How can founders revive VC tokens?

Author: Azeem Khan, CoinDesk; Translator: Baishui, Golden Finance

An undeniable reality in Web3 over the past year has been the proliferation of memecoins. This has led to a clear divergence between memecoins and VC tokens (tokens issued by venture-backed companies).

While I disagree with the view that memecoins will kill VC tokens in the long run, it is clear that the market for many VC tokens is currently stagnant.How did we get to this point? What do we need to do to make VC tokens exciting again?

More importantly, what can a savvy founder willing to go against the tide do to revitalize the venture capital token market, especially when we start to see memecoin weakness? To answer this question, we need to go back to the root of the problem, the root cause that has led us to this point.

The problem lies at the intersection of venture-backed Web3 companies and centralized exchanges. For founders and venture capitalists, a successful token launch is critical. Centralized exchanges can be divided into unofficial tiers based on their trading volume and liquidity. The goal is to get your token listed on the exchange with the highest volume and liquidity, as this increases trading activity and improves market positioning. But what does it take to achieve this? It's a complex process, but I'll simplify it.

As you can imagine, the top centralized exchanges are very picky. Each exchange has different criteria, but one key factor they look for is a high valuation. A high valuation indicates that the founders have successfully raised a lot of money, making their token launch look more promising. The specific valuation that matters is the fully diluted valuation (FDV). This is calculated by multiplying the token price by the total supply, estimating the token's market value after all tokens are in circulation. If a company has a high FDV, then it is seen as an exciting company that deserves to be listed on an exchange with better volume and liquidity. While there are other factors to consider, this is a critical one.

While this strategy was successful in the past, venture capitalists, especially those with excess capital, found a way to manipulate the system by helping more companies raise funds at high valuations. This approach worked well for a while, and some people made significant profits, but it also polluted the market. Now, it seems that every company is raising tens or hundreds of millions of dollars, with valuations often exceeding $1 billion.

This strategy worked well for a while, but it has a big drawback: it artificially inflates the value of tokens before they go public. This practice limits the upside potential for retail investors who only have a few hundred dollars to trade. Without enough upside, the risk is not worth it, especially for short-term traders looking for a quick profit. It was into this gap in the market that memecoins stepped in and replaced VC tokens.

In contrast, memecoins thrived by offering the potential for huge returns, attracting investors that VC tokens lost out on. These tokens promised potentially huge returns in a short period of time, which VC tokens could not match. The problem with memecoins, however, is that they lack intrinsic value beyond the meme. As a result, they tend to have a short lifespan and eventually become worthless.

To revitalize venture capital tokens, we need to rethink the current approach. This means moving away from inflated valuations and adopting a model that appeals to retail investors. This requires courageous founders willing to challenge the conventional wisdom of the past few years. Eventually, the founders will succeed in making retail investors money, sparking a new trend that others will follow. But what does this look like?

Currently, Web3 founders are encouraged to raise more money than necessary in order to achieve an artificially high FDV. However, savvy founders can create hype while only raising the money they need. This approach can keep valuations low, making the token more accessible to retail investors and offering greater upside potential.

Admittedly, this strategy requires nuance, such as explaining to retail investors why your token is priced below your competitors. There are other aspects that need to be communicated to the broader Web3 ecosystem. However, once retail investors realize that you have left value for them, your VC token could see a similar surge to memecoin this year. Given the scarcity of original ideas in Web3, others may follow.

You may be wondering how this founder can get their token listed on the right exchange without artificially inflating the FDV. Centralized exchanges, frustrated with the gamification created by venture capitalists, are now pushing back against unnecessarily high FDVs. Exchanges are shifting focus because their business model relies on users buying and selling tokens. If users don’t see potential upside to a token, they won’t trade, which means exchanges won’t profit. As a result, exchanges are now waiting for projects that offer realistic valuations and true value to investors.

In summary, the stagnation of VC tokens, while memecoins are on the rise, highlights the need for a shift in funding strategies. Moving away from inflated valuations and adopting approaches that appeal to retail investors can revitalize the VC token market. Such a change will not be easy, but it is essential for the long-term health of the ecosystem. Innovative founders who rise to this challenge will lead the way and create trends that balance the interests of investors and exchanges, ensuring a vibrant future for VC tokens.