Here’s the thing. When was the last time you were involved in a popular ICO or DEX? Ever stop to think about those who invested before you? Those powerful venture capitalists (VCs). Those so-called qualified investors who made millions.
The truth is that these people were probably getting tokens at a better price than the public open token price. It seems like a shady world where private placements only make the rich and powerful richer, right?
What is venture capital?
Before you start, it may be necessary to do some groundwork and explain what a venture capitalist is. If you know all that, then chances are you’ll want to ease into the next topic.
In short, venture capitalists pool investor capital from high net worth individuals and use it to fund cryptocurrency projects that are still in their early stages. In return, these crypto-venture capital firms typically provide tokens for their investors or, in some cases, for equity.
Essentially, the name of the game for crypto venture capitalists is to find great projects, get tokens at a good price, get these crazy multiples for their investors, and take a cut of the profits.
The problem, however, is that contrary to public opinion, most venture capital firms do not want to fund crypto startups from offsets. Instead, many of the targeted projects are at the stage where the idea is being commercialized.
So, in essence, venture capital funds provide money to help projects pay for developers, user testing, UI and UX, etc.
The truth is that most solid crypto projects launched through IDO or IEO have been working for at least a year before selling any tokens to the public. But where do these projects get the money to hire everyone on their team? That’s most likely through venture capital funding. After all, most people don’t work for free.
So, venture capitalists just put other people’s money into crypto projects and then get a cut of the profits without doing anything. Well, not exactly. What many people don’t realize is that many young crypto projects actually lack experience in obtaining additional financing, strategic planning, legal, accounting, and recruiting. Essentially, this is something that most fledgling tech geeks don’t want to care about.
Additional funding may take the form of ties to top IEO platforms (such as Binance Launchpad), and strategic planning may involve things like optimizing the token economics of the project.
Think about the strategic relationships that crypto VCs must have in this space and the value that a brand new project can derive from this network. This could be helpful for marketing, content distribution, and even getting favorable terms for coin uploads to popular exchanges.
In short, these venture capitalists essentially provide capital, strategic insight and a network of contacts for a project. These are all very valuable things, which is why venture capitalists typically get super deals in private placements.
After all, they invest earlier than people like you and me and essentially take on more risk. Best of all, they bring all that extra expertise with them.
What does the mechanics of a crypto private placement look like?
Now, not really wanting to whitewash this, but the reason private placements are so secretive is that many junk coins are reluctant to share the details of what happens behind closed doors. If you’re doing something unseen, it’s usually a bad strategy to talk about it.
Another major problem is that most people don’t know where to find information about these private placements, or know what to do if they do. This has led many to worry about crypto venture capitalists and private equity giants dumping on token holders.
The situation is such that most private placements have two main rounds. First, the best price for tokens is found in the initial seed round. Next, a private placement round is conducted.
All of this happens before the IDO or IEO and generally it can be involved. So if you want to know if you have the opportunity to participate in these private placements and get into that hot program before the regular.
Some programs seem to open these private sales to qualified investors willing to offer a very high minimum investment, and most programs seem to operate on an invitation-only basis. But who will be invited? The main players will be those crypto-venture capital firms.
Private Placement and Venture Capital
There is a very important question. Our normal cryptocurrency traders have reason to fear that these “evil” venture capitalists will throw their baggage at them. A good project to use as a case study here is Mina Protocol (MINA).
Because they actually provide a lot of public information about private placements. So all users need to know is that Mina sold about 75 million old tokens to the public in April 2021 at 25 cents per token. That’s about 28% of the available tokens.
Now, that may sound like a lot of tokens until one realizes that over 205 million tokens are in private placement.
Here’s the truth. Almost all of the private placements we’ve looked at have one thing in common. They all come with a cash-out clause, which is a clever way of showing that investors can get their tokens over time rather than all at once.
This means that private equity investors like venture capitalists can’t dump all their tokens on the market once the project is coined on an exchange, which is probably a smart idea for all concerned.
Interestingly, Mina Protocol actually ran 4 different funding rounds prior to their ICO, including a seed round in Q4 2017 where tokens were sold for 7 cents.
Then there was the Series a in Q4 2018, where tokens were sold at an implied price of 15 cents.
This is followed by a strategic lock-in round of 15 cents/token in Q3 2020 and finally a strategic unlock round of 25 cents/token.
The first three rounds essentially have an 18-month lock-up period after the ICO, with the strategic unlocking round allocated to investors 40 days after the community offering.
This means that these early backers will not be able to access their tokens for at least 40 days after the Mina ICO, and even then, only those who participated in the Strategic Unlock round will be able to access all of their tokens. Those with a keen eye will realize that the strategic unlock token price is exactly the same as the ICO price.
So why would any early backers want to lock the tokens for 40 days when they can get them for the same price without these restrictions?Mina’s ICO is capped at $1,000, so we can only assume that the Strategic Unlock tokens do not have this restrictive cap.
But the question is. what happens after 40 days? If we look at the back of the unlocking schedule, then it is clear that the first month of the unlocking will see the release of a large number of tokens to investors, which will probably be dumped on the market. However, over the next 17 months, tokens from Seed Series A and Strategic Lock-in investors will be released in equal amounts on a monthly basis.
This means that there will not be a sudden flood of tokens being dumped onto exchanges; instead, the tokens participating in the private placement will be released smoothly over time. More strictly speaking, they are released linearly. But what do these unlocked tokens mean for the price of Mina?
Frankly, it’s hard to isolate the pressure to sell from private placements and ICO investors. The reason is that Mina will only be publicly tradable on June 1, more than 40 days after the community sale. So there is a scenario where strategic unlocking investors own a fraction of all token participants in other private placement rounds, while ICO folks can get off all of them.
Needless to say, when Mina was finally coined on the exchange, people started selling it off at a lower price. However, it should be noted that despite Mina’s price plummeting after it went up on the exchange, the price per token is now just over 2.50. This represents a 10x increase in the ICO price. So, yes, for those lucky enough to get in early, Mina is indeed doing well.
But sadly, many people must have been fascinated by the initial height of Mina when it first went up and purchased these tokens on June 1 at sky-high prices. If only they had known the ICO price and the large number of private tokens that had been unlocked.
Now, the lesson we learned from this story is that the private placement unlocking schedule really matters. Something that should definitely be considered before putting money into the latest and greatest cottage coin you’ve heard about in the grapevine.
For projects like Mina, the linear nature of the unlocking schedule after the first month means it’s unlikely that there will be any worse surprises.
This is the case with Mina, but it’s important to note that not all projects have a linear vesting schedule this doesn’t mean they should be ignored. Let’s explore it.
Customized Attribution Schedules
The truth is that most projects have more customizable attribution schedules. Many have defined points in time to unlock some of their tokens. Now, this can actually add another dimension to our portfolio management. The project used in this example is Injective Protocol (INJ).
Now, one of the first things that people pay attention to is that Cryptocurrency research reports typically list key private placement and public sales metrics for cryptocurrency projects. So, if users want to take their token analysis game to the next level, then they need to see if Cryptocurrency has a research report on the cryptocurrency they are considering.
In any case, Injective has only had two private placement rounds. The seed round sold 6 million tokens at 8 cents and the private placement round sold over 16.5 million tokens at 18 cents.
These studies from Cryptocurrency also provide a very cool graph showing the crypto supply distribution and the percentage distribution of token supply sold in the private placement and seed rounds.
Here we can see that Injective, 6% of the tokens were sold in a seed round and 16.67% in a private placement.
This means that private and seed level investors represent about 22.5% of the total INJ supply. It is quite a large number. But what about those vesting periods?
This can be addressed by checking out the research reports and token release schedule sections of Coinan.
The light gray shows the token release schedule for seed round investors, and the dark gray shows the unlocking for private placement participants. Soon, anyone can see that these release schedules are not linear, with three unlock dates for each sales round.
Interestingly, the first round of the private placement round brought forward the unlocking period of the seed round by one month. The first big Injective unlock was in April 2021, when about a third of the tokens sold were available to investors.
This may have been due to the big DeFi buzz at the time, or to the fact that Injective had some venture capital investors in private equity who had some very solid “diamond hands”.
In any case, the point is that some projects have some fixed dates for unlocking tokens for private investors. A sudden increase in supply is certainly something we need to know about in advance. This may mean that early backers hoping to realize some gains may add some selling pressure.
It is something to keep an eye on, and it may be wise to opt out of a certain cryptocurrency until the unlocking event has passed. Now that you know the details of private placements, what to look for and how this will affect a portfolio.
Are private placements fair?
This is still a difficult question for us. For companies like Mina Protocol, those who got 7 cent tokens for several times cheaper than the ICO price did so back in 2017. That’s essentially a four-year wait.
Again, four years ago, this project was clearly less mature, more likely to fail, and unsure if it would make it to market. Also, I’m sure someone like Coinbase Ventures has a lot of contacts in the space and has some influence on the holy grail of a Coinbase IPO.
I don’t see a problem with the idea that the higher the risk, the higher the reward. It would be very harsh for VCs to take on much more risk than the later rounds for the same nominal price.
But private placements they are inherently exclusionary. They allow some privileged people to get tokens at a better price than others. This is inherently very unfair, especially since that person doesn’t add any additional value other than bringing in money, such as a high net worth individual.
In addition, the way the U.S. accredited investor is defined makes it more exclusive. Whether or not one is willing to take on more risk in the early stages, one cannot do so because one is not defined as an accredited investor.
This classification is reserved for those who earn more than $200,000 per year or have more than $1 million in investment assets. So, these people may already be wealthy.
By the way, this problem is not limited to cryptocurrencies. It is a well-known inequity in traditional startup investments. Retail investors are excluded from early-stage projects on the grounds that they are much riskier.
To sum up
The mistake many people make is thinking that just because they don’t have access to these private placements, they don’t learn more about their value.
In fact, when it comes to crypto venture capital, the truth is that those top venture capital firms manage billions of dollars in crypto assets for their investors. Pantera Capital, for example, has $3.2 billion in blockchain-related assets under their management. That’s a lot of money, and it’s true that most people can’t afford the minimum $100,000 investment that these venture capitalists require. However, the fact remains that they have so much capital that they do play a key role in these crypto markets and should certainly be taken into account.
Another thing to consider is how these venture capital firms attracted such huge amounts of money in the first place. Why do so many reputable investors trust them?
Well, it’s simple.
Top-tier venture capitalists tend to outperform the market and generate so-called alpha returns. In essence, better performance than simple bitcoin investment strategies. The top venture capitalists must be credited for their outstanding performance to some very skilled crypto researchers who are able to pick the right projects. This is an important point to consider, and it helps to look at projects that are backed by reputable venture capitalists, as users can be sure that in-depth research has been done.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/mina-and-injective-as-examples-analyzing-seed-rounds-and-private-placements-in-venture-capital/
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