Written by: Newman
ICO Mania: Historical Context of Web3 Fundraising
The ICO mania of 2017-2018 was a pivotal moment in crypto funding, with the following characteristics:
Minimal lockup and huge returns: VCs entered projects at lower valuations than regular investors, with no lockup period, resulting in huge returns (e.g., @Zilliqa grew 50x after its January 2018 ICO).
Concentrated liquidity: With only a small number of tokens issued each week, investors had limited options, and this scarcity drove demand and amplified returns.
VC as signaling: The appeal of VCs is not primarily their capital (most ICOs don’t really need much money in the pre-product phase), but their signaling. Projects raise millions of dollars by attracting a few well-known VCs, thereby attracting more ICO investors to participate.
However, this period was not sustainable. Scams, fund runs, and unclear regulation undermined market trust.
By 2019, regulation began to shape a more structured fundraising environment. Characteristics of this period include:
Longer lockup periods: VCs are required to accept longer lockup periods when entering private rounds. The market can no longer support the hype-driven VC “unlocking on the same day” behavior of early VCs.
Fragmented liquidity: The market was oversaturated with too many ICO projects launching simultaneously. Investor demand was no longer concentrated in a few projects, and the hype that early success relied on began to wane.
VC as a source of funding for builders: Founders needed VC funding to develop products before launching tokens. This marked a shift in the funding landscape away from speculative ICOs to a more product-focused approach.
After 2019, the market transitioned to what is currently often referred to as a "low circulation, high FDV (fully diluted valuation)" environment, where token issuances typically launch with low circulating supply and high FDV valuations.
Current Challenges Faced by VCs
Although VCs have played an important role in history, they face increasing challenges in today’s market:
1. Mismatch of Tokenomics
Historically, VCs entered at low valuations and with short lock-up periods, which was inconsistent with the interests of ordinary investors. This led to reputational issues and a lack of trust.
Poorly designed tokenomics (e.g., low circulation, high FDV) led to projects experiencing “continuous and expected sell-offs” after launch.
2. Reduced demand for VC funding
Weaker founders: Successful founders no longer rely on VCs, but use personal resources to start projects.
Retail-driven model: Memecoin and high circulation issuance (see @HyperliquidX) show that some projects can succeed without VC participation.
Weakened signaling: Although some mainstream VCs still have influence in infrastructure projects, their influence in application layer projects has declined significantly.
3. Product-market mismatch
For most Web3 projects, the community and users are the driving force for success. However, VCs are not good at reaching out to communities.
Therefore, the role of traditional VCs is gradually being replaced by well-known angel investors. These angel investors tend to have closer connections with end users and are better able to promote community-driven growth.
The Future Role of VC
While the demand for VC funds may be uncertain, VCs are still important in certain specific contexts:
1. Deeply involved in the ecosystem
VCs need to actively participate in ecosystem activities, such as mining, Memecoin trading, and other retail-level operations.
To stay relevant, VCs need to exist not only as institutions, but also as players deeply embedded in the trenches. This involvement enables them to provide unique insights into evolving growth hacking strategies, Tokenomics design, and go-to-market strategies.
2. Provide Strategic Value
Founders increasingly value VCs that can provide real value (e.g., operational support, Tokenomics guidance, market expertise).
While angel investors can help, they are not as focused on portfolio management as VCs.
VCs need to move from being passive fundraisers to active strategic partners.
3. Selective participation
VCs can focus on a small number of investment projects and concentrate on contributing to these projects, while adopting a "cast-net" approach for smaller investments.
Founders tend to keep a small investor structure, preferring investors who are small in number but can bring substantial contributions.
Interesting recent/upcoming projects
1. Hyperliquid (@HyperliquidX)
May adopt a high-volume, non-VC-participated issuance method to test whether the market can maintain price stability without long-term lock-up.
If successful, it may establish a new model for other projects, but it also faces challenges such as first-day selling pressure.
2.BIO Protocol (@bioprotocol)
Combines VC rounds and public auctions, allowing participants to exchange WETH or original child DAO tokens for $BIO.
Expand community members through public auctions, while introducing VC investment to achieve broader community coverage.
3.Universal Basic Compute $UBC (@UBC4ai)
Potential New Funding Models
To transition from a low float, high FDV environment, we need an experimental phase to explore sustainable solutions. Here are some possible models:
1. VCs and retail investors enter at similar valuations
VCs invest in projects at similar or even the same valuations, potentially receiving larger allocations than retail investors, but subject to stricter lockups. This alignment ensures that the interests of VCs and retail participants are aligned, reducing the risk of VCs selling off ordinary users.
This model may drive healthier and more organic growth for projects.
2. No VC Model
The project raises funds directly from retail investors without seeking VC support.
This will test whether the market can maintain price stability and growth without significant lock-up or VC involvement. If successful, this model may set a precedent for other projects to balance Memecoin economics with operational/funding needs.
3. Model inspired by Memecoin
The success of Memecoin is influencing structured projects to adopt simpler, community-driven Tokenomics:
No foundation holding pool: No community/ecological pool, team and advisor pool or treasury pool. Founders/developers need to purchase tokens on the open market, aligning the interests of retail participants.
100% initial circulation: ensures liquidity and reduces reliance on long-term lock-up.
For example, $URO and $RIF launched by Universal Basic Compute (@UBC4ai) and @pumpdotscience, these projects adopted a similar issuance method to Memecoin, without VC funding, team allocation, airdrop or pre-sale.
The future direction of Tokenomics
As the market continues to evolve, the ideal Tokenomics structure (for non-Memec) has gradually become clear:
1. Alignment of interests
2. Relatively high initial circulation
3. Changes in the Token Pool Structure
Unlike Memecoin, projects require continuous operating funds, so 100% initial circulation cannot be achieved. 30%-40% of the tokens can be allocated to the treasury pool, team and advisor pool, and investor pool for future financing, and set a lock-up period.
4. Volatility Expected in the First 7 Days
For projects that adopt an airdrop strategy, a large amount of supply will be unlocked on the first day and distributed to farmers and NFT holders, especially for projects that adopt a high circulation approach. Similar to the direct listing of companies such as Spotify, a large amount of circulating supply on the first day may lead to extreme volatility in the first 7 days.
Conclusion: Web3 Financing and the Future of VC
Web3 financing is at an inflection point. The high circulation, no VC model is challenging traditional norms, but the role of VC remains critical in areas that require large upfront investments. The future of Web3 funding may blend the best of both worlds:
For founders: Streamlined investor structures and redesigned tokenomics will enable projects to engage communities while aligning with investors.
For VCs: The focus will shift from capital deployment to providing services with concentrated value to ensure their relevance in a rapidly changing ecosystem.
For the market: Growth hackers will rely on product innovation and improved tokenomics rather than relying on traditional mechanisms such as airdrops.
As markets experiment with these new paradigms, successful cases will pave the way for broader adoption, creating a more sustainable and fair funding environment for Web3.
Catherine
Hui Xin
Aaron
Davin
Brian
Jasper