The Turning Point for Crypto VCs: From Token Arbitrage to Project Quality Reevaluation

Behind the failure of SAFT, there are three fatal flaws in the old model.

Written by: Paul Klay, Venture Partner at Begin Capital

Compiled by: Saoirse, Foresight News

Recently, the majority of token generation events (TGEs) have performed poorly after launch, with a few projects rising against the trend, raising market concerns about their compliance.

Investing through the SAFT agreement essentially follows this logic: token issuance has torn a hole in the traditional venture capital model, resembling prediction markets and gambling.

Note: SAFT, Simple Agreement for Future Tokens, is an early financing tool for crypto projects where investors provide funds in exchange for the right to receive tokens after the project goes live or the TGE occurs, representing a pre-token subscription agreement.

In the Web2 space, venture capital firms and founders typically rely on project exits or IPOs to make money. Both of these monetization paths are extremely scarce and challenging. However, in the crypto industry, even if a project fails, the team can still issue tokens. Retail investors come in to take over, and the project instantly gains liquidity.

In traditional venture capital, typically only one out of ten projects can recoup the entire fund's cost, while the other nine go to zero; in the crypto space, theoretically, all ten projects have a chance to yield returns.

Sounds pretty good, right? But this system has three fatal flaws:

Wealth Does Not Appear Out of Thin Air

IPOs have a clear and complete process. Companies undergo strict scrutiny, financial data is verified, regulatory oversight is involved, and valuations are generally tied to the company's current profitability and market expectations for future earnings.

The operation of the crypto industry is almost the exact opposite. Not long ago, projects wanting to list on top exchanges faced minimal scrutiny. As long as trading volume was sufficient, they could go live. The market cap of tokens often has little to do with the project's actual business fundamentals.

Investors hold token rights, while the project retains all operational income. Thus, the economic interests of both parties are completely severed.

What was originally seen as a simplified version of an IPO has ultimately turned into a casino. Retail investors lose money, gradually lose interest in participating, and eventually exit the market.

Only now is the market beginning to realize that what truly matters is quite simple: Can this company be profitable? Does the product have real users? Are these users real people, or bots and airdrop hunters?

Complete Lack of Transparency

This may be the biggest problem. The group controlling the entire process is almost the only one that knows the real situation.

You cannot verify whether KOLs actually received promotional fees; you cannot determine why market makers made certain moves; you cannot explain why a large amount of tokens suddenly flooded the market just one minute after listing; you cannot trace where the marketing budget was spent; and you cannot even discern the truth behind most of the statements given by the project team.

Unless you directly participate in the project operation, you can only choose to believe the stories told by others.

For many years, a large number of crypto VCs have been indifferent to this. They do not seriously investigate the truth of events, the motives behind them, or the flow of funds. They only care about issuing tokens. Until everyone started going bankrupt one after another.

The Entire Process is Extremely Complex

In the past, this space relied more on hype rather than the actual value of companies. To make money, you need to understand a vast array of variables: marketing, KOLs, exchanges, market makers, launch platforms, liquidity, listing arrangements, and token distribution.

One decision could yield a 500% return, but another could result in a total loss. Distinguishing between the two usually requires years of industry experience and a complete understanding of the entire token issuance process.

This is worlds apart from an IPO. The game in the crypto space is often not about assessing the intrinsic value of the asset itself, but about finding ways to sell it at a price far above its actual value. Many have honed their skills to perfection in this regard.

So what is happening now in the crypto VC industry? Everyone is slowly realizing that the old model is no longer viable. This is also why we are seeing these changes:

• SAFE and SAFT agreements have almost become standard;

Note: SAFE, Simple Agreement for Future Equity, is a traditional early financing tool in Web2 where investors provide funds and receive shares when the company's equity matures, corresponding to equity, not tokens. SAFE and SAFT agreements have almost become standard, indicating that in current Web3 project financing, the mixed use of these two agreements is becoming increasingly common. Some receive equity, while others receive future tokens, no longer relying solely on SAFT to speculate on token listings, marking a shift from pure token speculation to regulated financing in the industry.

• The industry places greater emphasis on real income and clearly understandable business models;
• Due diligence (DD) is becoming more aligned with the Web2 industry;
• More funds are flowing into sectors that have validated product-market fit (PMF): gambling and prediction markets, meme coin launch platforms, payments, digital neobanks, fiat on/off ramps, artificial intelligence; DePIN and RWA sectors receive relatively less funding.

In the past, Web3 fundraising was a wild frontier. Now, if your project can secure funding in Web3, theoretically, it can also raise money in the Web2 market.

Where will the industry head next? The industry is maturing.

Those venture capital firms that once could blindly throw money around have either exited the market or learned painful lessons. The firms that remain are building more rigorous investment processes. This is actually a good thing. Because only in this way can the industry potentially give birth to more truly viable crypto applications and quality products.

Retail investors are also becoming more rational. Now, there are only two types of plays left in the market: one is where you clearly understand this is purely gambling, quick in and out; the other is where the project has real products, real users, and real income, making holding this asset logically reasonable.

The middle ground is disappearing.

"We will soon launch an amazing product," "The project is progressing smoothly," "There will be major positive news next month"... Such phrases that once made people a fortune are now hard to fool anyone with.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.