Compiled by Tim, PANews
In my last installment, I discussed how the "Summer of Digital Asset Treasurys (DATs)" siphoned attention and funding away from traditional startup funding rounds. At the time, some venture capital firms also raised another issue: limited partners (LPs) were becoming wary of investing in crypto funds. In this installment, I'll delve deeper into why raising crypto venture capital funds has become more difficult, even during a bull market, and what this means for the future.
Several venture capitalists told me that after the collapse of Terra (LUNA) and FTX in 2022, fundraising became significantly more difficult, which not only eroded LP trust but also damaged the reputation of the entire industry. Lattice Fund co-founder Regan Bozman said: "While the perception of the crypto market has improved significantly, this has not offset the widespread concerns about venture capital performance. The new challenge facing crypto venture capital today is the need to compete with ETFs and DATs for funds."
Neoclassic Capital co-founder Michael Bucella stated that only funds with clear advantages or impressive track records are now able to attract consistent LP capital inflows. This market shift has driven what Dragonfly General Partner Rob Hadick calls a "flight to quality." He noted that in 2024, just 20 firms attracted 60% of all LP capital, while another 488 firms captured the remaining 40%. While liquidity has improved this year through mergers and acquisitions and IPOs, financing barriers remain significantly higher than before the 2022 market crash.
Broader data supports this. Data from The Block Pro, provided by my colleague Ivan Wu, shows a sharp decline in crypto venture fund raising since the boom of 2021-2022. In 2022, over $86 billion was raised across 329 funds. This figure plummeted to $11.2 billion in 2023 and further to $7.95 billion in 2024. By 2025, only 28 funds had raised $3.7 billion, highlighting the challenging nature of the current fundraising environment. Both funding sizes and the number of funds are declining sharply, reflecting LP caution and a growing selection of capital.
Several venture capital firms told me that family offices, wealthy individuals, and crypto-native funds are still actively supporting crypto venture capital. However, since 2022, pension funds, endowment funds, parent funds, and corporate venture capital departments have mostly chosen to withdraw, resulting in a smaller and more selective LP group.
Why raising capital is harder now than in 2021 or early 2022
The unique circumstances of the previous bull market cycle meant that nearly anyone could raise a crypto venture capital fund in 2021, even those with little experience. However, many of these funds have yet to return capital to investors. Limited partners (LPs) are now demanding tangible paid-in capital distributions before committing to new funds. Sep Alavi, General Partner at White Star Capital, stated, "LPs are increasingly skeptical of unrealized gains and are prioritizing funds with a track record of realized returns."
The interest rate hike cycle since March 2022 has also prompted capital allocators to shift to safer, more liquid assets. Steve Lee, co-founder of Neoclassic Capital, noted that gains in this cycle have primarily been concentrated in Bitcoin, Ethereum, and a few blue-chip stocks through ETFs and DATs, with little benefit reaching smaller projects that typically represent venture capital value. Lee stated, "LPs see short-term gains in large-cap stocks, while venture capital takes longer to realize value."
An unnamed early-stage venture capital founder added that the lack of "altcoin buying" since the 2021-22 cycle has dampened LPs' appetite for tokens, as few tokens have outperformed. Many crypto VCs are investing in tokens. Artificial intelligence is also a major factor: Lattice Fund's Bozman said, "AI is the catch-all buzzword that's attracting a lot of interest from LPs focused on the tech sector."
Overall, while financing may not be as difficult today as it was in the years after the Luna and FTX crashes, it is still much more severe than the loose period of hot money influx from 2021 to early 2022.
What the future of crypto venture capital looks like
If fundraising continues to be difficult, most venture capital firms anticipate a wave of industry consolidation, 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 is already shrinking as capital concentrates on the top players.
The early crypto venture capital founder believes that mid-sized funds will become hollowed out: small funds under $50 million with cutting-edge advantages will survive, and giant funds like Paradigm and a16z will continue to grow, but underperforming mid-sized funds will gradually disappear. He added that the crypto venture market may increasingly resemble a traditional market structure, with smaller but higher-quality venture capital firms supporting a large liquidity base. Bucella said: "Capital markets have a wonderful ability to self-correct. We are moving beyond a period of over-allocation to venture capital and under-allocation to liquid strategies."
Others believe the model itself is evolving. Erick Zhang of Nomad Capital predicts that the number of purely cryptocurrency-focused firms will decrease, Web2 venture capital firms will expand into crypto, and crypto funds will expand into Web2 businesses.
The timeline for a large-scale return of liquidity providers is uncertain. Neoclassic’s Lee said investors will return once capital shifts from Bitcoin and Ethereum to the mid- and low-cap token ecosystems, a shift he expects to be accelerated by on-chain capital flows driven by stablecoins.
Alavi believes that institutional investors may return by mid-2026 as falling interest rates and mergers and acquisitions boost capital allocation. Hadick believes that, with the exception of pension funds, most institutional investors have already returned and predicts that pension funds will return to the market over the next few years as regulations become clearer and the market matures. The early-stage venture capital founder stated that LPs will not return en masse unless the next "super-hot narrative" emerges, such as stablecoins or breakthrough use cases.
