The original text is fromdecentralised
Compiled by Odaily Golem (@web3_golem)
This article examines the venture capital situation in the crypto industry and expectations for the future. All data is fromFunding Tracker.
Current State of Crypto Venture Capital
Rational market participants may believe that capital markets also have highs and lows, just like other cyclical phenomena in nature. However, crypto venture capital seems more like a one-way waterfall - an ongoing gravity experiment. We may be witnessing the final stages of the 2017 smart contract and ICO financing frenzy, which accelerated during the low-interest-rate era of the COVID-19 pandemic and is now returning to more stable levels.
Total Funding and Total Funding Rounds
In the peak year of 2022, crypto venture capital reached $23 billion, and by 2024 this figure will drop to $6 billion. There are three reasons for this:
The 2022 boom led VCs to allocate too much capital to cyclical and highly valued projects. For example, many DeFi and NFT projects failed to deliver returns. OpenSea's peak valuation was $13 billion.
Funds will have difficulty raising new capital in 2023-2024, and projects listed on exchanges will struggle to command the valuation premiums seen from 2017-2022. The lack of premiums makes it difficult for funds to raise new capital, especially as many investors have underperformed Bitcoin.
With AI becoming the next tech frontier, large capital has shifted its focus. Crypto has lost the speculative momentum and premium it once had as the most promising frontier technology.
When examining which startups have developed enough to warrant Series C or D funding, another deeper crisis becomes apparent. Many of the major crypto exits have come from token listings, but as most tokens trend negatively, investor exits become difficult. This contrast is evident when considering the number of seed-stage companies that continue to Series A, B, or C.
Since 2017, of the 7,650 companies that received seed funding, only 1,317 progressed to Series A (a 17% graduation rate), just 344 reached Series B, and only 1% made it to Series C, with a 1-in-200 chance of Series D funding, comparable to graduation rates in other industries. However, it's worth noting that in crypto, many growth-stage companies bypass traditional follow-on rounds through tokenization, but the data points to two separate issues:
Crypto venture capital will stagnate without a healthy token liquidity market.
Venture capital preferences will decline without healthy companies developing to later stages and going public.
The data across funding stages seems to reflect the same underlying reality. While capital entering seed and Series A has stabilized, Series B and C funding remains more conservative. Does this mean now is a good time for seed-stage? Not entirely.
Total Funding Amounts by Stage
The data tracking the median funding for Pre-Seed and Seed rounds each quarter shows this figure steadily rising over time. Two observations are worth noting:
The median funding for Pre-Seed rounds has increased significantly since early 2024.
The Seed round funding median has fluctuated with the macroeconomic environment over the years.
As the demand for early-stage capital declines, we see companies raising larger Pre-Seed and Seed rounds, with what was once "friends and family" rounds now being deployed earlier by early-stage funds. This pressure also extends to Seed-stage companies, which have grown and can compensate for the constantly rising labor costs and longer time to product-market fit in the crypto industry since 2022.
The increase in funding amounts means companies are being valued higher (or more diluted) at the early stages, which in turn means they will need even higher valuations to provide returns in the future. The Seed round funding data also saw a significant spike in the months following Trump's election. My understanding is that Trump's election changed the GP fundraising environment for funds, with increased interest from LPs and more traditional allocators, translating into a preference for early-stage venture investment.
Funding Difficulties, Capital Concentrated in Fewer Large Companies
What does this mean for founders? Early-stage Web3 financing has more capital than ever before, but it is chasing fewer founders, larger scale, and demands companies grow faster than previous cycles.
With traditional liquidity sources (like token issuances) now drying up, founders spend more time demonstrating their credibility and the likelihood of their business achieving. The days of "50% discount, new round at higher valuation in 2 weeks" are over. Capital cannot profit from follow-on investments, founders cannot easily get raises, and employees cannot see appreciation from their vested tokens.
One way to test this argument is through the lens of capital momentum. The chart below measures the average days between a startup announcing their Seed round and raising their Series A. Lower numbers indicate a higher capital churn rate. In other words, investors are deploying more capital into new Seed-stage companies at higher valuations without waiting for companies to mature.
The chart also reveals how public market liquidity impacts the private market. One observation is through the lens of "safety" - whenever public markets experience a pullback, there is a surge in Series A funding, as seen in the sharp drop in Q1 2018 and its repeat in Q1 2020 during the COVID-19 outbreak. When liquidity deployment sounds less optimistic, investors with capital to deploy are incentivized to establish positions in the private market.
But why was the opposite true in Q4 2022, when the FTX collapse occurred? Perhaps it marks the precise moment when people's interest in crypto investment as an asset class was completely eroded.Multiple large funds lost massive amounts in FTX's $32 billion funding, dampening enthusiasm for the industry. In the following quarters, capital has only coalesced around a few large companies, as most capital from LPs has flowed into those few, as that is where the most capital can be deployed.
In venture capital, the growth rate of capital is faster than the growth rate of labor. You can invest $1 billion, but you cannot hire 100 people proportionally. Therefore, if you start with a 10-person team and assume no further hiring, you will be incentivized to obtain more investment. This is why we see a lot of late-stage financing for large projects, which often focuses on token issuance.
How will future crypto venture capital evolve?
For six years, I have been tracking this data, but I always come to 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 difficult over time. In 2018, simply being "blockchain" could secure funding, but by 2025, we will start focusing on the profitability of projects and the fit between products and the market.
The lack of convenient liquidity exit windows means that venture capitalists will have to re-evaluate 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 the valuations of these tokens have also become lower. This does not mean that there are no profitable companies in the crypto industry, it just means that, like the traditional economy, a few companies will attract the vast majority of the industry's economic output.
If venture capitalists can make venture capital great again, by seeing the true nature of founders rather than just the tokens they can issue, then the crypto venture capital industry can still move forward. The strategy of signaling in the token market and then hastily issuing tokens in the hope that people will buy them on exchanges is no longer viable.
Under these constraints, capital allocators are incentivized to spend more time working with founders who can capture a larger share of the evolving market. The transition from venture capital firms only asking "when will the tokens be issued" to wanting to know how far the market can develop is an education that most capital allocators in web3 must go through.
However, the question remains, how many founders and investors will persist in seeking the answer to this problem?
