Financing is becoming increasingly difficult, and encryption venture capital is entering the final stage of frenzy.

Original text from**decentralised

Compiled by｜Odaily Planet Daily Golem (@web3_golem)

This article studies the venture capital situation in the cryptocurrency industry and the expectations for the future. All data comes from Funding Tracker.

Current Situation of Crypto Venture Capital

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

Total financing and total number of financing rounds

During the peak in 2022, the venture capital investment in cryptocurrencies reached 23 billion dollars, and in 2024, this figure dropped to 6 billion dollars. There are three reasons for this:

• The boom in 2022 led VCs to allocate too much funding to projects that are cyclical and highly valued. For example, many DeFi and NFT projects failed to deliver returns. OpenSea peaked at a valuation of $13 billion.
• It will be very difficult for funds to raise capital again from 2023 to 2024, and projects listed on exchanges will also struggle to achieve the valuation premiums seen from 2017 to 2022. The lack of premiums makes it challenging for funds to raise new capital, especially with many investors underperforming compared to Bitcoin.
• As AI becomes the next focal point of technological frontiers, large capital has shifted its allocation focus. Cryptocurrency has lost the speculative momentum and premium it once had as the most promising frontier technology.

When researching which startups develop enough to guarantee C or D round financing, another deeper crisis becomes apparent. Many large exits in the crypto industry come from token listings, but when most token listings are trending negatively, it becomes difficult for investors to exit. Considering the number of seed-stage companies that continue to go through A, B, or C round financing, this comparison becomes evident.

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

• Without a healthy token liquidity market, venture capital in cryptocurrencies will stagnate.
• In the absence of healthy enterprises developing to the later stages and going public, venture capital preferences will decline.

The data from the various stages of financing seems to reflect the same fact. Although the capital entering the seed and Series A financing has basically stabilized, the funding for Series B and C financing remains relatively conservative. Does this mean that now is a good time for the seed stage? Not entirely.

! Funding is becoming more difficult, crypto venture capital enters the final stage of frenzy

Total financing amount at different stages

The data below tracks the median funding for each quarter of the Pre-seed and Seed funding rounds, and this number has been steadily increasing over time. There are two points worth noting here:

• Since the beginning of 2024, the median financing in the Pre-seed round has significantly increased.
• Over the years, the median seed round financing has changed with the macro environment.

As the demand for early-stage capital declined, we saw companies raise larger Pre-seed and seed rounds, with what was once a "friend and family" round now being filled by an earlier deployment of early-stage funds. This pressure also extends to companies in the seed round stage, which has grown since 2022 to compensate for rising labor costs and a longer time to reach PMF in the crypto industry.

The expansion of the fundraising amount means that the company's valuation will be higher (or diluted) in the early stages, which also implies that the company will need a higher valuation in the future to provide returns. In the months following Trump's election, seed round financing data also saw a significant increase. My understanding is that Trump's presidency changed the fundraising environment for fund GPs (general partners), leading to increased interest from LPs and more traditional allocators in the fund, which translates 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? Web3 raised more capital in its early days than ever before, but it pursued fewer founders, more scale, and required companies to grow faster than in previous cycles.

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

One way to examine this argument is through the lens of capital momentum. The chart below measures the average number of days it takes for startups to raise Series A funding since announcing their seed round financing. The lower the number, the higher the capital turnover. 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, based on the above chart, we can observe how public market liquidity affects the private placement market. One way to observe this is from the perspective of "safety"; whenever there is a pullback in the public market, Series A financing occurs on a large scale, such as the sharp decline in the first quarter of 2018, which was repeated in the first quarter of 2020 during the outbreak of the COVID-19 pandemic. When liquidity deployment does not sound very optimistic, investors with capital to deploy are instead incentivized to build positions in the private market.

But why was it the opposite in Q4 2022 when the FTX crash happened? Perhaps it symbolizes the exact point in time when interest in cryptocurrency investing as an asset class has been completely exhausted. Multiple large funds lost huge sums of money in FTX's $32 billion funding round, which led to a decline in interest in the industry. In the following quarters, capital was concentrated around only a few large companies, and since then, most of the capital from LPs has flowed into those large companies because this is already where the most capital can be deployed.

In venture capital, the rate of capital growth is faster than the rate of labor growth. You can invest 1 billion dollars, but you cannot proportionally hire 100 people. Therefore, if you start with a team of 10 people and assume no more hiring, you will be incentivized to secure more investment. This is why we see a significant amount of late-stage financing for large projects, which often focuses on token issuance.

How will future crypto venture investments change?

For six years, I have been tracking this data, and I always arrive at the same conclusion: raising risk capital is becoming more difficult. The initial market frenzy easily attracts talent and available capital, but market efficiency dictates that things will become increasingly difficult over time. In 2018, simply being a "blockchain" could secure funding, but by 2025, we start 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 when investors expected liquidity exit opportunities within 18-24 months are gone. Now, employees have to work harder to obtain the same number of tokens, and the valuation of these tokens has also decreased. This does not mean that there are no profitable companies in the crypto industry; it simply means that, like in traditional economies, there will be a few companies that attract the vast majority of the economic output of the industry.

If venture capitalists can make venture capital great again by seeing the true nature of founders rather than the tokens they can issue, then the crypto venture capital industry can still move forward. The strategy of sending signals 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 collaborating with founders who can capture a larger share in the 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 this question?