This article was compiled and organized by BlockWeeks
Crypto venture capital has still not bottomed out. Although the number of deals rose slightly in the second quarter of 2023, the total amount of funds invested by venture capital firms in crypto and blockchain startups continued to decline quarter over quarter. Valuations also continued to fall: the median pre-money valuation for crypto VC deals in the second quarter was $17.93 million, the lowest since the first quarter of 2021, while the median deal size rose slightly quarter over quarter. In terms of deal count, broad Web3 companies dominated; in terms of total funding, trading companies raised the most—a pattern that continued the trend from the previous quarter. The United States continued to dominate the crypto startup landscape, with U.S.-headquartered crypto startups accounting for more than 43% of all completed deals and more than 45% of the capital invested by VCs. The VC fundraising environment remained extremely difficult, with only 10 new crypto VC funds raising $720 million in the second quarter, the lowest level since the third quarter of 2020, in the early days of the COVID-19 outbreak.
Overall Overview: Funding Hits a New Cycle Low, Deal Volume Edges Up
The crypto and blockchain industry attracted $2.32 billion in investment in the second quarter of 2023, a new cycle low and the lowest level since the fourth quarter of 2020, continuing the downward trend from the peak of $13 billion in the first quarter of 2022. The total funding for crypto and blockchain startups over the past three quarters is still less than that of a single second quarter last year.
Although invested capital has not yet found a clear bottom, deal activity rose slightly in the second quarter, with 456 deals completed, up from 439 in the first quarter. This slight increase was mainly driven by Series A funding, which rose from 154 deals in the first quarter to 174. In terms of invested capital, early-stage deals (pre-seed, seed, and Series A) accounted for the vast majority of total investment (73%), while later-stage deals accounted for 27%.
VC Investment by Company Founding Year
Companies founded in 2021 and 2022 completed the most VC deals in the second quarter of 2023. Unlike the first quarter of this year, companies founded in 2022 raised the most among all annual cohorts, followed closely by companies founded in 2021.
Crypto VC Investment by Company Headquarters Location
U.S.-headquartered companies dominated both in deal count and amount raised. In the second quarter of 2023, U.S. companies raised 45% of all crypto VC funds, followed by the United Kingdom (7.7%), Singapore (5.7%), and South Korea (5.4%).
In terms of completed deals, the situation was similar. In the second quarter of 2023, U.S. companies completed 43% of all crypto VC deals, followed by Singapore (7.5%), the United Kingdom (7.5%), and South Korea (3.1%).
Deal Size and Valuation
In the second quarter of 2023, valuations continued to decline across the entire venture capital sector, and crypto was no exception. The median pre-money valuation for crypto or blockchain VC deals fell to $17.93 million, the lowest since the first quarter of 2021. The median crypto VC deal size in the second quarter was $3 million, corresponding to a pre-money valuation of $17.93 million. The decline in crypto VC deal size and valuations was consistent with the trend across the entire venture capital industry.
Crypto VC Investment by Category
In the second quarter of 2023, trading/exchange/investment/lending startups raised the most ($473 million, 20% of deployed capital); Web3, NFT, gaming, DAO, and metaverse startups ranked second in amount raised ($442 million, 19% of all VC deployed). The Layer 2/interoperability sector produced the largest deal of the quarter—LayerZero completed a $120 million Series B funding round. Magic Eden secured the largest Web3/NFT deal ($52 million), Auradine secured the largest infrastructure deal ($81 million), and River Financial secured the largest trading/exchange deal ($35 million).
In terms of deal count, companies building Web3 gaming, NFT, DAO, and metaverse products continued to hold first place, followed by trading/exchange/investment/lending companies, trends that were flat with the first quarter of 2023. Notably, companies building privacy and security products saw the largest quarter-over-quarter increase in deal count (275%), followed by infrastructure (114%).
The categories with the largest share of later-stage deals were mining and enterprise blockchain; while the compliance category, which includes on-chain analytics and regulatory tools, had the largest share of pre-seed deals. In terms of amount raised, mining and Layer 1 deals were mostly at later stages, while custody, media/education, compliance, and DeFi raised a considerable portion of their funds at early stages.
Fundraising Environment: 10 New Funds Raised Only $720 Million
Galaxy Asset Management compiled information on venture capital fund fundraising in the second quarter of 2023—that is, the situation in which VCs raise funds for new funds or new fund series. In the second quarter of 2023, both the number of new fund launches (10) and the amount raised ($720 million) were the lowest since the third quarter of 2020.
Including data for the first half of 2023, the average new fund size is now $236 million, with a median of $50 million, both down sharply from last year.
Core Conclusions and Key Points
The crypto VC bear market is still ongoing. Deal count remains steady, but total capital invested in crypto startups continued to decline quarter over quarter. However, the decline in crypto VC activity is not unique to crypto—against the backdrop of rising interest rates, the entire venture capital industry is facing headwinds. The second quarter of 2023 crypto VC data also yielded the following important conclusions:
Relative to the previous bear market, crypto VC activity remains active. Deal count and invested capital are still about twice the levels during the 2017–2020 bear market, indicating that over a longer time horizon, the startup ecosystem has achieved net growth.
Venture capital firms still face a difficult fundraising environment. Rising interest rates continue to weaken the willingness of allocators to bet on long-tail risk assets such as venture capital funds—especially compared with the period of near-zero interest rates over the past decade. Combined with the bear market in crypto asset prices and the fact that many allocators are still shaken after the spectacular blowups of several VC-backed companies in 2022, venture capital firms will continue to face fundraising difficulties in 2023. In fact, both the number of new fund launches and the amount raised in the second quarter were the lowest since the third quarter of 2020, which was one of the bleakest quarters for VC investment, when global investors were struggling with the asset crash triggered by the COVID-19 pandemic.
The lack of large amounts of new venture capital funding will continue to pressure founders. VC-backed startups will find it harder to raise new rounds this year and will continue to face a difficult financing environment for the foreseeable future. Many of the more speculative and ambitious blockchain use cases during the bull market are now difficult to fund as bull market users and hype recede. Founders must focus on revenue and sustainable business models and be prepared to raise smaller rounds and give up more equity.
Pre-seed deal activity remains relatively active. Although slightly lower than the first quarter, pre-seed deal count was essentially flat quarter over quarter. Together with seed and Series A rounds, early-stage deals accounted for nearly 75% of all deals, indicating that despite the overall downturn in activity, entrepreneurs remain active and venture capital firms remain attentive. At a time when many institutions are completely exiting crypto during the bear market, savvy investors may be able to find hidden gems among the "diehards" who continue to start businesses in a difficult environment—just as in the previous bear market.
The United States continues to dominate the crypto startup ecosystem. Despite a generally unfriendly regulatory environment, U.S.-headquartered crypto startups still captured the vast majority of venture capital activity. U.S. companies dominate the crypto ecosystem, and U.S. policymakers who want to retain top talent, promote technological and financial modernization and leadership, and extend American leadership into the future economy would be wise to enact aggressive policies that promote growth and innovation.
Web3 continues to lead in deal count, while trading still captures the largest amount of capital. This has become a trend lasting multiple quarters: the traditional "money machines"—companies building exchanges, trading tools, and the like—raise the most, but the largest number of individual deals flow to companies building products in the emerging Web3, DAO, metaverse, and gaming categories.
