Written by: decentralised
Compiled by: Lawrence, Mars Finance
The current state of crypto venture capital
Rational market participants may believe that capital markets also have their peaks and troughs, just like other phenomena in nature that follow cycles. However, cryptocurrency venture capital seems more like a one-way waterfall—a continuous gravity experiment that keeps falling down. We may be witnessing the final stage of a frenzy that began with the smart contract and ICO financing boom in 2017, which 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
At the peak in 2022, the venture capital investment in cryptocurrency reached 23 billion dollars, but by 2024, that number dropped to 6 billion dollars. There are three reasons for this:
The prosperity of 2022 led VC to allocate excessive funds 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 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 when many investors are underperforming compared to Bitcoin.
As AI becomes the next key technological frontier, 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 have developed enough to secure Series C or D funding, another deeper crisis becomes apparent. Many large exits in the crypto industry come from token listings, but when the majority of token listings are trending negatively, investor exits become difficult. Considering the number of seed-stage companies continuing to raise Series A, B, or C funding, this comparison becomes evident.
Since 2017, among the 7,650 companies that received seed funding, only 1,317 advanced to Series A (a graduation rate of 17%), only 344 reached Series B, and only 1% entered Series C, with the chances of Series D funding being 1 in 200, which is comparable to the graduation rates in other industries. However, it is important to note that many companies in the growth stages of the crypto industry bypass traditional follow-up rounds through tokenization, but these data point to two different issues:
Without a healthy token liquidity market, venture capital in cryptocurrency will stagnate.
In the absence of healthy enterprises reaching the later stages of development and going public, venture capital preferences will decline.
The data for each of the financing phases below seem to reflect the same fact. While the amount of capital going into seed and Series A funding has largely stabilized, funding for Series B and Series C funding remains conservative. Does that mean it’s a good time for the seed round? Not exactly.
Total financing amount at different stages
The following data tracks the median funding of Pre-seed and Seed rounds for each quarter, and this figure has been steadily rising over time. Two points are worth noting here:
Since the beginning of 2024, the median funding 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 capital decreases, we see companies raising larger Pre-seed and Seed round financing, with the once common “friends and family” round now being filled earlier by early-stage funds. This pressure has also extended to companies at the Seed round stage, which have grown since 2022 to compensate for the rising labor costs and the longer time to reach Product Market Fit (PMF) in the crypto industry.
The expansion of the fundraising cap means that the company’s valuation in the early stages will be higher (or diluted), which also means 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 the fund’s GP (General Partner), leading to increased interest from LPs in the fund and more traditional allocators, which translated into a preference for venture capital in early-stage companies.
Financing difficulties, funds concentrated in a few large companies.
What does this mean for founders? Early-stage financing in Web3 has more capital than ever before, but it is pursuing fewer founders, larger scales, and requires 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 possibilities their business can achieve. The days of “50% discount, raising new rounds of financing at a high valuation in 2 weeks” are over. Capital cannot profit from additional investments, founders cannot easily secure 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 rate. 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 figure, 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 correction in the public market, Series A funding occurs on a large scale, such as the sharp decline in the first quarter of 2018, which reappeared in the first quarter of 2020, during the outbreak of the COVID-19 pandemic. When liquidity deployment doesn’t sound very optimistic, investors with capital to deploy are instead incentivized to establish positions in the private placement market.
However, why was the situation the opposite in the fourth quarter of 2022 when the FTX collapse occurred? Perhaps it marks the exact point in time when people’s interest in cryptocurrency investment as an asset class was completely eroded. Multiple large funds lost significant amounts in FTX’s $32 billion financing, which led to a decline in interest in the industry. In the following quarters, capital only gathered around a few major companies, and subsequently, most of the capital from LPs flowed into those few companies, as that was the place where the most capital could 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 proportionally hire 100 people. Therefore, if you start with a team of 10 people and assume no further hiring, you will be incentivized to obtain more investment. This is why we see a large number of late-stage financings for major projects, which are often focused on token issuance.
How will future crypto venture capital evolve?
For the past six years, I have been tracking this data, and I always reach the same conclusion: raising risk financing is becoming increasingly difficult. The initial enthusiasm of the market easily attracts talent and available capital, but market efficiency determines that things will become more challenging over time. In 2018, simply being “blockchain” could secure funding, but by 2025, we began 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 long gone. Now, employees must work harder to obtain the same amount 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 traditional economies, a few companies will emerge that attract the vast majority of economic output in the industry.
If venture capitalists can make venture capital great again, that is, see 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 larger market shares in an evolving market. The shift from venture capital firms in 2018 only asking “When will tokens be issued?” to wanting to know how far the market can evolve is an education that most capital allocators in web3 have to undergo.
But the question is, how many founders and investors will persist in seeking the answer to this question?
