What Are VC-Backed Tokens: The Role of Large Crypto Investors
Funding has a decisive role in crypto. Projects need capital for development, user experience design, testing, and other purposes. The sale of a native cryptocurrency is a common way to raise funds. In the case of VC-backed tokens, large investors access a portion of the token’s total supply before the public launch.
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Venture Capital in the Crypto Industry
Venture Capitalists are investors who finance young companies in exchange for ownership shares, which in the crypto industry are represented by tokens. These investors include both VC firms that pool funds from various sources and individual investors who work independently.
VCs typically target projects with high growth potential, often investing when a company has a working prototype and is moving towards commercialization. According to Harward Business Review, 80% of venture capital funding is allocated to building business infrastructure, acquiring fixed assets, and covering daily operational costs. VC funds have different strategies and can be focused on certain industries. Among the VC companies focused on Web3 are Pantera Capital, a16z crypto, Coinbase Ventures, and others. VC investments in crypto come in different ways: strategic partnerships, private token sales, and direct investments into company shares among other options.
Statistically, VC funding involves investments of millions of dollars. According to Galaxy Research, the average size of VC investment in crypto startups in the second quarter of 2024 was $3.2 million. Besides the financial part, VCs can support a startup’s growth by providing a network of connections and business resources.
VC-Backed Tokens and Private Sales
In the early stages of a cryptocurrency launch, projects may choose to hold invitation-based private sales before making the token publicly available. During private sale events, exact investors can buy the asset at a low price. VC-backed tokens usually have a lockup period when investors can’t sell their tokens to prevent the sell-off and associated price valuation.
Private sales can be an important step for crypto startups to secure initial liquidity and create a solid base, while also offering investors the opportunity to purchase tokens at good prices. Among the biggest tokens which release involved this step is Solana (SOL). On June 9, 2021, Solana completed the private sale of its native SOL token raising over $314M from investors including a16z, Jump Trading, Multicoin Capital, Polychain Capital and others. During the private sale, SOL’s price varied from $0.04 to $0.2 across different rounds. To prevent price volatility, there was a lockup period for initial investors that lasted until June 9, 2021. The public launch of SOL had taken place earlier on Coinlist in March 2020, with the token priced at $0.22, showing only a slight difference from the private sale price. In total, Solana raised $359.7 million.
Other crypto tokens holding private sales and receiving VC funding include Avalanche (AVAX), Optimism (OP), Quant (QNT), and others.
The Balance Between Private and Public Sales and Concerns of Retail Investors
Sometimes, the difference between the token’s price during private and public sales can create concerns about fair pricing. However, it’s important to note that projects have different launching strategies, and for some VC funding is a way to form initial liquidity and attract funds for further growth. The practice of holding private sales is also common outside crypto as public companies can choose to sell company stocks to large investors at lower prices in primary markets.
A VC-backed token often means that large investors have some ownership of the project and may influence its development. This can be beneficial for the token development team and investors by combining the experience of VCs with crypto teams and the community.
However, it’s important to take into account that VC funding doesn’t always guarantee post-ICO price growth. At the initial stages of token launch and distribution prices can be highly volatile because traders are interested in buying tokens so as not to miss future gains. If you’re planning to invest in a VC-backed token, research the project, to be aware of its mission, fundamentals, and possible risks.
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