The following is a guest post and opinion of Hatu Sheikh, founder of Coin Terminal.
The conventional model for venture capital investment in crypto has faltered. VC firms are returning to their core strategies to realign their funding mechanisms in this fiercely competitive landscape.
As a result of fluctuating market dynamics, VCs have come to understand that their success is less about maintaining a fundamental belief system and more about investing in projects that command significant attention, possess compelling narratives, and execute effective go-to-market (GTM) strategies.
Motivated by the rise of investments driven by mental dominance, VC investing is shifting its focus from long-term commitments to more immediate, high-velocity opportunities.
The outlook for crypto VC investing is concerning
Crypto venture capitalists, who once played a pivotal role in shaping the industry’s narrative with substantial capital, have seen their influence wane over recent years.
A variety of internal and external factors have contributed to the muted state of venture capital.
A recent report highlighted that regulatory uncertainties under the Biden administration and the U.S. SEC’s enforcement actions against significant players have made VCs cautious.
Moreover, the emergence of crypto exchange-traded products (ETPs) and the influx of institutional capital from firms like BlackRock and Franklin Templeton have redirected funds away from VC firms. Large investors, such as hedge funds and endowments, are gaining crypto exposure through liquid instruments rather than through early-stage ventures.
Additionally, high interest rates have dampened the appetite for risk among VCs. This has made them hesitant to invest in high-risk products that could yield substantial returns, even as speculation and volatility remain inherent to crypto—their features, not flaws.
To compound the situation, standardized VC funding models in crypto are fundamentally flawed.
The widespread failures of venture-backed firms that financed projects during 2021-2022 have sent warning signals to generalist VCs. These setbacks highlight a lack of a sound investment strategy, rather than a rejection of the industry altogether.
Overall, capital flow to venture funds has decreased over recent years. In 2024, crypto VC fundraising hit a five-year low, raising just $5.1 billion.
Even with a bull market emerging in the latter half of 2024, VC investments appeared disconnected from the successes observed in crypto markets. The liquid crypto market expanded by $1.6 trillion in 2024, marking an 88% year-over-year increase to reach a total market cap of $3.4 trillion. Yet, VCs only committed $11.5 billion to crypto startups during this period.
This stark discrepancy underscores VCs’ pessimism and their failure to grasp the fundamental dynamics of crypto markets. In their pursuit of traditional fundamentals, VCs seem to have overlooked the most pressing meta-narratives and robust market trends. Consequently, their dwindling resources have been funneled into unprofitable ventures without yielding significant returns.
In contrast, retail investors who have placed their capital in sectors with heightened awareness and tangible real-world applications have seen tremendous success. There are valuable lessons for VCs in this retail-led approach.
Lessons from a mindshare-driven investment culture
According to the report, various crypto startups have opted to forgo token sales to traditional VCs in favor of community-driven fundraising methods in 2024. This shift has allowed community involvement—central to the essence of crypto—to reclaim its significance, demonstrating to VCs how to remain resilient amid cyclical market trends.
A report from CoinGecko revealed that memecoins emerged as the leading narrative in 2024, claiming the title of “the most popular crypto narrative.” By December, the memecoin market capitalization surged to $137 billion, primarily driven by retail engagement.
While critics have dismissed memecoins as mere speculative distractions, they have played a crucial role in fostering retail crypto adoption, with surveys indicating that over 40% of individuals were first-time investors in tokens like Trump and Melania.
AI tokens also ranked as a significant narrative in 2024, capturing 16% of investor attention as retail investors funneled resources into advanced financial technologies. The market cap for AI tokens is projected to soar to $60 billion in 2025, giving early investors a distinct advantage as the sector evolves.
Historically, VCs have favored fundamentals over mindshare-driven strategies, believing that the former leads to sustainable long-term gains. However, data suggests this is not always the case.
The crypto sector is evolving rapidly. Relying solely on fundamental principles without adapting to shifting market landscapes can lead to stagnation.
Now, VCs are beginning to recognize their missteps and are prepared to pivot. They are adopting mindshare-based strategies to pinpoint disruptive sectors and strategically invest for growth.
By centering their investments around dominant narratives in a cyclical market, VCs can act early on projects with solid GTM strategies. This will enable them to realize profits as these sectors mature and the projects roll out real-world applications.
It has been suggested that the “fintech winter” is ending, with a resurgence in VC funding as regulatory environments stabilize. With clearer regulations expected under upcoming leadership, crypto VC funding is poised for a revival, possibly attracting $18 billion in new capital.
VCs need to be astute about how to deploy these funds. Instead of investing in outdated fundamentals, they should adopt a mindshare-driven approach to nurture early-stage innovations that contribute to profitable balance sheets.
As various narratives vie for limited attention in the crypto space, VCs must strategically manage their capital reserves. Mindshare-based investing offers a mutually beneficial alternative, promising advantages for both the industry and the VCs themselves.
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