By Alex Thorn & Gabe Parker
Compiled by: TechFlow
introduction
Since March, the price of Bitcoin has been range-bound, while other major cryptocurrencies have failed to reclaim their previous all-time highs, keeping venture activity subdued in 2024. The âdumbbell marketâ refers to Bitcoinâs lead on one side and high activity in meme coins on the other, combined with muted interest from large investors and regular venture funds, makes the crypto venture market generally muted in 2024. However, opportunities remain, especially as experienced managers in the crypto space dominate deal activity. With falling interest rates and a potentially loosening regulatory environment, venture activity is likely to accelerate in the fourth quarter and first quarter of 2025. Our quarterly report analyzes two aspects of venture capitalâinvestment by venture funds in crypto startups and the allocation of capital to venture funds by institutional investorsâbased on research from public filings, data providers such as Pitchbook, and Galaxy Researchâs own VisionTrack fund performance database.
Key Takeaways
In the third quarter of 2024, venture capital investment in crypto startups totaled US$2.4 billion, a 20% decrease from the previous quarter, and a total of 478 transactions were completed, a 17% decrease from the previous quarter.
Venture capitalists have invested $8 billion in crypto startups through the first three quarters, and total investment in 2024 is expected to be the same or slightly higher than in 2023.
Early-stage deals attracted the most funding (85%), while late-stage deals accounted for just 15%, the lowest level since the first quarter of 2020.
The median valuation of venture capital investments increased in Q2 and Q3, with crypto deal valuations growing faster than the venture capital industry as a whole. The median valuation of deals in Q3 2024 was $23.8 million, down slightly from $25 million in Q2.
Layer 1 projects and companies raised the most funds, followed by cryptocurrency exchanges and infrastructure companies, with most deals involving infrastructure, gaming, and DeFi projects and companies.
The United States continues to dominate the crypto venture capital space, with 56% of capital invested and 44% of deals involving U.S.-based companies.
On the fundraising front, investor interest remains subdued, with only eight new funds raising $140 million in the third quarter of 2024.
The median size of crypto VC funds continues to decline, with the median ($40 million) and average ($67 million) of new funds in 2024 being the lowest since we began tracking in 2017.
Venture Capital
Number of transactions and investment capital
In the third quarter of 2024, venture capitalists invested $2.4 billion in startups focused on crypto and blockchain, a 20% decrease from the previous quarter, and completed a total of 478 deals, a 17% decrease from the previous quarter.
2024 is expected to reach or slightly exceed 2023 levels.
Investment Capital and Bitcoin Price
The long-term correlation between Bitcoin price and investment capital in crypto startups has been broken, with Bitcoin rising significantly since January 2023 while venture capital activity has struggled to keep pace. Weak interest among fund allocators in the crypto space and overall venture capital, combined with the market favoring Bitcoin and ignoring many of the hot topics of 2021, could partially explain this disparity.
Investment by stage
In the third quarter of 2024, 85% of venture capital was invested in early-stage companies, while late-stage companies received only 15% of investment. Crypto-focused funds may still have leftover funds from large rounds a few years ago, and because of their close connections with entrepreneurs, they are able to tap into new deal opportunities from the renewed enthusiasm in the crypto market.
In terms of transactions, the share of transactions in the pre-seed stage has slightly decreased, but still remains at a healthy level compared to previous cycles.
Valuation and deal size
Venture capital-backed crypto company valuations fell significantly in 2023, reaching their lowest point since Q4 2020 in the fourth quarter. However, valuations and deal sizes began to recover in the second quarter of 2024 as Bitcoin hit new all-time highs. In the second and third quarters of 2024, valuations reached their highest levels since 2022. The rise in crypto deal sizes and valuations in the second and third quarters is consistent with trends across the venture capital space, but the rebound in crypto has been more significant. The median pre-deal valuation in the third quarter was $23 million, and the average deal size was $3.5 million.
Invest by Category
In the third quarter of 2024, companies and projects in the "Trading/Exchange/Investing/Lending" category received the most crypto venture capital funding, accounting for 18.43% of the total, raising a total of $462.3 million. Among them, Cryptospherex and Figure Markets were the two largest transactions in this category, raising $200 million and $73.3 million respectively.
In the third quarter of 2024, crypto startups focused on building AI services achieved a 5x sequential increase in crypto venture capital funding. Sentient, CeTi and Sahara AI have contributed significantly to venture capital investment in AI crypto projects, raising US$85 million, US$60 million and US$43 million respectively. Venture capital funding for trading/exchanges/investing/lending and Layer 1 crypto projects also grew significantly by 50%. Venture capital funding for Web3/NFT/DAO/Metaverse/game projects decreased by 39%, the largest decrease among all categories.
If we further break down the larger categories, crypto projects building Layer 1 blockchains accounted for the largest amount of crypto venture capital in Q3 2024, reaching 13.6% and totaling $341 million. In the Layer 1 category, Exochain and Story Protocol were the top two deals, raising a total of $183 million, accounting for 54% of the total Layer 1 venture capital funding in the quarter. They were followed by crypto exchanges and infrastructure companies, which raised $265.4 million and $258 million, respectively.
In terms of transaction volume, Web3/NFT/DAO/Metaverse/Games ranked first with 25% of transactions (120 in total), a 30% increase from the previous quarter, of which 48 were game transactions. The largest game transaction in the third quarter of 2024 was Firefly Blockchain raising $50 million in its Series B financing.
Crypto infrastructure projects and companies ranked second in terms of deal count, accounting for 16.5% of total deals (79 deals), up 12% month-over-month. They were followed by projects and companies in trading/exchange/investment/lending products, which ranked third with 11.5% of deals (55 deals). Notably, crypto companies focused on media/education and data businesses saw the largest month-over-month declines in deal count, down 73% and 57%, respectively.
Breaking down the larger categories further, projects and companies building crypto infrastructure saw the most deals of all sectors (64 in total). Gaming and DeFi-related crypto companies followed closely behind, with 48 and 38 deals completed in Q3 2024, respectively.
Investments by stage and category
By breaking down investment capital and deal count by category and stage, we can get a clearer picture of what types of companies are raising money in each category. In Q3 2024, most of the money invested in Layer 1, Enterprise Blockchain, and DeFi went to early-stage companies and projects. In the mining sector, a larger portion of crypto venture capital funding went to later-stage companies.
Analyzing the distribution of investment capital in each category at different stages can reveal the relative maturity of various investment opportunities.
Similar to Q2 2024, a large portion of deals completed in Q3 2024 involved early-stage companies. The total dollar amount of late-stage crypto venture deals across all categories remained unchanged from Q2 2024.
Examining the percentage of deals completed by stage within each category provides insight into the different stages of development within each investable category.
Investment by Geographic Location
In the third quarter of 2024, 43.5% of deals involved companies headquartered in the United States. Singapore came in second with 8.7%, the United Kingdom with 6.8%, the United Arab Emirates with 3.8%, and Switzerland with 3%.
Venture capital investments by US companies accounted for 56% of total investment, up 5% from the previous quarter. The UK accounted for 11%, Singapore accounted for 7%, and Hong Kong accounted for 4%.
Investment by year of incorporation
Companies and projects founded in 2021 received the most investment capital, while companies founded in 2022 completed the most deals.
Venture Capital Fundraising
Fundraising for crypto venture funds remains challenging. The macro environment in 2022 and 2023 and the volatility in the crypto market have caused some investors to no longer be as active in crypto venture capital as they were in 2021 and early 2022. At the beginning of 2024, investors generally expected interest rates to fall sharply during the year, but the rate cuts did not begin to gradually materialize until the second half of the year. Since the third quarter of 2023, the total capital allocated to venture funds has continued to decline, and the number of new funds raised in the third quarter of 2024 was the lowest since the third quarter of 2020.
On an annualized basis, 2024 could be the weakest year for crypto venture capital fundraising since 2020, with just 39 new funds raising $1.95 billion, well below the 2021-2022 boom.
The decline in allocator interest has led to a decline in new crypto VC funds raising smaller funds, with median and average fund sizes in 2024 (as of the third quarter) reaching their lowest levels since 2017.
Summarize
Market sentiment and activity remain well below bull market levels. Although liquid crypto asset markets have recovered significantly since late 2022 and early 2023, venture capital activity remains below previous bull market levels. During the bull markets of 2017 and 2021, venture capital activity was highly correlated with liquid crypto asset prices, but over the past two years, venture capital activity has remained subdued even as the cryptocurrency market has rebounded. There are many reasons for this stagnation, including a "barbell market" where Bitcoin (and its new ETFs) takes center stage while new activity on the fringes comes largely from memecoins that are difficult to fund and have questionable longevity.
Early-stage deals continue to lead the way. Despite the challenges facing venture capital, interest in early-stage deals remains strong, which bodes well for the long-term health of the cryptocurrency ecosystem. While later-stage companies have difficulty raising funds, entrepreneurs are still able to find backers willing to invest in new and innovative ideas. Projects and companies working on building Layer 1, scaling solutions, games, and infrastructure are performing well in a difficult fundraising environment.
Bitcoin ETFs may put pressure on funds and startups. Several high-profile investments in spot Bitcoin ETFs by some U.S. investors (such as pension funds, endowment funds, hedge funds, etc.) indicate that they may prefer to enter the field through these large liquidity tools rather than choosing early-stage venture capital. Although there is little interest in the newly launched spot Ethereum ETF, if demand for other crypto areas such as DeFi and Web3 increases, Ethereum ETFs may also attract some funds that originally flowed to venture capital.
Fund managers continue to face a difficult environment, although some new smaller funds are starting to have some success raising capital. The number of new funds and capital allocated to these funds reached their lowest levels in four years (since Q3 2020) in the third quarter. Late-stage companies are likely to continue to face difficulties as fewer and smaller new funds are launched, and as regular venture investors and capital allocators remain inactive in the market. If U.S. regulations on digital assets loosen significantly after the November 5 presidential election, late-stage companies may consider public markets as an alternative.
The United States continues to dominate the crypto startup ecosystem. Despite facing a complex and often unfriendly regulatory environment, U.S.-based companies and projects account for the majority of transactions and investments. If the United States hopes to remain a center of technological innovation in the long term, policymakers should be aware of the impact their actions or inactions may have on the cryptocurrency and blockchain ecosystem. There may be good news in the future, as former President Donald Trump and current Vice President Kamala Harris have expressed attitudes ranging from extremely supportive to mildly supportive of the industry, respectively.
