The cryptocurrency sector is experiencing a significant downturn in venture capital (VC) funding, marking the fifth consecutive quarter of decline since Q1 2022, according to data from VC firm Pitchbook. The global funding for crypto startups has dropped to $2.34 billion, a stark contrast to the industry’s peak of $12.14 billion in the first quarter of 2022. This decline is attributed to a variety of factors, including regulatory challenges, economic uncertainty, and a shift in investor sentiment.
The second quarter of 2023 saw significant funding rounds, such as LayerZero’s $120 million Series B and Worldcoin’s $115 million Series C. However, these figures are dwarfed by the previous highs. Lydia Chiu, VP of Business Development at Ava Labs, suggested that investors are now writing “smaller checks” due to lower valuations in the crypto industry.
The regulatory landscape in the U.S. has been a significant factor in this decline. Many crypto-related deals in Q2 were structured like traditional venture structures, such as raising equity, as opposed to token investments or simple agreements for future tokens (SAFTs).
The industry has also been affected by a number of crypto companies filing for Chapter 11 bankruptcy protection last year, which has dented confidence in the sector. Traditional firms and entrepreneurs have exited the U.S. ecosystem, and investors have adopted a more discerning approach that values profits over growth.
Per Chiu, Valuations in the crypto industry have suffered a significant drop. From the first half of 2022 to the second half, valuations dropped by 50%. They have further dropped by 15% in the first half of 2023, totaling a year-over-year decrease of almost 70%. This decline has made it challenging for startups that raised money in early 2022 to secure additional capital without accepting down rounds. These are funding rounds where the startup raises capital at a lower valuation than its last investment.
Despite the gloomy outlook, crypto-native founders and investors are not losing hope. Chiu believes that the downward trend might slow down or become less severe in Q3. Lasse Clausen, founding partner at early-stage crypto investing firm 1kx, echoed this sentiment in an interview, stating that while funding appears to be down, it’s important to remember that the previous all-time highs were not sustainable.
