From the former 'investment barometer' to today's 'VCs are feared', crypto venture capital is undergoing a necessary demystification and cleansing.
Article author: Nancy
Source: PANews
The darkest moment is also the moment of rebirth. This brutal process of de-bubbling is forcing the crypto market to establish a healthier and more sustainable valuation logic, while also promoting the industry to return to rational construction and maturity.
Star VC collapses, the moment of demystifying the elite halo
Another crypto venture capital firm has collapsed. On December 17, Shima Capital was reported to be quietly winding down operations.
In this brutal crypto cycle, the exit of VCs is not uncommon, but Shima Capital's departure is not dignified. Unlike other VCs that died from liquidity exhaustion or were dragged down by poor portfolios, Shima Capital's troubles stem more from internal moral hazards and management chaos.
The direct trigger for this decision was the lawsuit filed by the U.S. SEC against the institution and its founder Yida Gao three weeks ago. The allegations claim that it violated multiple securities laws and illegally raised over $169.9 million from investors through fraudulent means.
Under regulatory pressure, Yida Gao quickly chose to reach a settlement with the SEC and the U.S. Department of Justice, paying a fine of about $4 million while deciding to close the fund and announcing his resignation from all positions, expressing deep regret over his "misleading decisions." The foundation entered a liquidation process and will gradually liquidate assets to repay investors as the market allows.
As a once-high-frequency star VC in the crypto field, Shima Capital's rise relies more on the elite aura of its founder. Yida Gao, a Chinese-American, was a top student on Wall Street, with a background from MIT, and had replaced former SEC chair Gary Gensler to teach a crypto course at MIT, with experience including Morgan Stanley and New Enterprise Associates.
With this background, Shima's first fund easily raised $200 million, with investors including Dragonfly, hedge fund billionaire Bill Ackman, Animoca, OKX, Republic Capital, Digital Currency Group, and Mirana Ventures.
With massive funds in hand, Shima has become one of the most active catchers of the last cycle, betting on over 200 crypto projects, including popular ones like Monad, Puddy Penguins, Solv, Berachain, 1inch, Coin98, etc. Despite the large portfolio, Shima and its team were evaluated by investors as young and inexperienced, not truly understanding the industry, merely following the speculative trend of cryptocurrencies.
More seriously, all of this is built on lies. According to the SEC's indictment documents, while raising $158 million for the Shima Capital Fund I, he fabricated past performances, claiming that one of his investments achieved a 90-fold return, while the actual data was only 2.8 times. When the lies faced the risk of being exposed, he even attempted to use a "typo" to excuse himself to the investors.
Not only that, Yida Gao raised funds from investors to purchase BitClout tokens through an SPV, promising discounts and principal protection. However, in reality, although he bought the tokens at low prices, he did not provide them to investors at the original price but rather resold them at a markup to his own SPV, secretly profiting $1.9 million without disclosure.
From a long-term perspective, Shima's exit also sends a positive signal to the market: crypto wrongdoing is no longer a lawless land, and the industry's transparency and moral standards will be better improved.
Related reading: Revealing the founder of Shima Capital accused of misappropriating assets: from Fujian immigrant to Wall Street financial elite.
The era of easy profits has ended; VCs have entered an evolutionary phase.
The so-called VC model's failure is essentially the market forcing the industry to evolve.
Currently, the linear model of "VCs gathering and retail investors taking over" has been broken, and funds are rapidly withdrawing from air projects. For example, not long ago, after the luxurious investment lineup of Monad went live, it still struggled with price issues, causing many VCs to "break defense," with firms like Dragonfly engaging in intense debates over value valuations.
The industry's game rules have changed. Whether it’s the success of projects without VC financing (like Hyperliquid) or the community's resistance to overvalued projects, they are actually pushing venture capital firms out of their arrogant ivory towers. Only when the path of making quick money by merely relying on "issuing and selling tokens" is blocked will VCs truly calm down to seek projects that have the ability to generate revenue and solve real problems.
This pain is evident. As retail investors exit, leading to liquidity depletion, traditional exit channels for VCs are blocked, and valuation adjustments not only lengthen the return cycle but also leave a large number of investments facing severe paper losses.
Recently, Akshat Vaidya, co-founder of the Arthur Hayes family office Maelstrom, publicly complained that the principal of his investment in a certain Pantera fund four years ago has nearly halved, while Bitcoin has risen about twofold during the same period.
Even more VCs told PANews that they are overwhelmed by exits; even if they participated in seed rounds, the current value of the tokens they hold is below the cost price. Even if projects go live on top exchanges like Binance, they only recover one-fifth of their principal after many years. Many projects choose to casually list on smaller exchanges to explain to investors, but there is fundamentally no liquidity exit, and some projects simply choose to lie flat, with responses like 'waiting for the right moment.'
Glassnode data shows that currently only about 2% of altcoin supply is in profit, presenting an unprecedented market divergence. Historically, it is uncommon for altcoins to continuously underperform during Bitcoin bull markets.
Data confirms that the era of easy profits has completely ended.
The end of an era means the beginning of another. Rui from HashKey Ventures pointed out on social media that VCs are not afraid of enduring but are afraid of quick outcomes, which is also why bear markets are more suitable for VCs. To truly succeed, one must endure until the next dead silence period; unlike project parties, VCs are quite capable of enduring. Meanwhile, most crypto VCs essentially rely on arbitrage from information asymmetry, combined with some path dependence, to earn a bit of hard-earned money and channel fees. More importantly, many of these individuals have now turned into market agents or market makers; the fundamental difference is not great.
First build roads, then construct buildings, and seek certain opportunities.
Faced with the retreat of hot money, VCs are not all 'fleeing,' but are strategically retracting and adjusting their frontlines.
"If a project doesn’t have a data dashboard, we won’t invest in it." Recent participants at Dubai's crypto events revealed that VCs are now more focused on actual business data rather than just stories. Facing a grim reality, VCs have significantly raised investment thresholds, or even completely abandoned new investments.
Dovey Wan, founder of Primitive Ventures, admitted that for investors, the ratio of strength to luck that can be exchanged is becoming increasingly harsh, especially in the post-GPT era. This applies to all industries; choice is more important than effort, but choice is much harder than effort.
Pantera Capital recently revealed a positive trend in a video. According to its disclosures, although the total amount of financing in the crypto field this year reached $34 billion, surpassing the records of 2021 and 2022, the number of transactions has decreased by nearly 50%. There are several main reasons behind this phenomenon: firstly, the investor structure has changed. Family offices and individual investors that were active during 2021 to 2022 have become more cautious after suffering losses in the bear market, with some even choosing to exit the market; secondly, existing VCs' investment strategies are becoming more concentrated, tending to invest funds into a few high-quality projects rather than spreading them thinly like before, as the costs of starting new projects in terms of funding, time, and resources are now higher; on the other hand, some funds have shifted to relatively safer assets, explaining why in this cycle, a large amount of capital is highly concentrated in Bitcoin and a few mainstream assets; finally, while funds are ample, the pace of deployment has slowed. Many venture capital funds raised a large amount of capital in 2021 and 2022, and now hold plenty of "ammunition," mainly used to support existing portfolios, and are not in a hurry to invest in new projects. From a longer-term perspective, this change is not a negative signal but rather a sign of the market's maturation.
Galaxy Research recently analyzed Q3 investment reports, noting that the investment amount from crypto VCs increased that season but was relatively concentrated. At the same time, nearly 60% of investment funds flowed to later-stage companies, the second highest level since the first quarter of 2021. Compared to 2022, venture capital fundraising data also shows a significant decline in investor interest. This data also demonstrates that VCs are more willing to double down on certainty opportunities.
To hedge against the risks of a single market, some crypto VCs have begun to "stray from their main business" and target markets outside of crypto-native ones. For example, the recent investment list from YZi Labs shows that its focus has shifted to biotech, robotics, and other non-crypto sectors. Some crypto-native funds have already begun investing in AI projects; although they don't have significant bargaining advantages compared to tech funds, it is an attempt at transformation.
Pantera also reflected on the investments from the last cycle. "In the last cycle, a large amount of capital flowed into speculative fields like NFTs and the metaverse. These projects attempted to skip infrastructure and directly build the 'cultural top layer.' But just like building castles on sand, the underlying infrastructure was not ready, the payment rails were not mature, the regulatory environment was unclear, and the user experience was far from mainstream. The industry was too eager to seek killer applications, pouring resources into application layers that lacked soil."
Pantera believes that the current crypto cycle is undergoing necessary "corrections." Now, funds are increasingly flowing towards infrastructure development, such as more efficient payment chains, more mature privacy tools, and stablecoin systems. This path is the correct order; the next cycle's applications will only have the conditions to truly explode.
First lay a solid foundation, then build the skyscraper.
The brutal cleansing of crypto VCs today is both a pain and a reshaping.
