By deal count and capital invested, 2022 was the second-largest year for crypto VC after 2021, which was the industry’s greatest year ever. However, every quarter in 2022 saw a decrease in the number of deals and capital invested. The total amount raised by cryptocurrency and blockchain startups in Q4 was $2.7 billion over 366 transactions, a decrease of more than 50% from Q3’s $6 billion across 676 transactions. Venture investors had already started to scale back their investments, but the collapse of the FTX disaster caused them to do so even more.
In Q4 2022, investments hit a multiyear low. Significant reduction in seed and pre-seed venture investment as the investing pattern switched to later stages. In spite of this, Web3/NFT/DAO/Metaverse/Gaming (“Web3”) continued to dominate the deal count in Q4 2022. In Q4 2022, Web3 startups, the largest subsector, were involved in 31% of all transactions.
Current Funding Market Outlook
Decentralized finance, or DeFi, is a topic that remains in the spotlight during market volatility in the crypto VC industry as well as throughout the community as new use cases, protocols, and projects emerge.
According to the investors we questioned, DeFi-related pitches make up anywhere between 20% and 50% of all crypto-related pitches today. That demonstrates the enormous number of DeFi projects that are in need of funding.
According to Paul Veradittakit, general partner at Pantera Capital, “DeFi is ultimately a mirror image of traditional finance (TradFi), and founders who have extensive industry expertise in TradFi coupled with a fundamental understanding of blockchains will stand out from the other teams.”
The Terra/LUNA ecosystem collapse in May and the cryptocurrency exchange FTX in early November were just two of the significant, industry-changing events the crypto community had to deal with in 2018. Numerous larger companies and smaller startups that interacted with the now-defunct market players were also taken down by both occurrences.
While the market looks to the future, some venture capitalists are updating their investment strategy, while others are sticking to their current plans with possibly a few minor adjustments.
Crypto Startups Funding Outlook 2023
Bridges must be built, standards must be established, primitives must be developed, users must be onboarded, infrastructure must be stress tested, and product stories must be told.
We believe that a GAAP or IFRS standard for crypto assets is necessary. Rejoice, value investors and consumer advocates: the next cycle’s surge may actually reflect fundamental user adoption, and live investigation will be completely free.
In 2023, the venture markets for established businesses are anticipated to become more brutal. We anticipate a sharp decline in deal sizes and pace as Series A+ companies need to show that their operations are sound on a fundamental level despite the bear market’s headwinds.
Some believe that 2023 will only mark the beginning of a venture winter and general economic downturn, while others believe that by the middle of the year, everything will have stabilised and will be returning to normal.
In 2023, Alex Thorn, Head of Galaxy Digital, said, “startups will need to be laser-focused on fundamentals, reducing operational costs, and growing revenue.” Given that the United States still dominates the ecosystem for cryptocurrency startups, the regulatory environment there will also have an impact.
According to TechCrunch, most investors believe that there will be incredible investment opportunities available; they won’t be changing our deployment strategy much despite macro conditions; current market would see it as a chance to favour seed and Series A investments in early-stage companies. Economic difficulties won’t hinder the demand for more developer solutions because developers support the foundation of competition in the digital sphere. Solutions with a definite ROI will flourish as developer productivity, and efficiency becomes more crucial.