Q3 Crypto Venture Report: The VC market has not yet bottomed out, with the United States continuing to dominate crypto startups but other countries catching up

PANews · 2023-10-14T07:56:30+00:00

Venture funds raised more than $1 billion in the third quarter, the first rise since the decline began in the third quarter of 2022. The number of new funds issued also increased to 15 from 12 in the second quarter. The median and average fund size is down significantly from bull market highs.

PANews

2023-10-14 07:56:30

Written by Galaxy

Compiled by Joyce, Sharon, BlockBeats

TL;DR:

Cryptocurrency venture capital has not bottomed out. In terms of total transactions completed and investments, the third quarter was the lowest since the fourth quarter of 2020.
Companies in the broad Web3 category dominate the number of deals, while companies in the deal category raise the most total capital. The third quarter results continue the trend we saw throughout the year, with interest in AI requiring the creation of a new division in our datasets and increasing interest in overlapping between AI and cryptocurrencies.
The U.S. continues to dominate the cryptocurrency startup space, but other countries are catching up. While crypto startups in the U.S. account for more than 35% of all completed deals and raise more than 34% of the investment capital of venture capital firms, the U.S. now has a clear loss of deal and capital share to countries such as the United Arab Emirates, with both Singapore and the UK having more advanced cryptocurrency regulatory frameworks.
The venture capital funding environment remains extremely challenging but may be improving. In the third quarter of 2023, venture funds raised more than $1 billion, the first rise since the decline began in the third quarter of 2022. The number of new funds issued also increased to 15 from 12 in the second quarter. The median and average fund size is down significantly from bull market highs.

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Cryptocurrency venture capital

By number of transactions and invested capital

The cryptocurrency and blockchain industry recorded a new cyclical low of $1.975 billion in investment in the third quarter of 2023 and the lowest level since the fourth quarter of 2020, continuing a downward trend that began after a peak of $12 billion in the first quarter of 2022. The total amount of money raised by cryptocurrency and blockchain startups in the past four quarters is less than it was raised in the first quarter of 2022 alone. The number of deals also hit a new low during the cycle, with just 376 transactions.

Most transactions completed in the third quarter of 2023 involved Series A stage startups, with the number of pre-seed deals decreasing slightly sequentially.

In terms of investment size, early-stage deals (Pre-Seed, Seed and Series A) accounted for the vast majority of investment (83.5%), compared to 16.5% of late-stage deals. This continues the trend of the previous quarter.

By year of incorporation

In the third quarter of 2023, companies founded in 2021 and 2022 completed the most venture capital deals.

Companies founded in 2021 raised the most money of any annual group, while remarkably, companies founded in 2022 raised significantly less, unlike last quarter.

By location of the company’s headquarters

While the U.S. continues to lead in terms of transaction volume and investment funds, companies headquartered in these regions saw significant growth in both in jurisdictions with more progressive and clear regulatory frameworks for the cryptocurrency industry.

US-based companies raised 34.5% of all cryptocurrency venture capital funding in the third quarter of 2023, followed by the United Arab Emirates (23.5%), the United Kingdom (9.5%), and Singapore (6.2%).

The situation is similar when looking at the completion of the transaction. US-based companies completed 35% of all cryptocurrency venture capital deals in the third quarter of 2023, followed by Singapore (10.6%), the UK (7.9%), and China (4.7%).

Cryptocurrency venture capital deal size and valuation

From a median perspective, valuations and deal sizes grew across the venture capital landscape in the third quarter of 2023, including cryptocurrencies. The increase in deal size and valuation was partly attributed to an increase in the number of Series A deals, while the number of seed and pre-seed deals decreased. The venture capital landscape as a whole, as well as cryptocurrency ventures, saw growth in median deal size and valuation in the third quarter of 2023, although both are still well below their highs in 2021 and 2022.

Cryptocurrency Venture Capital (by Category)

For the third consecutive quarter, trading, exchanges, investment and lending startups raised the most venture capital funding ($611 million, or 32.5% of all venture capital). For the second consecutive quarter, Web3, non-fungible tokens (NFTs), gaming, decentralized autonomous organizations (DAOs), and metaverse startups raised the second most funding ($266.5 million, or 14.2% of all VCs in the quarter).

The trading, exchange, investment and lending industries completed the largest deal during the quarter, with Haqqex, a digital asset exchange with the slogan “Islamic Compatible,” raising $400 million in early funding. In the third quarter of 2023, the custody industry made the second largest deal, with BitGo raising $100 million in Series C funding. Our new AI category shows that startups building AI-related products raised more than $60 million in funding in the third quarter of 2023, representing 3.2% of all venture capital investments in the quarter.

By number of transactions, companies building Web3 games, non-fungible tokens (NFTs), DAOs, and metaverse products maintained their leading position, followed by trading, exchanges, investment, and lending companies. These trends remain unchanged from the first and second quarters of 2023.

In the third quarter, the largest industry sectors for late-stage deals were banking, tier 1 and tier 2, while the largest sector for seed stage deals was custodians, wallets and venture capital.

In terms of investment size in the third quarter, late-stage investments dominated the hosting sector, while investments in the media/education sector were dominated by seed funding.

Cryptocurrency venture capital financing

We’ve partnered with Galaxy Asset Management to compile information about venture capital fundraising for the third quarter of 2023, which is money raised by venture capital firms for a new fund or series of funds. After bottoming out in the second quarter, allocations rose slightly in the third quarter, with a total of 15 funds raising $1.17 billion.

Combined with the first three quarters of 2023, the average size of new funds is now $238.43 million, compared to a median of $50 million, both of which are significantly lower than last year.

Analysis and conclusions

The bear market in the cryptocurrency venture capital market continues. Whether the market has bottomed out either in terms of the number of trades or the amount of money invested is unclear. While this decline is not limited to cryptocurrencies, it may be affected by long-term events in the cryptocurrency ecosystem. High interest rates continue to weigh on the entire venture capital industry. There are other important points from the Q3 2023 crypto VC data:

· Cryptocurrency venture capital activity remains strong compared to previous bear markets. The number of deals and investment funds is still roughly double what it was during the bear market from 2017 to most of 2020, suggesting that the startup ecosystem is showing net growth over a longer period of time. Still, both indicators continue to hit new quarterly lows, so it’s impossible to determine if the market has bottomed out.

· Venture capitalists continue to face a difficult fundraising environment. In the face of macroeconomic headwinds, investor interest in long-tail venture assets like venture capital funds remains below levels seen during the near-zero interest rate policy of the previous decade, especially those focused on cryptocurrencies. Coupled with the bear market in crypto asset prices and the fact that some investors may be unhappy with the miserable failure of several venture-backed businesses in 2022, venture capitalists will still face difficulties in raising new capital in the near term. However, some positive signs are also likely as the number of new funds and allocated funds increased slightly in the third quarter. Previously, the second quarter of 2023 was the least allocated to the fund since the third quarter of 2020, at the height of the COVID-19 pandemic and asset crash.

· The lack of significant new venture capital funding will continue to put pressure on entrepreneurs. This year, venture-backed startups have had more trouble raising a new round of funding and will face a tough fundraising environment for the foreseeable future. Many of the more speculative and ambitious blockchain use cases that were funded during the bull market are now experiencing difficulties in product market adaptability and investment funding as the bull market users and hype have waned. Entrepreneurs must focus on income and sustainable business models, and be prepared to raise smaller amounts of capital and give up more equity.

· The U.S. is still ahead, but other jurisdictions are catching up. Historically, the United States has been a hotbed of innovation, including in the cryptocurrency space. Historically, US-based cryptocurrency companies have dominated in terms of trading shares and investment funds. However, in the third quarter, this leading position narrowed significantly, with more cryptocurrency-friendly jurisdictions such as Singapore, the United Kingdom, and the United Arab Emirates gaining more share. U.S. policymakers seeking to retain top talent, drive technological and financial modernization and dominance, and extend U.S. leadership into the economy of the future should be wise to craft progressive policies that promote growth and innovation.

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