Crypto was unique for allowing retail investors access before Wall Street. Now, the market is dominated by venture capitalists who launch tokens at inflated valuations with long unlocking schedules, effectively using retail buyers as exit liquidity.
Related Insights
The rallying cry to give retail investors access to elite opportunities is not new; this same narrative fueled mass participation in the leveraged 1920s stock market bubble. Today, similar rhetoric surrounds cryptocurrency and private equity in 401(k)s, serving as a potential historical warning sign.
The default VC practice of distributing shares after an IPO lockup can leave massive gains on the table. Missing a multi-billion dollar run-up suggests a more nuanced, case-by-case discussion with LPs is needed, as holding can be the difference between a 5x and a 15x fund.
Y Combinator's model pushes companies to raise at high valuations, often bypassing traditional seed rounds. Simultaneously, mega-funds cherry-pick the most proven founders at prices seed funds cannot compete with. This leaves traditional seed funds fighting for a narrowing and less attractive middle ground.
The standard VC practice of distributing shares to LPs immediately after a lockup expires can be a multi-billion dollar error. The case of selling Reddit at a $9B valuation, only to see it rise much higher, highlights that VCs may need to evolve into holding public positions longer, challenging the traditional model.
When private equity firms begin marketing to retail investors, it's less about sharing wealth and more a sign of distress. This pivot often occurs when institutional backers demand returns and raising new capital becomes difficult, forcing firms to tap the public for liquidity.
Unlike assets like commodities or private markets where institutions pioneer adoption, cryptocurrencies saw retail investors lead the charge. Institutions are only now slowly beginning to explore allocations, reversing the historical trend of top-down financial innovation.
The venture capital paradigm has inverted. Historically, private companies traded at an "illiquidity discount" to their public counterparts. Now, for elite companies, there is an "access premium" where investors pay more for private shares due to scarcity and hype. This makes staying private longer more attractive.
The venture capital return model has shifted so dramatically that even some multi-billion-dollar exits are insufficient. This forces VCs to screen for 'immortal' founders capable of building $10B+ companies from inception, making traditionally solid businesses run by 'mortal founders' increasingly uninvestable by top funds.
Seed funds that primarily act as a supply chain for Series A investors—optimizing for quick markups rather than fundamental value—are failing. This 'factory model' pushes them into the hyper-competitive 'white hot center' of the market, where deals are priced to perfection and outlier returns are rare.
The trend of companies staying private longer and raising huge late-stage rounds isn't just about VC exuberance. It's a direct consequence of a series of regulations (like Sarbanes-Oxley) that made going public extremely costly and onerous. As a result, the private capital markets evolved to fill the gap, fundamentally changing venture capital.
