Crypto VC Landscape in 2023: Adapting Strategies Amidst the Winter

@ulriklykke

Author of the Bitcoin Global Macro, a newsletter focusing on digital assets, macro...

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Major Highlights

• Funding Continues to Decline:

  The Crypto VC market is still facing headwinds as investors are cautious, with Q2 2023 attracting $2.32 billion in funding, slightly lower than the previous quarter.

• Mixed Valuations:

  The number of completed crypto VC deals increased in Q2, but pre-money valuations continued to decline, reaching $17.93 million, while the median crypto VC deal stood at $3 million in Q2 2023.

• Web3 Dominance:

  Web3 Gaming, NFTs, and the Metaverse are high-interest segments, this nascent crypto niche recorded the highest number of deals in Q2 2023.

• Crypto VC Landscape:

  Despite headwinds in 2023, the US remains the leading destination for venture capital funds in the digital asset industry, with over $2 billion invested this year.

• Crypto Winter Continues:

  46% of respondents in a survey carried out by InnMind believe that the crypto winter will persist throughout 2023, with market recovery expected in 2024.

Crypto VC Funding Overview

The crypto VC landscape has continued to face headwinds this year, with more investors shying away from the digital asset industry. According to the latest data from Pitchbook, Q2 2023 attracted $2.32 billion in funding, down from the previous quarter, which was slightly higher at $2.6 billion.

Source: Galaxy Research

Valuations and Number of Deals Show Mixed Trends

The number of completed crypto VC deals increased from 439 in Q1 to 456 in Q2. This is the first time the figure has gone up since the market peaked in Q1 2022 when over 1,200 deals were completed during that quarter.

However, on the other hand, the pre-money valuation for deals in the digital asset industry has continued on a downtrend, reaching $17.93 million, while the median crypto VC deal stood at $3 million in Q2 2023.

Source: Galaxy Research

Top 5 Crypto VCs by Capital Invested in Q1 2023

According to a Q1 2023 report from the InnMind Web3 startups and VC platform, the same players from last year are still dominating the action. Here are some of the VCs that have invested the most funds into crypto startups this year:

1. Coinbase Ventures - Invested $136.2 million in Q1 funding 10 startups, including EigenLayer, Term Labs, Avalon Corp, Chaos Labs, MSafe, Azra Games, Alongside, Architect, Obol Labs, and Alkimiya.

2. a16z - Invested $131.5 million in Q1, some of the projects funded include Voldex, Alongside, Towns, Believer, Capsule, and CCP Games.

3. DWF Labs - Invested $107.8 million in Q1 to fund 9 projects: Mask, YGG, Inverse Finance, Beldex, Conflux, Tonstarter, Radix, So-Col, and Alchemy Pay.

4. DragonFly Capital - Invested $75 million in Q1 into 6 projects namely Alkimiya, Caldera, Monad, Kaito, OP3N, and Econia Labs.

5. Shima Capital - Invested $53.5 million in Q1 funding 10 projects: MSafe, Quasar, Open Forest Protocol, Quantum Temple, Sleepagotchi, Cedro Finance, OrbLabs, Monad, 3RM and Strider.’

Crypto VC Fundraising is at its lowest since Q3 2020

Evidently, crypto VCs have not invested a lot of funds into the market this year. This is due to a sharp decline in the amount of newly injected capital and new funds. Data from Galaxy Asset Management reveals that the number of new funds in Q2 2023 was only 10, with the total amount raised falling below $1 billion.

Source: Galaxy Asset Management

As expected, the decline in fundraising amounts has affected the average fund size, which currently stands at $236 million compared to $343 million in 2022. Meanwhile, the median fund size has halved from $100 million to $50 million.

Source: Galaxy Asset Management

High Ticket Crypto VC Funding Rounds in 2023

While 2023 might have started on a low note for both the global and crypto VC industry, there have been several notable raises this year:

1. Blockstream, a company specializing in digital asset infrastructure, secured $125 million in January through a convertible note and secured a loan to fund its mining co-location services.

2. In March, Ledger, the prominent crypto hardware wallet provider, successfully attracted $109 million in a series C funding round extension.

3. Taurus, a digital asset infrastructure provider serving financial institutions in Europe, raised $65 million in a Series B capital raise with Credit Suisse leading the funding round.

4. Scroll, a Layer 2 Ethereum network working on a zero-knowledge Ethereum Virtual Machine (zkEVM) scaling solution, secured a $50.0 million late-stage VC round in March from prominent investors, including Polychain Capital and Sequoia China.

Funding Rounds by Investor and Category

As for the number of funding rounds, data from CryptoRank shows that Polygon Fund has participated in 29 funding rounds this year, closely followed by DWF Labs and COINBASE Ventures, both at 28 rounds each.

It is also noteworthy that most of the funds were allocated toward blockchain service and blockchain infrastructure projects.

Source: CryptoRank

Seed Stage Rounds Accounted for the Lion’s Share

Seed-stage funding rounds have attracted the most capital this year, accounting for 33.82% while pre-seed and series A raises stood at 8.97% and 7.5% respectively.

Source: CryptoRank

Crypto VC Investments by Segment & Region

Web3 Gaming, NFTs, and the Metaverse are still an area of high interest, this segment of the crypto market recorded the highest number of deals in Q2 2023 followed closely by Lending, Investing, Exchange, and Trading companies.

Source: Galaxy Research 

However, when it comes to the amount of capital invested, it was vice versa: trading and investing companies carried the day, while Web3 infrastructures came in second.

Source: Galaxy Research

The US Leads in Crypto VC Raises and Funding Rounds

Despite regulatory uncertainty, the US remains the leading destination for venture capital funds targeting the digital asset industry. This year alone, over $2.1 billion has been invested in crypto startups based in the US. Undisclosed locations follow at $1.2 billion, and in third place is the United Kingdom with $602.93 million.

Source: CryptoRank

InnMind Survey: Web3 Most Potential Niche and Crypto Winter to End in 2024

A recent survey conducted by InnMind, involving 147 professional VCs in the digital asset industry, reveals that the majority of participants believe Web3 infrastructure startups hold the most upside potential.

Source: InnMind

More interestingly, 46% of the respondents believe that the crypto winter or the period of 'nothingness' will continue for the rest of 2023, and it is unlikely that we will see the market bouncing back until next year.

Closing Thoughts

The crypto bear market has undoubtedly impacted the availability of venture capital over the past year. However, it is essential to highlight that there remains notable activity in value-based projects focusing on Web3, especially in the metaverse and NFT segments.

As we look ahead, the outlook on whether substantial capital will flow into the digital asset industry this year remains uncertain. That said, there is a higher likelihood that many investors will remain cautious and stay on the sidelines for the rest of 2023.