Written by: Yogita Khatri
Compiled by: Tim, PANews
In the previous content, I mentioned that the 'Summer of Digital Asset Treasuries (DAT)' attracted attention and funding away from traditional startup financing rounds. At that time, some venture capital 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 crypto venture funds has become more difficult, even during 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 became significantly more difficult, which not only eroded LP trust but also damaged the overall reputation of the industry. Regan Bozman, co-founder of Lattice Fund, stated, 'Although the outlook for the crypto market has improved significantly, this has not alleviated the general concerns about venture capital performance. The new challenge facing crypto venture capital today is the need to compete for funds with ETFs and DATs.'
Michael Bucella, co-founder of Neoclassic Capital, stated that nowadays only funds with clear advantages or impressive historical performance can continue to attract LP funding. This market change has driven what Dragonfly's general partner Rob Hadick referred to as the 'shift in quality targets.' He pointed out that in 2024, only 20 institutions attracted 60% of total LP capital, while the remaining 488 institutions divided the remaining 40%. Despite improvements in liquidity through mergers and IPOs this year, the fundraising threshold remains 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 funding scale of crypto venture funds has sharply shrunk. 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 difficulty of the current fundraising environment. Both the funding scale and the number of funds show a steep downward trend, reflecting the cautious attitude of LPs and the increasing options for capital.
Several 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, pensions, endowment funds, fund-of-funds, and corporate venture capital departments have mostly chosen to withdraw, leading to a smaller and more selective LP group.
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 venture fund, even without experience, but many of those funds have yet to return capital to investors. Nowadays, LPs require to see 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; they prioritize funds with actual earnings track records.'
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, barely benefiting small projects that typically have venture capital value. Lee stated, 'LPs see short-term gains in large-cap stocks, while realizing the value of venture capital takes longer.'
An anonymous early venture capital founder added that due to the lack of outstanding token performance since the 2021-22 cycle, the absence of 'altcoin buying pressure' has suppressed LPs' willingness to invest, as many crypto venture firms invest in tokens. Artificial intelligence is also a major influencing factor: Bozman from Lattice Fund stated, 'Artificial intelligence is a catch-all hot topic, attracting significant interest from LPs focused on the tech sector.'
Overall, while the current fundraising difficulty may not be as severe as in the years following the collapses of Luna and FTX, it is still much harsher compared to the loose period of rampant capital inflow from 2021 to early 2022.
What will the future of crypto venture capital look like?
If fundraising continues to be difficult, most venture capital firms expect 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-on funds, while Hadick pointed out that as capital concentrates at the top, the market has begun to shrink.
An early crypto venture founder believes that medium-sized funds will become hollow: small funds with cutting-edge advantages under $50 million will survive, while mega 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 underpinned by significant liquidity. Bucella stated, 'Capital markets have a remarkable self-correcting ability, and we are moving out of a phase of over-allocation in venture capital and under-allocation in liquidity strategies.'
Others believe that the model itself is evolving. Erick Zhang of Nomad Capital predicts that companies purely focused on cryptocurrency will decrease, Web2 venture capital will venture into the crypto space, and crypto funds will expand into Web2 businesses.
The timeline for the large-scale return of liquidity providers is uncertain. Lee from Neoclassic stated that once capital shifts from Bitcoin and Ethereum to mid- to low-market cap token ecosystems, investors will return, and he anticipates that this transition will be accelerated by on-chain capital flows driven by stablecoins.
Alavi believes that with the decline in interest rates and the push for capital allocation from merger and acquisition deals, institutional investors may return by mid-2026. Hadick, on the other hand, believes that most institutional investors, excluding pensions, have already returned and expects that as regulations become clearer and the market matures, pensions will return to the market in the coming years. An 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.
