Maybe Old-Fashioned Venture Capital Wasn’t So Bad After All

From the perspective of the founder of an infrastructure project, it may appear contradictory that our achievement hinges on widespread crypto adoption among consumers. However, recognizing this challenge as crucial is essential. By contemplating deeper, I came to appreciate the motivations guiding investors in potential consumer applications.

Azeem Khan serves as the creator of Morph, a testnet-running Ethereum Virtual Machine (EVM) layer-2 blockchain.

As a researcher studying the intersection of cryptocurrencies and venture capital, I’ve observed an intriguing disconnect between crypto investors and the projects they invest in. This disconnect might be attributable to the evolving nature of tokens, which is transforming the traditional venture capital landscape. However, it’s essential to remember that venture capital itself is not a single entity; it encompasses various models, strategies, and approaches.

As a crypto investor, I believe that for consumer applications to attract investment, it’s crucial that founders and their backers engage in transparent and authentic discussions about their goals and objectives. Let’s have open and honest conversations that build trust within the community. This will not only help potential investors make informed decisions but also foster a healthier ecosystem where everyone benefits from the collective growth of the project.

As a seasoned analyst specializing in venture capital, I would explain it this way: I’ve seen many queries about the inner workings of venture capital, and my go-to response is this: It’s a form of private equity financing where investors contribute funds to young companies in exchange for ownership shares, typically anticipating returns within a decade. Historically, that’s how venture capital has operated.

As a crypto market analyst, I’ve noticed that when approaching a venture capitalist in the crypto industry, one might anticipate following traditional investment procedures. However, it’s essential to remember that token launches have significantly transformed this landscape.

Tokens’ impact

Ethereum stands out among other blockchains as both a widely recognized name and the go-to choice for many developers. What sets Ethereum apart, however, is its role as a platform enabling individuals to create and launch consumer cryptocurrency applications along with their utility tokens.

Investors identified another lucrative niche, facilitating massive token sales worth billions for supposed Ethereum rivals. Despite numerous project failures resulting in deserted blockchains, this approach proved fruitful for many investors who injected funds into them. The intricacies of the token economy are highlighted by this phenomenon.

Prior to the emergence of token launches, venture capitalists would put money into businesses that granted them equity as the only form of return – consider Meta Platforms, Airbnb, and Roblox among others. In order to recoup their investment, they could either sell their stake in a company that got bought by another business or wait for the company to go public through an Initial Public Offering (IPO) on the stock exchange. This lengthy process is one of the reasons why venture capitalists had to wait a considerable amount of time before seeing any profit from their investments.

With the emergence of blockchain tokens, investors seeking to back crypto initiatives now have a new option for earning profits, frequently in a more expeditious manner.

In modern venture capital investments for Web3 startups, investors acquire a share of the company’s tokens or equity, or both, as outlined in the investment contract. A significant consideration for these investors is determining the specifics of token distribution. This aspect is unique to Web3 ventures and distinct from traditional venture capital arrangements.

When considering an investment in a token launch, focus on two key aspects. First, the “lockup” duration specifies the number of months following the launch during which investors cannot access their tokens. Secondly, the vesting period length determines how long it takes for an investor to receive their entire token allocation based on their investment’s proportion of the total token supply.

Lastly, note that the investments made by these investors come with liquidity – this means they can be quickly converted into cash via an open market. Contrastingly, in an equity-only model, selling one’s ownership stake is far more challenging.

Impatient capital

From the outset, the scenario has shifted significantly in the world of investing. Previously, investors had to exercise patience for nearly a decade before they could determine if their investments bore fruit. However, with the emergence of token agreements, the possibility of cashing out within a year is now a reality. This raises the question: Is it time we reconsider our approach to venture capital?

It might be worthwhile to explore which investors aim for substantial returns, such as 100x to 1000x, within a decade, and contrast that with those targeting smaller gains over a shorter timeframe. The former category holds potential for driving consumer adoption since the blockchain technology’s advantages need to be communicated to the masses, products must be developed and released, regulatory approvals secured, and scalability achieved – all of which are time-consuming processes. The latter group, however, risks perpetuating wealth accumulation among existing venture capitalists, which runs counter to our goal.

Ideally, an open dialogue about the changing landscape of venture capital could lead to increased funding for appropriate infrastructure projects and consumer-focused applications within the crypto sector.

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.