Crypto Venture Capital Market Continues to Experience Downturn in Third Quarter
The third quarter of 2024 saw a significant drop in investment by crypto venture capital firms, with $2.4 billion invested across 478 deals, according to a recent report from Galaxy Digital. This represents a 20% decrease in funding compared to the second quarter of this year and a 17% decline in the number of deals.
The industry’s overall performance is on track to barely surpass the funding received in 2023, with $8 billion invested over the first three quarters of the year. In contrast, 2021 and 2022 saw significantly higher investments, with over $30 billion across 3,000 deals each year.
According to Alex Thorn, head of firmwide research at Galaxy Digital, the decrease in investment can be attributed to a variety of factors. "Allocator interest in crypto VC and venture capital more broadly is down from prior years," he explained. This lack of interest is due in part to high interest rates making venture funds less attractive, as well as the emergence of spot bitcoin (BTC) and ether (ETH) exchange-traded funds (ETFs) offering new avenues for exposure to crypto.
Additionally, the industry’s various collapses in 2022 are still fresh in everyone’s minds. Thorn stated that this "leaves venture investors struggling to find large sources of capital to launch new fund vehicles, leading to a tightening of the crypto venture investing market." The surge in ETF-driven markets is also contributing to increased competition among surviving crypto VCs for deal flow and putting entrepreneurs in the driver’s seat when it comes to valuation.
The report highlights that early-stage firms received 85% of capital investment, while later-stage companies only received 15%. Early-stage firms typically involve startups that are still developing their product and business model. In contrast, later-stage companies already have a well-established product and brand.
Deal Breakdown by Sector
Some sectors within the crypto ecosystem saw more interest than others. For instance:
- Crypto exchanges, lending, investing, and trading platforms raised 18% of VC capital, totaling over $460 million.
- Layer 1 projects came in next, accounting for roughly $440 million.
- Web3/Metaverse projects garnered about $360 million.
- Infrastructure projects took in approximately $340 million.
- Projects combining crypto and artificial intelligence (AI) secured around $270 million – a fivefold increase from the previous quarter.
Regional Breakdown
The United States led the way in terms of investment, providing 56% of all capital and accounting for 44% of all deals. The UK followed closely behind, offering 11% of capital and striking 6.8% of deals. Singapore-based VCs provided 7% of all capital but secured 8.7% of all deals.
Fundraising Challenges
The report highlights the challenges faced by crypto venture funds in fundraising efforts. With only $140 million raised across eight new funds, the industry is experiencing its weakest year for fundraising since 2020. On an annualized basis, this equates to 39 new funds raising a total of $1.95 billion – significantly lower than the frenzy seen in 2021-2022.
The current market trends indicate that venture investors are struggling to find large sources of capital to launch new fund vehicles, leading to a tightening of the crypto venture investing market. The surge in ETF-driven markets is also contributing to increased competition among surviving crypto VCs for deal flow and putting entrepreneurs in the driver’s seat when it comes to valuation.
Conclusion
The third quarter of 2024 saw a significant decline in investment by crypto venture capital firms, with $2.4 billion invested across 478 deals – a 20% decrease in funding compared to the second quarter. The industry’s overall performance is on track to barely surpass the funding received in 2023, highlighting a challenging environment for both investors and entrepreneurs. As the market continues to navigate the impacts of high interest rates, spot crypto ETFs, and the hangover from 2022, it remains to be seen how the industry will adapt and recover in the coming months.