TechFlow news — Jason Choi, co-founder of TANGENT, tweeted that founders should recognize the Ponzi-like nature of venture capital. This scheme is already well-known in Web 2 but even more pronounced in Web 3. Here's how it works:
- VC invests $1 million in a $20 million seed round;
- Pressures founders to raise at an inflated $100 million valuation too early;
- Invests another $1 million in the next round;
- Now, their initial $2 million total investment appears on paper as worth $6 million each (3x paper return);
- This cycle repeats, attracting attention from more limited partners;
- Raise larger funds based on these inflated paper returns;
- Charge 2% management fees.
He added that TANGENT opted for internal capital to avoid this misalignment of incentives. A large number of mid-sized funds are running this playbook—especially underperforming firms desperate for track records. Founders should always question the motives of VCs when they push for early and oversized funding rounds.
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