VC's Double Dilemma: LPs Face Low Returns and High Risks, While GPs Lose Market Hunger

Author: ivangbi 🦞

Translation: TechFlow

Being a limited partner (LP) in a VC fund today is a disappointing experience. The situation is just too tough right now. This isn't merely about general partners traveling around and attending dinners—it's a real return challenge. Many well-known funds are emotionally checking out, becoming complacent and losing their hunger, simply buying whatever they can get their hands on. No wonder—they don’t intend to keep working beyond the current cycle. Since 2021, lazy strategies have deteriorated so much that they've led to outright failures. The trends are as follows:

1. Deal-related dirty games

Every second deal (yes, shockingly bad) is actually incubated by other funds—essentially inflated or dumped purely to chase narratives. These fundraisings or products aren’t organically born; these founders didn’t naturally embark on this journey. It’s all pieced together behind the scenes by someone pulling strings. This means massive ownership stakes are already taken up front, both by insiders and the team. By the time you get in early, you're already the tenth person in line. You won't get any meaningful allocation. Moreover, GPs accept personal checks (or LPs invest via co-investments into other funds that will eventually sell, or even some advisors), allowing them to exit ahead of their own LPs—an act bordering on fraud, almost semi-criminal, yet happening far too frequently nowadays.

2. Near-zero chance of full exits

Given today’s fundraising scales, these investments will never become liquid. This has been true since last year. The issue isn't that the bag depreciates—it’s that the fund cannot offload it. As an angel investor, you might still make a small profit at the same fully diluted valuation (FDV), but for a fund, doing so is vastly more difficult. You enter at a high valuation, but the gap between token issuance and liquidity spans years. I could understand buying into a project at a $100M valuation with the token launching within a year. But since 2022, almost no projects have launched their tokens. Add in two-year lock-up periods (during which tokens can’t be sold), and you’re facing a five-year liquidity gap—double or more compared to before.

3. Diminishing power-law returns in Web2

At this point, it feels entirely like Web2, yet you still lack effective protections. Equity backing, founder golden handcuffs, and other legal safeguards have become more concrete in this cycle—but still remain relatively blurry. Worse, there are simply too many funds, too many projects, and overall oversaturation. You’re not entering a 10x game anymore, but one where maximum returns over the coming years may only reach 2x. Under current conditions, holding major cryptocurrencies is clearly a better strategy than buying new shiny tokens. This has always been true, but previously you could take risks chasing 10x gains. Now, your risk-taking yields an average return of just 2x.

I’m not saying all VCs are bad or underperforming. Many have reached the same conclusions—or realized this long ago—but simply haven’t spoken up publicly. I’m just highlighting future challenges.

Either a full 3–4 year bear market is needed to completely reshuffle the landscape, or user bases must grow tenfold to justify valuation increases. Of course, the latter is preferable! Alternatively, you can invest in a niche that’s still tiny, expecting growth even if the industry doesn’t magically expand tenfold. That works too. But VCs rarely back such small verticals because they prefer the safety of failing or winning together. After all, it’s all part of a cycle. But the VC investment cycle is something you must factor in.

Nor am I suggesting there’s anything wrong with projects that have already launched. The teams that are still alive and operating continue to shrink in number, but their foundations and experience grow stronger every day.