The risks and benefits of VCs for crypto communities – Cointelegraph Magazine

Traditional venture capital funds drive valuations through multiple funding rounds. Startups aim for initial public offerings or other exits. Then the sharemarket decides upon a more realistic valuation. 

But in cryptoland, tokens introduce market capitalization while a company is being built.

This means there are a lot of competing interests and agendas. Token sales for Web3 startups can be the bastard child of a personality cult leader founder and a bunch of VCs, raised by a group of Discord-dwelling degens manning a DAO, while speculators trade 24/7 and the media circles.

So, how do founding teams get the balance right between the needs and wants of the VCs and what’s best for the community? Are the interests of VC funds aligned with the interests of token holders?

Even VCs were LUNAtics

Let’s start with LUNA’s collapse. Who did the due diligence? VC funding can have a big impact on whether the community invests or thinks a project is legitimate or not. The stamp of big-name funds carries credibility and traction before retailers can invest.

Retail investors got rekt when Terra’s algorithmic stablecoin project and ecosystem collapsed in May. The stories of homes and life savings being lost and suicide hotlines being posted on Reddit were alarming. Memes of Squid Games and Bernie Maddoff’s 150-year prison sentence were mashed up next to Terra founder Do Kwon’s attempt to save the ecosystem with a phoenix-like token called Luna 2.0.

Perhaps representative of retail investors in general, one retail investor who lost a substantial amount when the algorithmic stablecoin collapsed told me, he “didn’t really get it but thought it was too big to collapse overnight.” 

On the other hand, some funds that trade complex financial products for a living made a killing.

Who did the due diligence? Who said pegging two related coins via complex math was a good idea? Most were just plain confused.

One very senior risk analyst at a crypto VC fund told me he held grave reservations regarding the “algorithm stablecoin.” But his team was assuaged by the cap table having some big names in crypto capital.

And he actually read LUNA’s filings from the United States Securities and Exchange Commission.

VCs look at cap tables and see who else invested. LUNA was widely considered a “blue chip” by then, leading among crypto analysts and then reputable institutions,…