Author: Regan Bozman, Co-founder of Lattice Capital
Compiled by: Hu Tao, ChainCatcher
This week's "hot topic" on Crypto Twitter seems to be widespread concern: whether the shrinking available funds mean that cryptocurrency is no longer as attractive. The scale of crypto venture capital is clearly contracting—this is indisputable.
As for why this is happening and what it means, there is more debate. Rob Hadick's view is that crypto venture capital is concentrating towards the best founders and the best funds, which is precisely a sign of the industry's maturity. Meanwhile, Meltem believes that the reasons for the contraction are (a) a lack of high-quality early-stage founders, and (b) compared to other high-growth industries, the scalable surface area of cryptocurrency is too small.
I don't have much to add to this specific debate. Clearly, there are still outstanding founders building projects in the crypto space. But compared to 2021, there are far fewer founders starting businesses in crypto now, while significantly more are venturing into other areas like AI. Is this due to a capital shortage, or has this gap led to a capital shortage? Both are likely true.
Undoubtedly, the job is also much harder than before. As capital flooded in, returns were compressed. Tokens also face more challenges structurally than they did from 2017 to 2021. Since the AI boom, there have been far fewer allocators willing to invest in crypto venture funds. If you aren't truly passionate about crypto VC, now is a great time to do something else.
Last week, I went to El Segundo (Translator's note: a city in California) for Disciplus's Demo Day, which focused on industrial tech. I was surprised to find many crypto investors there. It felt like running into another married friend at a bar—neither of us should have been there. Industrial tech isn't a focus for Lattice (I am a personal investor in Disciplus), but I wanted to better understand the dynamics of the non-crypto venture market.
Understanding how crypto investors are responding to the current market environment is the most interesting question, as it directly affects the future landscape of crypto capital markets. Clearly, some are heading to "Gundo" (nickname for El Segundo). But not everyone is doing so.
I currently see three main ways crypto investors are responding: The first is to leave entirely and do something completely different. This could mean taking an operational role in crypto or work entirely outside of crypto. As many zero-interest-era funds continue to die off, departures from established funds are becoming more common across the venture industry. Yes, the mega-funds are growing in assets under management, but they are unlikely to expand their team sizes fast enough to offset the number of funds that are dying.
Some crypto fund managers have done well enough that they can now invest in whatever they want, no longer bound by their fund's mandate. Kyle Samani is the most public example. Samani reminds us that while underperformance might push someone down this path, there are also clearly some exceptionally performing investors who simply find more interesting problems to solve elsewhere.
The second is to continue doing venture capital within their fund but broaden the investment scope. This is easier for some than for others. Not all funds active in crypto are explicitly crypto-only. My sense is that Meltem's investment scope was always broader than crypto, so teams like Crucible can directly shift their focus to other areas.
Paradigm was very clear at its founding about positioning itself as a crypto fund—now they do "frontier tech." Many funds (including ours) have explicit mandates to invest in digital assets and related businesses. Fund documents often write definitions broadly, but I think for most crypto fund managers, there is a very clear understanding with their LPs (Limited Partners): they represent "crypto exposure."
Therefore, these peer managers either amend their LPA (Limited Partnership Agreement) to do non-crypto business, get verbal agreement from LPs, or do it sneakily. This is clearly a spectrum—you could argue that all AI businesses will eventually use stablecoins, so it counts as "crypto business." I'm not saying that view is correct, just that the lines can be blurry.
The third option is to stick to the core business. If you believe the industry will grow another 100x in the future, with less competition and lower valuations, now is a great time to invest. This is the path we have chosen.
Which Door Hides the Wealth?
I understand the appeal of the second option, but I am skeptical. Venture capital is both an extremely competitive industry and follows a power law. There's a reason Y Combinator captures around 90% of accelerator returns globally. Top venture capital funds tend to get access to the best deals, which drive most of the returns. This means that unless you are the best, participating is pointless; and becoming the best is really, really hard.
The most common derivative area from cryptocurrency is artificial intelligence. AI is huge, growing rapidly, and will change the world. It is almost certainly the most competitive venture capital market of the past two decades. More and more money is pouring into companies with higher valuations (yet these companies have many questions about their business models). You are competing against AI-focused funds, all generalist venture capital funds, and almost every source of venture capital on the planet. Therefore, I highly doubt that most crypto funds actually have any competitive advantage. Sure, there will be exceptions, and some crypto fund managers have seriously considered AI investment strategies. But I think most crypto funds will fade into obscurity.
Areas like deep/industrial tech, such as El Segundo , might be less competitive, but they are not without challenges. You are leaving the historically most capital-efficient industry (open-source protocols) to enter a highly capital-intensive one. Moreover, these industries also require specific technical skills for analysis.
Remaining Opportunities in Crypto
This brings us back to the crypto space, which in some ways reflects... the current broader venture capital market trend, where a minority of companies raise a larger proportion of available funds. The market is polarizing. There used to be many crypto funds in the $100 million to $200 million range. Now it's mainly divided into early-stage specialized funds below $70 million and large platform funds. The main difference between crypto venture capital and traditional venture capital is that crypto venture capital is shrinking, while traditional venture capital is growing at an astonishing rate.
Our focus remains on seeding. Opportunities in industries or categories that large institutional enterprises have not yet realized. "The current crypto market obviously faces many challenges, but I think with a little attention, one can find just as many opportunities. In many markets around the world, crypto-based financial applications are flourishing. The circulation of non-USD stablecoins is still minimal. We might have only completed 5% of upgrading the financial system—therefore, there are still many opportunities waiting to be discovered in the future."
