While early-stage crypto companies may still find willing investors, late-stage tech investors have largely exited the space.
The crypto industry, which once thrived on investor exuberance and rapid growth, has recently hit a rough patch as venture funding for crypto startups in the third quarter of this year plunged to its lowest level since 2020.
According to data from research firm PitchBook, Venture Capitalists (VCs) invested just $2 billion in crypto space during the quarter, marking a staggering 63% decline from the same period in the previous year.
The Decline in Crypto Funding
The dramatic decline in venture funding for crypto startups in Q3 2023 has many factors at play. One of the key reasons, as highlighted by PitchBook analyst Robert Le, is the notable absence of the “big deals” that were once common in the crypto space. The deals have become smaller in scale, leading to a decrease in overall investment volume.
During the crypto bull market, companies like the FTX Derivatives Exchange, OpenSea, and Yuga Labs enjoyed the benefits of mega fundraisers, attracting substantial investments from venture capitalists eager to ride the wave of digital assets and blockchain technology. However, as the crypto industry faces increasing scrutiny and regulatory challenges, the tide seems to be turning, with venture capitalists pulling back significantly.
The declining interest of VCs in the crypto industry poses a critical challenge for startups. Le expressed his concern, saying, “If they’re not able to raise a round, even a down round, they’re either going to go out of business or get acquired at a valuation that’s much, much lower.” This dilemma leaves startups with limited options, making survival a daunting task.
While early-stage crypto companies may still find willing investors, late-stage tech investors have largely exited the space. This shift reflects a broader trend of investors becoming more cautious and discerning in their crypto investments.
SBF’s Trial and the Impact on Venture Capitalists
Adding to the complexity of the situation is the continuing fallout from the FTX scandal. FTX, once a rising star, has faced legal troubles, with its former CEO Sam Bankman-Fried and other executives facing criminal fraud charges. This has raised questions about the role of VCs in the crypto industry and their investments in companies like FTX.
Sequoia Capital, a prestigious VC firm, was among those that had invested heavily in FTX. However, the scandal has forced VCs to reevaluate their involvement in the crypto space. FTX and its trading arm, Alameda Research, had also made their own venture bets and built a diverse portfolio of companies, including stablecoin providers Circle and Paxos, blockchain developer Aptos Labs, and crypto bank Anchorage Digital.
The startup stakes held by FTX and Alameda are now being closely watched as FTX navigates bankruptcy proceedings. The presence of a new funding round for AI startup Anthropic, in which FTX invested, has provided some hope that creditors might be compensated through the sale of equity.
However, there is a significant concern that a massive liquidation sale of these startup stakes could lead to a further devaluation of crypto startups.