Crypto-focused venture capital firms are struggling to raise funds despite the bullish crypto markets, according to the latest report from Galaxy Digital Research. The report, which examines crypto VC fundraising and the number of new funds, shows that there were only eight new funds in Q3 of 2024, and they raised a combined $140 million, the lowest since Q3 of 2020.
According to the report, the decline in capital allocation to crypto VC continues a trend that started in Q3 of 2023. Since then, the allocation has been falling quarter on quarter (QoQ) to its current level. The report attributed this to events in 2022 and 2023, which caused many investors to withdraw from the crypto sector.
It said:
“The macro environment and turmoil in the crypto market from 2022 and 2023 has combined to dissuade some allocators from making the same level of commitments to crypto venture investors that they did in 2021 and early 2022.”
With the continuous decline in capital allocation, this could become the worst year for crypto VC in terms of fundraising since 2020. So far, 39 new funds have raised just $1.91 billion, and most of the VCs have raised smaller capital. The average and median fund sizes in 2024 are the lowest since 2017.
VC investments into crypto companies fall 20% in Q3 2024
Meanwhile, just as fewer new VC funds focus on crypto, existing VCs have also pulled back on their crypto investments. In the third quarter of 2024, VCs invested only $2.4 billion into blockchain and crypto startups across 478 deals. This represents a 20% QoQ decline in value and a 17% fall in the number of deals.
VC crypto deals fell in Q3 (Source: Galaxy Research)
As the report noted, a continuation of this trend could see 2024 end at the same level or slightly lower than 2023 regarding VC investing in crypto. Already, this year has marked a sharp departure from the correlation between Bitcoin performance and investment in crypto startups.
This is due to multiple factors, including Bitcoin now enjoying most of the attention, thanks to the spot exchange-traded funds (ETFs) that have fueled this current bull run. Besides BTC, memecoin has also been responsible for most of the on-chain activity, forcing many traditional VCs to shift attention away from crypto.
“Weak allocator interest in crypto venture, and venture broadly, combined with market narratives that favor Bitcoin and have left out many of the hot narratives from 2021 can partially explain the divergence.”
Still, crypto-focused VCs are pouring money into the industry, even if not at previous levels. Most investments (85%) were in early-stage companies, while the rest were in more established companies. However, the VC pullback from crypto startups is also understandable, given how the valuation of these deals plummeted. The positive news is that valuation is starting to rebound, with the average deal size by Q3 of 2024 now at $3.5 million and the median pre-money valuation at $23 million, the highest level since 2022.
DeFi, Layer-1 networks, and AI categories attracting the most VC investment
Despite the VCs’ fund allocation falling in Q3, distribution was uneven. Most VC fundraising currently favors startups in the decentralized finance sector, which are projects focused on lending, trading, exchanges, and investing.
Companies in these sectors raised $462.3 million (18.43%) of all VC fundraising in Q3 of 2024. Other top-performing sectors include the Layer-1 sector, with over $400 million, and the Web3/NFT/Gaming/DAO sector, with over $350.
However, the Web3 sector saw a 39% decline in its VC funding this quarter, compared to the DeFi sector, which saw a 50% increase. Nevertheless, the AI-focused crypto projects saw the most increase in VC funding, with a 500% rise that led to over $250 million in fundraising. This proves that VCs are hot for artificial intelligence, even in the crypto industry.
Interestingly, crypto startups based in the US saw the most funding from VCs, as 44% of the deals had recipients in the US. This happened despite the country’s lack of regulatory clarity, but it does not come as a total shock given that 55% of the capital investments were also from US-based VCs.
