The Funding: Why raising a crypto VC fund is harder now — even in a bull market

Last edition, I wrote about how “DAT (digital asset treasury) summer” was pulling attention and capital away from traditional startup rounds. At the time, some VCs also flagged another issue: limited partners (LPs) had become far more cautious about backing crypto funds. So in this edition, I’m digging into why raising a crypto VC fund has gotten harder — even in a bull market — and what that means for the road ahead.

Fundraising began to get materially tougher after the 2022 collapses of Terra (LUNA) and FTX, which eroded LP trust and left reputational scars across the sector, several VCs told me. “The sentiment on crypto has improved a lot, but that has not outweighed broader concerns about venture performance,” said Regan Bozman, co-founder of Lattice Fund. “The new challenge is crypto venture is now competing with ETFs and DATs for inflows.”

Today, only funds with a clear edge or exceptional track record are still drawing new LP commitments, said Michael Bucella, co-founder at Neoclassic Capital. That dynamic has fueled what Dragonfly’s general partner Rob Hadick described as a “flight to quality.” In 2024, he noted, just 20 firms captured 60% of all LP capital, while the other 488 split the remaining 40%. Even with liquidity improving this year through M&As and IPOs, the fundraising bar remains far higher than before the 2022 collapses.

The broader data backs it up. Crypto VC fundraising has shrunk dramatically since the 2021–2022 boom. In 2022, firms raised more than $86 billion across 329 funds, but that collapsed to $11.2 billion in 2023 and $7.95 billion in 2024, according to The Block Pro data from my colleague Ivan Wu. So far in 2025, just $3.7 billion has been raised across 28 funds — underscoring how much tougher the environment has become. Both the amount raised and the number of funds are on a steep downtrend, reflecting LP caution and a more selective capital base.

Family offices, wealthy individuals, and crypto-native funds remain active in backing crypto VCs. But pensions, endowments, funds-of-funds, and corporate venture arms have largely stepped back since 2022, leaving a smaller, more selective pool of LPs, several VCs told me.

Why it’s harder to raise now than in 2021 or early 2022

The last bull cycle was unusual — in 2021 almost anyone could raise a crypto VC fund, often without much experience, but many of those funds still haven’t returned capital. LPs are now waiting for real DPI (distributions to paid-in capital) before committing fresh money. “LPs are increasingly skeptical about unrealized gains and prioritize funds with proven track records of realized returns,” said Sep Alavi, general partner at White Star Capital.

Rising interest rates since March 2022 have also pushed allocators toward safer, more liquid assets. Neoclassic Capital’s other co-founder, Steve Lee, noted that this cycle’s gains have been concentrated in bitcoin, ethereum, and a few blue chips through ETFs and DATs, leaving little spillover into smaller projects where VC value usually emerges. “LPs see short-term gains in large caps, while VC value takes longer to materialize,” Lee said.

An early-stage VC founder, who didn't wish to be identified, added that the lack of an “altcoin bid” — with very few tokens performing since the 2021–22 cycle — has weighed on LP appetite, since many crypto VCs invest in tokens. AI is also a major distraction: “AI is such an overarching shiny object that it has captured a lot of tech-focused LP interest,” said Lattice Fund’s Bozman.

Overall, while raising today may not be harder than the post-Luna/FTX years, it’s still far tougher than the easy-money days of 2021 and early 2022.

What the future of crypto VC could look like

If fundraising remains tight, most VCs expect a wave of consolidation ahead, where smaller, weaker or undifferentiated funds will quietly disappear. Alavi expects smaller or underperforming funds to struggle with follow-on vehicles, while Hadick noted the market is already thinning out as capital concentrates with the strongest players.

The early-stage crypto VC founder argued that the middle tier will hollow out: small, sub-$50 million funds with a sharp edge will survive, as will the mega-funds like Paradigm and a16z, but underperforming mid-sized funds will fade away. Neoclassic’s Bucella added that crypto VC may increasingly resemble traditional markets, with a large liquid base supported by a smaller, but higher-quality venture segment. “Capital markets have a wonderful way of self-corrective behavior. We’re coming out of a period of over-allocation to venture and under-allocation to liquid strategies,” Bucella said.

Others see the model itself evolving. Erick Zhang of Nomad Capital predicted fewer firms will remain purely crypto-focused, with web2 VCs dipping into crypto and crypto funds branching into web2. 

The timeline for LPs returning in size varies. Lee at Neoclassic said LPs will return once capital flows shift from bitcoin and ethereum toward mid- and small-cap token ecosystems — a change he expects to be accelerated by stablecoin-driven on-chain capital.

Alavi thinks it could be mid-2026 as interest rates decline and M&A boosts distributions, while Hadick believes most institutional investors are already back, apart from pensions, which he expects to return over the next few years with regulatory clarity and a market that has matured. The early-stage VC founder suggested LPs will only flood in again once the next “super-hot narrative” — like stablecoins or another breakout use case — takes hold. 

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