The past couple of years have proved to be a turbulent time for the crypto industry. As if a spate of big crypto institutions failing or going under wasn’t enough, the industry saw many tourist investors running for the gates as the wider macroeconomic climate worsened.
But a recent spike of interest in crypto, driven by rising Bitcoin and Ethereum prices, is rebuilding momentum, and many think that next year could be promising for crypto startups’ valuations.
Fundraising was difficult for both startups and venture capitalists in 2023, according to Lydia Chiu, VP of business development at Ava Labs. “On the startup side, we saw a correction in valuations, with fewer token offerings,” she said. “VCs also had more leverage to negotiate better terms when leading, much more so than in 2021 or 2022. We’ve seen more follow-on and down-round opportunities from teams that had raised during the bull market than new projects raising [today].”
The aftermath of 2021’s hype is still being reflected in the crypto venture landscape. “[In] 2021, [there were] outlandish valuations with a number of terrible ideas being funded by traditional Silicon Valley VC firms that joined the space at the top and had absolutely no idea what they were doing,” said Michael Anderson, co-founder of Framework Ventures. In 2022, the crypto venture capital deck “saw a complete reshuffling,” with “many tourist VCs in retreat and their weaker portfolio investments bleeding out,” he added.
The drier funding climate of 2023 only served to weed out the weaker businesses that had managed to secure capital in 2021. According to Marc Bhargava, managing director at General Catalyst, a lot of dry powder from the good days still made it to this year.
Valuations “came back down to earth,” Anderson added.
And when FTX blew up in November 2022, many funds, even those focused on web3, “slammed the brakes on new deals,” Alex Marinier, founder and general partner of New Form Capital, said.
“Anyone should’ve expected venture funding to dry up in 2023, and it did,” said Will Nuelle, general partner at Galaxy Ventures. “Funding returned to levels not seen since 2020 in the crypto and blockchain venture markets.”
“In 2023, most people seemed to finally get the message that we’re in a new market and that the investor class is thinking and behaving more rationally than before,” Anderson said.
Early-stage deals are down but not out
Flat or discounted valuations were not uncommon in 2023 for the wider tech industry, so it wasn’t a surprise that the more beleaguered crypto startups also had to suffer substantial haircuts. According to Nuelle, there has been a dispersion in valuation — competitive rounds are still receiving multiples that can “make the stomach quiver,” but a successful raise is no longer preordained, like it was 18 months ago.
Chiu helps manage Blizzard, a $200 million fund dedicated to investing in the Avalanche ecosystem, and she told TechCrunch+ that the vehicle has seen average valuations come down by around 15% between 2022 and 2023. “Just as valuations have come down, round sizes are much smaller versus 2022.”
But early-stage investment remained “very hot” in 2023 and didn’t decline as much as one might have expected during a downturn, Bhargava said. Sure, the seed and Series A valuations for crypto companies were lower than before, but it’s “still frothy out there,” he said.
“It’s easier to get seed and Series A [rounds] done in such a hangover of money . . . Funds and commitments have flowed through 2022, so it’s been a year to work off money.”
In fact, many would-be Series As are being structured as seed extension rounds from 2021 and 2022 at flat or discounted valuations, per Marinier. However, valuations at the pre-seed, seed and Series A stages seem to have come down a bit this year, he said. Seed valuations, meanwhile, have ranged between $10 million and $25 million on average.
David Nage, a portfolio manager at Arca, agreed with that evaluation. Pre-seed valuations have declined to $5 million to $7 million post-money, and seed valuations have come down to about two to three times pre-seed valuations, he estimated.
Venture capital investment at the pre-seed, seed and early-stage levels in the crypto and blockchain spaces has declined every quarter since the beginning of 2022, according to PitchBook data. The median post-money valuation for early-stage crypto startups in Q1 2022 was over $30 million, the data showed, indicating that valuations are nowhere close to where they used to be.
But that’s nothing compared to the late-stage market. Like the wider tech industry, investment in late-stage crypto startups appears to have declined massively. “The number of folks who are willing to write a bigger check, for $10 million to $20 million, has really gone down from 2021,” Bhargava said.
Series A rounds have become much more dependent on key performance indicators and growth metrics, Nage said. “If the company produces MRR/ARR [monthly recurring revenue/annual recurring revenue], we see an observable multiple in the market, normally 10 to 15 times ARR.”
Valuations and VC activity for 2024
Chiu expects valuations to remain competitive during the dealmaking stage in 2024. In fact, she said she wouldn’t be surprised if there was a slight adjustment upward similar to early 2021, with a material increase in valuations coming in the second half of 2024.
In 2024, Marinier expects seed extension dynamics to play out as more startups will likely run out of money before gaining traction.
Next year will likely get busy again but will not be too competitive, according to Felix Hartmann, managing partner of Hartmann Capital. “If anything, 2024 is likely to be the ideal happy medium, where funds have ample time to do good due diligence without dragging their feet and putting undue burden on founders,” he said.
Valuations will improve only marginally, Anderson predicts. “Some projects are going to get funded, but at lower valuations. There will be more available capital, but I don’t think it will reflect in prices that much, as the investor class remains highly rational in comparison to 2021. There are more sources of capital, and they won’t be as timid.”
Bhargava expects the biggest change to be the mid- and late-stage markets opening up again and “be back to business.” Startups that raised in 2021 will likely raise in 2024, so he expects many more companies to come to market looking for fresh capital, which will cause an uptick in investment activity.
As market sentiment generally improves, people who have been waiting on the sidelines will join or rejoin the industry, Anderson said. “The jury is still out as to whether or not the increase in excitement translates to better projects.”