Private Crypto Venture Capital Sentiment Hits Rock Bottom: What Lies Ahead?

The sentiment in private crypto venture capital has reached its lowest point since Q4 2022. As we approach the final phase of fundraising this year, here are some reflections on the current landscape and what the future may hold.

Plummeting Valuations in Recent Quarters

In the past quarter, the average valuations across pre-seed and seed stages have dropped dramatically. Pre-seed valuations now sit between $10 million and $20 million, while seed stage valuations range from $20 million to $30 million. This represents a stark contrast to Q1 2024, where valuations were almost double these figures.

What’s driving this downturn?

1. Venture Capital Funding Drought

Many VCs are nearing the end of their fund cycles, struggling to raise new funds or facing difficulty in doing so. Limited partners (LPs) are waiting for returns before reinvesting, leaving VCs hesitant to deploy their remaining capital.

2. Missed Opportunities in 2023

Some VCs, cautious during the 2022-2023 market, missed out when the market rebounded in Q4 2023. As a result, they overinvested in the hot Q1 2024 market and are now facing the consequences, taking a wait-and-see approach despite having funds available.

3. Underperformance of Venture Tokens

VC tokens have significantly underperformed compared to mainstream assets, including even meme coins. This has left VCs uncertain about where to direct their investments:

• Private markets have consumed most returns.
• Low liquidity and high fully diluted valuations (FDVs) have introduced severe inflation risks.
• Venture tokens continue to struggle in public markets.

4. Perceived Lack of Innovation

Discussions in the crypto community revolve around scaling solutions, L2s, modular vs. monolithic architectures, and transaction fees, signaling a zero-sum game. If the ecosystem were evolving, we’d see efforts to attract new users and fund groundbreaking innovations.

5. Election-Related Risks

Political uncertainty adds to the hesitation. Regulatory figures like Gary Gensler show no signs of easing crypto regulations, creating a potential four-year headwind for the industry under the next administration.

What If I Have a Great Idea and Want to Raise Funds?

Don’t hesitate to raise funds, but proceed cautiously.

Fundraising is fundamentally about creating demand for your project. As a founder, you need to strike a balance between valuation, dilution, and partner quality, but you may not have full visibility into how your project will be priced in the market.

Many founders set their valuations before engaging with investors, a risky move in today’s climate.

Set Realistic Valuation Expectations

If your valuation expectations are too high, you may waste time only to find that the market values your project much lower than anticipated. This could lead to missed opportunities and ultimately force you to accept lower offers from less ideal partners. Returning to your preferred investors with a lower valuation is a losing strategy, as 95% of VCs will likely reject you:

1. It signals that others have passed on your project.
2. They’ve moved on to other opportunities.

Instead, consider setting a lower valuation or letting the market determine your worth. As interest grows, your valuation can always increase. Interestingly, investors who have already committed may feel that paying a higher price is justified because they’ve “won” the deal.

Waiting for Better Market Conditions? Think Again.

Some founders might consider waiting until the fundraising environment improves. However, waiting 6, 12, or even 18 months could cost you valuable time. When you could be raising funds, testing your ideas, and moving forward, sitting idle in anticipation of better conditions is a poor strategy.

Reasons for Optimism

It’s easy to focus on the negatives, but there are still reasons to be optimistic about the future of private crypto venture capital.

1. Maturity of Key Sectors
   Sectors like stablecoins, decentralized infrastructure (DePIN), and decentralized finance (DeFi) have emerged from the trough of disillusionment. It has taken over five years for these sectors to mature, and they are now showing strong potential for sustainable growth.
2. Interest Rates and Market Liquidity
   We are on the brink of declining interest rates, which could significantly increase market liquidity. Bitcoin and Ethereum ETFs (and potentially Solana ETFs) are poised to bring new institutional inflows into the market.
3. Rethinking High-Valuation Fundraising
   Founders are increasingly questioning whether raising large sums at high valuations benefits their long-term community. Some notable projects are actively turning down new funding, launching with more reasonable valuations.
4. A Healthier Market Environment
   The pessimism has weeded out most speculators and leverage, leaving only long-term builders—many of whom can be reached directly via email. Now is the ideal time to collaborate with like-minded individuals and leverage the talent available.

Conclusion

While the sentiment in private crypto venture capital may be at a low, there are still opportunities for founders willing to navigate the current landscape with caution and realism. By setting appropriate valuations, leveraging current market conditions, and focusing on long-term sustainability, founders can continue to innovate and thrive despite the challenges.