After six quarters of falling venture interest, crypto investors see recent price gains as positive signal

The crypto venture capital landscape is heating back up after a number of weak quarters amid talk of a potential market recovery.

Investors are getting back in the groove of investing in web3, crypto and blockchain technology, said John Nahas, VP of business development at Ava Labs. “The renewed focus is on real-world use cases, infrastructure, and practical solutions rather than the more abstract, trendy projects of the past.”

In the third quarter, the crypto space saw $1.8 billion invested across 309 deals, according to a new PitchBook report. That’s a 28.3% decrease from the previous quarter, marking the “most subdued activity since late 2020” and a sixth straight quarter of decline in the value of venture capital investment into web3 companies.

By comparison, Q2 2023 saw $2.34 billion in capital across 382 crypto and blockchain deals.

PitchBook crypto VC deal activity by quarter as of September 30, 2023

PitchBook data as of September 30, 2023. Image Credits: PitchBook

But that dark cloud might be dissipating. “I believe that deals will pick up and close into the rest of this year, the most active quarter of the whole year,” said Paul Veradittakit, managing partner at Pantera Capital.

The bullish takes come at a time when a lengthy market downturn has persisted, chilling consumer, founder and investor interest in the crypto industry.

Recently, conservative market conditions have forced the crypto space to mature, Nahas said. “The rush to market has been replaced by more thoughtful approaches, which take longer but give greater chances of success.”

The crypto investment space has gotten busy, too, as deals start hitting the market. Seed and Series A rounds are the most active right now and have “appropriate valuations,” Veradittakit said.

But even with some deals, Series B rounds and later financings are still slow, said Stan Miroshnik, founder and managing partner of TenSquared Capital (10SQ). “Primary rounds in later stages have not yet come back due to lack of dry powder in the space overall and the overhang of shares in the secondary market.”

The strong crypto startups that raised in 2021 reduced spend in 2022 and cut “more aggressively” this year to maintain capital and runways for next year and beyond, Miroshnik said. Most of the stronger startups have “high watermark valuation issues,” so they’re working to avoid a meaningfully lower valuation in today’s market.

Veradittakit also thinks a recovery in the value of major crypto assets can drive more capital into the space. The two biggest cryptocurrencies by market capitalization, bitcoin and Ethereum, have both risen about 37% on the month, according to CoinMarketCap data. And it’s not just the two largest digital assets taking the reins; other cryptocurrencies like Solana rose 163% from October to November, signaling potential thawing of a long crypto winter.

While the liquid market is benefiting from talks of a spot bitcoin ETF in the U.S., cryptocurrencies rising and other narratives, the private market is still digesting high valuations and trying to find a balance between company expectations and what investors are willing to pay. “Token-denominated revenues and token-driven balance sheets are making it hard to hit KPIs — but things are looking up,” Miroshnik said, given that many cryptocurrencies are still down from all-time highs. “Upstream capital from allocators to venture has slowed, which is impacting investment and capital deployment pacing overall.”

And for mid- to late-stage founders, they’re focusing on managing costs and running businesses well to mitigate churn and prioritize what needs to be built.

All in all, crypto players like Nahas think “it’s a great time to be optimistic.”

The year is “done,” Miroshnik said. “Most companies are already mentally in Q1.”

As for next year, Veradittakit thinks 2024 will see more crypto capital as institutional adoption grows — through players like BlackRock — and more startups come to market as interest returns.

“A lot of maturity has come to the space, a lot of unserious actors have departed, and a lot of professionals and prudent builders have entered,” Nahas said. “At this moment, the outlook for crypto is very promising.”