If regulatory progress continues and genuine momentum in on-chain development is strong, there may be a situation of “crazy fund deployment”. This article is sourced from Jacquelyn Melinek’s article “Nine crypto VCs on why Q1 investments were so hot and how it compares to previous bull market”, compiled, translated, and written by Foresight News.
Table of Contents:
Why the Current Recovery?
Where the Trades are Flowing
Founder-Friendly Market
The Token Economy is Making a Comeback
What’s Next?
Dragonfly Capital partner Tom Schmidt told TechCrunch that if the cryptocurrency venture capital landscape in 2023 was a pot of cold water, then the first quarter of 2024 was when the water started to boil before the bubble formed.
He’s not wrong. According to PitchBook data, the cryptocurrency and blockchain sector raised a total of $2.52 billion in funding in the first quarter of 2024. This is about 25% higher than the $2.02 billion raised in the fourth quarter of 2023.
Arca portfolio manager David Nage stated that his company tracked over 690 cross-stage financings that occurred in the first quarter, which is about 30% to 40% higher than the low point in 2023. CoinFund co-founder and CIO Alex Felix added that even though risk investments and cryptocurrency financing were down about 65% compared to 2023, trading activity has increased significantly.
One reason for the heating up of the cryptocurrency venture capital market is the positive impact of last year’s Ripple and Grayscale lawsuits and the positive sentiment towards DeFi on Solana. In addition, the approval of a physically-backed Bitcoin ETF by the SEC has increased demand for Bitcoin.
When combined with macroeconomic factors, this trend in cryptocurrency is unlikely to stop soon. Galaxy Ventures general partner Mike Giampapa stated that “BlackRock is launching a tokenized money market fund on the Ethereum blockchain, which could intensify competition from traditional financial institutions and drive further adoption.”
Overall, funding for cryptocurrency startups in various sectors, from DeFi to SocialFi to Bitcoin L2, is on the rise. Nage said, “We are seeing a resurgence in funding for new companies and also for older companies that have been underperforming during the bear market.”
Currently, SocialFi primarily refers to decentralized social media in the Web3 world and is very popular. Bi.social recently completed a $3 million funding round, and the decentralized social networking protocol Mask Network raised $100 million to further support similar applications.
Some successful projects in this field can be attributed to decentralized social application networks like Farcaster, which are attracting new audiences using Web 2.0 technology. Web3 gaming is also rapidly expanding, with hundreds of new games expected to be launched later this year.
Schmidt said that cryptocurrencies, artificial intelligence, blockchain, and anything related to zero-knowledge are now all hot topics.
Dao5 founder Tekin Salimi stated that blockchain models that integrate and modularize artificial intelligence, such as 0G Labs, which raised $35 million in seed funding, have also attracted the attention of venture capitalists.
Salimi stated that competition among venture capital firms is creating an environment where project founders have more leverage in financing negotiations. Framework Ventures co-founder Michael Anderson said, “Recently, the market has not lacked greedy capital.”
White Star Capital digital asset fund partner Marthe Naudts stated that power has not really shifted from investors to founders but rather a “perfect balance” has been achieved between the two.
It is worth noting that valuations vary greatly depending on the quality of the team and industry. Schmidt said that some startups that were successful in the previous market cycle are now repricing through down rounds or delayed rounds, while others are new players.
Schmidt pointed out that valuations for cryptocurrency consumer projects before the seed round are usually less than $10 million, but valuations for industries like cryptocurrency and artificial intelligence can reach $300 million or even higher. For example, according to Messari data, artificial intelligence prediction market PredX raised $5 million and has a post-investment valuation of $200 million. Additionally, Web3 artificial intelligence social network CharacterX raised $2.8 million in seed funding and has a post-investment valuation of $30 million.
For seed rounds, Nage expects pre-investment valuations to range from $25 million to $40 million, with some seed rounds valuing companies at $80 million. Schmidt stated that the average seed round valuation is between $30 million and $60 million.
Schmidt stated that because financing announcements are usually made months to a year after actual financing, relying solely on news headlines can lead to misunderstandings about the current state of the private market.
Valuation shifts are also driven by the sentiment in the cryptocurrency market, with Bitcoin reaching new all-time highs, Solana breaking $200, and Ethereum approaching $4,000. This is a “huge shift in sentiment,” according to Nage.
For founders, seed funding is still the easiest, as many small funds and angel investors are willing to write the first check at the lowest threshold, Felix said.
Many venture capitalists are still trying to avoid getting caught in high valuations due to overhype, while also realizing that they can’t just sit back and wait. Ryze Labs investment VP Thomas Tang said, “LPs are looking to deploy capital and are re-entering the space, but they are also being very discerning about where they put their money.”
Nage said that since late 2023, he has heard companies and colleagues discussing token economics for 2024. As a result, there has been a new wave of token issuances, and many of Arca’s portfolio companies are working towards this goal for this year. He added that this is different from the post-Terra/LUNA crash in mid-2022 when most seed deals were done through Simple Agreement for Future Equity (SAFE) or convertible note financing.
Tang stated that this dynamic is leading venture capital firms to accept “high valuations in private rounds, as they expect tokens to appreciate significantly in public trading.”
This doesn’t mean that SAFE financing is no longer happening, Schmidt said. The market has shifted towards priced equity rounds and token structures as a way to protect investors while providing flexibility for teams.
Clay Robbins, co-founder of accelerator and venture fund Colosseum, stated that teams adopting traditional business models face greater difficulty in fundraising. He added that native cryptocurrency venture capitalists view token trading and early liquidity as the driving forces behind it, so they have a strong bias towards this, while other investors are still skeptical of this market.
In this regard, Naudts stated that the long-term performance of these tokens remains to be seen. Her company, White Star, takes a cautious approach to tokens that can be used as speculative assets as well as means of payment. “But we see a lot of experimentation with token economics here, and that innovation is exciting.”
Robbins stated that early-stage funding will continue to heat up for the remainder of this year. He expects the situation for growth-stage cryptocurrency companies to be different due to a relatively weak IPO market, a lack of fundamental underwriting for growth-stage cryptocurrency companies, and the ongoing SEC and Coinbase litigation.
April will be an important month for cryptocurrency market sentiment. With the upcoming Bitcoin halving that only occurs every four years, there is a lot of uncertainty about how it will affect the cryptocurrency industry. Past halving events have driven up the price of Bitcoin, but historical data doesn’t always predict the future.
Compared to last year, many venture capitalists are confident that if there are no major fraud cases, lawsuits, or negative regulatory impacts, the market will continue to see the same level of venture capital activity as in the first quarter in the coming quarters.
Robbins stated that if there is positive progress in regulation, strong momentum in genuine on-chain development, the introduction of more institution-based products, and ongoing improvements in the overall macro environment, there may be a situation of “crazy fund deployment”.
Last year, many companies struggled to raise funds from LPs as the industry “had reached a tipping point, and LPs were not interested,” Schmidt said.
Schmidt stated that as the industry recovers from the FTX incident, LPs are starting to return to the field, but some are also starting to differentiate between “cryptocurrency” and “cryptocurrency venture capital”, which may lead some to only focus on Bitcoin.
Traditional venture capital firms or crossover funds haven’t fully immersed themselves in the cryptocurrency space, but they are gradually exploring more transactions, Schmidt said.
Nevertheless, there has been a significant change in sentiment in the last quarter, so as the sentiment continues to improve, it should have a positive impact on the venture capital market, Nage added.
Nage said that last year, most funds were only doing one or two transactions per month or a few transactions per quarter. “Now, things have changed dramatically. In December alone, we completed six or more transactions.”
In comparison, CoinFund completed 17 transactions in 2023 and four transactions in the first quarter of 2024, according to Felix.
PitchBook data shows that the entire cryptocurrency and blockchain industry raised a total of $10.18 billion in funding last year. I asked each company how much they expect to raise by the end of 2024, and most companies estimate over $10 billion, with some even expecting as much as $20 billion.
Felix believes that investments in Web3 by venture capital may account for over 10% of the total global funding, so based on PitchBook’s 2023 funding data, this could amount to as much as $16.2 billion by the end of the year. However, it is expected to be lower than the nearly $30 billion raised by cryptocurrency startups in 2022 and the over $33 billion raised in 2021.
Although Giampapa also believes that many managers will accelerate deployment and raise funds in the next 6 to 12 months, there is a need for caution. In the previous bull market, some large capital deployers were companies like FTX and Three Arrows Capital, which are no longer in business. “Without these participants, it is hard to imagine the level of fund deployment in cryptocurrency venture capital returning to the levels of 2021 and 2022.”
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