Lattice Capital Founder: Crypto VC, because believing is seeing

Author: Regan Bozman, Co-founder of Lattice Capital

Translation: Hu Tao, ChainCatcher

This week’s hot topic on crypto Twitter seems to be a common concern: the shrinking of available funds, does this mean cryptocurrencies are no longer as attractive? The scale of crypto venture capital is clearly contracting — there’s no debate about that.

As for why this is happening and what it signifies, there is more controversy. Rob Hadick’s view is that crypto VC is concentrating on the best founders and the best funds, which is precisely a sign of industry maturity. Meltem, on the other hand, believes the reasons for contraction are (a) a lack of high-quality early-stage founders, and (b) compared to other high-growth industries, the surface area for crypto scalability is too small.

I don’t have much to add to this specific debate. Clearly, there are still outstanding founders building projects in crypto. But compared to 2021, there are far fewer founders starting companies in crypto now, while the number of founders in other fields like AI is significantly higher. Is this due to a shortage of capital, or has this gap caused the capital shortage? Both could be true.

Undoubtedly, this work is also much harder than before. As capital flows in, returns are compressed. Tokens face more structural challenges than in 2017-2021. Since the AI boom, fewer allocators are willing to fund crypto VC funds. If you don’t truly love crypto VC, now might be a good time to do something else.

Last week, I visited El Segundo (note from translator: a city in California) to attend Disciplus’s Demo Day, focused on industrial technology. I was surprised to find many crypto investors there. It felt like meeting another married friend at a bar — neither of us should really be here. Industrial tech isn’t Lattice’s main focus (I personally am an investor in Disciplus), but I wanted to better understand the dynamics of the non-crypto VC market.

Understanding how crypto investors are responding to the current market environment is the most interesting question because it directly impacts the future landscape of crypto capital markets. Clearly, some are heading to “Gundo” (El Segundo’s nickname). But not everyone is doing so.

Currently, I see three main responses among crypto investors: The first is to completely leave and do something entirely different. This could mean taking operational roles in crypto or working in fields unrelated to crypto altogether. As many zero-interest-era funds disappear, the phenomenon of founders leaving old-school funds is becoming more common across the VC industry. Yes, the assets of mega-funds are growing, but their team expansion likely won’t offset the number of funds shutting down.

Some crypto fund managers are doing well enough that they can now invest in anything they want, no longer constrained by fund terms. Kyle Samani is the most publicly known example. Samani reminds us that poor performance might push people toward this path, but there are also some exceptionally successful investors who simply feel there are more interesting problems outside crypto worth solving.

The second response is to continue investing through their own funds but expand the scope. This is easier for some, harder for others. Not all active crypto funds focus solely on crypto. My sense is that Meltem’s investment scope is broader than just crypto, so teams like Crucible can directly shift their attention to other areas.

When Paradigm was founded, it explicitly positioned itself as a crypto fund — now they focus on “frontier technology.” Many funds (including ours) have clear mandates to invest in digital assets and related businesses. Fund documents often define this broadly, but I believe most crypto fund managers and LPs (Limited Partners) have a very clear consensus: they represent “crypto exposure.”

Therefore, these peer managers either modify their LPAs (Limited Partnership Agreements) to include non-crypto activities, get verbal approval from LPs, or do it covertly. This is clearly a spectrum — you could argue that all AI-related businesses will eventually use stablecoins, so they also count as “crypto businesses.” I’m not saying this view is correct, just that the boundaries can be blurry.

The third option is to stick to their core business. If you believe this industry will still grow 100x in the future, with less competition and lower valuations, now is a good time to invest. That’s the path we’ve chosen.

Which door hides wealth?

I understand the appeal of the second option, but I remain skeptical. Venture capital is an industry with fierce competition and follows a power-law growth pattern. It’s no coincidence that Y Combinator accounts for about 90% of global accelerator returns. Top-tier VC funds often participate in the best projects, generating most of the returns. This means that unless you are among the very best, participating is pointless; and becoming the very best is extremely difficult.

The most common derivative in the crypto space is artificial intelligence. AI is enormous, rapidly developing, and will change the world. It’s arguably the most competitive VC market of the past two decades. Increasingly, capital is flowing into higher-valued companies (though their business models are often questionable). You’re competing with AI-focused funds, all generalist VC funds, and nearly every source of venture capital on Earth. So I highly doubt most crypto funds have any real competitive advantage. Of course, there are exceptions — some crypto fund managers have seriously considered AI investment strategies. But I believe most will ultimately exit the scene quietly.

In deep/industrial tech fields like El Segundo, competition may be less fierce, but challenges remain. You’re leaving the historically capital-efficient industry of open-source protocols to enter a capital-intensive one. And these industries require specific technical skills for analysis.

Remaining opportunities in crypto

This brings us back to crypto, which in some ways reflects the broader trend in the venture capital market — a few companies raising a larger proportion of available funds. The market is diverging. Previously, many crypto funds had sizes between $100 million and $200 million. Now, they mainly fall into two categories: early-stage specialized funds under $70 million and large platform funds. The main difference between crypto VC and traditional VC is that crypto VC is shrinking, while traditional VC is growing at an astonishing rate.

Our focus remains on seed-stage investments. Opportunities in sectors or categories that large institutional firms have yet to realize. “The current crypto market faces many challenges, but I believe that with some attention, many opportunities are still available. In many global markets, crypto-based financial applications are thriving. The circulation of non-USD stablecoins remains minimal. We may have only completed about 5% of upgrading the financial system — so many opportunities still await discovery.”