Bull run中的encryption风投：募资难，难于上青天

Author: Yogita Khatri

Compiled by: Tim, PANews

In the previous issue, I discussed how "Digital Asset Treasury (DAT) Summer" has attracted the attention and funds of traditional startup financing rounds. At that time, some venture capital firms also raised another question: Limited Partners (LPs) have become very cautious about investing in crypto funds. Therefore, in this issue, I will delve into why raising crypto venture capital funds has become more difficult, even in a bull market, and what this means for future development.

Digital venture capitalists have told me that after the collapse of Terra (LUNA) and FTX in 2022, financing has obviously become much more difficult, which not only eroded LP trust but also damaged the reputation of the entire industry. Lattice Fund co-founder Regan Bozman stated: "Although the outlook for the crypto market has significantly improved, this has not offset the general concerns about venture capital performance. The new challenge facing crypto venture capital today is the need to compete for funding with ETFs and DATs."

Michael Bucella, co-founder of Neoclassic Capital, stated that today only funds with significant advantages or impressive historical performance can continuously attract capital injections from LPs. This market change has led to a phenomenon referred to as "quality target migration" by Dragonfly General Partner Rob Hadick. He pointed out that in 2024, only 20 institutions attracted 60% of total LP capital, while the remaining 488 institutions divided the remaining 40%. Although liquidity has improved this year through mergers and IPOs, the financing threshold remains much higher than the levels before the market crash in 2022.

Broader data also confirms this. The Block Pro data provided by my colleague Ivan Wu shows that after the boom period from 2021 to 2022, the scale of financing for crypto venture capital funds has sharply shrunk. In 2022, related institutions raised over $86 billion through 329 funds, but this figure plummeted to $11.2 billion in 2023 and further dropped to $7.95 billion in 2024. By 2025, only 28 funds raised $3.7 billion, highlighting the difficulty of the current financing environment. Both the scale of financing and the number of funds show a steep downward trend, reflecting the cautious attitude of LPs and the increasing options for capital.

Multiple venture capital firms have revealed to me that family offices, wealthy individuals, and crypto-native funds are still actively supporting crypto venture capital. However, since 2022, pension funds, endowment funds, fund of funds, and corporate venture capital arms have mostly chosen to withdraw, resulting in a smaller and more selective LP group.

Why is it harder to raise funds now than in 2021 or early 2022?

The previous bull market cycle was unique; in 2021, almost anyone could raise cryptocurrency venture capital funds, and even those lacking experience could succeed. However, many of those funds have yet to return capital to investors. LPs now require tangible capital distribution data before investing new funds. Sep Alavi, a general partner at White Star Capital, stated: "LPs are increasingly skeptical about unrealized gains, and they prioritize funds with a track record of actual returns."

The interest rate hike cycle since March 2022 has also prompted capital allocators to turn to safer, more liquid assets. Steve Lee, another co-founder of Neoclassic Capital, pointed out that the returns in this cycle have mainly concentrated on Bitcoin, Ethereum, and a few blue-chip stocks through ETFs and DATs, with almost no benefit to small projects that typically have venture capital value. Lee stated, "LPs see short-term returns in large-cap stocks, while the realization of venture capital value takes longer."

An early-stage venture capital founder who wished to remain anonymous added that due to the lack of standout tokens since the 2021-22 cycle, the absence of "altcoin buying" has suppressed LPs' willingness to invest, and many crypto venture capital firms are inclined to invest in tokens. Artificial intelligence is also a major influencing factor: Bozman from Lattice Fund stated, "Artificial intelligence is a comprehensive hot topic that has attracted a lot of interest from LPs focused on the tech sector."

Overall, although the difficulty of financing today may not be as severe as in the years following the collapse of Luna and FTX, it is still much harsher compared to the loose period of abundant capital from 2021 to early 2022.

What will the future of crypto venture capital look like ###

If financing continues to be difficult, most venture capital firms expect an integration wave in the industry, with smaller, weaker, or less distinctive funds quietly exiting the market. Alavi predicts that small or underperforming funds will find it hard to raise subsequent funds, while Hadick points out that as capital concentrates at the top, the market has already begun to shrink.

The early crypto venture capital founder believes that medium-sized funds will tend to hollow out: small funds with cutting-edge advantages, under $50 million in size, will survive, while giant funds like Paradigm and a16z will continue to grow, but poorly performing medium-sized funds will gradually disappear. He added that the crypto risk market may increasingly approach the structure of traditional markets, supported by smaller but higher-quality venture capital institutions that underpin a large liquidity base. Bucella stated: "Capital markets have a wonderful self-correcting ability, and we are moving out of a phase where venture capital allocation is too high and liquidity strategy allocation is insufficient."

Others believe that the model itself is also evolving. Erick Zhang of Nomad Capital predicts that the number of companies solely focused on cryptocurrency will decrease, Web2 venture capital will enter the crypto space, and crypto funds will also expand into Web2 businesses.

The timeline for the large-scale return of liquidity providers remains uncertain. Lee from Neoclassic stated that investors will return once capital shifts from Bitcoin and Ethereum to the mid- to low-market cap token ecosystem, and he expects this transition to be accelerated by on-chain capital flows driven by stablecoins.

Alavi believes that as interest rates decline and merger and acquisition deals boost capital allocation, institutional investors may return by mid-2026. Hadick, on the other hand, believes that most institutional investors, except for pension funds, have already returned, and anticipates that as regulations become clearer and the market matures, pension funds will re-enter the market in the coming years. That early venture capital founder stated that unless there is a "super-hot narrative" similar to the next stablecoin or breakthrough application case, LPs will not return on a large scale.