Exploring the status of encryption venture capital and future expectations: The final stage of frenzy

Written by: decentralised

Compiled by: Odaily Planet Daily Golem

All data comes from the Funding Tracker.

Current Status of Crypto Venture Investments

Rational market participants may believe that capital markets also experience peaks and troughs, much like other cyclical phenomena in nature. However, cryptocurrency venture capital seems more like a one-way waterfall—a continuous gravity experiment falling downward. We may be witnessing the final stages of a frenzy that began with the 2017 smart contract and ICO funding craze, which accelerated during the low-interest-rate era of the COVID-19 pandemic and is now returning to more stable levels.

Total financing and total number of financing rounds

At its peak in 2022, venture capital investment in cryptocurrency reached $23 billion, and in 2024, this figure dropped to $6 billion. There are three reasons for this:

• The prosperity of 2022 led VC to allocate excessive funds to projects with cyclical nature and extremely high valuations. For instance, many DeFi and NFT projects failed to deliver returns. OpenSea's peak valuation was $13 billion.
• It will be difficult for funds to raise capital again in 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 have underperformed 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 of the large exits in the crypto industry come from token listings, but when most token listings are in a negative trend, it becomes difficult for investors to exit. Considering the number of seed-stage companies continuing to pursue Series A, B, or C funding, this comparison becomes obvious.

Since 2017, among the 7,650 companies that received seed funding, only 1,317 have advanced to Series A (graduation rate of 17%), only 344 reached Series B, and only 1% entered Series C, with the chance of obtaining 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 cryptocurrency industry 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 financing stages seems to reflect the same fact. Although the capital entering the seed and Series A financing has stabilized, the funds for Series B and C financing remain relatively conservative. Does this mean that now is a good time for seed round financing? Not entirely.

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 increasing over time. There are two noteworthy observations here:

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

As the demand for early capital declines, we are seeing companies raise larger Pre-seed and Seed Round funding, with what was once the "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 PMF in the crypto industry.

The expansion of the fundraising amount 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 fund GPs (general partners), 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.

Difficulty in financing, 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 seeks fewer founders, larger scales, and demands 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 that their businesses can achieve. The days of "50% discount, new round of financing at a high valuation in 2 weeks" are over. Funds cannot profit from additional investments, founders cannot easily secure pay raises, and employees cannot gain value from their vested tokens.

One way to test this argument is through the perspective 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 round companies at higher valuations without waiting for the companies to mature.

At the same time, based on the above figure, it can also be observed 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 establish positions in the private placement market.

However, why was it the opposite situation in the fourth quarter of 2022 when the FTX collapse occurred? Perhaps it symbolizes the exact point in time when people's interest in cryptocurrency investments as an asset class was completely worn out. Several large funds lost huge amounts of money in FTX's $32 billion financing, which diminished interest in the industry. In the following quarters, capital only gathered around a few large companies, and thereafter, most of the capital from LPs flowed into those few large companies, as that became the place where the most funds could 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 large number of large projects in later-stage financing, which is often focused on token issuance.

How will future crypto risk investments evolve?

For six years, I have been tracking this data, and I always reach the same conclusion: raising risk financing will become more difficult. The initial market frenzy easily attracts talent and available capital, but market efficiency dictates that things will become increasingly 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 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, that is, see the true nature of the founders instead of just the tokens they can issue, then the crypto venture capital industry can still move forward. The strategy of signaling 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 shares 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?