Web3 financing is at an inflection point.
Written by: Newman
ICO Frenzy: The Historical Context of Web3 Fundraising
The ICO frenzy of 2017-2018 was a pivotal moment in crypto funding, marked by:
Minimal lock-up and huge returns: VCs enter projects at lower valuations than regular investors and without lock-up periods, resulting in huge returns (e.g., @Zilliqa achieved 50x growth after its ICO in January 2018).
Liquidity concentration: At the time, only a small number of tokens were issued each week in the market, and investors had limited choices. This scarcity drove demand and amplified returns.
VC as a signal: The attraction of VC is not mainly its capital (most ICO projects do not need much capital in the stage without products), but its signaling effect. Projects raise millions of funds by attracting a few well-known VCs, thereby attracting more ICO investors to participate.
However, this period was not sustainable. Scams, money flight and unclear regulation undermined market trust.
By 2019, regulation began to shape a more structured funding environment. Characteristics of this period include:
Longer lock-up period: VCs need to accept longer lock-up periods when entering private rounds. The market can no longer support the hype-driven “same-day unlocking” behavior of VCs in the early days.
Fragmented liquidity: The market is oversaturated with too many ICO projects launching at the same time. Investor demand is no longer concentrated in a few projects, and the hype that early success relied on begins to wane.
VC as a source of funding for builders: Founders need VC funding to develop products before launching tokens. This marks a shift in the funding landscape from speculative ICOs to a more product-focused approach.
After 2019, the market transitioned to what is now often referred to as a “low circulation, high FDV (fully diluted valuation)” environment, where token issuances typically have low circulating supply at launch and high FDV valuations.
Challenges facing VCs today
Despite the important role VC has played historically, in today’s market, VC faces increasing challenges:
1. Tokenomics Mismatch
Historically, VCs have entered at low valuations and with short lock-up periods, which is inconsistent with the interests of ordinary investors. This has led to reputational issues and a lack of trust.
Poorly designed tokenomics (e.g. low circulation, high FDV) lead to projects experiencing “continuous and expected sell-offs” after launch.
2. Reduced demand for VC funding
Wealthier founders: Successful founders no longer rely on VCs, but instead use their personal resources to launch projects.
Retail-driven models: Examples include Memecoin and high circulation offerings (see @HyperliquidX) showing that some projects can succeed without VC involvement.
Weakened signaling effect: 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, communities and users are the driving force for success. However, VCs are not good at reaching out to communities.
As a result, the role of traditional VCs is gradually being replaced by well-known angel investors, who tend to have closer connections with end users and are better able to drive community-driven growth.
The future role of VCs
While the need for VC funding may be uncertain, there are certain situations in which VC still makes sense:
1. Deeply participate 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 that are deeply embedded in the trenches. This involvement enables them to provide unique insights into evolving growth hacking strategies, Tokenomics designs, 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 transform from passive financiers of capital to active strategic partners.
3. Selective participation
VCs can focus on a small number of investment projects, concentrating their efforts on contributing to these projects, while using a "cast net" approach for smaller investments.
Founders tend to keep the investor structure small, preferring investors who are few in number but can make substantial contributions.
Interesting recent/upcoming projects
1. Hyperliquid (@HyperliquidX)
It is possible to adopt a high circulation, non-VC-participated issuance method to test whether the market can maintain price stability without long-term lock-up.
If successful, it could establish a new model for other projects, but it also faces challenges such as first-day selling pressure.
2.BIO Protocol (@bioprotocol)
A combination of VC rounds and public auctions allowed participants to redeem $BIO with WETH or the original child DAO tokens.
Expand community members through public auctions and introduce VC investment to achieve wider community coverage.
3.Universal Basic Compute $UBC (@UBC4ai)
A fair launch similar to Memecoin, with no team allocation, no pre-sale, and no airdrop.
Potential new financing models
To transition from a low-volume, 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 investing in projects at similar or even the same valuations may receive larger allocations than retail investors, but are subject to stricter lock-ups. 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, more organic growth for the project.
2. No VC Model
Projects raise 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 could 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/ecosystem pool, team and advisor pool, or treasury pool. Founders/developers need to purchase tokens on the open market, aligned with 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, airdrops or pre-sales.
The future of tokenomics
As the market continues to evolve, the ideal Tokenomics structure (for non-Memecoins) becomes clearer:
1. Alignment of interests
VCs enter at similar valuations to retail players and ensure long-term interest alignment by locking positions.
The trade-off is that VCs get a larger percentage of the allocation than retail.
2. Relatively high initial circulation
While referencing Memecoin-inspired Tokenomics, projects should aim to achieve 60%-70% of circulating supply at launch to ensure liquidity and reduce the possibility of manipulation.
3. Changes in Token Pool Structure
Unlike Memecoin, the project requires continuous operating funds, so it is impossible to achieve 100% initial circulation. 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 expectations for the previous 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 method. 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 Fundraising and the Future of VC
Web3 financing is at an inflection point. High-volume, no-VC models are challenging traditional norms, but the role of VCs remains critical in areas that require large upfront investments. The future of Web3 financing may combine the best of both worlds:
For founders: A streamlined investor structure and redesigned Tokenomics will allow projects to engage their communities while aligning with investors.
For VCs: The focus will shift from capital deployment to providing focused value services 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 the market experiments with these new paradigms, successful cases will pave the way for broader adoption, creating a more sustainable and equitable funding environment for Web3.
