The VC-dominated crypto funding model needs a reboot
Does the crypto industry’s funding space need an overhaul? This is one of many questions swirling in the wake of FTX’s downfall: When the prominent exchange collapsed, it left behind a long line of helpless creditors and lenders — including many promising projects dependent on funds promised by Sam Bankman-Fried and company.
But there is a bigger problem at the heart of the current funding picture, wherein deep-pocketed venture capital firms throw their weight around in the low-liquidity Web3 market, heavily backing early-stage projects before cashing out at a profit once retail has FOMO'd into the market.
For all the talk of how blockchain and cryptocurrencies represent a critical fiat off-ramp and a wholesome pathway towards greater decentralization, transparency, fairness and inclusion, this notion is truly pie-in-the-sky when it comes to how projects are currently financed.
The problem starts with a project’s pre-sale/closed sale, which naturally favors the sort of wealthy venture capital firms that are in a position to inject substantial capital, typically in return for significantly discounted tokens. At this juncture, VCs invariably promote their portfolios and the token of choice, causing many retail investors — buoyed by the fact that a reputable name is backing a project — to grab a bag for themselves.
Related: 5 tips for investing during a global recession
When retail enters en masse, liquidity naturally goes up, enabling the early backers to exit their positions while in the green. You might ask: Well, what else are they supposed to do? The raison d’etre of a VC is to make money for its limited partners, and if that is achieved by dumping on the market, most won’t bat an eyelid. To quote Omar Little in The Wire:
Read more on cointelegraph.com
