VC’s double dilemma: LPs face low returns and high risks, while GPs lose their hunger for the market

Original author: ivangbi, Lobsterdao administrator

Original translation: TechFlow

Today, being a limited partner (LP) in VC is a disappointing thing. The situation at this time is too difficult. This is not just a game of general partners traveling around and attending dinner parties, but a real return challenge. Many well-known funds are emotionally withdrawing, becoming complacent with the market, losing their hunger, and therefore just buying anything they can get. No wonder - they don't plan to continue working after the current cycle. Since 2021, the slack strategy has become worse and worse to the point of suffering a miserable failure. The trends are as follows:

1. There are dirty tricks related to transactions

Every second transaction (yes, it's shockingly bad) is incubated by other funds, simply put, pumped up or dumped to follow the narrative. These financings or products did not come naturally, and these founders did not embark on this journey spontaneously. It’s all put together by someone behind the scenes. This means they have a huge stake in the early rounds, and so does the team. At that point, even if you’re early enough, you’re just the 10th person in line. You don’t even get any benefits. Also, GPs will accept personal checks (or LPs investing in some other funds that co-invest but actually sell, or even some advisors) to sell before their LPs, which is actually a fraud, almost semi-criminal, but it happens too often nowadays.

2. Slim chance of a complete exit

At today’s funding scale, these investments will never be liquid. This was already true last year. The problem is not that the package will depreciate, but that the fund cannot sell it. As an angel investor, you may still make some small profits at the same fully diluted value (FDV), but as a fund, it is much more difficult to do so. You enter at a high valuation, but the time gap between tokens and liquidity is years. I can understand buying into a project at a valuation of 100 million and then the token is live in 1 year. But since 2022, almost no projects have listed their tokens. Add to that a 2-year lockup period (i.e., tokens cannot be sold during this period), and you're facing a 5-year liquidity gap. This is at least 2 times the previous time.

3. Web2's power-law diminishing returns

It's a total Web2 vibe at this point, but you still don't get effective protection. Equity support, golden handcuffs for founders, and other legal boundaries have become more real in this cycle, but are still relatively vague. To make matters worse, there are too many funds, projects, and overall saturation. You're not entering a 10x game, but a game that will only give you a maximum of 2x returns in the next few years. In the current state, holding mainstream coins is clearly a better approach than buying new shiny tokens. This has always been the case, but before you could risk pursuing 10x returns. Now the average return you risk pursuing is only 2x.

I am not saying that all VCs are bad or underperforming. Many are coming to the same conclusions, or have already come to them, but just haven't expressed them publicly. I am just mentioning the challenges ahead.

Either a full 3-4 year bear market is needed to completely shake things out, or the user base must grow 10x to justify the growth in valuation. Of course, the latter is preferable! Alternatively, you can invest in a still tiny niche that you expect to grow even if the industry doesn't magically grow 10x. That's fine too. But VCs rarely invest in such small niches because they prefer the security of losing or winning together. After all, it's all a cycle. But the investment cycle of VCs is something you have to consider.

I am also not saying there is anything wrong with the projects that have already been launched. The teams that are still alive and existing are shrinking every day, and their foundation and experience are getting stronger.

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