Original Title: The Funding: Why raising a crypto VC fund is harder now — even in a bull market
Original Author: Yogita Khatri, The Block
Original Translation: Tim, PANews
In the previous issue, I discussed how the "Digital Asset Treasury (DAT) summer" attracted attention and funding away from traditional startup financing rounds. At that time, some venture capital firms raised another question: limited partners (LPs) have become very cautious about investing in crypto funds. Therefore, in this issue, I will delve into why raising crypto venture capital funds has become more difficult, even in a bull market, and what this means for future development paths.
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. Regan Bozman, co-founder of Lattice Fund, stated, "Although the outlook for the crypto market has improved significantly, this has not offset the general concerns about venture capital performance. The new challenge facing crypto venture capital today is the need to compete for funds with ETFs and DATs."
Michael Bucella, co-founder of Neoclassic Capital, mentioned that only funds with clear advantages or impressive historical performance can continue to attract LP funding. This market change has led to what Dragonfly general partner Rob Hadick referred to as "the shift of quality targets." He pointed out that in 2024, only 20 institutions attracted 60% of total LP funds, while the remaining 488 institutions divided the remaining 40%. Although liquidity improved this year through mergers and IPOs, the fundraising threshold remains far higher than the levels before the market crash in 2022.
Broader data also confirms this. The Block Pro data provided by my colleague Ivan Wu shows that after the boom period of 2021-2022, the fundraising scale of crypto venture capital funds has sharply declined. In 2022, relevant institutions raised over $86 billion through 329 funds, but this figure plummeted to $11.2 billion in 2023 and further dropped to $7.95 billion in 2024. By 2025, only 28 funds raised $3.7 billion, highlighting the difficulty of the current fundraising environment. Both the scale of fundraising and the number of funds are on a steep decline, reflecting LPs' cautious attitudes and the increase in capital choices.
Several venture capital firms revealed to me that family offices, wealthy individuals, and crypto-native funds are still actively supporting crypto venture capital. However, since 2022, pensions, endowments, fund-of-funds, and corporate venture capital departments have mostly chosen to withdraw, resulting in a smaller and more selective LP group.
Why is fundraising harder now than in 2021 or early 2022?
The previous bull market cycle was unique; in 2021, almost anyone could raise a crypto venture capital fund, even without experience, but many of those funds have yet to return capital to investors. LPs now require tangible capital distribution data before committing new funds. Sep Alavi, general partner at White Star Capital, stated, "LPs are increasingly skeptical of unrealized gains; they prioritize funds with actual historical returns."
The interest rate hike cycle since March 2022 has also prompted capital allocators to turn to safer, more liquid assets. Steve Lee, another co-founder of Neoclassic Capital, pointed out that this cycle's returns are mainly concentrated in Bitcoin, Ethereum, and a few blue-chip stocks through ETFs and DATs, with little benefit to smaller projects that typically have venture capital value. Lee stated, "LPs see short-term gains in large-cap stocks, while realizing venture capital value takes longer."
An early venture capital founder, who wished to remain anonymous, added that due to the lack of outstanding token performance since the 2021-22 cycle, the absence of "altcoin buying" has suppressed LPs' willingness to invest, as many crypto venture capital firms would invest in tokens. Artificial intelligence is also a major influencing factor: Bozman from Lattice Fund stated, "AI is an all-encompassing hot topic that has attracted a lot of interest from LPs focused on technology."
Overall, while the current fundraising difficulty may not be as severe as in the years following the collapse of Luna and FTX, it is still much more challenging compared to the loose period of hot money flowing in from 2021 to early 2022.
What will the future of crypto venture capital look like?
If fundraising continues to be difficult, most venture capital firms expect a wave of consolidation in the industry, with smaller, weaker, or less distinctive funds quietly exiting the market. Alavi predicts that small or underperforming funds will struggle to raise follow-on funds, while Hadick points out that as capital concentrates at the top, the market has begun to shrink.
That early crypto venture capital founder believes that mid-sized funds will become hollow: small funds with a size below $50 million and cutting-edge advantages will survive, while 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 traditional market structures, supported by smaller but higher-quality venture capital firms that underpin a large liquidity base. Bucella stated, "Capital markets have a remarkable self-correcting ability, and we are moving out of a phase of over-allocation in venture capital and under-allocation in liquidity strategies."
Others believe that the model itself is also evolving. Erick Zhang of Nomad Capital predicts that purely crypto-focused enterprises will decrease, Web2 venture capital will venture into the crypto space, and crypto funds will also expand into Web2 businesses.
The timeline for a large-scale return of liquidity providers remains uncertain. Lee from Neoclassic stated that once capital shifts from Bitcoin and Ethereum to mid- and low-market-cap token ecosystems, investors will return, and he expects this transition to be accelerated by on-chain capital flows driven by stablecoins.
Alavi believes that as interest rates decline and merger transactions boost capital allocation, institutional investors may return by mid-2026. Hadick, on the other hand, believes that most institutional investors, except for pensions, have already returned, and he anticipates that as regulations become clearer and the market matures, pensions will re-enter the market in the coming years. That early venture capital founder stated that unless a "super hot narrative" similar to the next stablecoin or breakthrough application case emerges, LPs will not return on a large scale.
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