Venture capital (VC) has long been the lifeblood of the startup ecosystem, fueling some of the biggest tech successes of the past few decades. But when it comes to Web3, the traditional VC funding model is proving to be a poor fit. Many blockchain startups that initially secured large investments from venture capitalists are now struggling to sustain growth, remain decentralized, or align with the ethos of the crypto community.
The very nature of Web3—decentralization, community-driven governance, and long-term network effects—conflicts with the short-term, high-return expectations of traditional VCs. As a result, the industry is witnessing the cracks in this system, forcing founders and investors alike to rethink how Web3 projects should be funded.
The misalignment between VCs and Web3 projects
- Short-term exit strategies vs. long-term decentralization
Venture capital firms operate on a model that requires them to generate returns within a set time frame, typically 5 to 10 years. This creates a fundamental disconnect with Web3 projects, which often require long-term development, organic growth, and decentralized governance to succeed. Many VCs push for early token unlocks or high valuations before a product is fully developed, leading to artificial hype followed by inevitable crashes. - The ‘pump and dump’ effect
VCs often receive a significant allocation of a project’s tokens at a discounted rate. When these tokens vest, VCs frequently sell large portions to secure profits, causing market instability and eroding community trust. This cycle has played out repeatedly with various Web3 projects, where early-stage investors make money while retail investors and long-term users bear the brunt of the losses. - Centralization of power
One of the core principles of Web3 is decentralization, yet when VCs control large portions of a project’s token supply or governance, they hold disproportionate influence. This goes against the ethos of permissionless and community-driven ecosystems. Instead of fostering decentralization, VC funding can often lead to projects that resemble Web2 companies, where decision-making is concentrated among a few stakeholders rather than the broader user base.
Examples of VC-funded Web3 failures
Several high-profile Web3 projects that received major VC backing have struggled, highlighting the weaknesses of this funding model:
- Terra (LUNA): Once hailed as a DeFi breakthrough, Terra was backed by prominent VCs. When its algorithmic stablecoin collapsed in 2022, it wiped out billions of dollars, raising questions about whether excessive VC funding led to unsustainable growth.
- dYdX: A decentralized derivatives platform that initially launched with strong VC support but later faced criticism for governance centralization, as early investors had significant control over decision-making.
- Aptos and Sui: These blockchain projects raised hundreds of millions in VC funding but have struggled to differentiate themselves in an already competitive market, leading to skepticism about whether the funding was based on genuine utility or speculative hype.
The future of Web3 funding: Alternative models
To truly align with the decentralized nature of blockchain, Web3 projects must explore alternative funding methods that empower communities rather than concentrating power in the hands of a few investors.
- Community-led funding
Decentralized Autonomous Organizations (DAOs) and crowdfunding platforms offer a more organic way to finance projects. Platforms like Gitcoin and Juicebox enable communities to directly fund initiatives they believe in, ensuring that power remains distributed. - Token-based fundraising with better vesting schedules
If token-based fundraising is used, projects must implement fairer distribution models. Extended vesting periods, community allocations, and staggered unlocks can prevent VC-driven market manipulation. - Revenue-sharing models
Instead of relying on speculative token raises, Web3 projects can adopt revenue-sharing models where users and contributors benefit from a project’s growth. This aligns incentives with long-term sustainability rather than short-term profit-taking. - Hybrid models with strategic investors
Some projects are exploring hybrid funding models, where they selectively raise from mission-aligned investors who are committed to the project’s long-term vision. These investors act as partners rather than short-term profiteers.
Conclusion
The Web3 ecosystem is built on principles of decentralization, community participation, and long-term innovation. Yet, the traditional VC funding model often contradicts these values, prioritizing rapid returns over sustainable development. While venture capital can still play a role in blockchain innovation, it must evolve to align with the ethos of the decentralized economy.
As Web3 matures, founders and investors must rethink how funding works. Alternative models—such as DAOs, revenue-sharing, and community-driven capital—are already proving that Web3 can thrive without repeating the mistakes of traditional tech funding. The future of Web3 belongs to those who embrace true decentralization, not just in code but in capital as well.
