Encrypted venture capital institutions report that at least half of the betting projects in 2022 will shelve the currency issuance plan

This article comes fromThe Blocksecondary title

Odaily Translator | Nian Yin Si Tang

Summary:

Summary:

- A growing number of crypto VCs are reporting that at least half of their portfolio companies have delayed token offerings.

- A host of headwinds, from regulatory concerns to exchange fees, mean there is no clear date for a token launch yet.

Keeping tabs on performance should be easy for venture capitalists in the crypto space. Most (possibly all) of their bets are denominated in liquid tokens that can be marked to market at any time.

There’s just one problem: A growing number of VCs are reporting that at least half of their portfolio projects have delayed token launches, citing concerns about price, exchange fees and increasingly stringent regulations.

Let’s take Spartan Group, one of the more active investors in the decentralized finance space, as an example.

A Q3 2022 investment report obtained by The Block shows that of the 108 projects supported by Spartan through a $110 million DeFi fund, less than 40% are listed on exchanges. Kelvin Koh, managing partner at Spartan Labs, said the fund invests in early-stage venture capital, and some of its returns — even for projects that have already launched tokens — don’t materialize.

“Approximately 60% of tokens are yet to be issued, and approximately 3% of projects are already in jeopardy due to the impact of FTX and are only on life support,” Oliver Blakey, partner and co-founder of Ascensive Assets, said in an email. of companies made 89 investments through two different funds.

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Continue to wait and see

A source with venture capital and market-making experience said that for the founding team and early investors, the token launch could be a liquidity event, allowing them to cash out some equity or update the valuation of the portfolio. Perhaps more importantly, this also allows projects to build token economies into their products.

“I would say that in a bull market, a lot of tokens were launched early (pre-production) because it was a marketing and adoption tool, whereas now it’s more of a decentralized tool,” Blakey said, "The project will not launch until the token becomes an integral part of the project."

White Star Capital is in a similar situation. General partner Sep Alavi said that about half of the companies in his DeFi portfolio are still unissued. Rich Rosenblum, co-founder and president of market maker and VC heavyweight GSR, estimates that most of the firm’s DeFi and infrastructure investments in 2022 have yet to issue tokens.

Even projects in Outlier Ventures' Token Rise program, which is geared towards startups in the final stages of token offerings, are on hold.

About 10 projects in Outlier’s token advisory program are slated to launch this year, but they can afford to wait if needed, he added. The program currently includes 25 projects.

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Difficult situation

Founder and investor interest in token offerings has been on the decline for most of 2022. The year was marred by the failure of the Terra/Luna stablecoin ecosystem in May, after which cryptocurrency exchange FTX and its sister exchange Alameda Research filed for bankruptcy.

This drop in interest has been attributed to a number of factors, from a deteriorating macro environment that has sapped market liquidity, to increased scrutiny from regulators on issues such as whether tokens can be considered securities.

As of September 2022, Pantera Capital's early-stage token fund is down about 71%. Andreessen Horowitz's (a16z) flagship crypto fund is down 40% in the first half of the year, according to the Wall Street Journal. Investor documents show that in the third quarter of this year, Spartan’s DeFi fund returned only 4.5%.

FTX’s debacle last November only exacerbated existing problems. Michal Benedykcinski, senior vice president at venture capital firm Arca, said many cryptocurrency exchanges have taken a defensive stance since the crisis began, protecting existing liquidity rather than listing new tokens.

“Frankly, many of these exchanges, especially onshore centralized exchanges, will not accept new coins for the time being,” Benedykcinski said.

David Chreng-Messembourg, founding partner at LeadBlock Partners, said the exchange is now focused on “cash preservation and client retention” after a painful year.

“Any cash-intensive plans, including strategic or marketing activities, are on hold. New token listings are no exception — most exchanges have paused/postponed any token listings that were originally planned,” he added.

“Alameda is the market maker of choice for most projects, so founders now have to decide who to trust next, as many companies are still announcing that they have failed or are about to fail,” Blakey said.

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under pressure

Even in such a tough market environment, some startups may be forced to list whether they want to or not.

“Today, as a founder, you have a different investor perspective. Some investors who only focus on tokens are pushing their investment projects to tokenize prematurely,” said Paul Hsu, founder and CEO of Decasonic Said that he saw some founders being forced to issue coins.

"I don't think there will be much pressure in the second half given the combination of the Luna and FTX events, and if the market seems to be clearing, it won't be too much pressure," he said. "But if the market looks healthy Yes, companies that have been in operation for close to a year may be under pressure as most of them have pitched the idea to investors that tokens are essential to optimize operations, so once conditions are favorable, if they don't have a timeline , naturally need to find a reason.”

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SAFE bet

One of the biggest lessons Outlier Ventures has learned from this cycle is that companies with a hybrid equity and token structure have had greater success raising capital than projects that have focused solely on the token side of their business.

Equity funding through a token warrant structure means startups can focus on developing their product-market fit in the short term, while deferring designing token economies until later, Outlier’s Burke said.

“In our company, 100 percent of token transactions have different risk parameters,” agrees Decasonic’s Hsu, “pure equity companies have different risk parameters. The most antifragile companies are those with SAFE (Simple Agreement for Future Equity) and Token Warrant Company.”

Benedykcinski said widespread delays in token offerings could even be beneficial to venture capital firms that are just getting started in the cryptocurrency space.

“A lot of VCs have entered the game as potentially liquid tokens come into play, and many of these funds haven’t been fully established to handle and manage the internal risks of actively trading tokens,” Benedykcinski explained.