Funding for cryptocurrency startups at its lowest point in two years
- ByStartupStory | January 10, 2023
After the demise of the digital asset exchange FTX, cryptocurrency startups are having a difficult time attracting private investors. According to data from research firm PitchBook, venture capital investment in the sector fell to its lowest level in over two years during the fourth quarter of 2022.
According to PitchBook, VC firms made a total investment of $2.3 billion in crypto businesses during the quarter, a 75% decrease from the same time last year. According to Robert Le, a cryptocurrency analyst at the research firm, venture capitalists had already started to scale back their investing activity, but the collapse of FTX in November caused them to do so even more.
Le said in an interview, “Investors are trying to see what’s going to happen next and there isn’t a rush to deploy capital.”
The retreat contrasts with the enthusiasm for cryptocurrencies at the beginning of 2022. While VC firms like Andreessen Horowitz, Haun Ventures, and Electric Capital raised billions of dollars to support cryptocurrency entrepreneurs, FTX had raised $400 million at a $32 billion value in January. According to PitchBook, a record $26.7 billion was invested in blockchain startups last year due to industry enthusiasm, the majority of which came in the first quarter. In comparison to 2021, that figure reflected a modest increase.
The collapse of FTX was undoubtedly the tipping point for some VCs. Alex Thorn, head of firmwide research at cryptocurrency financial services provider Galaxy Digital, claims that setbacks like the bankruptcy of cryptocurrency lender Celsius Network in July had already given them pause. Investors were further alarmed by the failure of the TerraUSD stablecoin and the closure of infamous crypto hedge fund Three Arrows Capital, both of which drove down the value of digital assets.
Particularly if they were exposed to one of the industry’s major blowups, generalist VC firms that dabbled with cryptocurrency while the market was booming are probably more wary about the industry now, according to Thorn.
Smaller funds that are only invested in cryptocurrencies run the possibility of being at risk, even though such organizations can invest in other tech sectors.
“It is hard to see how some of those are going to last,” Thorn said.
The disappearance of FTX, whose investors were condemned for not performing adequate due diligence, is also altering the landscape of crypto ventures. FTX did not have a formal board. Prior to their demise, FTX and Alameda Research, a sister company, were both active venture investors. Le from PitchBook claimed that FTX was known for jumping into projects, issuing huge checks, and interrogating founders in a hasty manner that frequently drove away rival venture capitalists.
“I don’t know how price-disciplined they were,” Le said. “It will be better for other crypto investors because now you can go back to the correct valuations and the correct due diligence process.”
According to David Pakman, managing partner at cryptocurrency VC firm CoinFund, venture capitalists who are still interested in cryptocurrencies are now spending more time performing due diligence. They are lobbying for board seats and demanding more robust investor safeguards. According to him, valuations are also becoming more accurate.
Le from Pitchbook still anticipates a rise in crypto venture capital spending over the summer, not least because many crypto funds are required to use the substantial sums of money they collected during the spike in digital assets.
“It’s not going to remain low forever,” he said.
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