[How did the financing and valuation of Web3 VC come about?] 】 Have you ever wondered why the same $10 million project is valued at 100 million and 200 million? Have you ever wondered what variables affect the financing amount and valuation relationship of web3 projects? Why can some projects raise their valuations to the sky, but they break all the way after TGE; And some projects don't care about quietly opening low, but they can convince everyone for several days in a row? In a VC project - how do the four forces of the project side make the game, VC make money, exchange listing, and retail investors take over 👉? ———————————————— The above questions are also my long-standing confusion 🤔 about VC coins - for web3 projects, how much financing should correspond to the valuation? Therefore, based on all the queryable data on rootdata, I summarized the financing amount and valuation of 615 projects, compiled them into a detailed table, and analyzed the data. ✅ Let's talk about the core data conclusion: the median of the "valuation/total financing" multiple of more than 600 projects is 10, and the average is 12, which is the core benchmark and the most valuable data in my opinion. This means that generally speaking, when a Web3 project receives $10 million in VC funding, its recognized valuation at the funding stage is usually around $100 million. For us average retail investors, this number has direct guiding significance: it provides a quick yardstick to determine whether a project's valuation is "generally reasonable." If you see a project funded at multiples well above this average (say 10 million funded at a valuation of 200 million or even 300 million), then you need to be vigilant. This could signal a bubble in the project's valuation or early investors' expectations for the project's future FDV being over-pushed, increasing your risk as a secondary market takeover. ———————————————— Next is the main text, first of all, the long warning ⚠️ article will be divided into the following parts: 1️⃣ Methodology: What is the reason and significance of studying this data 2️⃣ Data source 3️⃣ Data analysis and interpretation: correlation between financing amount and valuation, average > median number of "valuation/financing", the impact of different financing rounds, financing amounts, and financing years on "valuation/financing" 4️⃣ Deduction of the relationship between project parties, VCs, exchanges, and ordinary investors in different market environments 5️⃣ Conclusion: The reference significance and shortcomings of the data ———————————————— 🟢 [Part 1: Methodology] 🟢 (a bit long, but recommended to read) In the traditional venture capital model, the relationship between financing amount and valuation is clear. If a project receives X amount of financing, the corresponding post-investment valuation is Y, then the theoretical equity ratio obtained by the VC is X/Y. This equity ratio is usually transparent, legally binding, and recorded in the Cap Table in traditional companies. Its level mainly depends: -The attractiveness and potential of the project itself: the technological innovation, market size, team background, etc. of the project. -Bargaining power of the project party: If the project is sought after by many VCs, the project party naturally has stronger bargaining power and can sell less equity at a higher valuation. - The stage of the project: the early stage of the project is high, the valuation model may be based on future forecasts such as discounted cash flow, and more equity may be transferred; The later project has revenue and user base, and the valuation is more mature and stable. - Market environment: The overall valuation level will be higher in a bull market. However, when we turn our attention to the cryptocurrency space, the situation becomes very different and more complex. The traditional valuation logic and the equation of "financing amount/valuation = currency holding ratio" are facing huge transformations 👇 here ✅ The crypto space is a huge difference from traditional VC investing In Web3 investing, there are several key differences that make it difficult to simply apply traditional valuation logic: 1️⃣High opacity of coin holding ratio and tokenomics: -Unlike traditional equity cap tables, Web3 projects' initial token allocation ratios and detailed unlocking and lock-up schedules are often not mandatory or fully transparent. - The lack of clear regulation of the final allocation and use of vaguely purposed token reserves (such as "ecosystem funds" or "community funds") provides operational space for project parties and early investors, making the actual "effective holding ratio" of VCs far exceeding their nominal "financing amount/valuation" ratio. - The token supply can also be dynamically changing (inflation/deflation), further increasing uncertainty. 2️⃣ Diversification and elasticity of valuation logic: -The valuation of Web3 projects, in addition to traditional methods, also relies heavily on tokenomics models, community size and activity, network effects, track popularity, and market sentiment. -Many times, valuation is not strictly based on the actual situation or cash flow of the project, but more like a [demand pricing method]❗️, that is, based on the project party's "how much money it hopes to raise" and the VC's "expected profit times". Especially in a bull market, project teams and VCs have [motivation] and [opportunity] collusion, and may use "liquidity and expected returns at exit" as a benchmark to push back the current valuation, rather than reverse pricing based on normal actual costs and holding ratios. This makes the valuation more like an "expected anchor" for FDV at TGE. 3️⃣ Information asymmetry and regulatory lag: The Web3 space lacks a mature, unified regulatory framework and mandatory disclosure requirements. This leads to a high degree of information asymmetry, and project parties and VCs have information advantages that far exceed those of ordinary retail investors. This provides the soil for project parties and VCs to take advantage of the flexibility of the rules and carry out profit-maximizing operations. ✅ So, what is the practical significance of the "valuation/financing ratio" in the Web3 space? Despite the above complexities, the "valuation/financing ratio" still holds horizontal contrast and guiding value in the cryptocurrency space: 1️⃣ Measure market expectations: It has become an important benchmark for the market to judge whether the FDV is reasonable or broken after the project's TGE. 2️⃣ Reveal the dilution cost of VC From a VC's perspective, this ratio shows the "dilution cost" they pay to get a share of the corresponding token at the "paper valuation". A higher percentage means they receive a smaller share of tokens in nominal terms. However, this nominal dilution may mask the actual benefits VCs receive through other channels (such as additional token allocation, preferential terms), making their "effective holdings" may be higher than the notional value. Studying this ratio helps us speculate on whether there is such a "hidden transaction" between the VC and the project party. 3️⃣ Insight into market sentiment and industry bubbles: Through the analysis of a large amount of project data, the average and median (10-12) of this ratio can be used as a benchmark for the general valuation level of Web3 projects in the current market environment. When the proportion of individual projects is significantly higher than the industry average, this should be a strong warning sign. It may indicate over-hype, valuation bubbles, and a highly consistent short-term motivation between the project team and early-stage VCs to "push up valuations and ship high", passing on huge risks to subsequent secondary market retail investors. ———————————————— 🟢 [Part 2: Data Sources] 🟢 (can be skipped 😂) In order to deeply analyze the relationship between financing and valuation of Web3 projects, the data in this article are all from @RootDataCrypto. Data collection method and scope -Manual collection: Due to the high cost of the RootData website API interface, this data collection is done entirely manually 😢. This ensures a review of each project data, but also means a lengthy collection process. -Screening criteria: 1️⃣ With "valuation" as the core screening condition: This study mainly focuses on the relationship between financing amount and valuation, so only collects all projects that have publicly disclosed specific valuation amounts on RootData. 2️⃣Exclude invalid data: Projects with undisclosed financing amounts or undisclosed specific figures (e.g., "millions of dollars", "undisclosed") are excluded. Funding rounds for ordinary investors: Excludes funding rounds for ordinary investors such as IDOs and Public Sale. -Data processing logic: 1️⃣Calculation of total funding amount: For each project, its total funding amount is the sum of the funding amounts of all its VC funding rounds (seed round, Series A, Series B, etc.). 2️⃣ Valuation selection: In order to reflect the latest institutionally recognized valuation of the project at a certain point in time as much as possible, we uniformly select the last round of valuation data recorded by the project. 【Data Limitations and Trade-offs】 It should be clearly pointed out that despite significant efforts in data collection and screening, the data in this study still have certain limitations due to the following factors: - Potential errors in manual collection: Individual project data may be biased, and despite best efforts to check, a complete proofreading from start to finish was not performed. -Data timeliness and openness: Not all projects are fully disclosed in valuation and financing details. The latest financing information of some projects may not have been included or disclosed. -No TGE FDV data: The core analysis of this study is based on valuation data from the VC financing stage, and FDV data on the day of the project's TGE has not been obtained for further comparison and verification. This will be the direction of future research (Flag 🚩 +1). ———————————————— 🟢 [Part 3: Analysis and interpretation of data] 🟢 ✅ Correlation between financing amount and valuation Chart 1️⃣: Scatter plot: Correlation between total financing and valuation amount (logarithmic scale) 【Data Conclusion】: ⭕️ Correlation coefficient between the total financing amount and the last valuation amount: 0.80 ⭕️ Conclusion: A correlation coefficient close to 1 indicates a strong positive correlation, meaning that the larger the financing amount, the larger the valuation amount, which is in line with the general logic of investment. Some projects may have achieved higher valuations with relatively small funding (dots above the average trend line), while others may require more funding to reach similar valuations (dots below the average trend line). This diversification is what the "valuation/financing ratio" is what we will discuss in depth later. ✅ [Distribution of "valuation/financing" multiples and average & median] Chart 2️⃣3️⃣: Number of projects in different tiers of "valuation/financing" (histogram and pie chart) 【Data Conclusion】: ⭕️ Average of "Valuation/Financing Ratio": 12.36; Median "Valuation/Financing Ratio": 10.00 ⭕️ Most of the projects' valuation/financing multiples are concentrated in the 5-10 band (211 projects, 34.3%) and the 10-15 band (183 projects, 29.8%). ⭕️ About 85% of projects have a "valuation/financing multiple" of less than 20x. [In-depth interpretation]: - Median 10.00: Means that half of the projects are valued at 10 times or less than the amount raised, while the average of 12.36 is slightly higher, indicating that there are a few extremely overvalued projects that have pulled up the average. -64% of projects are concentrated in the 5-15x range: This indicates that most Web3 VC investment projects will still follow a certain market consensus during the financing stage to avoid excessively outrageous valuations. This range may be seen as the equilibrium that the market finds between project attractiveness and VC risk-reward. - About 85% of projects are less than 20x: This indirectly shows that retail investors may need to be extremely cautious ⭕️ when they see a project with a "valuation/financing ratio" of more than 20x, as this is far beyond the general industry level, either the project has disruptive potential, there is a severe valuation bubble, or the actual benefits of VCs are not as simple as they appear (emphasis). ⭕️ ✅ [Impact of financing amount on "valuation/financing" multiple] Chart 4️⃣: Weighted average "valuation/financing" multiples for different financing amounts (table, reflecting the efficiency of the total capital of this tier) Chart⃣ 5️: Average vs. median "valuation/financing" for different financing amounts (two histograms) 【Data Conclusion】: Weighted Average: The weighted average multiples of the $0-$1 million and $60 million-$100 million levels are significantly higher than the other tiers. The $100 million to $300 million tier is also relatively high, ranking third. Average vs. Median: The $0-$1 million range also far exceeds all other tiers in terms of average and median. The $60 million-$100 million range also outperformed the average and median. The average and median for most other gears are concentrated around 10-12. [Interpretation]: ⭕️$0-$1 million (very early projects, leading by high multiples): Whether in terms of weighted average, average or median, the "valuation/financing" multiple of this smallest financing bracket shows the most significant inflation. At this time, projects are at the highest risk with only concepts, white papers, or very early prototypes. But if successful, the return potential is also greatest, so investors are willing to accept a higher "valuation premium". (However, it should be noted that many projects with 0-1 million financing have not issued coins, and the reference value is limited) ⭕️60 million-$100 million (mid-to-late sprint, second highest valuation): This stall shows high valuation multiples in weighted average, mean and median, second only to the very early stage. This type of project has emerged in their respective tracks and has the potential to become a "star project", attracting more attention and competition from institutional investors, thereby pushing up valuation multiples. Investors may value its imminent growth potential and proximity to exit (TGE) and are willing to pay a higher premium. ⭕️100 million to 300 million US dollars (large projects, stable and high): This tier ranks third highest in weighted average multiples, and the total financing amount and total valuation scale are very large. Projects that reach this scale are usually already the top players in their respective tracks and have the potential to become "unicorns". Investing in such projects, in addition to financial returns, may also be accompanied by considerations such as strategic layout and ecological cooperation, attracting more traditional institutions or strategic investors, who may be more receptive to valuation multiples. ⭕️Above $300 million (Big Mac project, valuation tends to be rational): The weighted average multiple of this highest financing level is relatively middle (11.03). Projects that have reached such large-scale financing are usually very mature, and the valuation may be closer to the rational valuation method of traditional enterprises, focusing on hard indicators such as project cash flow and user scale. VCs or late-stage investors who invest in such mega-projects may focus more on investment certainty and risk control, and have more robust expectations for valuation multiples. ——👇 There are too many pictures, see the next thread👇 for the rest——