Funding is becoming increasingly difficult, and encryption venture capital is entering the final stage of frenzy.

In 2022, the amount of encryption venture capital reached 23 billion dollars; by 2024, this figure dropped to 6 billion dollars.

Written by: decentralised

Compiled by: Odaily Planet Daily Golem

This article studies the venture capital situation in the encryption industry and expectations for the future. All data comes from Funding Tracker.

Encryption Venture Capital Status

Rational market participants may believe that capital markets also experience peaks and troughs, just like other phenomena in nature that have cycles. However, cryptocurrency venture capital seems more like a one-way waterfall—a continuous gravity experiment falling downwards. We may be witnessing the final stage of a frenzy that began in 2017 with smart contracts and ICO financing, 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 Financing Rounds

At its peak in 2022, the amount of venture capital investment in cryptocurrencies reached $23 billion, and in 2024, this figure drops to $6 billion. There are three reasons for this:

• The prosperity of 2022 led to VCs allocating excessive funds to cyclical projects with extremely high valuations. For example, 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 from 2023 to 2024, and projects listed on exchanges will also find it hard to achieve the valuation premiums seen from 2017 to 2022. The lack of premium makes it challenging for funds to raise new capital, especially when many investors are underperforming compared to Bitcoin.
• As AI becomes the next focus of technological frontiers, large capital has shifted its allocation priorities. 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 encryption industry come from token listings, but when most token listings show a negative trend, it becomes difficult for investors to exit. If we consider 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 round financing, 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 probability of D round financing being 1/200, 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 encryption industry bypass traditional follow-up rounds through tokenization, but these data point to two different issues:

• Without a healthy liquidity market for tokens, investment 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 from the various stages of financing seems to reflect the same fact. Although the capital entering seed and Series A financing has basically stabilized, the funding for Series B and C financing remains relatively conservative. Does this mean it is a good time for the seed stage? Not entirely.

Total financing amount at different stages

The data below tracks the median funding for each quarter of Pre-seed and Seed rounds, and this figure has been steadily rising over time. Two points are worth noting here:

• Since the beginning of 2024, the median financing in the Pre-seed round has increased significantly.
• 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 financing, with what used to be the "friends and family" round now being filled by early funds deploying earlier. 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 encryption industry.

The expansion of the fundraising amount means that the company's valuation in the early stages will be higher (or diluted), which also implies that the company will require 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 GPs (General Partners), leading to increased interest from LPs and more traditional allocators within the fund, 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 possibilities their businesses can achieve. The days of "50% discount, new funding round at a high valuation in 2 weeks" are over. Capital cannot profit from additional investments, founders cannot easily obtain salary increases, and employees cannot gain value from their vested tokens.

One way to validate 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-stage companies at higher valuations without waiting for the company to mature.

At the same time, according to the above chart, 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 pullback in the public market, large-scale A-round financing occurs, such as the sharp decline in the first quarter of 2018, which was repeated again in the first quarter of 2020, during the outbreak of the COVID-19 pandemic. When liquidity deployment sounds less optimistic, investors with capital to deploy are instead incentivized to establish positions in the private placement market.

But why was it the opposite in Q4 2022 at the time of the FTX crash? Perhaps it symbolizes the exact point in time when interest in cryptocurrency investing as an asset class has been completely exhausted. Multiple large funds lost huge sums of money in FTX's $32 billion funding round, which has led to a decline in interest in the industry. In the following quarters, capital was concentrated around only a few large companies, and since then, most of the capital from LPs has flowed into those large companies because this is already 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 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 amount of late-stage financing for major projects, which is often concentrated on issuing tokens.

How Will Future Encryption Venture Capital Evolve?

For six years, I have been tracking this data, and I always reach the same conclusion: raising risk financing will become 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" was enough to 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 of investors 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 valuation of these tokens has also decreased. This does not mean that there are no profitable companies in the encryption industry; it simply means that, like traditional economies, there will be a few companies that attract the vast majority of the economic output of the industry.

If VCs can make venture capital great again by seeing the nature of the founders rather than 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 rushing to issue a token in the hope that people will buy it on exchanges is no longer viable.

Under such constraints, capital allocators are incentivized to spend more time collaborating with founders who can capture a larger share of the evolving market. The shift from venture capital firms in 2018 simply asking "When will tokens be issued?" to wanting to know how far the market can develop is an education that most capital allocators in web3 must undergo.

But the question is, how many founders and investors will persist in seeking the answer to this question?