Written by: Dara, Partner, Hashgraph Ventures
Compiled by: Luffy, Foresight News
The next decade of crypto venture capital belongs to $50 million boutique funds. I firmly believe this, and I will explain my reasons in detail below.
First, let me introduce my theory of polarization. Polarization refers to an industry splitting into two distinct branches of roughly equal size. Large platforms and small specialists will prevail, while mid-sized platforms will be eliminated.
In the crypto space, venture capital firms completed 217 investments in the first quarter of 2026, investing $4.56 billion, a 38% decrease in funding and a 22% decrease in the number of deals compared to the previous quarter.
Late-stage Series C and above funding rounds surged by 1020% year-on-year, while investment in early-stage projects cooled significantly. In April 2026, the total transaction volume across the industry plummeted to $659 million, the lowest monthly figure in nearly two years.
If you only look at the overall data, you might think that the industry is only slightly weakening; but if you look deeper, you will find that a few super-large financings have swallowed up the vast majority of funds, while a large number of seed and pre-seed small funds are struggling.
In the first half of 2025 alone, Founders Fund raised more than 1.7 times the total amount raised by all emerging venture capital managers combined; the fundraising amount of established leading platform funds was even 8 times that of emerging funds. Well-known native crypto funds such as MechanismCap and Tagent also exited in 2025-2026.
If you are an emerging crypto venture capital manager, you will definitely be able to understand the signals behind these data: whenever investors say they want to “concentrate their investments on leading established institutions”, and whenever entrepreneurs insist on “waiting only for top-tier institutions to lead the investment”, you can truly feel the changes in the industry.
The core argument of this article is that mid-sized, comprehensive crypto funds are structurally dying out. The industry is becoming increasingly polarized, with platform giants at the top and niche, boutique funds at the bottom. Over the next decade, those funds that outperform the market will almost exclusively be vertical funds with assets under management below $50 million and a clear, unwavering investment strategy. Mid-sized players have only 36 months left to survive.
The following analysis will break down the data logic, structural causes, and strategies for professional funds to break through. If you are a limited partner (LP), entrepreneur, or venture capital partner (GP), this content will directly relate to your future strategy.
The End of Mid-Sized Comprehensive Funds
We define medium-sized comprehensive funds with a size of $100 million to $500 million, a wide range of investment sectors, investing in 15 to 25 projects per fund, and balancing equity and tokens as the mainstream players in the 2020-2022 cycle, with approximately 80 such funds globally.
Back then, their fundraising pitches were remarkably similar: “We have deep expertise in the crypto-native sector, flexible investment strategies, and investments ranging from $500,000 to $20 million. We can lead or follow up on investments, covering the entire spectrum from underlying infrastructure to application layers.”
This logic worked because back then, there was an abundance of LP funds, and the crypto market seemed to have unlimited potential. Even with a diversified investment approach, the inherent advantages of the sector itself were enough to create differentiation.
Now, the window of opportunity has completely closed, and the game is over.
Three major structural changes
Shift 1: Digital asset listings and wealth management tools divert institutional funds
In 2025, publicly traded digital asset companies (those holding physical crypto assets in their financial statements) attracted approximately $29 billion in institutional funds, with a large influx of funds flowing into micro-strategy concept stocks and crypto ETFs.
For LPs, allocating to crypto assets no longer requires going through venture capital funds. They can directly buy listed financial products, ETFs, or spot assets, gaining immediate liquidity without having to endure the high costs of venture capital funds, such as a ten-year lock-up period, a 2% management fee, and a 20% profit share. In the past, mid-sized comprehensive funds were the only option for those wanting to allocate to cryptocurrencies; now, there are more convenient alternatives.
Second change: Amid market risk aversion, LP funds are concentrating on leading companies.
When LPs feel uneasy about the market, they don’t withdraw directly from the sector; instead, they concentrate their investment in the industry’s front-end. This is a common characteristic of every cycle.
The trend will be particularly evident in 2025: the top 10% of institutions will take the vast majority of LP funding. Employees of institutions such as pension funds and endowments will never be held accountable for investing in top performers like a16z; however, if they invest in an ordinary all-round fund with a size of $200 million and end up with a return of only 0.4 times, they will bear professional risks.
Third change: Investment logics are becoming increasingly similar, and mid-sized funds are losing their differentiation.
Starting in 2024, the presentation slides of all mid-sized funds became almost identical: stablecoins, real-world asset RWA, modular public chains, AI + cryptography, and decentralized physical infrastructure network DePIN. If you covered up the logos of all twelve funds’ presentations, it was impossible to tell them apart.
When investment logics become completely similar, the only differentiator is brand accumulation. However, top-tier institutional brands require a decade of development, and the mid-sized funds that entered the market in 2021 have neither accumulated experience nor the ability to quickly establish a brand.
A true reflection of medium-sized bases in 2026
A mid-sized fund that raised $250 million at the industry’s peak in 2022 has two senior partners and four junior staff. From 2022 to 2024, they invested 60% of their funds in 18 projects, achieving a return of 1.8 times their book value.
However, the partners privately knew that the book valuation was highly inflated. Secondary market buyers were only offering 30-50% of the book valuation for high-quality projects, while inferior projects were completely unable to secure further financing. The fund’s actual cash dividend return was only 0.15 times, and it had been operating for three years.
Currently, they claim to be “rebalancing towards existing projects,” but in reality, they are no longer investing new funds; fundraising for their second-phase funds has stalled; they appear to be still operating, but in fact, they are not generating any new business. Senior partners have begun looking for family office positions, and junior employees are submitting their resumes in droves.
This awkward situation affected nearly 40 of the 80 mid-sized funds at the peak of the cycle. By 2028, half of them will either be liquidated by their partners or completely transformed into other asset classes.
The Matthew effect of top funds
Large platform funds like Dragonfly and a16zcrypto possess advantages that mid-sized funds cannot replicate:
For a $400 million fund, a single $30 million Series A round is just normal; but for a small fund of $80 million, a single round can seriously skew the portfolio’s position.
Top-tier platform teams, often numbering forty or fifty people, are prioritized for entrepreneurs; the platform itself serves as a source of customers for projects. Even if 60% of the projects in the portfolio perform only moderately, as long as 80 projects are invested in, the power law effect can still generate excess returns; while small funds invest in only 12 projects, with an extremely low margin for error, but this only applies to small funds blindly copying the strategies of large platforms.
Paradigm’s research on perpetual DEXs was widely read across the industry; however, when an ordinary $80 million fund released a research report, only its own projects shared it, and it quickly faded into obscurity.
Every allocation decision made by an LP is essentially a trade-off of professional risk: if the investment goes to zero, can I justify my decision to the investment committee? Investing in a16z is blameless regardless of the outcome; investing in a $150 million general fund, however, carries the risk of accountability.
People are considering not only investment quality, but also professional insurance. This effect will only be reinforced in one direction: as long as the top institutions are still around and the historical returns remain, they can easily continue to raise funds.
The reality is harsh for emerging fund managers. Trying to compete for institutional LP funding by “outperforming top funds” is doomed from the start. The only investors they can attract are those who don’t prioritize professional risk: family offices, high-net-worth individuals, and a few dedicated LPs that specifically encourage and support emerging funds.
Nearly 75% of emerging funds have single LP contributions of less than $150,000, mostly from individuals or quasi-individuals.
Given that the top performers have solidified their positions and the middle performers have disappeared, where will the excess returns for the next decade come from?
Advantages of small funds: Small size can actually be a bonus.
Traditional venture capital perspectives often assume that smaller funds are weaker, with limited capital, insufficient brand recognition, weak lead investment capabilities, and difficulty accessing top-tier projects. These are all true, but in the current climate of capital scarcity and highly differentiated investment sectors, smaller size has become a core advantage.
A dedicated $40 million crypto fund focuses on investing in 8-12 projects, leading each Pre-Seed and Seed round with investments of $1.5-3 million. Following a power-law effect, just 1-2 of these projects could cover the entire fund’s costs; to triple the overall return, only $120 million in cash needs to be raised. Investing in a single company valued at $1 billion, holding 5-10% of the portfolio, would achieve the goal with just one project.
A $400 million comprehensive fund would need to recoup $1.2 billion to triple its value, requiring it to successfully invest in multiple projects with valuations in the tens of billions of dollars, making the difficulty increase exponentially. Similarly, when betting on the next Polymarket, a smaller fund only needs a project valuation of $4 billion to drive overall returns; a large fund, however, would need to wait until $40 billion to see a significant contribution. For the same investment targets, it’s 10 times easier for a smaller fund to generate returns.
This is the reverse Cambrian effect: even if a special fund has less brand, resources, and connections than the top players, it will still outperform platform giants in the next ten years.
However, small size alone is far from enough; professional funds must possess core capabilities that cannot be replicated by the four major platforms:
- Decision-making speed. Professional funds with a two-person partnership structure can complete funding in 6 hours; top-tier funds, however, require investment committee approval, legal review, partner alignment, and platform procedures, often taking six weeks. Many high-quality early-stage projects are secured by the speed of smaller funds.
- No committee needed, daring to invest heavily against the trend. The platform’s investment committee’s multi-layered screening process filters out all non-mainstream, controversial, and obscure targets. By the time the eight partners reach a consensus, the investment logic has already become market consensus, and excess returns have disappeared. Dragonfly’s Haseeb has also bluntly stated that the most successful investments by institutions were all non-mainstream targets that no one dared to touch at the time. The profit logic of crypto venture capital inherently rewards players who dare to bet heavily when there is disagreement, which the committee mechanism cannot do by nature.
- Partners have no worries about their career prospects. Platform partners who bet on niche projects and fail could have their careers affected; however, partners in small, professional funds are the core of the fund and are not subject to reassignment, demotion, or marginalization. Decisions are made solely based on right or wrong, not personal relationships or public opinion, allowing for more rational judgments on non-mainstream targets.
- A clearly defined and transparent business strategy naturally attracts targeted entrepreneurs. General funds, with their broad focus, fail to attract niche entrepreneurs, resulting in generic business plans received across the internet. In contrast, specialized funds, by publicly committing to a specific sub-sector—such as “Latin American stablecoin distribution,” “tokenized private lending for non-US institutions,” or “MEV mitigation layers for application blockchain L2″—will prioritize applications from entrepreneurs within that sector. There’s no need to build a 40-person platform team; a sufficiently sharp perspective and focused focus are enough to naturally and precisely attract talent.
These four advantages do not rely on capital, brand, or seniority, but solely on operational discipline and decisive decision-making.
The fate and end of mid-sized funds
In 2026-2027, mid-sized funds that are unable to climb to the top and are unwilling to narrow their focus will all face the same dilemma:
- Its size is stuck between $80 million and $300 million, which is not as strong as the leading investors, nor does it meet the conditions for concentrated investment by small funds.
- Holding 18-25 projects, with inflated book valuations that are not recognized by the secondary market;
- A few star projects on paper may look good, but they are unable to deliver cash dividends. Either the equity is locked up before the listing, or the tokens are dumped by the market as soon as they are unlocked.
- Founding partners went from working together to becoming estranged, with little prospect of profit sharing and difficulty in reaching a consensus;
- LP communication has shifted from quarterly reporting to “on-demand communication,” with a reluctance to confront the true performance of clients.
- Hiring has stopped and lower-level employees are seeking other opportunities. The official website still labels it as “actively investing,” but in reality, there has been no new investment for nine months.
Of the funds established in 2021, nearly a third are now in this state. They won’t collapse directly, but will slowly degenerate into a family office-like, passive model, hoping for a market recovery to revitalize existing projects.
However, the reality is that a market recovery will only benefit two types of people: established top-tier funds and specialized small funds. Mid-sized funds stuck in the middle, lacking a compelling narrative and sound logic, will never attract new capital.
For those in these types of funds, the only rational choice is either to proactively shrink operations, return uncommitted funds, and focus on 2-3 core sectors for continued operation, or to liquidate the fund altogether.
The most irresponsible approach is to passively give up and let the partners secretly seek other opportunities, which will only cause the LP to suffer another 4-6 years of lost revenue sharing.
To put it bluntly, if you are a limited partner (LP) of this type of zombie mid-sized fund, dispose of your shares through the secondary market as soon as possible, and don’t wait until 2028 to regret it.
Practical strategies for using 50 million-level special funds
If you accept the theory of polarization, you must follow this set of principles for operating boutique funds:
- Stick to a single vertical market. Narrow your focus to the extreme, ensuring you become an authority in the field within 12 months. Don’t just write “stablecoin infrastructure”; be specific, like “Latin American stablecoin distribution channels,” “tokenized private lending for non-US institutions,” or “MEV mitigation layer primitives for application chain L2.”
- Highly concentrated holdings. Invest in a maximum of 8-15 projects, with an average investment of $1-3 million per project. Resist the urge to “look at one more high-quality project.” Diversification is the biggest killer of returns for special-purpose funds; the power law effect inherently requires concentrated betting.
- Turn your publicly disclosed investment logic into a powerful customer acquisition tool. Continuously produce in-depth articles, investment reviews, and post-investment/missed-out project reviews within your vertical market, along with talk podcasts. This generates two major compounding effects: entrepreneurs in the same sector will prioritize submitting their business plans; LPs will gain a clearer understanding through your content and be more willing to fund and support emerging managers. High-quality content output is worth far more than a platform team of forty people.
- Transparent decision-making processes and open reviews of missed opportunities are crucial. Most venture capitalists are reluctant to disclose their failures, but this is precisely what gives special funds their highest leverage. LPs value your judgment far more than project resources. Writing “Why I missed Ondo at a $200 million valuation” demonstrates your investment framework and understanding far better than writing “Why I invested in Ondo.”
- Prioritize people over industry analysis. 70% of crypto pre-seed projects undergo multiple business transformations before launch. Your investment is essentially a bet on whether the founding team can weather three strategic adjustments. When conducting due diligence, don’t get bogged down in industry data; prioritize determining if the founder is worth investing in long-term. If you believe in them, invest at a reasonable valuation; if not, abandon the investment decisively.
- Treat fundraising like a 24-month marathon; don’t fantasize about a short-term sprint. The average closing period for an initial fund is as long as 17.5 months, and behind every commitment of interest, there are an average of 5-10 rejections. Maintain a calm mindset and accept the slow pace.
If the polarization theory is correct, then we should see the following in the next 24 months:
- Five to ten well-known mid-sized crypto funds have transformed into family office models or gone into liquidation; signs include freezing hiring, partner departures, shifting rhetoric to “rebalancing existing assets,” and missing annual disclosures.
- A number of specialized small funds with focused tracks and transparent logic have emerged as dark horses, with their second-phase funds attracting follow-on investments from top-tier LPs; they do not rely on scale to gain popularity, but rather on the speed of cash dividends and their influence in the industry.
- At least one leading platform fund delivered a product with a cash return of 0.7 to 1.2 times, yet it was still able to successfully raise funds for the next round, demonstrating that the moat of connections among top players is unshakeable.
- A new analytical framework will emerge for LPs, using secondary market quotes to benchmark fund book net asset value. Valuation price differences will be publicly disclosed for the first time in the industry, accelerating the elimination of zombie mid-sized funds.
If the above three conditions are not met by mid-2028, my theory will be wrong, and I will publicly review and admit my mistake; but I firmly believe that the core trend will not deviate.
Conclusion
If you’re a GP reading this: Don’t be complacent if you’re managing a small, specialized fund, and don’t panic excessively if you’re managing a mid-sized fund. This is a structural industry divergence, and has nothing to do with personal emotions.
Those stuck in the middle still have time to save themselves: return idle funds, narrow their focus to 2-3 core sectors, and embrace a smaller, more specialized approach. While the survival logic for small special-purpose funds is stringent, there is still a way forward; medium-sized comprehensive funds, on the other hand, are left with only unsolvable internal friction.
If you are a manager of a specialized small fund, the next decade is your era; don’t miss this opportunity. The top performers will always dominate the headlines, but excess alpha returns will ultimately flow to professional players.
If you are a limited partner (LP): You need to rethink your allocation decisions using this differentiation framework. Can you afford a seemingly ordinary 40 million RMB special fund that, after three years of dormancy, delivers amazing returns? Most LPs can’t, but the few who dare to invest will ultimately outperform their peers.
If you are an entrepreneur: Understand the differentiation before choosing a funding partner. If you need scale and brand resources, look for leading platforms; if you need quick decision-making and a firm commitment to invest heavily, look for vertical funds.
The industry hasn’t disappeared; it’s just undergoing a process of self-reorganization and reshuffling.