto VCs must be making huge profits. But in reality, VCs also hold many failed projects—ones the market never hears about. It’s precisely due to this high failure rate that individual successful investments must deliver outsized returns. Often, when founders come to me seeking funding, they say, “My project is stable—it won’t lose money, maybe just make less.” I always reply: “I don’t invest in projects that only break even. You need to convince me this project can return 10x—or it could go to zero. If the founder doesn’t have ambitious goals, raising from VCs makes no sense. Just build slowly and earn a modest living.”
On the other hand, when a project fails, the community blames VCs for “harvesting韭菜 (reaping lambs),” forgetting that VCs are often victims too—and may have lost even more money than retail investors.
How to Evaluate a Good VC
To assess whether a VC is truly excellent, I believe two criteria are essential.
The first is performance. A VC is not a charity—LPs’ (limited partners’) interests come first. There are several large, well-known funds in the industry whose actual performance is mediocre. Personally, I’m not impressed by such funds. Recently, a fund-of-funds approached us to discuss collaboration. They shared that among ten U.S.-based crypto VCs they previously invested in, the worst performer was the one with the “letter-plus-number” name, while the best performer was a small fund managing only $20–30 million. This completely contradicts popular perception, so never believe nonsense like “just follow big-name institutions.”
The second criterion, independent of pure performance, is evaluating the quality of the projects a VC has invested in—particularly those where the VC had significant influence. How strong are the top projects? Do they bring technological innovation? Have they advanced the industry? In other words, has the VC contributed to the ecosystem through its investments? A firm that merely backs empty projects and generates returns for LPs cannot be considered excellent. Nor can a firm that invests late into seemingly star-studded projects at high valuations without providing meaningful support. The latter has become common among wealthy Web2-native institutions in recent years.
Challenges Facing Crypto VCs
The community’s criticisms aren’t baseless. The biggest current issue is that well-funded institutions are pushing projects to excessively high valuations. During the ICO era, retail investors could profit because they had equal access to projects as institutions—the competition was based on courage and understanding, not connections or exclusive deal-making.
Take a typical Binance-listed “star project” today: friends-and-family round at $10M valuation, seed round at $30–50M. If a major overseas institution joins, the next round jumps straight to $300–500M. Then comes exchange listing talks—once Binance is secured, a pre-listing round pushes valuation above $1B. By launch, market cap hits $3–5B, sometimes even $10–20B. Only then do retail investors get a chance to buy. But at that point, how much upside remains? Meanwhile, the downside risk is enormous. No wonder retail investors are increasingly reluctant to participate. In recent years, we’ve declined multiple financing requests from “star projects” valued at hundreds of millions or even billions of dollars—not only due to limited capital, but also because we genuinely don’t believe these unlaunched, unproven projects deserve such sky-high valuations.
I suggest top exchanges implement a circuit-breaker mechanism during a token’s initial listing period—allowing trading only within a capped price range (e.g., the last private round price). This would allow institutions to exit reasonably while protecting retail from excessive pricing. Alternatively, we could return to the ICO model, treating institutions as large retail participants. Current fair-launch community sales are essentially modern variations of ICOs.
Another challenge is that as the industry matures, most sectors are already dominated by giants. Until new narratives emerge, the old approach of throwing money at teams and letting them fend for themselves will likely fail. Now, VCs must co-found with teams—clarifying rights and responsibilities, imposing stronger governance, while also offering deeper support through resources and expertise. In short, VCs must professionalize. The days of solo operators running a personal-brand VC are over—they may still do angel investing, but not institutional VC.
Finally, I hope that as the crypto industry evolves, we’ll no longer need VCs—just as I’ve always hoped we’d eventually no longer need CEXs (centralized exchanges). A more decentralized world should be our ultimate goal.
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