In 2022, capital is being deployed into crypto at a less noteworthy pace month over month, but in the grand scheme of things, levels are significantly higher than last year, showing that the space has matured significantly and the bar is now much higher.
Total venture capital funding in the crypto space fell 38% from $6.829 billion in April to $4.219 billion in May, according to Dove Metrics data. Even though the amount of capital deployed into crypto is down in the short term, it’s significantly higher than levels from a year ago: The amount of capital invested in the space last month increased 89% from $2.233 billion in May 2021.
Funding may have dropped on the month due to the growing chasm between private and public market valuations for equities and decentralized networks, Will Nuelle, an investor at Galaxy Digital Principal Investments, said to TechCrunch. “[It] has caused venture investors to be tighter on valuations and has caused increasingly wide spreads between founders’ asks and investors’ bids.”
There’s definitely a valuation reset going on right now, according to Stan Miroshnik, partner and co-founder of 10T Holdings.
“For investors like us, it’s time to buy,” Miroshnik told TechCrunch. “Valuations have come in and great companies are now available at a more reasonable price.”
“Generally, there is a big difference between people who are at the surface of understanding this space — those funds might take a backseat — but true crypto-native funds with conviction will continue to invest heavily,” Saurabh Sharma, head of investments at Jump Crypto, said to TechCrunch. “This time is where we find the best long-term-thinking entrepreneurs.”
As for where funding is going, blockchain infrastructure is seeing the most capital at 21%, followed by decentralized finance, centralized finance, NFTs and other web3 categories, Dove Metrics data showed. Decentralized autonomous organizations (DAOs) had the least investments at 2%, it said.
A shift to an investor-friendly market
“Private and public market valuations are both taking a hit,” Gabe Frank, CEO and co-founder of Arcade, said to TechCrunch. “Crypto is a risk-on asset class and funding can dry up quickly.”
The market was founder-friendly for the past two years, but now it’s shifting into an investor-friendly market, Frank said.
“Financing for smaller projects that depend on token subsidies and early liquidity events is starting to fade. VC capital is mainly on the sidelines but will continue to deploy to tier-1 projects with clear market opportunities and sound fundamentals.”
Massive funds are still launching
Multiple massive funds have been announced in recent weeks, including today’s $367 million fund by boldstart ventures, which is devoted to backing developers, crypto infrastructure and SaaS founders, the firm’s founder, Ed Sim, wrote in a post.
“Given our Day One focus, we go where the founders go, and as of late and despite the turbulent markets, we’ve seen an equal number of talented founders building new enterprise infra as well as crypto infra companies,” Sim wrote. “The opportunities are endless.”
Binance Labs also closed a massive $500 million investment fund to increase web3 and blockchain technology adoption.
“If we zoom out year over year, the trend line is very positive,” Ken Li, Binance Labs’ executive director of investments and M&A, said to TechCrunch. “I think 2021 was a monumental year for web3 — we could even call it a hype year — so I wouldn’t be surprised if the total allocated amount was lower this year versus last year, because if we zoom out, I think the important point is we do see the trend line increasing overall.”
A number of mega-funds launched into the digital asset world last month, including Andreessen Horowitz’s $4.5 billion fund and Old Fashion Research’s $100 million venture fund focused on the metaverse and emerging markets, which means it’s only a matter of time before that capital is deployed across the ecosystem.
“Though we have entered a downturn in the economic cycle and crypto prices dropped dramatically in early May, the numbers tell us that VCs remain interested in crypto, especially compared to this same time last year,” Simon Yu, CEO of StormX, told TechCrunch, adding that “a16z, for example, took advantage of the last crypto market downturn by betting on crypto and deploying a $300 million fund that, amidst uncertainty, paid off within two years. a16z is doing it again, deploying 15 times their original 2018 fund, and clearly other VCs are taking a page out of their book.”
Growing forward
There has been broader crypto education for the larger financial and institutional markets, Sharma said. As institutional investors continue to take more notice and better understand the digital asset class, more capital will continue to flow in and, in turn, there will be larger funds, he added.
“We have significantly more capital allocated. Even though VC funding is down [on the month], it’s significantly above last year’s levels, which means there is more capital and enough funding to fund good, solid R&D projects and entrepreneurs,” Sharma said.
Going forward, Miroshnik said he expects the pace of capital deployment to be more measured as investors and founders alike have slowed down. But on the VC side, there’s still a robust amount of activity occurring, he noted.
If there is one thing we have learned for certain, it is that companies thrive at building during a bear market, and Yu said he has no doubt that the best crypto firms will rise to the top and be uniquely positioned to capitalize on a sentiment shift when the time comes.