Author: decentralised

Compiler: Odaily Planet Daily Golem

All data comes from Funding Tracker.

Current State of Crypto Venture Capital

Rational market participants might believe that capital markets also experience peaks and troughs, just like other cyclical phenomena in nature. However, cryptocurrency venture capital seems more like a one-way waterfall—a continuous gravity experiment falling downward. We may be witnessing the final phase of a frenzy that began in 2017 with smart contracts and ICO financing, a frenzy that accelerated during the low-interest era of the COVID-19 pandemic and is now returning to more stable levels.

Total Financing and Total Rounds of Financing

During the peak in 2022, cryptocurrency venture capital reached $23 billion, which dropped to $6 billion in 2024. There are three reasons for this:

• The boom in 2022 led VCs to allocate too much funding to cyclical and highly valued projects. For example, many DeFi and NFT projects failed to deliver returns. OpenSea peaked at a valuation of $13 billion.
• Funds have found it difficult to raise capital in 2023 to 2024, and projects listed on exchanges struggle to achieve the valuation premiums seen from 2017 to 2022. The lack of premiums makes it difficult for funds to raise new capital, especially when many investors have underperformed Bitcoin.
• As AI becomes the next focus of technological frontiers, large capital has shifted its allocation priorities. Cryptocurrency has lost the speculative momentum and premiums it once had as the most promising frontier technology.

When researching which startups have developed enough to secure Series C or D financing, another deeper crisis becomes apparent. Many large exits in the crypto industry have come from token listings, but when most token listings trend negatively, investor exits become difficult. Considering the number of seed-stage companies continuing to pursue Series A, B, or C financing, this comparison becomes evident.

Since 2017, of the 7,650 companies that received seed funding, only 1,317 have graduated to Series A (a graduation rate of 17%), only 344 reached Series B, and just 1% entered Series C, with the odds of Series D financing being 1 in 200, comparable to graduation rates in other industries. However, it is worth noting that many growth-stage companies in the crypto industry bypass traditional follow-on rounds through tokenization, but these data point to two different issues:

• Without a healthy token liquidity market, cryptocurrency venture capital will stagnate.
• Without healthy companies developing to later stages and going public, venture capital preferences will decline.

Data from various financing stages seems to reflect the same fact. Although capital entering seed and Series A financing has stabilized, funding for Series B and C remains conservative. Does this mean it is a good time for seed-stage financing? Not entirely.

Total Financing Amounts at Different Stages

The following data tracks the median funding amounts for Pre-seed and Seed financing each quarter, which have steadily increased over time. Two points are worth noting here:

• Since the beginning of 2024, the median funding amount in the Pre-seed stage has significantly increased.
• Over the years, the median funding amount for Seed financing has fluctuated with the macro environment.

As the demand for early capital decreases, we see companies raising larger Pre-seed and Seed rounds, with what used to be "friends and family" rounds now being filled by early funds deploying earlier. This pressure has also extended to Seed-stage companies, which have grown since 2022 to compensate for rising labor costs and the longer time to achieve PMF in the crypto industry.

The expansion of fundraising amounts means that companies will have higher (or more diluted) valuations in the early stages, which also means that companies will need higher valuations in the future to provide returns. In the months following Trump's election, Seed financing data also saw a significant increase. My understanding is that Trump's presidency changed the fundraising environment for fund GPs (General Partners), with increased interest from LPs and more traditional allocators, translating into a preference for venture capital in early-stage companies.

Financing Difficulties, Capital Concentrated in a Few Large Companies

What does this mean for founders? Early financing capital in Web3 is greater than ever, but it seeks fewer founders, larger scales, and demands companies to grow faster than in previous cycles.

As traditional sources of liquidity (such as token issuance) are now drying up, founders spend more time demonstrating their credibility and the potential their businesses can achieve. The days of "50% discount, new round of financing at a high valuation in two weeks" are over. Capital cannot profit from follow-on investments, founders cannot easily secure raises, and employees cannot gain value from their vested tokens.

One way to test this argument is through the lens of capital momentum. The following chart measures the average number of days it takes for startups to raise Series A financing since announcing their Seed round. The lower the number, the higher the capital turnover rate. In other words, investors are putting more money into new Seed-stage companies at higher valuations without waiting for the companies to mature.

At the same time, the above chart also shows how public market liquidity affects the private market. One observation method is through the lens of "safety"; whenever there is a pullback in the public market, Series A financing occurs on a large scale, as seen in the sharp decline in Q1 2018, which repeated in Q1 2020 during the outbreak of COVID-19. When liquidity deployment sounds less optimistic, investors with capital to deploy are incentivized to establish positions in the private market.

However, why was the situation reversed in Q4 2022 during the FTX collapse? Perhaps it symbolizes the exact point in time when interest in cryptocurrency investment as an asset class was thoroughly eroded. Several large funds lost significant amounts in FTX's $32 billion financing, which diminished interest in the industry. In the following quarters, capital only gathered around a few large companies, and subsequently, most capital from LPs flowed into those few large companies, as that became the place to deploy the most funds.

In venture capital, the growth rate of capital outpaces the growth rate of labor. You can invest $1 billion, but you cannot proportionally hire 100 people. Therefore, if you start with a team of 10 people and assume no further hiring, you will be incentivized to secure more investment. This is why we see a large number of late-stage financings for major projects, which are often concentrated on token issuance.

What Will the Future of Crypto Venture Capital Look Like?

For six years, I have been tracking this data, and I always arrive at the same conclusion: raising venture capital will become more difficult. The initial market frenzy easily attracts talent and available capital, but market efficiency dictates that things will become increasingly challenging over time. In 2018, simply being "blockchain" could secure funding, but by 2025, we will begin to focus on project profitability and product-market fit.

The lack of convenient liquidity exit windows means that venture capitalists will have to reassess their views on liquidity and investment. The days of expecting liquidity exit opportunities within 18-24 months are long gone. Now, employees must work harder to obtain the same amount of tokens, and these tokens are valued lower. This does not mean that there are no profitable companies in the crypto industry; it simply means that, like traditional economies, there will be a few companies that attract the vast majority of economic output in the industry.

If venture capitalists can make venture capital great again—by seeing the nature of founders rather than the tokens they can issue—then the crypto venture capital industry can still move forward. The strategy of signaling in the token market, then hastily issuing tokens and hoping people will buy them on exchanges is no longer viable.

Under such constraints, capital allocators are incentivized to spend more time working with founders who can capture a larger share in an evolving market. The shift from venture capital firms in 2018 only asking "when to issue tokens" to wanting to know how far the market can develop is an education that most capital allocators in web3 must undergo.

However, the question remains: how many founders and investors will persist in seeking the answer to that question?

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