Original source: wassielawyer X account

Author: wassielawyer

Compiled by: TechFlow

 

Some thoughts on “first round venture capital” and why the most profitable business in Web3 right now is providing services to teams that issue tokens.

While altcoins have been disappointing, the venture capital market remains very active and as an advisor and investor, I can definitely see that there is still a lot of capital flowing.

An interesting phenomenon in recent weeks has been the increase in funding needs.

Despite the poor performance of the large TGE in June 2024 and many teams still planning to conduct TGEs in the third quarter of this year, the venture capital market remains very active.

It is still relatively easy for seed-stage companies to raise funds at higher valuations, although there have been major concessions made in terms of cliff periods and investor unlocking plans.

Even though it was obvious that no one would buy venture capital projects, many participants still bet that retail investors would buy their projects in a few months.

I can only describe this phenomenon as a failure of market structure.

Participants in these still-hot venture capital rounds include not only the big VCs, but pretty much everyone with more than $500,000 who either added capital to their Web3 aliases, called themselves angel investors or influencers, or participated in a $20,000 allocation via a $2,000 check.

These investors are bullish on the space, but don’t want the poor returns on ETH/BTC. They also don’t want to buy altcoins to be “exit liquidity” for others, and think memecoins are “too risky.”

These are the “mature retail investors” who have evolved into what I call first round VCs. These are the people who bought altcoins in the last round but were smart enough to do so.

They realize that this round of altcoins is very unfairly designed. But they may not fully understand the meaning of venture capital - they just see the successful venture capital transactions in the last round and think it is "free money".

This phenomenon ultimately benefits two types of participants in the Web3 space.

The first category is the project founders. Now the fact is that no matter how bad your project is, as long as you provide a short enough cliff and vesting period, and create a (no matter how far-fetched) promise that there is a fictitious retail sucker that the seed investors will be able to sell, you will find funding.

If you can’t find funding, lower the valuation, increase the TGE unlock ratio and shorten the cliff/vesting period until you find funding.

This is really bad for the field.

Dishonest founders will quickly shut down their companies after taking money from seed investors.

Founders with good faith will see their projects completely destroyed by having to offer shitty token economics to compete for funding.

In any case, the investors themselves are unlikely to see actual returns because the retail investors they hope will pick up the seed rounds are also participating in other meaningless seed rounds in the hope that someone else will pick up the seed round.

The second group that benefits from this meta narrative are token issuance service providers.

The real key is to realize that Web3 is now primarily about issuing tokens. Everything else is a narrative woven to achieve this primary goal of issuing tokens.

So the real profits come from taking money from founders who have raised money primarily through their first round of venture capital (VC).

There is a clear selection bias here. Good founders/teams get oversubscribed by well-known investors, and these teams usually have some experience.

Weaker founders funded by first-round VCs often don’t benefit from those networks and experience.

These founders may pay high fees for services such as “token economics consultants”, “marketing and GTM”, “launch pad services”, “KOL management”, “legal”, “marketplace making”, “community management”, etc.

Since everyone is issuing tokens, it seems like everyone is using the services of these service providers, and it’s almost a given for any inexperienced founder to follow the “playbook.”

What these founders fail to realize is that this scheme is neither foolproof nor price transparent. In fact, it can be said that this scheme is mostly untested, as many of the tokens running it have yet to face significant investor unlocking.

Many service providers are also doing this for the first time and may be just as lost as the founders at times, but they just fake it until they make it. After all, who’s going to point out your mistakes if no one knows?

As a token economics advisor, why not copy and paste a token economics plan and charge 1.5% of the supply and USD advisory fees?

As a “Marketing and GTM” consultant, why not copy and paste a broad “Market Strategy” from ChatGPT or your previous job?

As a “general counsel,” why not use the completely different transaction documents you saw during your internship here as well?

Since service providers are typically compensated in dollars and token appreciation, they are often the first to get paid in any token project (barring dishonest founders).

So, while it sounds realistic, the best way to succeed in this meta narrative is to:

(a) being the founder of a bad faith,

(b) Try to become a “subject matter expert” on an early seed project.

Investing in random venture deals is unlikely to pay off because everyone entering the Web3 space in mid-2022 is now investing randomly in various seed projects.

Investment projects no longer automatically equal profits.