By Alex Thorn & Gabe Parker
Compiled by: TechFlow
introduction
After a strong first quarter for Bitcoin and other liquid cryptocurrencies, the market has cooled slightly but is still up significantly year over year. The crypto venture capital market rally observed in the first quarter appears to be continuing. However, as of July 1, the data was still slightly below consensus expectations. Founders and investors generally report that the fundraising environment is more active than in previous quarters.
The number of deals declined slightly quarter-over-quarter, from 603 in the first quarter to 577 in the second quarter, while investment capital rose from $2.5 billion in the first quarter to $3.2 billion in the second quarter. The median deal size increased slightly, from $3 million to $3.2 million, but the median estimate surged significantly to near all-time highs, rising from $19 million to $37 million. This suggests that the crypto market’s recovery over the past few quarters has resulted in significant competition and “fear of missing out” (FOMO) among investors, despite less investment capital available compared to previous peaks.
Number of transactions and investment capital
In Q2 2024, VCs invested $3.194 billion (up 28% QoQ) in crypto and blockchain-focused companies across 577 deals (down 4% QoQ).
Investment Capital and Bitcoin Price
The multi-year correlation between Bitcoin price and investment capital in crypto startups has broken down, with Bitcoin rising significantly since January 2023 while venture capital activity struggles to keep pace. Although Bitcoin has risen significantly since the beginning of the year, investment capital has increased, but it is still well below the levels when Bitcoin was trading above $60,000 in 2021-2022. Crypto-native catalysts such as Bitcoin ETFs and emerging areas such as re-hypothecation, modularity, Bitcoin L2, coupled with the pressure of crypto startup bankruptcies and regulatory challenges, as well as macroeconomic headwinds (interest rates), have contributed to this significant divergence . Investors may be preparing to return in earnest due to the resurgence of liquid cryptocurrencies, which could lead to an increase in venture capital activity in the second half of the year.
Venture Capital by Stage
In Q2 2024, 78% of capital was allocated to early-stage companies, while 20% was allocated to later-stage companies. While crypto-focused early-stage venture funds still have funding for 2021 and 2022, larger general-purpose venture capital firms have exited the space or significantly reduced activity, making it harder for later-stage startups to raise capital.
In terms of deals, the share of seed-stage deals has declined slightly but remains higher than in previous market cycles.
Valuation and deal size
Venture capital-backed crypto company valuations fell significantly in 2023, reaching the lowest median estimate in the fourth quarter since the fourth quarter of 2020. However, valuations recovered in Q1 2024 and surged to $37 million in Q2 (up 94% QoQ), reaching their highest level since Q4 2021. It's important to note that late reporting and a lack of detailed public valuation data could cause these numbers to fluctuate significantly as more data becomes available. We strive to provide this information in a timely manner after the quarter ends, so the data we provide is always subject to revision, although the spike is still signaling. Median deal size increased slightly sequentially (+7%) to $3.2 million, but has remained essentially flat over the past five quarters. The increase in valuation stems from improving market sentiment; although there has been no significant increase in investment capital, the founders have capitalized on interest and competition among the existing investor base.
Investments by Category
In Q2 2024, companies and projects in the “Web3/NFT/DAO/Metaverse/Gaming” category raised the largest share of crypto VC funding, accounting for 24% and totaling $758 million in VC funding. The two largest deals in this category were Farcaster and Zentry, which raised $150 million and $140 million, respectively.
Infrastructure, Exchanges, and Layer 1 companies received 15%, 12%, and 12% of capital investment, respectively. Notably, the Layer 1 category increased its capital investment market share by more than 6x, thanks to deals by Monad and Berachain, which raised $225 million and $100 million, respectively. Bitcoin L2 raised $94.6 million in Q2 2024, up 174% QoQ ($34.7 million in Q1 2024).
Number of transactions by category
In terms of transaction volume, Web3 leads with 19%, driven by an increase in decentralized social media and gaming-related transactions. Despite a decrease in the number of restaking-related crypto startups in Q2 2024, the Infrastructure category ranked second in terms of transaction volume this quarter, accounting for 15%.
Trading and DeFi-related crypto companies follow closely with 11% and 9% of trading volume, respectively, completing the second quarter of 2024.
Investments by stage and category
The breakdown of capital investment and deal count by category and stage provides a clearer picture of the types of companies raising funding in each category. In the Web3, Layer 1, and Infrastructure categories, the vast majority of funding went to early-stage companies and projects. In Q2 2024, venture funding for companies in the Deals category was more concentrated in later-stage rounds.
Analyzing the share of capital investment by stage for each category provides insight into the maturity of each investment category.
The number of deals shows a similar trend, with the majority of deals completed in virtually all categories involving early-stage companies and projects.
Analyzing the share of deals by stage for each category provides insight into the different stages of development for each investment category.
Investment by Geography
In the second quarter of 2024, more than 40% of deals involved companies headquartered in the United States. The United Kingdom accounted for 10%, Singapore accounted for 8.7%, the United Arab Emirates accounted for 3.13%, and Hong Kong accounted for 2.78%.
Companies headquartered in the United States attracted 53% of all VC capital, up 23.5% month-on-month. The United Kingdom accounted for 12.78%, Singapore accounted for 4.6%, and the United Arab Emirates accounted for 4.39%.
Investments by year of inception
The vast majority of deals and capital raised in the second quarter of 2024 involved companies founded between 2021 and 2023.
Key Takeaways
Despite the improvement in crypto venture investment sentiment, it is still well below the bull run levels of 2021-2022. With BTC and ETH up about 50% year-to-date, investment capital is up 28% month-over-month, while deal count is roughly flat. If this trend continues through the end of the year, 2024 would rank third highest in both investment capital and deal count after 2021 and 2022.
Web3 and Layer 1s received significant investment. The Web3 category leads with approximately $750 million in funding, driven by Farcaster ($150 million) and Zentry ($140 million). Layer 1s ranked fourth with $371 million in funding, led by deals by Monad ($225 million) and Berachain ($100 million).
The median valuation surged significantly, reaching its highest level since the fourth quarter of 2021, the peak of the previous bull market. With regular VCs still mostly on the sidelines due to challenges and macroeconomic headwinds in 2022, crypto-focused VCs find themselves in a more competitive environment, giving founders more leverage when negotiating terms. lever. Note that this median is based on available data as of July 1 and may be updated as more information about second-quarter transactions is reported, potentially adjusting the median downward.
Bitcoin L2s continue to receive significant investment. Bitcoin Layer 2 companies and projects raised $94.6 million, a 174% month-on-month increase. Investor excitement remains high about the emergence of more composable block space in the Bitcoin ecosystem, which will attract DeFi and NFT models back to the Bitcoin ecosystem. Our internal research shows that there are at least 65 projects calling themselves “Bitcoin Layer 2s”.
Early-stage deals led the way in Q1. Early-stage deals attracted nearly 80% of investment capital, with pre-seed deals accounting for 13% of all deals. Continued interest in early-stage deals bodes well for the long-term health of the broader cryptocurrency ecosystem. While some late-stage companies have had trouble raising capital, entrepreneurs are finding willing investors for new, innovative ideas.
The United States continues to dominate the crypto startup ecosystem. While the U.S. maintains a clear lead in dealmaking and capital, regulatory headwinds could force more companies to relocate abroad. If the U.S. hopes to remain a hub for technological and financial innovation in the long term, policymakers should be aware of how their actions or inactions could impact the cryptocurrency and blockchain ecosystem.
