Funding for crypto startups continues to grow more scarce. Venture capital flowing into the industry dropped for the fifth consecutive quarter since Q1 2022 to $2.34 billion globally as investors withhold their checkbooks, fearing risks from a severe regulatory stance and an uncertain economy.
The second quarter’s $2.34 billion tally was raised across 382 deals, according to PitchBook data, but it’s a stark decline from the $12.14 billion peak the industry hit in the first quarter of 2022. The biggest raises during Q2 2023 were LayerZero’s $120 million Series B round and Worldcoin’s $115 million Series C round.
“It’s a numbers game,” said Lydia Chiu, VP of business development at Ava Labs. In general, investors are seeing lower valuations, so they’re writing “smaller checks,” she told TechCrunch+.
This decline in capital deployment could be attributed to regulatory headwinds in the U.S., which have inclined a lot of crypto-related deal flows in Q2 to be structured like traditional venture structures, like raising equity, opposed to token investments or simple agreement for future tokens (SAFTs), Chiu said.
Regulations have certainly stifled optimism around the industry, but there are also a number of other factors at play. A handful of popular crypto companies filed for Chapter 11 bankruptcy protection last year, squelching confidence in the industry, and a few traditional firms and entrepreneurs left the U.S. ecosystem altogether when the market turned. It also didn’t help when investors suddenly adopted a much more discerning approach that valued profits over growth.
According to Chiu, valuations in the industry dropped a stark 50% from the first half of 2022 to the second half of 2022. Since then, crypto startups’ valuations have dropped an additional 15% to the first half of 2023, totaling almost 70% year over year.
That’s a severe decline — startups that raised money in January 2022, for example, would be hard pressed to raise capital again today without taking a steep discount on their price tags.
But it’s not all doom and gloom, and crypto-native founders and investors are not yet giving up hope. “That trend is not necessarily going to reverse, but it may slow down in Q3 or be less severe,” Chiu said.
Indeed, there’s still “a lot of money being deployed,” said Lasse Clausen, founding partner at early-stage crypto investing firm 1kx. “[Funding] looks like it’s down, and it absolutely is, but comparing it to all time highs, those didn’t even make any sense.”