Original author: Jacquelyn Melinek
Original compilation: Luffy, Foresight News
Dragonfly Capital partner Tom Schmidt told TechCrunch that if the cryptocurrency venture capital landscape in 2023 is a pot of ice-cold water, then the first quarter of 2024 is when the bubble begins to form before the water boils.
He was right. According to PitchBook data, a total of $2.52 billion was raised in the cryptocurrency and blockchain fields in the first quarter of 2024. This is approximately 25% higher than the $2.02 billion in the fourth quarter of 2023.
David Nage, portfolio manager at Arca, said: “It’s an incredibly busy period right now and it feels like 2021. Raising money in 2021 is like having a gun to the back of your head and you have to do it and that feeling is back. . Nage said his firm tracked more than 690 cross-stage financings that occurred in the first quarter, which is about 30% to 40% higher than the low in 2023.
Alex Felix, co-founder and chief investment officer of CoinFund, said: In the first quarter, the financing prospects of crypto venture capital were cautiously optimistic, and the company escaped from the financing difficulties of the previous two years.
Felix added that despite a significant year-on-year decline in venture capital and cryptocurrency financing in 2023 (approximately 65%), there has been a significant increase in deal activity.
Why the resurgence now?
The crypto venture market is heating up in part due to the positive impact of last years lawsuit victories against Ripple and Grayscale, as well as positive sentiment toward DeFi on Solana. Additionally, demand for Bitcoin is increasing after the SEC approved a spot Bitcoin ETF.
“The other thing that’s affecting the market is that we’re still alive,” Nage said. “I know it’s funny to say that, but after the collapse of LUNA, BlockFi, FTX, and the banking crisis, people thought we were going to die, but we’re not.
Combined with the macroeconomic background, this trend of cryptocurrencies may not stop anytime soon. Mike Giampapa, general partner at Galaxy Ventures, said: “With the launch of cryptocurrency ETF products, Bitcoin halving, expected interest rate cuts before the U.S. presidential election and other favorable macro backdrops, cryptocurrency investment will continue to heat up.” “We also see institutional interest in Cryptocurrency interest is starting to translate into real action.”
BlackRock, for example, is launching tokenized money market funds on the Ethereum blockchain, which could increase competitive pressure on traditional financial institutions and lead to greater adoption.
Where deals are pouring in
Overall, funding for crypto startups is picking up across multiple sectors, from DeFi to SocialFi to Bitcoin L2. Were seeing 30 to 40 transactions a week, which is a 10% to 20% increase over the last quarter, Nage said.
Giampapa said there has been an increase in the number of new companies and established companies that have been underperforming during the bear market restarting financing. “The market in 2024 will be a ‘haves’ and ‘have nots’ story, with new companies growing according to the hot narrative and receiving funding at high valuations, while many others will fail,” he added.
Currently, SocialFi mainly refers to decentralized social media in the Web3 world, which is very popular. Bi.social recently completed a $3 million funding round, and decentralized social network protocol Mask Networks fund raised $100 million to further support other similar applications. Some of the success in this space can be attributed to decentralized social application networks like Farcaster, which are using Web 2.0 technologies to reach new audiences. Web3 gaming is also expanding rapidly, with hundreds of new games expected to be available later this year.
Cryptocurrencies and artificial intelligence, blockchain and anything related to zero-knowledge are all hot right now, Schmidt said.
Tekin Salimi, founder of dao 5, said: Given the huge expectations for the potential of artificial intelligence to impact the global economy, we expect this trend to continue for the foreseeable future.
For example, modular and artificial intelligence-integrated blockchains (such as 0G Labs, which raised $35 million in a seed round), have also attracted the attention of venture capitalists.
Founder Friendly Marketplace
Competition among venture capital firms is creating an environment that gives project founders greater leverage in financing negotiations, Salimi said. Michael Anderson, co-founder of Framework Ventures, said, “Recently, there has been no shortage of greedy capital in the market.”
Marthe Naudts, partner at White Star Capital Digital Asset Fund, said: “This is good for founders because in an oversubscribed round, investors are now counter-selling their value.” This means that some investors Founders must be shown why they should be chosen. Founders now have options and the ability to set terms.
But Felix said that power did not really shift from investors to founders, but that the two parties reached a perfect balance. “Founders have benefited from tighter funding rounds and valuations have recovered slightly from recent troughs, while VCs have received more protective and favorable deal structures.”
Its worth noting that there are huge differences in valuations based on the quality of the team and industry, Schmidt said. Some startups that successfully raised money in the last market cycle are re-pricing themselves with markdowns or extensions, while others are new faces.
Schmidt pointed out that before the seed round, the valuation of projects in the field of cryptocurrency consumption is usually less than 10 million US dollars, but the valuation of industries such as cryptocurrency and artificial intelligence can reach 300 million US dollars or even higher. For example, AI prediction market PredX raised $500,000 at a post-money valuation of $20 million, according to Messari. In addition, Web3 artificial intelligence social network CharacterX raised US$2.8 million in seed round financing, with a post-investment valuation of US$30 million.
For the seed round, Nage expects a pre-money valuation of $25 million to $40 million, with several startups having seed round valuations of $80 million. Schmidt said the average seed round valuation is between $30 million and $60 million.
“Valuations have gone up significantly, and even though larger, more established companies have raised money, founders still have a lot of options,” Anderson said. Given that were in the early stages of this cycle, some of the valuations were seeing are already a little outrageous.
Schmidt said that because financing announcements are often made within months to a year after the actual financing, market participants can misunderstand the latest private market conditions if they judge the state of the private market based solely on news headlines.
“Last year, even for high-quality teams, it would take months or even no financing, but now it only takes a few weeks or less, and the conditions for founders are better,” Schmidt said. Teams that wasted time and money during the bear market are still raising bridge financing, but new teams are able to start strong with larger rounds and higher valuations.”
Valuation shifts have also been driven by sentiment in the cryptocurrency market, so with Bitcoin hitting all-time highs, Solana topping $200 and Ethereum approaching $4,000, its a huge sentiment shift, Nage said.
Seed rounds are still the easiest for founders to raise because many small funds and angel investors are willing to write the first check at the lowest threshold, Felix said. “However, I do not expect an immediate improvement in Series A completion rates, which have dropped from over 20% to around 15%. Raising more than $10 million will remain a fairly challenging task.”
Many venture capitalists are still trying to avoid falling into the over-hype trap of high valuations, while also realizing they cant just sit back and wait. Thomas Tang, vice president of investments at Ryze Labs, said: “It is quite common for a funding round to be oversubscribed within days, and for the investment to be rejected or moved to a subsequent funding round with a higher valuation.”
The Token Economy Makes a Comeback
Nage said that since late 2023, he has been hearing that companies and peers are working on token economic designs for 2024. As a result, there is new growth in token issuance, which many of Arca’s portfolio companies are working to achieve this year. He added that this differs from the post-Terra/LUNA crash era of mid-2022, when most seed deals were funded via Simple Agreements for Future Equity (SAFE) or warrants.
“The phase of new token issuance that we are about to enter is a phase of dramatic shifts in valuations,” Nage said.
This dynamic prompts venture capital firms to accept high valuations in private rounds because they expect the tokens to rise significantly in public trading, Tang said.
This doesn’t mean there are no more SAFE rounds, Schmidt said the market has moved around pricing equity rounds and token structures “as a way to protect investors while also providing flexibility to teams.”
Clay Robbins, co-founder of accelerator and venture capital fund Colosseum, said raising money is more difficult for teams with traditional business models. He added that crypto-native venture capitalists are heavily biased in thinking that token trading and early liquidity are the driving force behind it, while some other investors are not yet convinced of the market.
At this point, Naudts said the long-term performance of these tokens remains to be seen. Her company, White Star, is wary of tokens that can be used as both speculative assets and means of payment. “But we’re seeing a lot of experimentation with token economics models here, and that definitely makes us excited about the innovations out there.”
what happens next
Robbins said early-stage funding will continue to ramp up throughout the rest of the year. Given “the relative softness of the IPO market, the lack of fundamental underwriting for growth-stage crypto companies, and the trial between the SEC and Coinbase, I expect the picture for growth-stage crypto companies to be inconsistent.”
April will be a big month for cryptocurrency market sentiment. With the Bitcoin halving approaching, which only occurs every four years, there is a lot of uncertainty about how this will impact the crypto industry. Past halving events have boosted Bitcoins price, but historical data doesnt always predict the future.
While a short-term market correction may be coming, we expect the next three quarters of 2024 to be very positive, Salimi said. Financial markets historically experience positive developments in election years. Additionally, we expect the macro environment to Improvements will begin later in the year, starting with interest rate cuts.
Relative to last year, many venture capitalists are confident that, absent large-scale fraud cases, lawsuits, or negative regulatory impact, the market will continue to see the same surge in venture capital investment seen in the first quarter in the coming quarters. Regulation remains an uncertain factor that could be a catalyst to push the market higher again or hinder growth, Giampapa said.
Robbins said that if there are positive regulatory developments, real on-chain development gains momentum, the launch of more institutional-based products, and the overall macro environment continues to improve, then there may be a situation of crazy capital deployment.
There will be more activity, more deals, and most importantly funds are raising money, Nage said. Many companies were unable to raise capital from LPs last year because the industry had reached its end and LPs had no interest.
Schmidt said that as the industry recovers from the FTX incident, LPs have also begun to return to the field, but some people have also begun to distinguish between cryptocurrency and cryptocurrency venture capital, which may lead some people to choose to only invest in Bitcoin.
Traditional venture capital firms or crossover funds are not going headfirst into crypto, but they are slowly trying more deals, Schmidt said. “As those larger market players return, crypto funds return to the market and recapture capital from limited partners, the entire space becomes more institutionally attractive again. I wouldn’t be surprised if the bubble intensifies again .”
Regardless, sentiment changed dramatically last quarter, so as sentiment continues to improve, it should have a positive impact on the venture capital market as well, Nage added. If companies are able to raise capital in the next two to three quarters, they wont be holding on to capital like last year. As this situation eases, you will see more checks.
Last year, most funds made just one or two trades per month, or a few trades per quarter, Nage said. Now the situation has changed dramatically. In December alone, we completed six or more transactions.
By comparison, CoinFund completed 17 transactions in 2023 and four transactions in the first quarter of 2024, Felix said.
PitchBook data shows that the entire cryptocurrency and blockchain industry raised a total of $10.18 billion last year. I asked each company how much money they expected to raise by the end of 2024, and most estimates were above $10 billion, but some even projected as high as $20 billion.
Felix believes that venture capital investment in Web3 may account for more than 10% of total global financing, so according to PitchBooks 2023 financing data, this number may be as high as $16.2 billion by the end of the year. Regardless, the figure is expected to be lower than the nearly $30 billion that crypto startups raised in 2022, and the more than $33 billion raised in 2021.
The current market conditions are somewhere between the mania of 2021 and 2022 and the downturn of last year, Robbins said.
While Giampapa also believes many managers will accelerate deployments and go out to raise capital over the next six to 12 months, there is one caveat. Some of the big capital deployers during the last bull market were firms like FTX and Three Arrows Capital, which are no longer in business. “Without these players, it’s hard for me to imagine that funds deployed into crypto ventures could return to 2021-2022 levels.”
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