Author: Alex Thorn, Gabe Parker, Galaxy; Translated by: Tao Zhu, Golden Finance
Crypto VC investment rebounds in second quarter
After a strong first quarter for Bitcoin and liquid cryptocurrencies, the market has cooled somewhat 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 still appeared to be slightly weaker than the prevailing sentiment. Founders and investors generally report that the funding environment is more active than in previous quarters.
The number of deals fell slightly quarter-over-quarter, from 603 in Q1 to 577 in Q2, while investment capital increased from $2.5 billion in Q1 to $3.2 billion in Q2. The median deal size increased slightly from $3 million to $3.2 million, but the median pre-money valuation surged to an almost all-time high, from $19 million to $37 million. This suggests that the recovery in the cryptocurrency market over the past few quarters is leading to intense competition and fear of missing out (FOMO) among investors, despite the lack of available investment capital compared to previous peaks.
Number of transactions and investment capital
In Q2 2024, venture capitalists invested $3,194 billion (up 28% QoQ) in cryptocurrency and blockchain-focused companies across 577 deals (-4% QoQ).
Investment Capital and Bitcoin Price
A multi-year correlation between Bitcoin prices and investment capital in crypto startups has broken down, with Bitcoin rising sharply since January 2023 while venture capital activity struggles to keep pace. While BTC has increased significantly year-to-date, investment capital has increased but is still well below the levels seen in 2021-2022 when BTC last traded above $60,000. Cryptocurrency-native catalysts such as Bitcoin ETFs and emerging areas such as staking, modularity, Bitcoin L2, and pressure from crypto startup bankruptcies and regulatory challenges, coupled with macroeconomic headwinds (interest rates), have led to this apparent The differences. Allocators may be preparing to return in earnest due to the resurgence of liquid cryptocurrencies, which could lead to increased venture capital activity in the second half of the year.
Phased venture capital
In the second quarter of 2024, 78% of funding was allocated to early-stage companies and 20% to later-stage companies. While activity is ongoing among early-stage crypto-focused venture funds, which still have funding in 2021 and 2022, larger generalist VCs have exited the industry or significantly reduced their activity, making it more difficult for later-stage startups to raise funding.
On the deal side, the share of pre-seed deals declined slightly but remains higher than in previous market cycles.
Valuation and deal size
Venture capital-backed cryptocurrency company valuations fell sharply in 2023, reaching the lowest median pre-money valuation since Q4 2020 in the fourth quarter. However, valuation rebounded slightly in Q1 2024 before surging to $37 million in Q2 (up 94% QoQ), reaching its highest level since Q4 2021. Note that delayed 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-end, so the data we provide is always subject to revision, although there is still a signal in this spike. Median deal size increased slightly sequentially (+7%) to $3.2 million, but has remained essentially flat over the past five quarters. The rise in valuation sentiment stems from improvements; while there has been no significant increase in investment capital, founders have taken advantage of interest and competition among the existing investor base.
Investment Type
Companies and projects in the “Web3/NFT/DAO/Metaverse/Gaming” category raised the largest share of cryptocurrency VC funding (24%) in Q2 2024, with a total of $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, Trading, and Layer 1 companies followed closely behind with 15%, 12%, and 12% of invested capital, respectively. Notably, the market share of capital invested in the Layer 1 category grew more than 6x, thanks to Monad and Berachain deals raising $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 deal count, Web3 leads with 19% due to an increase in decentralized social media and gaming-related deals. Despite a decrease in restaking-related crypto startups raised in Q2 2024, the infrastructure category ranked second in deal count, accounting for 15% of deals in the quarter.
Trading and DeFi-related cryptocurrency companies followed closely behind, accounting for 11% and 9% of all transactions completed in Q2 2024, respectively.
Investments by stage and category
Breaking down investment capital and deal count by category and stage provides a clearer picture of what types of companies are raising funding in each category. The vast majority of capital in the Web3, Layer 1, and Infrastructure categories went to early-stage companies and projects. Venture funding for companies in the Deals category went to more later stages in Q2 2024.
Examining the share of capital invested by stage in each category provides insight into the maturity of each investable category.
Deal counts tell a similar story. A large portion of deals completed in essentially all categories involved early-stage companies and projects.
Examining the share of deals completed by stage within each category provides insight into the various stages of each investable category.
Investment by Geography
More than 40% of deals in the second quarter of 2024 involved companies headquartered in the United States. The United Kingdom accounted for 10%, Singapore for 8.7%, the United Arab Emirates for 3.13%, and Hong Kong 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 4.6%, and the United Arab Emirates 4.39%.
Fundraising term preference
The vast majority of deals and funds raised in Q2 2024 involved companies founded between 2021 and 2023.
Summarize
Cryptocurrency venture capital sentiment continues to improve, but levels remain significantly below the 2021-2022 bull run. With BTC and ETH up around 50% year-to-date, invested capital is up 28% month-on-month, while transaction volume is essentially flat. If this pace is maintained until the end of the year, 2024 will rank third in terms of invested capital and number of deals, behind 2021 and 2022.
Web3 and Layer 1 have received significant investment. The Web3 category led the way, raising around $750 million, driven by Farcaster ($150 million) and Zentry ($140 million). Layer1 ranks fourth with $371 million, led by Monad ($225 million) and Berachain ($100 million) transactions.
The median valuation surged to its highest level since Q4 2021 (the peak of the last bull run). While generalist VCs have mostly remained on the sidelines due to the challenges and macroeconomic headwinds in 2022, crypto-focused VCs find themselves in a more competitive environment, giving founders more leverage in negotiations. Note that this median is based on available data as of July 1 and may be updated as more information about Q2 deals is reported, which could adjust the median downward.
Bitcoin L2 continues to receive a lot of investment. Bitcoin Layer 2 companies and projects raised $94.6 million, up 174% month-over-month. Investors remain excited because more composable blockspaces will emerge in the Bitcoin ecosystem, attracting models such as DeFi and NFTs to return to the Bitcoin ecosystem. Our internal research shows that at least 65 projects position themselves as "Bitcoin Layer 2".
Early-stage deals led the way in the first quarter. Early-stage deals accounted for nearly 80% of invested 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 difficulty raising funding, entrepreneurs are willing to find investors for new and innovative ideas.
The United States continues to dominate the cryptocurrency startup ecosystem. While the U.S. maintains a clear lead in transactions and capital, regulatory headwinds could force more companies to move overseas. Policymakers should be aware of how their actions or inactions could impact the cryptocurrency and blockchain ecosystem if the U.S. remains a hub for technological and financial innovation in the long term.