Original title: The Funding: Why raising a crypto VC fund is harder now — even in a bull market
Original author: Yogita Khatri, The Block
Original text translated by: Tim, PANews
In the previous issue, I discussed how the 'summer of Digital Asset Treasury (DAT)' attracted attention and funds away from traditional startup financing rounds. At that time, some VC firms 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 a crypto VC fund has become more difficult, even in a bull market, and what this means for future development.
Several venture capitalists have told me that after the collapses of Terra (LUNA) and FTX in 2022, fundraising has become noticeably more difficult, which has not only eroded LPs' trust but also damaged the entire industry's reputation. Regan Bozman, co-founder of Lattice Fund, stated, 'Although the outlook on the crypto market has improved significantly, this has not alleviated the general concerns about venture capital performance. The new challenge facing crypto venture capital is the need to compete for funds with ETFs and DATs.'
Michael Bucella, co-founder of Neoclassic Capital, stated that nowadays only funds with significant advantages or impressive historical performance can continue to attract capital from LPs. This market shift has led to what Dragonfly general partner Rob Hadick refers to as a 'migration of quality targets.' He pointed out that in 2024, only 20 institutions attracted 60% of total LP funding, while another 488 institutions divided the remaining 40%. Despite improvements in liquidity this year through mergers and IPOs, the financing thresholds remain far higher than 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 of 2021-2022, the fundraising scale of crypto venture funds has sharply declined. In 2022, related institutions raised over $86 billion through 329 funds, but this number 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 difficult nature of the current fundraising environment. Both the scale of fundraising and the number of funds are showing a steep downward trend, reflecting LPs' cautious attitudes and the increasing choices of capital.
Several venture capital firms have informed 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 departments have mostly chosen to withdraw, resulting in a smaller and more selective LP community.
Why is fundraising more difficult now than in 2021 or early 2022?
The previous bull market cycle was unique; in 2021, almost anyone could raise a crypto VC fund, and even those lacking experience could succeed, yet many of those funds have yet to return capital to investors. Nowadays, LPs demand to see tangible capital distribution data before committing new funds. Sep Alavi, a general partner at White Star Capital, stated, 'LPs are increasingly skeptical of unrealized returns; they prioritize funds that have a track record of actual returns.'
The interest rate hike cycle since March 2022 has also prompted capital allocators to shift towards safer and more liquid assets. Another co-founder of Neoclassic Capital, Steve Lee, noted that this cycle's returns are primarily concentrated in Bitcoin, Ethereum, and a few blue-chip stocks through ETFs and DATs, with little benefit to typically venture-capital-worthy small projects. Lee stated, 'LPs see short-term gains in large-cap stocks, while realizing venture capital value takes longer.'
An early-stage venture capital founder who wished to remain anonymous added that due to the lack of outstanding token performance since the 2021-22 cycle, the absence of 'altcoin buying pressure' has suppressed LP investment willingness, as many crypto VC firms tend to invest in tokens. Artificial intelligence is also a major influencing factor: Bozman from Lattice Fund stated, 'Artificial intelligence is a truly all-encompassing hot topic, attracting a lot of interest from LPs focused on the tech sector.'
Overall, while the difficulty of fundraising today may not be as severe as in the years following the collapses of Luna and FTX, it is still much more stringent compared to the loose period of easy money during 2021 to early 2022.
What will the future of crypto venture capital look like?
If financing continues to be difficult, most VC firms expect to see a wave of consolidation in the industry, with smaller, weaker, or less distinctive funds quietly exiting the market. Alavi predicts that small or underperforming funds will struggle to raise follow-up funds, while Hadick points out that the market has already begun to shrink as capital concentrates on the top.
The early crypto VC founder believes that medium-sized funds will tend to hollow out: smaller funds below $50 million with cutting-edge advantages will survive, while giant funds like Paradigm and a16z will continue to grow, but underperforming medium-sized funds will gradually disappear. He added that the crypto venture market may increasingly resemble traditional market structures, supported by smaller but higher-quality venture capital firms sustaining a large liquidity base. Bucella stated, 'Capital markets have an excellent self-correcting ability, and we are moving out of a phase of over-allocation to venture capital and under-allocation to liquidity strategies.'
Others believe the model itself is evolving. Erick Zhang of Nomad Capital predicts that companies focused purely on cryptocurrencies will decrease, Web2 venture capital will venture into 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 once capital shifts from Bitcoin and Ethereum to the mid- and low-market cap token ecosystem, investors will return, and he expects this transition to be accelerated by on-chain capital flows driven by stablecoins.
Alavi believes that as interest rates decline and M&A transactions boost capital allocation, institutional investors may return by mid-2026. Hadick, however, believes that most institutional investors, excluding pension funds, have already returned, and expects that as regulations become clearer and the market matures, pension funds will return to the market in the coming years. The early venture capital founder noted that unless the next 'super hot narrative' like a stablecoin or breakthrough application case emerges, LPs will not return on a large scale.
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