Investors unfazed by Q1 crypto funding decline

Crypto-focused venture capital investors are trucking along in their work. Many remain confident in their investing strategies despite an enervated first-quarter market for crypto startup fundraising. Others are noticing a sharper decline in investing pace.

“I definitely saw a big slippage and drop in activity [in] Western markets,” in Q1 2023, said David Gan, founder and general partner of OP Crypto. “I don’t think people are heavily deploying, and rounds are taking a lot longer to close than ever before.”

In Q1, $2.53 billion in capital was raised across 347 crypto and blockchain companies, down 79% from $12.27 billion in the year-ago quarter and a decrease of about 18% from $3.08 billion raised by the same corporate cohort in the previous quarter, according to preliminary PitchBook data.

The stark contrast from the year-ago quarter is unsurprising. The crypto world was in a different place back then. FTX, for example, was still a prominent crypto exchange and raised a $400 million round, bringing its total capital raised to $2 billion and giving the company a valuation of $32 billion at the time.

The climate has changed since then: FTX crumbled and Terra/Luna collapsed (and brought down $40 billion with it). Meanwhile, a series of Chapter 11 bankruptcy filings transpired across mega crypto institutions, including FTX, BlockFi, Three Arrows Capital, Celsius Network, Voyager Digital and Genesis Global Trading.

This past quarter was a “thawing of people wanting to open their checkbooks,” Michael Terpin, CEO of Transform Ventures, said. “Right after FTX, it’s predictable that no one wanted to invest in anything.”

Even though the amount of capital deployed wavered across the first quarter, the previous quarter and year-ago quarter, the average deal size was somewhat similar with $3.4 million in Q1 2023 versus $3.78 million in Q1 2022 and $3.1 million in Q4 2022, early PitchBook data shows.

The majority of investors TechCrunch+ spoke with said pre-seed rounds were being valued between $5 million and $25 million, while seed rounds had $10 million to $30 million valuations.

“In 2021 it wasn’t uncommon for a seed round [to get done] at $50 million or $60 million [valuations], but you don’t really see that anymore,” said Shan Aggarwal, head of corporate development and ventures at Coinbase.

What investors are saying

“The time to invest is now,” Aggarwal told TechCrunch+. “There’s people building products and companies for the right reasons” as there’s less hype in the ecosystem, he added.

Even as the market continues to face changes, most of these crypto-native investors are steadfast in their positions and looking with a long-term vision. “Thematically, things are very consistent with what we’re looking at historically,” said Michael Giampapa, general partner at Galaxy Ventures. “Our strategy is to not get involved in the hype cycles and different narratives.”

Others echoed the sentiment.

Will Nuelle, general partner at Galaxy Ventures, advises founders to be mindful of managing their burn amid a slower financing environment.

Last year, some rounds closed within a week, Tushar Jain, managing partner at Multicoin Capital, told TechCrunch+. But making decisions on a two-week timeframe was “not an optimal situation,” Giampapa said.

As a pre-seed and seed firm, OP Crypto wasn’t offered to lead deals in 2022 as people “aped into deals,” Gan said. But now the firm is in a position to lead deals and has “taken the contrarian view that now is a better time to invest.”

The new market reality

There are other shadows keeping crypto cool than just the lingering hangover from FTX’s implosion. In recent weeks, a number of U.S. regulatory agencies announced action against major crypto companies like Coinbase, Binance and Tron. Meanwhile, some crypto-friendly banks, like Silvergate and Signature, shut down.

There’s good news to be found as well. During the recent regulatory push and banking crisis, crypto markets rose, with the top cryptocurrencies bitcoin and ether up 72.4% and 53.7% year to date, respectively, according to CoinMarketCap data.

“It feels like we’re recovering,” Jain said. “I like to think about this, you know the market is recovering when it shrugs off bad news and continues marching higher, and you know the market is in the opposite when it shrugs off good news and goes lower.”

The market has “obviously shifted,” similar to the broader venture capital markets, Giampapa said. “Venture deal activities are down year over year and quarter over quarter. Timelines have slowed, which we think is a great thing, not just selfishly, but we have more time to do diligence and make investments.”

The competitiveness of deals varies widely, many investors noted. The investor landscape in rounds has shifted, too, Nuelle said. In 2021, there were hedge funds and generalists investing and “people who haven’t built their business around the space, but spent some time in it,” he added. “A lot of those people are no longer active in the space.”

But in general, the “top-tier” founders are consistently closing competitive rounds, Aggarwal said. “The funny thing is the natural assumption is that deals are not competitive, but it’s the opposite,” he said. “During these periods of time you get a bifurcation of haves and haves not — with very good companies and founders, everyone wants to get in and then valuations get squeezed and pushed up.”

“Everything else is negotiable at this point,” Gan said.

The average deal is less expensive but, what is broadly accepted as “quality high-tier teams and innovation is still being priced richly,” according to Giampapa.

But as funding is down, what are people building? Well, investors say a little bit of everything, including enabling better user experiences, consumer-facing applications, zero knowledge technology and deeper dives into decentralized finance.

“You have to show me something; don’t tell me something,” Terpin said. “I want to go and see a prototype. I don’t want just an idea even for pre-seed. Show me something compelling and that solves a problem, ideally a problem people haven’t thought about before. We’re still in the dawn of the industry. I’m looking for the next Vitalik [Buterin].”

These founders know there’s an “industry need to get more users, there needs to be stuff that’s valuable in crypto that touches mainstream audiences if it’s going to be a sustainable economy,” Jain said.

And people will continue to build. “That’s consistent with cycles we’ve seen over time,” Nuelle said.