Is it possible for a venture-funded startup to go into hibernation without dying?

You can also return investors some money or pivot to another project. There are many different options.

Is it possible for a running champion to take a little siesta in the middle of a race, then wake up and win ?

A startup is a race. You can't stop in the middle. Once you start, you win or you lose, but you can't postpone victory. If you wait for the market, the market will never wait for you. A competitor will take it. And all the stuff and experience you accumulated will become irrelevant as soon as you stop running.

I think you can. I was involved in a startup in the late 90's, ahead of it's time. The company went "stale" for a few years, and when the market was ready, blossom'd in to a thriving company. Your challenge, justifying to investors there's a reason you are waiting, and not pouring more money in to a no win situation, until the time is right.

The obvious question is...whose $1M seed investment are we talking about here? Family/friends...Angel/VC?

The next question would be, how do THEY feel about you wanting to turn this back into a side project?