This article comes fromThe Block, original author: Celia Wan

Odaily Translator |

Odaily Translator |

The global pandemic has frozen the flow of venture capital money to startups, a situation that has disproportionately affected early-stage crypto companies.

Chris Maurice, CEO of cryptocurrency startup Yellow Card, said: "In the past week and a half, three VCs who talked to us in the final stage of due diligence have walked away from funding. They said that this is not your reason, but given the market What just happened, they're not going to deploy funds for the next six months."

Crunchbase data shows that while the full impact of the new coronavirus has not yet been felt, the number of financings reported globally in 2020 has dropped by nearly half compared with the same period last year.

The cryptocurrency space is also suffering. According to PitchBook data, since the beginning of this year, a total of 125 blockchain and cryptocurrency startup financing transactions have been reported, less than half of the data in 2019 (326) and 2018 (363). To some extent, the crypto space is particularly sensitive to a slowdown in the pace of venture capital investment, because most crypto startups are still in their infancy, relying on a small amount of venture capital funding from a year or two ago to maintain operations.

According to PitchBook data, from 2017 to 2019, about 87.7% of the public financing scale was less than US$5 million, and many transactions were completed in 2018 and 2019 without follow-up financing.

As of now, some crypto startups have exhausted most of their funding. Therefore, these enterprises either need to replenish new funds, or have to face the danger of bankruptcy and closure.

In fact, in the first three months of 2020, the news piled up that some companies had completed financing or some companies hoped to raise further funds. These deals range from Bakkt’s $300 million Series B round to Amber’s $28 million Series A round to small checks in the hundreds of thousands of dollars for some early-stage companies.

At the same time, some companies (projects) were also forced to close down (Sparkswap and Paradigm Labs), and "lack of funding or user traction" was the main reason for the failure of these companies.

Jamie Burke, founder and CEO of Outlier Ventures, pointed out: "As of the end of last year, the number of VCs mainly focused on cryptocurrency related fields has decreased significantly, especially in Europe (and even the United States)."

“This is a microcosm of a black swan, casting a pall over an already struggling crypto industry.”

Who is the first victim? Will it be DeFi?

Which industry in the crypto space is likely to be hit the most? There are indications that DeFi may be one of the first victims of the VC funding freeze. As a nascent ecosystem, DeFi is still in the experimental stage.

DeFi projects generally lack a clear path to profitability as they strive to achieve a balanced relationship between decentralization and revenue generation. Projects that failed to attract users lost interest from investors long before the pandemic.

Paradigm Labs announced its closure earlier this month. Its founder, Liam Kovatch, said that after a successful seed round in 2018, the company failed to find product-market fit in the ever-changing decentralized exchange (DEX) landscape, forcing it to shut down. .

In a recent interview, Paul Veradittakit, vice president of Pantera Capital, also warned that financing for DeFi projects may slow down as VCs become more selective about where they invest.

Peter Yang, managing director of Fenbushi Capital, told The Block: “Many DeFi projects either don’t have too many users, or are difficult to make a profit. We’ve been thinking of ways to either transform them, or do something that can bring in income of things. Several teams have been consulting us on this.”

However, not all DeFi projects are tightening their belts, and some projects with better balance sheets may also be taking the opportunity to "hunt" in the market.

Zerion closed a new round of financing of $2 million last December, with investors including Placeholder, Blockchain.com Ventures, and Gnosis. The project recently acquired MyDeFi, which offers a similar service.

Evgeny Yurtaev, CEO of Zerion, said: “We are currently well-funded and hold cash for investment...so we can be more opportunistic. Those who look at DeFi and invest heavily in this field have not lost interest, So mainly short-term inflows are likely to decline."

new story

Some startups have accepted less funding and lower valuations in financing talks to weather the tough times. At the same time, other companies are worrying about long-term survival -- how to adapt their products to the post-pandemic world, which may lead to different narratives and a shift in investor interest.

Justin Banon, who currently runs Redeemeum, an Ethereum-based coupon exchange platform, said: "Some of the conversations we have with investors are that when you have a huge shift, you can be profitable. It's not a slow-moving business." The market, you're going to see a lot of pent-up demand being unleashed [after the pandemic is over]. That's what's changing in our market and we hope to accelerate and get out of the current situation."

Evgeny Yurtaev (Zerion CEO) said that crypto startups urgently need to create a story adapted to the post-pandemic market, because the price of Bitcoin has fallen along with other asset classes, and has driven away some potential investment interest.

“For us (DeFi projects), future financing will definitely be more complicated because crypto has not proven to be an uncorrelated asset like many people hope. There will probably be many other companies that will start to consider More money is going into these assets or DeFi.”

hope still

Although some investment institutions choose to keep a low profile during the market turmoil, there are still many "radicals" in the market.

An open-source electronic document circulating among investors and founders lists more than 250 VCs still accepting pitches, including Accel, Index Ventures, Kindred Capital and Techstars. Most of the institutions on the list said they were still considering investing in early-stage startups. A VC revealed that their latest investment was last Friday.

Frank Chapparo, news director of The Block, pointed out that a group of VCs in the encryption field, such as a16z and Polychain Capital, have recently completed fundraising or are sitting on a lot of cash. These institutions are ready to use their ammunition as the market downturn drives down startup valuations.

However, venture capital transactions, mergers and acquisitions, and even company closures all take a long time to come to a conclusion, and may not appear in the public eye in a short period of time. In fact, some of the recently disclosed deals actually took place before the pandemic and subsequent market downturn. Therefore, what we see now may still be just the tip of the iceberg.

Jamie Burke (founder of Outlier Ventures) said he expects many startups to "break even in the next quarter and be profitable within six months" to weather the pandemic and its legacy.