Venture Capital Continues to Struggle with Crypto Turmoil – Reuters

By Lisa Pauline Mattackal and Medha Singh

The impact of bitcoin’s tumultuous journey in 2022 continues to resonate deeply among venture capitalists. Despite a resurgence in bitcoin’s value, which has seen an increase of about 55% in 2023, investments in cryptocurrency startups have declined for five consecutive quarters.

Recent data indicates that venture capital funding for crypto-related companies amounted to just under $2.3 billion from April to July this year, marking the lowest quarterly level in over three years. Overall, investments during the first half of 2023 fell nearly 75% compared to the previous year, totaling $5 billion.

"The days of inflated valuations are behind us," remarked Tal Elyashiv, founder and managing partner of SPiCE VC. He noted that valuations of crypto companies have now realigned more closely with their actual performance.

The cryptocurrency market remains haunted by the chaos of last year, which was characterized by the collapse of the FTX exchange and other significant players like hedge fund Three Arrows Capital, leaving a lasting impact on investor confidence.

Additionally, scrutiny from U.S. regulatory bodies has increased for the industry. Cameron Peake, a partner at Restive Ventures, commented, "The biggest shift since the market’s peak is the extended time taken for thorough due diligence. Funds are currently more systematic in their evaluations, leading to longer deal closures."

By mid-2023, the number of deals finalized had dropped to 814, down from 1,862 during the same timeframe in 2022, according to PitchBook data.

"Most companies in the sector tightened their operations in response to the turmoil of 2022. Those currently seeking capital are likely doing so out of necessity," stated Adam Reeds, CEO of Toronto-based crypto finance firm Ledn. He expressed belief that the future could shift from essential fundraising to opportunities that are "nice to have."

If bitcoin’s performance is a reliable indicator, the current investment downturn may be short-lived. Historical trends show that venture capital investment in crypto tends to follow the price movements of crypto assets with a lag of approximately three to six months. If this trend continues, increased VC investment may be on the horizon for the latter half of 2023.

After plummeting 65% last year, bitcoin has rebounded by over 90% in the first half of 2023, currently up about 55% year-to-date at approximately $25,881. However, this price still represents only a third of its peak value of $69,000 in 2021.

Focus Shift in VC Investments

There has also been a noticeable shift in the types of companies attracting VC investments. Last year saw a strong focus on speculative non-fungible tokens, alongside metaverse and Web3 projects aimed at reimagining the internet with crypto integration.

Currently, investment has pivoted toward firms that provide foundational platforms or support the underlying technology of blockchain and cryptocurrencies. Infrastructure firms, including crypto exchanges and wallets, emerged as the leading targets for investment in 2023, garnering approximately $325 million, followed by blockchain networks attracting $220 million and Web3 companies receiving about $274.6 million.

In the second quarter, the only two funding rounds exceeding $100 million were secured by LayerZero, which connects two blockchains, and WorldCoin, a digital identity platform.

Alyse Killeen, founder and managing partner of Stillmark, a bitcoin-focused venture firm, observed, "Institutional investors are increasingly seeking durable investments. There seems to be a decline in appetite for high-risk ventures and a growing interest in sustainable technology."