This article will describe the evolution of venture capital dynamics in blockchain-related entities over the past 15 years, focusing on the shift in some companies toward liquid investments, where VCs do not acquire equity but instead acquire tokens with a vesting schedule.

In addition, famous investment institutions like a16z will be listed as making their first investments in the crypto space, such as their investment in OpenCoin (later Ripple Labs) in April 2013.

In the early days of Bitcoin, from 2009 to 2012, VCs had little interest in the crypto space, so this article will start the analysis from 2012. It is also worth noting that the long-term correlation between Bitcoin price and funding amount does not disappear until 2023.

2009-2018: Bitcoin’s first decade and VCs start investing in blockchain

The venture capital landscape for Bitcoin and crypto projects began to take shape in the early 2010s, with Union Square Ventures (USV) led by Fred Wilson and Andreessen Horowitz (a16z) being among the first companies to invest in blockchain projects, with both firms investing in Coinbase in 2013.

Founded in 2012 by Meyer “Micky” Malka, Ribbit Capital focuses on disruptive financial technologies and was an early investor in Bitcoin-related companies such as Coinbase.

Boost VC was founded by Adam Draper in 2012 as an accelerator and venture capital fund for emerging technologies, including bitcoin and blockchain startups; Lightspeed Venture Partners invested in Blockchain.info (now Blockchain.com) in 2013.

Other notable early funds include Bitcoin Opportunity Corp, founded by Barry Silbert in 2013, and Pantera Capital, which shifted its focus to bitcoin and blockchain in 2013.

Blockchain Capital was founded in 2013 by Bart Stephens, Brad Stephens and Brock Pierce as one of the first firms focused exclusively on blockchain and cryptocurrency investments.

2012

Bitcoin startups received just $2.1 million in investment.

year 2013

Key milestones include:

• Coinbase: With the largest single round of funding, backed by Andreessen Horowitz, Union Square Ventures, and Ribbit Capital, Coinbase is now a public company and a key player in the Bitcoin space;

• BTCChina: China’s largest and earliest Bitcoin exchange, which received $5 million in funding from Lightspeed China. Although this investment ultimately failed, it is still an important part of China’s early crypto history.

• Circle Internet Financial: Circle started out as a Bitcoin application company that raised $9 million from Breyer Capital and Accel Capital. Jeremy Allaire’s goal was to promote the use of Bitcoin, similar to Skype or email. Circle later became famous for issuing USDC in 2018.

Investments and major breakthroughs:

Total venture capital in 2013: $88 million, a significant increase from the previous year.

Major breakthroughs in 2013:

• In November, the price of Bitcoin surpassed the $1,000 mark for the first time;

• The first Bitcoin ATM was launched at Waves Coffee Shop in Vancouver;

• Bitcoin's mining power soared from 20 Th/s to 9,000 Th/s.

Year 2014

In June 2014, the blockchain industry's financing exceeded the total amount for the whole of 2013, reaching US$314 million, a 3.3-fold increase from US$93.8 million in 2013.

500 Startups became the most active investor, backing Bitcoin application companies along with Boost VC, Plug and Play Technology Center, and CrossCoin Ventures. 500 Startups initially focused on the crypto industry and later shifted to early-stage investments.

Significant investments in Bitcoin applications include:

• Blockchain: $30.5 million

• BitPay: $30 million

• Blockstream: 21 million USD

• Bitfury: $20 million

Bitcoin payment platform BitPay has raised $30 million in a round led by Index Ventures, with participation from AME Cloud Ventures, Horizons Ventures, and Felicis Ventures.

Blockstream focuses on the Lightning Network, a major innovation in Bitcoin payments, and has developed the c-lightning client and the Bitcoin sidechain Liquid.

OKcoin (now OKX) received $10 million in financing from investors including Ceyuan Capital, Mandra Capital and venturelab. It is worth noting that Ceyuan’s co-founder Feng Bo founded Dragonfly Capital in 2018, which launched a large number of crypto funds in the following years.

Overall, 2014 saw steady growth in crypto venture capital investment.

2015

Although the price of Bitcoin fell from its 2013 peak in 2015, blockchain technology attracted more and more capital and entrepreneurial interest, with total financing for Bitcoin startups reaching US$380 million.

The main financing includes:

• Coinbase: $75 million Series C funding

• Circle: $50 million Series C funding

• BitFury: $20 million Series B funding

• Chain: $30 million in Series B funding, including strategic investors such as Visa and Nasdaq

Ripple Labs (formerly OpenCoin) raised $28 million in a Series A round, while 21 Inc. received $116 million from a16z, Qualcomm, Cisco, and PayPal.

Canada’s OMERS Ventures announced plans to invest in blockchain, showing growing institutional interest, with notable active VCs including a16z, Union Square Ventures, Ribbit Capital, Boost VC, and DCG.

Investment activity in 2015 highlighted that participation in capital markets continues despite the bear market.

2016

Venture capital investment in the crypto market has declined as fintech investment has declined, with funding activity for Bitcoin and blockchain startups down 27% from 2015 and back to 2014 levels, according to CB Insights data.

Despite the drop in investment activity, total funding reached $550 million, primarily in more mature companies, with notable fundings including:

• Circle: $60 million Series D funding

• Digital Asset Holdings: $60 million Series A

• Ripple: $55 million Series B funding

• Blockstream: $55 million Series A

Circle’s pivot from bitcoin trading services to remittance and payment services paves the way for its stablecoin, and Polychain Capital, founded by former Coinbase employee Carlson-Wee, raised $750 million for its third venture fund with backing from a16z, Union Square Ventures, and Sequoia Capital.

In 2016, ICO-based project financing began to grow, with The DAO raising $150 million, marking the beginning of the ICO boom.

2017

Liquid Investments:

The venture capital landscape for liquidity investing began to take shape around 2017-2018, driven by the ICO boom and interest in tokenized assets.

Pioneering funds such as Polychain Capital, founded in 2016 by Olaf Carlson-Wee, and MetaStable Capital, co-founded by Naval Ravikant, focus on tokens rather than equity.

Pantera Capital launched its ICO Fund in 2017, targeting ICOs and token projects, while Blockchain Capital launched the BCAP token, a security token representing shares of its fund.

Multicoin Capital, founded in 2017 by Kyle Samani and Tushar Jain, and 1confirmation, led by former Coinbase employee Nick Tomaino, have also emphasized token investments.

Amentum Investment Management joined in 2017 and focuses on long-term capital appreciation through blockchain and token economy investments. These funds recognize the potential of tokenized assets and move away from traditional equity models to liquid token strategies.

In 2017, the blockchain industry experienced a period of enthusiasm and regulation. The Ethereum ERC-20 protocol triggered an ICO boom, but regulation caused the crypto industry to enter a long bear market.

ICO and VC performance:

• Q1 2017: 19 ICOs raised $21 million;

• Q4 2017: Over 500 ICOs raised nearly $3 billion;

• In 2017 as a whole: ICOs raised $5 billion across nearly 800 projects, 5 times more than the $1 billion in VC investments across 215 deals.

ICO projects worth noting:

• Filecoin: $257 million

• Tezos: $232 million

• Bancor: $152.3 million

• Polkadot: $140 million

• Quoine: $105 million

Institutions such as Union Square Ventures and Blockchain Capital also participated in ICOs, attracted by the quick returns.

Geographical distribution:

• EU: 40% of ICOs, $1.76 billion raised;

• North America: US$1.076 billion in financing.

After the regulatory policies were introduced, Chinese venture capital firms moved to regions such as Hong Kong and Singapore, and the ICO bubble burst due to regulatory pressure and unsustainable business models.

2018

ICO activity continued into 2018, with over 400 projects raising $3.3 billion in the first quarter, and CoinSchedule reported that there were 1,253 ICO projects worldwide in 2018, raising $7.8 billion.

The largest ICO projects:

• EOS: raised over $4 billion;

• Telegram: raised $1.7 billion in two rounds, but the project was later abandoned;

• Petro: Venezuelan government raised $740 million, but ultimately failed;

• Basis: Raised $130 million, though the project later ran into trouble.

VC Equity Financing:

• Bitmain: $400 million in Series B financing, invested by Sequoia Capital, and $1 billion in Pre-IPO financing, invested by Tencent, SoftBank and CICC;

• Total venture capital: $4.26 billion.

Main progress:

• Coinbase launches Coinbase Ventures;

• Paradigm was founded by Coinbase co-founders Fred Ehrsam and Matt Huang;

• a16z raised $300 million for its crypto fund, investing in projects like CryptoKitties and DFINITY;

• Fidelity launches institutional cryptocurrency platform.

In 2018, a variety of “blockchain+” applications emerged, many of which are still in the conceptual stage, laying the foundation for future innovation.

• Total sample (N=316): 14.9% - Of the 316 ICOs analyzed, 14.9% received VC backing before launching, meaning that about one in seven ICOs received VC backing before the token sale;

• Underfunded (did not reach minimum funding target) (N=43): 0.0% - All underfunded ICOs had no VC backing, suggesting a possible link between lack of VC backing and failure to reach minimum funding targets;

• Well-funded (reached minimum funding goal) (N=89): 9.7% - Of the well-funded ICOs, 9.7% had VC backing, indicating that nearly one in ten successful ICOs had VC backing;

• Mean Difference (Average Funding Goal - Minimum Funding Goal): 9.7% - A significantly higher proportion of well-funded ICOs are VC-backed compared to under-funded ICOs, highlighting the positive impact of VC backing on funding success.

2019: The post-ICO boom

In 2019, the blockchain deal environment stabilized after a surge in 2018, with 622 deals totaling $2.75 billion, up from 322 deals totaling $1.28 billion in 2017.

Blockchain’s share of VC deals rose to 2.8% from 1.5% in 2017, while seed and early-stage blockchain deals rose to 3.6% from 1.8%. The median valuation of early-stage blockchain deals was $12.5 million, 22% lower than the median of all investments of $16 million.

The focus of blockchain deals has changed, with 68% of investments in 2019 being categorized as fintech, down from 76% in 2017, indicating a wider range of applications beyond “cryptocurrency”. North America accounted for 45.3% of blockchain deals, and Asia accounted for 26.8%, reflecting a wider global distribution.

In 2019, blockchain accounted for 2.8% of global startup investment and 1.1% of total capital, compared to 3.6% and 2.7% respectively in 2018. The median deal valuation fell from $16.6 million in 2018 to $13 million in 2019. Notable non-crypto blockchain companies include Securitize, Figure, PeerNova, and Spring Labs.

CB Insights reported that there were 806 blockchain investment deals worldwide in 2019, compared to 822 in 2018, with investment volume falling 27.9% to $4.26 billion.

Zeroone Finance believes that Digital Currency Group was the most active blockchain investor in 2019, with 14 investments, followed by Collins Capital, Coinbase Ventures, and Fenbushi Capital.

In 2019, investment institutions focused on digital currency exchanges, games, digital wallets, digital asset management, smart contracts and DeFi. Animoca Brands, a Hong Kong mobile game developer listed on the Australian Stock Exchange, has occupied an important position in the blockchain game field. FTX was established with the strong support of Alameda Research.

In 2019, global blockchain investment enthusiasm dropped significantly, traditional institutions became more cautious, and the performance of investment institutions in the bear market demonstrated their rigorous attitude.

2020-2021: Funding grows and surges again

In 2020, driven by the potential for high returns, blockchain venture capital became an important part of the global private equity market, with 942 venture capitalists investing in more than 2,700 transactions involving blockchain startups since 2012, and top blockchain VC funds consistently outperforming traditional VC funds and the broader technology industry.

Despite its importance, blockchain private equity accounts for less than 1% of the global venture capital market, having reached about 2% during the 2017 crypto bull run.

Overall, blockchain VCs have shown resilience and performed well during market downturns, and their high return potential and diversification benefits make them an attractive option for investors.

In 2020, DeFi began to attract widespread attention. According to PAData data from PANews, the total investment and financing amount in the crypto industry was approximately US$3.566 billion, which is comparable to the figure in 2019.

DeFi projects received $278 million, accounting for 7.8% of the total. Although the amount is relatively small, DeFi has the largest amount of financing. Among the 407 disclosed projects, more than a quarter are related to DeFi, which shows that people are increasingly interested in this new type of crypto-native projects.

Prominent DeFi applications attracted a lot of investment in 2020, with Uniswap completing an $11 million Series A round, 1inch receiving $2.8 million in seed funding, and lending platform Aave raising $25 million in Series A funding.

Throughout the year, DeFi locked assets grew by nearly 2,100% and the number of unique addresses grew 10-fold. While these numbers may not seem large compared to future data, the “Summer of DeFi” marked an important turning point.

It is worth noting that native blockchain VC institutions have shown a preference for industry application projects (especially DeFi), adopting a more aggressive and riskier approach, and the investment strategies of each institution vary.

PAData reported that more than 700 institutions and individuals invested in blockchain projects in 2020, with NGC Ventures being the most active investor, followed by Coinbase Ventures and Alameda Research.

2021

With the advancement of blockchain technology, global VC institutions have increasingly recognized the importance of blockchain, especially with the emergence of concepts such as Metaverse and Web3. In 2021, blockchain start-ups received approximately US$33 billion in financing, the highest year ever. According to PwC data, the average financing amount for projects in the crypto industry in 2021 reached US$26.3 million.

The number of blockchain venture capital deals also hit an all-time high in 2021, with more than 2,000 deals, double the number in 2020, and the frequency of late-stage financing increased, resulting in 65 startups with valuations of $1 billion or more, reflecting the crypto market's transformation from a niche market to a mainstream market.

Galaxy statistics show that there are nearly 500 blockchain VC institutions in the world in 2021, and the number and scale of funds have reached historical highs. Major institutions such as Morgan Stanley, Tiger Global, Sequoia Capital, Samsung and Goldman Sachs have entered the blockchain market through late-stage equity investments, bringing sufficient funds to the market.

In 2021, the crypto space experienced a massive influx of new users and investments, with nearly half of users in major crypto regions starting to invest in 2021, according to Gemini data.

Percentage of new users:

• Latin America 46%

• Asia Pacific accounts for 45%

• Europe accounts for 40%

• The United States accounts for 44%

This influx has created a solid user base for the growth and development of crypto applications.

Major investments:

In July 2021, FTX announced the completion of a $900 million Series B financing round at a valuation of $18 billion. This is the largest private equity financing in the history of crypto. This round of financing involved 60 investment institutions, including SoftBank Group, Sequoia Capital, Lightspeed Venture Capital, etc.

Active Investors:

Coinbase Ventures is the most active blockchain investment institution in 2021. After its listing in the United States in April, the institution has invested in 68 blockchain startups. Before its listing, Coinbase raised nearly US$547 million in 13 rounds of financing.

Other notable investors include: AU21 Capital (based in China), which invested in 51 companies, and a16z, which invested in 48 companies.

Venture Capital:

In the fourth quarter of 2021, investments exceeded $10.5 billion, bringing the total venture capital investment in the cryptocurrency and blockchain sectors to an all-time high of $33.8 billion, accounting for 4.7% of the total venture capital investment that year. This year also saw the highest number of transactions, totaling 2018, almost double that of 2020 and exceeding the previous record of 1,698 in 2019.

Of the $33.8 billion in VC investment in the cryptocurrency and blockchain startup ecosystem, the largest portion went to companies that provide trading, investment, exchange, and lending services, receiving more than $13.8 billion (41.83%), and more and more VCs invested in Web3 companies, including those developing NFT, DAO, and metaverse tools, infrastructure, and games, accounting for 17% of total investment.

2022 and 2023: VC investment drops sharply

2022

Investment Overview:

• VCs invested over $30 billion in cryptocurrency and blockchain startups, almost on par with 2021’s $31 billion;

• Investment peaked in the first half of the year and fell sharply in the third and fourth quarters;

• The number of deals and capital investment in the fourth quarter of 2022 were the lowest in two years;

• Well-known venture capital firms that invested in FTX faced significant losses, with Sequoia Capital writing down its $200 million investment to zero and Temasek’s $320 million FTX shares becoming “worthless.”

trend:

• Later-stage companies received a larger share of capital, while pre-seed investments continued to decline;

• Web3 leads in transaction count, but trading and investment platforms raise the most funds;

• Median deal sizes and valuations were at their lowest levels since the first quarter of 2021.

VC Financing:

• 2022 was the best year for crypto VC funding at over $33 billion, although the amount raised in the fourth quarter was the smallest since the first quarter of 2021;

• The average fund size increased, with more than 200 funds raised and the average fund size exceeding US$160 million.

2023

Investment Overview:

• Crypto VC investment has fallen sharply, with investment only one-third of the previous two years;

• The number of deals and investment capital continue to hit new lows every quarter.

trend:

• Early-stage companies accounted for the majority of deals, with the share of pre-seed deals declining in the second half of the year;

• Valuations and deal sizes fell to their lowest levels since the fourth quarter of 2020;

• Trading firms raised the most funding, followed by Layer2 and interoperability, and Web3.

VC Financing:

• Fundraising is challenging due to macroeconomic conditions and crypto market volatility;

• The number of new crypto VC funds established in 2023 was the lowest since 2020, with the average fund size falling by 30% and the median fund size falling by 45%.

There is a clear decline in interest and investment in 2022 and 2023, with the decline being particularly significant in 2023. Despite this, Web3 still leads in the number of transactions, while trading platforms dominate in financing. Despite regulatory challenges, the United States remains the leader in crypto startups. Dominant players in the enterprise ecosystem, in addition, macroeconomic and market turmoil have created a difficult environment for founders and investors, with significant challenges in raising capital.

2024: The State of VC

The venture capital landscape for Q1 and Q2 2024 has been detailed in previous articles , and here we will only highlight what is visible in the chart below, which is a continued trend since the end of Q1 2021, with early-stage investments clearly outpacing later-stage investments.

Further reading - Web3 investment research report for the second quarter of 2024:

• panewslab.com/zh/articledetails/y0ygxzt8.html

Viewpoint: How can the “unloved” VC tokens “return to the peak”?

One of the undeniable facts in Web3 over the past year has been the massive proliferation of meme tokens, which has led to a clear differentiation between meme tokens and VC tokens (tokens issued by companies backed by venture capital firms).

While I disagree with the view that Memecoin will kill VC tokens in the long run, it is clear that the market for many VC tokens is currently stagnant. How did we get to this point? What needs to happen to revive the VC token market?

More importantly, what could a savvy founder willing to go against the grain do to reinvigorate the VC token market, especially as meme tokens begin to weaken? To answer this question, we need to trace back to the roots that led to this step.

The roots are at the intersection of venture-backed Web3 companies and centralized exchanges. For founders and venture capitalists, a successful token launch is essential. Centralized exchanges can be graded based on their trading volume and liquidity. The goal of the division is to get your token listed on the exchange with the highest trading volume and liquidity to increase trading activity and improve market positioning, but what does it take to do this? It's a complex process.

In short, as you can imagine, the top centralized exchanges are very picky and each exchange has different criteria, but one key factor they look for is a high valuation, which indicates that the founders have successfully raised a lot of funds, making their token issuance look more promising.

An important metric in valuation is the fully diluted valuation (FDV). FDV is calculated by multiplying the token price by the total supply. If a company achieves a higher FDV, it will be seen as a high-profile project and worthy of listing on an exchange with better trading volume and liquidity. Although exchanges also consider other factors when choosing to list coins, a high valuation is a crucial factor.

While this strategy was successful in the past, venture capitalists, especially those with deep pockets, found a way to exploit the model by helping more companies raise money at high valuations. This worked for a while, and a few made significant profits, but it also disrupted the market, and now it seems like every company is raising tens or hundreds of millions of dollars, often at valuations of $1 billion or more.

But this strategy has a major drawback: artificially inflating the value of tokens before listing. This practice limits retail investors who only have a few hundred dollars to trade. If there is not enough upside, retail investors believe it is not worth participating, especially for short-term traders looking for quick profits. It is this market gap that Meme tokens stepped in and "replaced" VC tokens.

In contrast, meme tokens thrived due to the potential to offer high returns, attracting traders who were lost by VC tokens. Meme tokens are expected to achieve huge returns in the short term, which VC tokens cannot match. However, the problem with meme tokens is that they lack intrinsic value outside of memes. Therefore, meme token cycles tend to be shorter and eventually become worthless.

In order to revive VC tokens, the current funding model needs to be rethought. This means moving away from inflated valuations and adopting a model that appeals to retail investors. This requires brave founders willing to challenge the conventional wisdom of the past few years and develop a new model where the founders can successfully make retail investors money and others will follow suit. But what does the new model look like?

Currently, Web3 founders are incentivized to raise as much money as possible to achieve an artificially high FDV, however, founders can create hype while only raising the money they need. This approach keeps valuations low, making tokens more accessible to retail investors and providing greater upside potential.

Granted, this strategy will require more nuance, such as explaining to retail investors why your token is priced below competitors and the need to collaborate with the broader Web3 ecosystem, however, once retail investors realize you have left value for them, your VC token may soar like this year’s Meme tokens, and given the scarcity of original thinking in Web3, others are likely to follow suit.

You may be wondering how founders can list their tokens on larger exchanges without artificially inflating the FDV. Centralized exchanges are frustrated with current funding strategies and are opposing unnecessarily high FDV tokens. Exchanges are shifting their focus on listing tokens because their business model relies on users buying and selling tokens. If users don’t see the potential upside of a token, they won’t trade it and the exchange won’t make a profit. Therefore, exchanges are now waiting to provide investors with projects that are reasonably valued and truly valuable.

In summary, the stagnation of VC tokens amid the rise of meme tokens highlights the need for a shift in funding strategies. Abandoning inflated valuations and adopting methods that attract retail investors to trade can revitalize the VC token market. This change is not easy, but it is crucial to the long-term health of the ecosystem.

Innovative founders who rise to this challenge will lead the narrative, create a trend that balances the interests of investors and exchanges, and ensure a vibrant future for VC tokens.

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