Investment and financing report for the second quarter of 2023: total investment decreased month-on-month, and the United States dominated

Original: "Crypto & Blockchain Venture Capital – Q2 2023" by Alex Thorn, Director, Firmwide Research & Gabe Parker, Research Analyst

Compilation: Kate, Marsbit

This report uses data from Pitchbook. Reporting of VC deal data tends to lag, so Galaxy Research may revise the Q2 2023 data in future reports.

Key Points

• Venture capital investment in the crypto space has not yet bottomed out. While the number of deals rose slightly in the second quarter, the total amount invested by venture capitalists in cryptocurrency and blockchain startups continued to decline sequentially.
• Valuations continue to decline. The median pre-money valuation of crypto venture capital deals in Q2 2023 was $17.93 million, the lowest level since Q1 2021, while the median deal size increased slightly quarter-over-quarter.
• Companies in the Broad Web3 category dominated the number of deals, while companies in the Deals category raised the most total capital. The second quarter results continued the trend of the previous quarter.
• The US continues to dominate the crypto startup scene. U.S.-based crypto startups accounted for more than 43% of all closed deals and raised more than 45% of venture capital firms’ investments.
• The venture capital financing environment remains extremely challenging. 10 new crypto venture capital funds raised just $720 million in Q2 2023, the lowest level since the start of the COVID-19 pandemic in Q3 2020.

Number of Cryptocurrency Venture Capital Deals and Capital Investments

The cryptocurrency and blockchain industry invested $2.32 billion in Q2 2023, a new cyclical low and the lowest level since Q4 2020, extending a streak of $130 billion invested in Q1 2022 A downtrend that started after a peak of $100 million. Cryptocurrency and blockchain startups raised less money in the last three quarters combined than in the second quarter of last year.

While capital investment has yet to bottom out, deal activity picked up slightly in the second quarter, with 456 deals completed compared to 439 in the first quarter of 2023. This slight increase was due to an increase in Series A deals to 174, up from 154 in Q1.

In terms of capital investment, early-stage deals (Pre-Seed, Seed, and Series A) accounted for the vast majority of investments (73%), compared to late-stage deals (27%).

Venture Capital by Company Year

Companies founded in 2021 and 2022 will close the most VC deals in the second quarter of 2023.

Unlike the first quarter of this year, companies from the 2022 vintage raised the most funds of any year in their category, although the 2021 vintage wasn’t far behind.

Crypto Ventures Headquarters

U.S.-based companies dominated both in terms of deals done and capital raised. In Q2 2023, US companies raised 45% of crypto venture capital funding, followed by the UK (7.7%), Singapore (5.7%) and South Korea (5.4%).

The situation is similar in terms of completed transactions. In Q2 2023, US companies closed 43% of all crypto venture capital deals, followed by Singapore (7.5%), UK (7.5%) and South Korea (3.1%).

![Investment and financing report for the second quarter of 2023: total investment decreased month-on-month, and the United States dominated] (https://img-cdn.gateio.im/resized-social/moments-69a80767fe-4291f8b583-dd1a6f-7649e1)

Crypto Venture Capital Deal Size and Valuation

In the second quarter of 2023, valuations continue to decline across the venture capital space, and cryptocurrencies are no exception. The median pre-money valuation for cryptocurrency or blockchain venture capital deals fell to $17.93 million, the lowest level since the first quarter of 2022. The median crypto VC deal in Q2 2023 is $3 million, with a pre-money valuation of $17.93 million.

![Investment and financing report for the second quarter of 2023: total investment decreased month-on-month, and the United States dominated] (https://img-cdn.gateio.im/resized-social/moments-69a80767fe-0a7edfb659-dd1a6f-7649e1)

The decline in crypto VC deal sizes and valuations follows trends across the venture capital industry.

![Investment and financing report for the second quarter of 2023: total investment decreased month-on-month, and the United States dominated] (https://img-cdn.gateio.im/resized-social/moments-69a80767fe-3fa91f1d40-dd1a6f-7649e1)

Crypto Venture Capital by Category

Trading, trading, investing, and lending startups raised the most VC funding in Q2 2023 ($473 million, or 20% of capital deployed). Web3, NFT, Gaming, DAO and Metaverse startups raised the second most at $442 million, or 19% of all venture capital deployed in Q2 2023. The Layer 2/ Interop space saw the biggest deal of the quarter, LayerZero, raising a $120M Series B round. Magic Eden had the largest Web3/NFT deal at $52m, Auradine had the largest infrastructure deal at $81m and River Financial had the largest deal/exchange at $35m.

From the perspective of the number of transactions, companies developing products in the field of Web3 games, NFT, DAO and Metaverse maintained the first position, followed by trading, exchanges, investment and lending companies. These trends are unchanged from the first quarter of 2023. Notably, companies building privacy and security products saw the largest quarter-over-quarter increase in the number of deals (275%), followed by infrastructure (114%).

![Investment and financing report for the second quarter of 2023: total investment decreased month-on-month, and the United States dominated] (https://img-cdn.gateio.im/resized-social/moments-69a80767fe-7d2594213f-dd1a6f-7649e1)

The largest share of deals done at later stages was in the mining and enterprise blockchain categories, while the compliance category (including chain analysis and custody tools) accounted for the largest share of deals done at the pre-seed stage.

In terms of funding, mining and Layer 1 deals were mostly late stage, while custody, media/education, compliance, and DeFi had a large portion raised in the early stages.

Crypto Venture Capital Funding

We partnered with Galaxy Asset Management to compile Q2 2023 venture capital funding information—that is, capital raised by VC firms for a new fund or fund year. Q2 2023 saw the fewest new fund launches (10) and lowest allocations ($720 million) since Q3 2020.

Combined with data for the first half of 2023, the average size of new funds is currently $236 million and the median is $50 million, both down sharply from last year.

Analysis and conclusion

The crypto venture bear market continues. While the number of deals remains strong, the total capital allocated to crypto startups is still down sequentially. But the decline in cryptocurrency VC activity is not unique to cryptocurrencies, as the broader venture capital industry faces headwinds in the face of rising interest rates. Other key takeaways from Q2 2023 crypto venture capital data include:

• Crypto venture capital activity remains strong relative to previous bear markets. The number of deals and invested capital is still about double what it was during the 2017-2020 bear market, suggesting that the startup ecosystem will still experience net growth over a longer period.
• Venture investors continue to face a difficult funding environment. Rising interest rates continue to reduce investors' willingness to bet on long-tail risky assets such as venture funds, compared with the previous decade of the near-zero interest rate policy. Add to that a bear market in crypto asset prices and the fact that many allocators are battered after several VC-backed companies crashed in 2022, and VCs will continue to find it difficult to raise new capital in 2023. In fact, the second quarter saw the fewest new fund launches and capital allocations since the third quarter of 2020, one of the bleakest quarters for venture capital, as global investors grapple with COVID-19 -19 asset crash.
• Lack of significant new VC funding will continue to put pressure on founders. Venture-backed startups have had more difficulty raising money this year, and they will continue to face a difficult funding environment for the foreseeable future. Many of the more speculative and ambitious blockchain use cases funded during the bull market are now struggling to find investment as bull users and hype have faded. Founders must focus on revenue and a sustainable business model, and be prepared to raise smaller rounds and give up more equity.
• Pre-seed deal activity remains fairly active. Although down slightly from Q1, the number of pre-seed deals remained largely unchanged. These early-stage deals accounted for almost 75% of all deals when seed and Series A deals were counted together, showing that despite the overall lackluster activity, entrepreneurs are still active and VCs are still paying attention. With many exiting cryptocurrencies entirely in bear markets, savvy investors may find gems among diehards who started companies in challenging environments, as they did in previous bear markets.
• The US continues to dominate the crypto startup ecosystem. Despite a mostly unfriendly regulatory environment, U.S.-based crypto startups continue to attract the vast majority of venture capital activity. U.S. companies dominate the crypto ecosystem, and U.S. policymakers seek to retain top talent, promote technological and financial modernization and dominance, and extend U.S. leadership into the economy of the future, enacting advancements that foster growth and innovation Policy is sensible.
• Web3 continues to lead in number of deals, while deals still account for the largest amount invested. It’s been a multi-quarter trend where traditional moneymakers — companies building exchanges, trading tools, etc. — are raising the most money, but the largest number of individual deals are going to the nascent world of Web3, DAOs, metaverses, and gaming company of.