Investment in crypto startups is becoming increasingly scarce as venture capital continues to dwindle for the fifth consecutive quarter since the first quarter of 2022. The global funding for the industry dropped to $2.34 billion in the second quarter of 2023, a sharp decline from the peak of $12.14 billion in the first quarter of 2022. Investors are becoming more cautious due to concerns over regulatory crackdowns and the uncertain economic climate.
PitchBook data reveals that the $2.34 billion funding in Q2 2023 was raised through 382 deals. Notable raises during this period include LayerZero’s $120 million Series B round and Worldcoin’s $115 million Series C round. Lydia Chiu, the VP of business development at Ava Labs, explains that investors are now making smaller investments due to lower valuations in the industry.
One of the primary reasons for this decline in capital deployment is the regulatory challenges faced in the United States. In response to these headwinds, many crypto-related deals in Q2 have adopted traditional venture structures, such as equity fundraising, rather than token investments or simple agreement for future tokens (SAFTs), according to Chiu.
Aside from regulations, there are other factors contributing to the funding scarcity. Several prominent crypto companies filed for Chapter 11 bankruptcy protection last year, eroding confidence in the industry. Furthermore, some traditional firms and entrepreneurs decided to leave the U.S. ecosystem during the market downturn. Additionally, investors have shifted towards a more discerning approach, prioritizing profitability over rapid growth.
Chiu reports a significant 50% drop in valuations within the industry from the first half of 2022 to the second half of 2022. Since then, valuations of crypto startups have declined an additional 15% in the first half of 2023, amounting to a nearly 70% decrease year-over-year. Consequently, startups that secured funding in January 2022 would face significant challenges in raising capital today without accepting substantial discounts.
Despite the challenging landscape, crypto-native founders and investors remain optimistic. Chiu believes that the downward trend in funding may slow down or be less severe in the third quarter. Lasse Clausen, founding partner at early-stage crypto investing firm 1kx, also notes that although funding appears to be declining, comparing it to the all-time highs is misleading since those figures were not sustainable. He emphasizes that there is still a significant amount of capital being deployed in the crypto industry.