【Sharing Trilogy】Part 1: The Problem, Why did the Pyramid collapse?
Albert Einstein, “You do not really understand something unless you can explain it to your grandmother.”
The Global Crypto Gold Rush swelled for a couple of months, but it went down even faster than it went up, and has stagnated to where we are now.
Traditional Angel Investors and VC funds usually work together with the projects to create value by connecting resources, providing consultancy, etc. The reason behind this is to make sure the project can properly grow in value, allowing funds to exit in later equity rounds throughout the months or years to come. In this long-term co-operating process, the seed round investors don’t fully exit in Pre-A or A rounds, but wait for a couple of rounds before they can fully exit, in order to maximize the amount of value captured. The key lesson here is that it’s a uni-directional and long-term process, as displayed in the following figure:
One of the reasons for the sudden growth of Crypto projects is due to its “Global” funding nature: a hyper crowd funding mechanism allowing for global investments and liquidity. Fast moving token funds saw the opportunity at hand and took their chance and did earn a good piece of the pie.
The following triangle displays the typical process of the Crypto investment:
Step 1: Teams / projects with a great idea look for 1st tier funds to invest as the early investor with better prices and conditions.
Step 2: With 1st tier fund names backing the project, the teams are now in a comfortable zone to find further investment from 2nd or 3rd tier funds.
Step 3: The team continues to do global road shows, PR, marketing campaigns to create a belief among global retail investors about the project’s value proposition and its future growth, premised on real user adoption and usage need. Projects typically limit the amount of tokens available for private sale so as to induce FOMO from retail investors upon listing, providing the necessary liquidity for presale investors to safely exit.
Step 4: The last part of the pyramid is the supposed product users that will join the ecosystem by using the product and that best displays tokens true value.
With in the pyramid, the following part are buying the bills of the previous ones and as long as there are more retail Crypto investors coming in, then the hype generator has worked and the mechanism can continue to propel itself. Since investors are seeking for a fast in and fast out for the highest possible return, the teams are usually busy with fund raising and marketing instead of the project itself, aka “air token” projects without real users and real projects.
It is not surprising that the pyramid collapsed soon after. Since there are no users at the bottom and retail crypto investors don’t want to be the base of pyramid to pay the bills of previous funds. After being repeatedly dumped on by funds and losing a certain amount of funds, these retail investors learned their lessons and have since become investment passive.
The new bottom base are the 2nd and 3rd tier funds, as they don’t get the same price offers as the first one. These funds can’t afford to pay for the bills and learned their lesson as well soon after, and have since become investment passive.
Now at this stage, there are only 2 players left: the projects and first tier funds. The projects are aware that after releasing the promised tokens to the investors, the first tier funds with the lowest discounts will most likely dump in the market hoping to sustain its high return, where the projects will then need to buy out at a higher cost to stabilize market prices. Hence, the projects try all excuses it can find to not release the tokens.
The fundamental process of investors supporting projects back in traditional investing was unsustainable in most cases in crypto. Instead, the projects and funds spent much more energy fighting over price and quota, and as a result, became enemy of each other. The wheels for such a game have stopped, and the pyramid has collapsed.
Perhaps, it’s an evolution cycle for the bubble to burst so as to allow all participants to rethink and come back to the core value of existence. The Core value is indeed the need of the product for the users, and that’s where it shall all restart.
Besides that, 1st tier funds ought to be more patient and should provide more valuable resources and consulting as in traditional investments; the projects shall refocus on delivering its promises first and target the very bottom of pyramid: the users. With the growth of the user base, then pyramid would reconstruct from base again and retail Crypto investors will have the opportunity to buy from the secondary market for its investments, whereas 2nd and 3rd tier funds can buy a larger piece of the total token pool from projects at more reasonable negotiated prices and lock up terms.
The final lesson learned is to create a product with accurate consumer needs and to design correct token economics to leverage its growth, which will be continued in the next article.
The Sharing Trilogy is authorized by LeadBest’s angel investor JRR Crypto.
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