If regulatory progress is made and real momentum in on-chain development is achieved, there may be a “crazy fund deployment” situation with the launch of more institution-based products. 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 transactions are flowing
Founder-friendly market
The resurgence of token economics
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, the first quarter of 2024 is when the water starts to boil and bubbles start to form.
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 said:
Nage said his firm tracked more than 690 cross-stage financings in the first quarter, a 30% to 40% increase from the low point of 2023. CoinFund co-founder and CIO Alex Felix added:
Felix also noted that while venture capital and cryptocurrency financing dropped significantly compared to 2023 (about 65%), trading activity has increased.
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. Additionally, the demand for Bitcoin has increased following the SEC’s approval of a physically-backed Bitcoin ETF.
When combined with the macroeconomic backdrop, this trend in cryptocurrencies may not stop anytime soon. Galaxy Ventures general partner Mike Giampapa said:
For example, BlackRock is launching a tokenized currency 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 areas, from DeFi to SocialFi to Bitcoin L2, is rebounding. Nage said:
Giampapa noted that there has been an increase in the number of new companies and underperforming old companies seeking funding during the bear market.
Currently, SocialFi mainly 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 network protocol Mask Network raised $100 million to support similar applications.
Some of the success in this field can be attributed to decentralized social networking applications like Farcaster, which are attracting new audiences using Web 2.0 technology. Web3 gaming is also expanding rapidly, 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 “hot” right now.
dao5 founder Tekin Salimi said:
For example, blockchain with modular and integrated artificial intelligence, such as 0G Labs, which raised $35 million in seed funding, has also attracted the attention of venture capitalists.
Salimi said that competition among venture capital firms is creating an environment where founders have more leverage in funding 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 said:
But Felix noted that power has not truly shifted from investors to founders and that a “perfect balance” has been reached 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 financings, while others are new faces.
Schmidt pointed out that before the seed round, valuations for cryptocurrency consumer projects were usually less than $10 million, but valuations for industries like cryptocurrency and artificial intelligence could reach $300 million or even higher. For example, according to Messari data, artificial intelligence prediction market PredX raised $5 million and was valued at $20 million after the investment. Additionally, Web3 artificial intelligence social network CharacterX raised $2.8 million in seed funding and was valued at $30 million after the investment.
For seed rounds, Nage expects pre-money valuations to be between $25 million and $40 million, with some startups having seed round valuations of $80 million. Schmidt said that the average seed round valuation is between $30 million and $60 million.
Schmidt said that as funding announcements usually come months to a year after actual funding, participants in the private market may have misconceptions about the latest private market conditions if they rely solely on news headlines.
Valuation shifts are also driven by sentiment in the cryptocurrency market, with Bitcoin hitting all-time highs, Solana surpassing $200, and Ethereum approaching $4,000, which Nage described as a “huge sentiment shift.”
For founders, seed funding is still the easiest to obtain as many small funds and angel investors are willing to write the first check with the lowest threshold, said Felix.
Many venture capitalists are still trying to avoid falling into the trap of over-hyped high valuations while also realizing that they cannot just sit back and wait. Ryze Labs Investment VP Thomas Tang said:
Nage said that since the end of 2023, he has been hearing about companies and peers researching token economics in 2024. As a result, there has been new growth in token issuance, and many of Arca’s portfolio companies are working towards achieving this goal this year. He added that this is different from the post-collapse era of Terra/LUNA in mid-2022, where most seed deals were done through Simple Agreement for Future Equity (SAFE) or warrant financing.
Tang said that this dynamic is causing venture capital firms to accept “high valuations in private rounds because 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 evolved around priced equity rounds and token structures as a way to protect investors and provide flexibility to teams.
Clay Robbins, co-founder of accelerator and venture capital fund Colosseum, said that traditional venture capital firms or crossover funds haven’t “dived headfirst into the cryptocurrency space, but they are slowly doing more deals.”
In any case, there has been a significant shift in sentiment last quarter, so as sentiment continues to improve, it should have a positive impact on the venture capital market, added Nage.
Nage said that last year, most funds were only doing one to two transactions per month or a few transactions per quarter. “Now, there has been a big change. Just in December, 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 estimated over $10 billion, with some even expecting as much as $20 billion.
Felix believes that venture capital investment in Web3 may account for more than 10% of the total global funding, so based on PitchBook’s 2023 funding data, this figure could reach $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. “I find it hard to imagine the funds deployed in cryptocurrency venture capital reaching the levels of 2021 to 2022 without these participants.”
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