Why do VCs raise the FDV of projects? Investment from the perspective of meme

Original author: @yashhsm
Original translation: Lucy, BlockBeats

Editor's note:
@yashhsm put forward a point of view in the tweet that governance tokens are essentially meme coins. Starting from the project agreement, he analyzed and compared the similarities between governance tokens and meme coins to explain why VCs need to raise FDV. In addition, @yashhsm also expressed his insights on project financing, community building and fair launch, and proposed a more fair launch direction for cryptocurrency projects. BlockBeats translated the original text as follows:

Venture capitalists hate meme coins, but I will explain why there is no difference between meme coins and governance tokens.

Governance tokens are just meme coins in suits.

Governance tokens are meme coins with a few more steps

All governance tokens are essentially meme coins, and their value comes from the meme origins of the protocol. Why do you say that?

· No revenue sharing (because of regulatory safety)

· Governance tokens do not perform well in community-oriented decision-making frameworks.

Tokens tend to be concentrated in the hands of a certain group of people and have low participation or dysfunctional DAOs, which makes them useless as meme coins. Whether it is ARB (Arbitrum's governance token) or WLD (Worldcoin's token), they are essentially meme coins attached to these projects.

Governance tokens can cause the same harm to communities as meme coins in many cases:

· Community: Most governance tokens are VC-backed coins that launch at high valuations and slowly migrate to retail investors.

· Builders: Many high-profile VC-backed governance tokens launched before product (e.g. Zeus launched with $1B FDV), which led to massive disillusionment. And many founders have struggled to even reach such valuations after making significant progress.

Not saying Zeus won’t succeed, just pointing out that it’s common practice for tokens to launch before product. Even ICOs (initial coin offerings) from 2017 are preferable to current VC-backed low-circulation tokens because they are more equitable with the majority of supply unlocked at launch.

Take EigenLayer as an example, a typical low float, high FDV investment strategy, backed by VCs with 29.5% of the shares. Insiders (VCs and team) hold a large stake of 55%. Last cycle, we blamed FTX/Alameda, but this cycle we are no better.

If a group of insiders holds more than 50%, we have severely hindered the redistributive effect of cryptocurrencies and have insiders enriched themselves on high FDV launches. If insiders truly believe that they are better off reducing their distributions given the launch of high FDV tokens.

Can the real cabal step up?

Given the absurdity of the capital formation process - we ultimately conclude:

· VCs blame meme coins

· Meme creators blame VCs

This leads to serious regulatory confusion and reputational harm, affecting the credibility of serious builders. But why are VCs so harmful to tokens?

There is a structural reason for VCs to inflate FDV. For example, a large VC fund invests $4 million for a 20% stake at a $20 million valuation; it stands to reason that they must increase the FDV to at least $400 million at the TGE to make it profitable for limited partners (LPs).

The larger the fund, the more likely they are to give a project:

A ridiculously high private valuation → Build a strong narrative → Raise money in a higher valuation round (raising early/seed investors’ investment) → Launch at a higher public valuation → Sell off on retail investors.

Launching at a high FDV only leads to a downward spiral and zero market share, like Starkware. Launching at a lower FDV allows retail investors to profit from repricing and helps form community buy-in and market share, like Celestia.

Retail investors are more sensitive to unlocks than ever before. In May alone, $1.25 billion worth of Pyth tokens will be unlocked, along with hundreds of millions from projects like Avalanche, Aptos, Arbitrum, and more. [Check out @Token_Unlocks]

Meme coins are the result of a broken financial system (like Bitcoin after the financial crisis)

Negative/zero real interest rates force every saver to speculate on new shiny asset classes (e.g., meme coins). Zero interest rate environments create markets flooded with zombie companies.

Even top indexes like the SP 500 have ~5% zombie companies, and now with rising interest rates it’s going to get worse, making them not much better than meme coins.

To make matters worse, they’ve been hyped by fund managers and retail investors have been buying them every month, like GME.

As the financial nihilism research says, speculation will never go away, and the epitome of this cycle is meme coins.

Meme coins are battle testing infrastructure

I disagree with @eddylazzarin (a16z CTO)’s position. Meme coins are a net positive for the network.

Without meme coins, chains like Solana would not face network congestion, and all network/economic errors would not be exposed. But meme coins on Solana have brought a net positive effect:

· All decentralized exchanges not only processed record trading volume, but also exceeded their Ethereum counterparts.

· Money markets integrate meme coins to increase total locked value.

· Validators earn huge fees via priority fees and MEV.

· Consumer apps integrate meme coins to attract attention or for marketing purposes.

· DeFi is having a broader impact due to increased liquidity and activity.

For real physical assets to be traded on-chain, we need stress-tested infrastructure and liquidity (DEX/broader DeFi; look at the top meme coins; they have the deepest liquidity outside of L1 tokens/stablecoins).

Meme coins are not a distraction; they are just another asset class on the blockchain.

Meme coins as a fundraising mechanism

Looking at pump.fun on Solana, thousands of meme coins are issued every day, generating millions of dollars in fees. For the first time in human history, anyone can create and participate in a financial product for less than $2 and in less than 2 minutes. Meme coins can serve as an excellent fundraising and GTM strategy.

Traditionally: projects raise funds by allocating 15-20% of funds to venture capital firms (VCs) → develop products → launch tokens → build communities through memes/marketing. However, this community is eventually abandoned by the VCs.

In the meme coin era: launch a meme coin (no roadmap, just for fun) → raise funds → form a tribal community early → build applications/infrastructure → continue to add utility to the meme coin, rather than making false promises or providing a roadmap.

This approach leverages the tribalism (holder bias) of the meme coin community and ensures high engagement of community members who become your BD/marketers. Ensures a more equitable token distribution and counters the low circulation high valuation pump and dump strategy adopted by VCs.

This trend will eventually lead to the convergence of meme coins and governance tokens:

· @bonkbot_io, a Telegram bot (peak daily trading volume of $25 billion), was born from BONKmeme coin and burns 10% of transaction fees.

· @degentokenbase, Farcaster meme coin (now building L3)

What does the future hold?

Everyone wants to be early; meme coins give retail investors this leverage over slower institutions due to limited access to VC private deals. While meme coins empower communities, this does make crypto look like a casino.

So, what is the solution?

For VCs, put your deals on a platform like @echodotxyz, engage the community in collaborative deals, and witness the meme-coin magic of communities rallying around projects from the early stages.

To be clear, I am not against VC/private rounds; VCs should be rewarded for their early risk-taking. I am simply advocating for a fairer distribution; creating a level playing field where everyone has a chance at financial sovereignty.

Crypto is not just about open and permissionless technology; it is also about making early-stage rounds open, a process that is currently as opaque as traditional startups.

To summarize this massive post:

· Everything is meme coin.

· Research meme coins as a fundraising and community building mechanism.

· Projects should move toward fairer launches.

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