Tons of capital has been raised across the crypto industry in recent months, but there has been a noticeable pause in deployment. That might change in the coming months.
As it’s taken longer to close crypto VC deals, valuations across the industry have dropped, according to David Nage, venture capital portfolio manager at Arca.
Some VCs are taking advantage of this time as the market remains investor-friendly, while others are waiting just a bit longer to push out capital.
“There’s been this kind of viral dialogue that sometime around September, valuations are gonna come down even more significantly and it’s just gonna be a frenzy,” Nage said.
Even though there might be a waiting game happening right now, the total amount of capital going into crypto is still up from the year-ago period. Capital raised in the digital asset sector rose nearly 35% from $6.08 billion during the second quarter of 2021 to $8.13 billion in the second quarter of 2022, according to data compiled on PitchBook.
For the Arca team, which has made about 30 investments to date across the crypto industry, valuations have fallen to where they believe they should be, Nage said.
“But there are VCs out there that are waiting for this moment, in terms of a cataclysmic moment, something that, as I said, is going to happen in September, where valuations are going to be perfectly in line with what they want,” he said.
During the fourth quarter of 2021 and the first quarter of this year, deals were closing within two weeks, but now they’re taking anywhere from three to five weeks, Nage said.
“There has been a pronounced and visible slowdown from peers and in terms of speed to transaction,” Nage said. “It kind of felt like I had a gun to the back of my head because if I didn’t do [a deal], someone else would jump onto it. Now, I think everyone is falling into place and slowing things down.”
The slowed pace is because VCs want to “do more due diligence” after the now-defunct and not-so-stablecoin UST and cryptocurrency LUNA plummeted earlier this year, bringing down the crypto market with them.
“I think that’s kind of BS; they should have been doing the diligence in the first place,” Nage said. “But I think a lot of us have been out there trying to see if the contagion was going to continue and persist or if we were getting toward the end of that contagion.”
This time last year, seed rounds were pricing valuations anywhere between $35 million to $45 million, according to Nage, with some “exaggerated toward $80 million or higher.”
“Valuations have definitely changed since and, in my opinion, normalized,” he said.
One company Arca was looking to invest in was aiming for a valuation in the range of $40 million to $50 million at the beginning of April, prior to the Terra collapse. Now, the firm is investing in it at a $17 million post-money valuation, Nage said.
In general, seed rounds for crypto startups are now being valued mainly below $20 million, Nage said. Even though valuations have fallen, massive funds are still being launched into the space – perhaps in an attempt to take advantage of these deals.
Earlier this month, crypto-focused Multicoin Capital launched its third and largest fund to date at $430 million. Separately, a fairly new crypto fund and incubation lab, Protagonist, launched its first $100 million fund to focus on early-stage crypto companies.
Valuations are down across a handful of industries, making the space prime for investors.
“You’re seeing a massive change there, and you’re seeing founders really acknowledge that it’s no longer a sellers’ market; it’s more of a buyers’ market,” Nage said.