Why are VC tokens like BERA facing strong opposition in the near future?

Recently, Berachain's launch of BERA token has sparked controversy over "VC coins", once again pushing early investor token allocation issues to the forefront.

What is the root of the BERA token dispute?

Many question the proportion of BERA tokens, focusing especially on the number of tokens held by investors and insiders and their impact on long-term price trends. Other venture-backed blockchain projects such as Aptos, Sei Network and Starknet are facing similar questions, with the crypto community closely following the impact of these token allocation mechanisms on long-term growth and whether it is primarily beneficial to early-stage investors.

We interviewed several investors to try to analyze the reasons why this controversy persists.

Rob Hadick, general partner of Dragonfly, pointed out that the degree of negative reviews is directly related to whether airdrop recipients and early users are profitable. The BERA token failed to meet expectations from many traders, exacerbating negative sentiment. “If the tokens perform better, sentiment on Twitter might be very different,” he said.

Some VC-backed tokens performed poorly, further highlighting concerns about their distribution mechanisms.

Many traders believe that low circulation and high fully diluted valuations (FDV) are the main issues.

Zaheer Ebtikar, founder and chief investment officer of crypto hedge fund Split Capital, said high FDV is often overvalued due to excessive venture capital, as funds need to deploy funds raised from limited partners. But he expects that this trend will change as venture capital slows down, with VC funds decreasing and valuation of early-stage projects will also be reassessed.

Hadick believes that FDV is not the best indicator to evaluate the valuation of crypto projects, because future issuances are not certain and any new supply may dilute market value. He also noted that many liquidity providers and foundations are given incentives to hold unlocked tokens, but once the incentives disappear, they may sell out tokens, increasing the pressure on selling.

Ed Roman, an investor at Berachain and co-founder and managing partner of Hack VC, believes that FDV is determined by the market, not the project party, so the team cannot control the height of the FDV, but they can control the initial supply. He noted that Berachain's 21% circulation rate is higher than other blockchain projects such as Starkware (7.28%) and Sui (5%).

However, Roman also acknowledged that Web3 projects can improve their long-term incentives. He suggested that similar to the practice of Web2 companies giving employees stock options, crypto projects could introduce token-based incentives to increase the likelihood of creating lasting value.

Hyperliquid's Success Stories

Hyperliquid's recently launched non-VC token, HYPE, has soared 140% since its launch in November, and has received widespread praise. But Hadick points out that this pattern is difficult to replicate. Hyperliquid’s success stems from its “very differentiated products and loyal community” and millions of dollars in self-funded development – ​​most projects are difficult to replicate. Hyperliquid has increased the circulation supply by allocating 31% of tokens to users through airdrops.

Boris Revsin, general partner and managing director of Tribe Capital (investor of Berachain), stressed that such a high supply of circulation does not apply to all projects, as projects require funds to be retained to support the continued growth of the ecosystem. He noted that even Ethereum distributes 10% of its supply to teams and foundations, and 40% is reserved for ecosystem growth and early miner rewards.

Hadick recommends that projects should focus on the long-term health of the agreement, align with the core community, and avoid excessive focus on short-term speculation.

Summary

While some VC-backed tokens gradually cooled down after initial hype, others maintained their long-term value. Investors say the difference usually depends on fundamentals, practical applications and market demand.

Roman stressed that the true appeal of blockchain should be reflected in its early ecosystem. As for valuation, the market will eventually decide because investors will price based on future expectations. “The market is a short-term voting machine, and a long-term weighing machine,” he said. “If the team is strong enough, they may build an ecosystem with significant traction and vibrancy.”

Smokey the Berachain's early ecosystem has grown significantly, with projects built on its blockchain having raised over $100 million in venture capital.

However, Ebtikar believes that the market demand for tokens tends to overwhelm its fundamentals. Some Layer 1 tokens, although not very attractive, are valued at billions of dollars, while others with high adoption rates are difficult to support. It depends on “who wants to bid for Token A instead of Token B”. While product-market fit is important, it is not always a decisive factor in success.

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