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Crypto VC deployment still slow as investors wait for even lower valuations

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Ongoing volatility in the crypto markets is leading to mismatched conversations between venture capitalists and founders — and entrepreneurs aren’t often finding themselves on the winning side.

While some crypto-native and general funds are actively deploying capital into the digital asset world, others are taking a slower approach. Over the summer, some market participants anticipated deals would ramp back up in September, but that still seems to be on hold as we move into mid-October and crypto market conditions remain shaky.

“A lot of VCs paused deployment over the summer and there’s a record amount of cash right now sitting on the sidelines; that’s not just specific to crypto,” Alex Marinier, founder and general partner of fintech and blockchain-centered firm New Form Capital, said to TechCrunch. “My sentiment is that the pervasive feeling in crypto right now is fear.”

However, Marinier said that the more bearish climate is an attractive time to keep investing, adding that “now is the time to be allocating.”

New Form has allocated about 30% of its $75 million Fund 2 to date, Marinier shared. The majority of New Form’s deals for its second fund have been in its target “sweet spot” of crypto startups valued in the range of $15 million to $35 million.

But not every fund is going full steam ahead.

“Many of us were expecting September to be a gangbuster type of moment where sentiment would be fully back and the events that happened with LUNA, Celsius and BlockFi would have been moved on from,” David Nage, venture capital portfolio manager at the crypto-focused firm Arca, said to TechCrunch. “But what you’re seeing with these events, while they’re in the past, they still come back to bite us in the proverbial ass.”

On a high level, the environment has changed quite a bit recently, Paul Veradittakit, general partner at crypto-centered firm Pantera Capital, said to TechCrunch. Pantera launched its $1.3 billion fund in the middle of 2021 and has “quite a bit of dry powder left … it has been about a year and a half, and we predicted a deployment period of up to three years, so we’re on track.”

Investors anticipated September would be a “high-volume output month,” but most have been slower and more judicious, trying to stick to their niches, Nage said.

In the past two quarters, global crypto VC deal activity fell from all-time highs of $10.87 billion in the first quarter to $7.63 billion in the second quarter and $4.44 billion in the third quarter, according to PitchBook data as of October 3. The last time the total deal size was this low was in the first quarter of 2021, when the total was $3.46 billion.

Larger funds in the space are slowing down, while smaller seed-focused funds are diverging in strategies, Veradittakit shared. “Some are still very, very active. Maybe they feel they have the money to reply and the upside is there, but other seed-stage funds are thinking the deals are OK, but don’t justify the valuations out there.”

Many well-known VCs and investors like Andreessen Horowitz or Jump Capital remain “very aggressive and active in their investments into the web3 space,” Yi He, co-founder and head of Binance Labs, said to TechCrunch.

But Nage compared the market to a Category 5 hurricane: “You’re not going to jump in a boat and go fishing in the ocean. You’re going to be mindful of where we are in the market.

“We’ve slowed down our pace of investments relative to other quarters,” Nage said. “We’re actually writing less checks, but larger checks because we’re spending more time with teams and founders … we’re being specific in the spot we’re pulling right now.”

A lot of investors want to wait a bit longer until valuations reset more, thinking that valuations will fall further for at least another three to six months amid a chilly market, Veradittakit said. “Some are still deploying but others are waiting for valuations to drop more. That’s the feeling there in terms of the earlier-stage side of things.”

In general, growth-stage investors are not really putting money into growth-stage rounds right now, Veradittakit noted. “The valuations are [at a] 70% to 80% discount; it’s pretty phenomenal. We’re not seeing a lot of capital going in there and if it’s in earlier stages of growth stage.”

In 2017, there were seed deals coming to market that were “basically getting written down on a napkin” with $100 million valuations or higher, Marinier said. “This also happened last year during the 2021 cycle, but whenever there’s a market explosion, VC generalists often back off from crypto, and we’ve seen that to a certain extent this year. The conversation has changed.”

Investors have the upper hand in the current market conditions as valuations drop across the board.

“Everything has been haircut by almost 50% in terms of what we’re seeing,” Marinier said. “In the bull market we saw a ton of seed deals at 50, 60, 70 to 100 million-dollar valuations. Now we’re seeing great teams come to market raising at 10, 20, 30, 40 million-dollar valuations.”

While a lot of valuations have fallen, some founders are still raising at “obscene valuations of $50 million to $80 million on a seed [round],” Nage said. “Those, obviously, quickly get filtered out because they don’t have a good sense of where the market is.”

So when will investments — and valuations — ramp back up again?

“I think it’s going to be three to six months where the market will either pick up and see a recovery and momentum,” Veradittakit said. “Retail [investors] will come back and people will want to invest in projects again.” Or on a less positive side, the bear market could stagnate and valuations could continue to be slashed, he added.

Even though things may be a bit slower for some, there’s still “a greater amount of opportunities now than at the end of August,” Nage said. “We’re starting to see accelerator programs come back online. The activity is coming back, as well as demo days and new cohorts.”

VCs and investors are still active and deploying capital into the market, He said.

With that said, the total number of deals and dollars invested is edging closer to 2021 levels, with about $23.14 billion across 1,961 deals to date, compared to $25.35 billion across 2,349 deals last year, PitchBook data showed.

“They recognize that the slowdown in activities is only temporary [as] markets go through cycles,” He said. “This is not the first one, and it will also not be the last one.”

In the past two weeks, Nage said he’s seen five to 10 times more deals than in prior weeks.

“We may not see the billion-dollar Series A rounds we saw in abundance 12 months ago, but capital will continue to get deployed in meaningful ways,” he said.

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