Over the past few years, the scale of early financing in Web3 has expanded, but funding has concentrated in a few companies, making financing more difficult. After the collapse of FTX, LP funds have gathered in a small number of leading funds, making it even harder for startups to secure financing. Token liquidity has decreased, investment return cycles have lengthened, and the market is now more focused on profitability and PMF. Venture capital will not disappear; the Web3 infrastructure has matured, and the development of AI brings new opportunities. In the future, capital will favor founders with long-term competitiveness rather than short-term token returns. The key question is which founders and investors can persist until the end and find the ultimate answers to the industry’s evolution. This article is adapted from a piece by Decentralised, organized, translated, and written by Zhouzhou, BlockBeats.
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Q1 2025 Web3 Financing Status
A rational market participant might believe that capital will experience fluctuations, much like many phenomena in nature, which have cyclic characteristics. However, venture capital in the crypto space resembles a one-way waterfall—a continuous experiment concerning gravity.
We may be witnessing the final stage of a frenzy that began with the smart contract and ICO boom in 2017, accelerated during the low-interest environment of the COVID period, and is ultimately returning to a more stable level.
During the peak in 2022, venture capital investment in the crypto space reached $23 billion. By 2024, this figure plummeted to $6 billion. Three primary reasons contributed to this decline:
- The frenzy of 2022 led to excessive capital inflow—venture capital invested in many products, such as DeFi and NFTs, at extremely high valuations in a seasonal market but ultimately failed to deliver the expected returns. OpenSea was once valued at as much as $13 billion, marking the pinnacle of market speculation.
- Difficulty in fundraising, with valuation premiums disappearing—many funds faced obstacles in raising capital in 2023/2024. Projects that successfully launched on exchanges also struggled to recreate the high valuation premiums seen during 2017-2022. Due to the lack of valuation increases, funds found it challenging to raise new capital, especially given many investors’ returns lagging behind Bitcoin’s performance.
- AI has replaced crypto as the “next hot sector”—large capital institutions have shifted their attention to AI, causing the crypto industry to lose the speculative fervor and premiums it once enjoyed as “the most promising frontier technology.”
However, the deeper issue lies in the fact that very few startups can grow to Series C or D rounds. One might assume that the primary exit strategy in the crypto industry is through token listings on exchanges, but when most tokens crash upon listing, investors find it difficult to exit. This becomes particularly evident when comparing data across various funding rounds.
Since 2017, out of 7,650 companies that secured seed funding, only 1,317 successfully advanced to Series A, representing a progression rate of 17%. Among them, 344 progressed to Series B, with only about 1% (±1%) making it to Series C. The probability of reaching Series D is just 1 in 200, comparable to other industries as reported by @Crunchbase. However, the crypto industry has a unique circumstance: many growth-stage companies bypass traditional funding paths through tokenization. Nonetheless, this reflects two core issues:
- Without a healthy token liquidity market, crypto venture capital will stagnate. This gap will be filled by liquidity market participants such as @SplitCapital and @DeFianceCapital.
- If not enough companies grow to later stages and successfully go public, investors’ risk appetite will diminish.
Data from various funding stages conveys the same message: despite stable capital inflows in seed and Series A rounds, active investments in Series B and C rounds have significantly decreased. Does this indicate that it is a good time for seed round financing? Not necessarily. The key lies in the details.
The data below shows the median amounts for pre-seed and seed round financing each quarter. The overall trend indicates a steady increase. Two noteworthy points are:
- Since the beginning of 2024, the amount of pre-seed financing has significantly increased.
- The nature of seed round financing has changed over the past few years.
We observe that despite a decline in early capital investment willingness, the scale of pre-seed and seed round financing for startups has actually increased. The previous “friends and family round” is now being filled by early-stage funds, and this trend is also impacting seed round financing. Since 2022, seed round financing has expanded to cope with rising labor costs and the longer time required for the crypto industry to achieve product-market fit (PMF). However, the decreasing costs of product development have partially offset this trend.
The increase in financing amounts means higher valuations (or equity dilution) for companies at early stages, which also implies that greater valuation growth will be necessary to provide returns for investors in the future. Furthermore, there was a noticeable increase in financing amounts in the months following Trump’s election. This may relate to changes in the fundraising environment for fund general partners (GPs) after Trump’s assumption of office—heightened interest from fund of funds (FoF) and traditional allocators has pushed the early market into a “risk appetite” mode.
What does this mean for founders? Currently, the amount of early financing in Web3 is greater than ever, but capital is concentrated among fewer founders, with larger financing amounts, while also demanding faster company growth than in previous cycles.
As traditional liquidity channels (such as token issuance) are drying up, founders need to invest more effort to demonstrate their credibility and the potential of their businesses. The era of “50% discount, high valuation financing in two weeks” has passed. Funds can no longer profit solely through “inflated valuations,” and founders can no longer secure financing easily; the tokens held by employees no longer enjoy the rapid appreciation they once did.
One perspective to validate this trend is through the velocity of capital flow. The chart below illustrates the average time startups take to progress from seed to Series A. The lower the number, the faster the capital flow, indicating that investors are willing to invest larger sums at higher valuations before the business matures to support new seed round companies.
Another critical factor is how liquidity in the public market impacts the private market. When investors pull back from the public market, they often increase their investments in the private market. For instance, during Q1 2018, when the market experienced severe declines, Series A financing drastically decreased. The same situation occurred again in Q1 2020—during the market crash triggered by the COVID pandemic. For investors holding capital, the attractiveness of investing in the private market tends to rise when opportunities in the public market diminish.
In Q4 2022, following the collapse of FTX, the market’s risk appetite significantly decreased. Unlike previous situations where financing in the private market increased during market pullbacks, this collapse directly destroyed the appeal of the crypto industry as an asset class. Prior to this, several large funds had already invested heavily in FTX’s $32 billion valuation financing, ultimately leading to total losses. As a result, investor interest in the entire industry has sharply declined.
After the collapse of FTX, funds began to concentrate on a few leading companies, which became the “kingmakers” dominating the capital flows in the market. Most LPs (limited partners) directed their funds into these top funds, which were more inclined to deploy capital in later-stage projects, as this could attract more capital. In other words, the financing environment for startups has become increasingly difficult.
What is the Future of Crypto Venture Capital?
For the past six years, I have been observing these data, and each time I arrive at the same conclusion—entrepreneurial financing is becoming increasingly challenging. At 24 years old, I may not have realized that the patterns of industry evolution are such. Market booms attract a plethora of talent and capital, but as the industry matures, the difficulty of financing inevitably increases. In 2018, projects could secure financing simply by being “on the blockchain”; by 2025, investors are more focused on profitability and product-market fit (PMF).
As token liquidity decreases, venture investors must reassess their liquidity and capital deployment strategies. In the past, investors expected returns through tokens within 18-24 months, but this cycle has now lengthened. Employees also need to exert more effort to obtain the same number of tokens, and these tokens often trade at lower valuations. This does not imply that there are no profitable companies in the industry; rather, similar to the traditional economy, ultimately only a few companies will capture the majority of economic value.
Will venture capital disappear? From a jokingly pessimistic perspective, perhaps it might. But the reality is that Web3 still needs venture capital.
The infrastructure layer has matured to support large-scale consumer applications.
Founders have experienced multiple market cycles and have developed a deeper understanding of how the industry operates.
The coverage of the internet continues to expand, and global bandwidth costs are decreasing.
The development of AI is broadening the possibilities for Web3 applications.
These factors together create an unprecedented opportunity period. If the venture capital industry wants to “make venture capital great again,” they need to focus on the founders themselves rather than how many tokens they can issue. Today, capital allocators are more willing to spend time supporting those founders with the potential to dominate the market. This shift represents the growth process through which Web3 investors have transitioned from asking “When will the tokens be issued?” in 2018 to “What are the market limits?” in 2025.
