According to the latest report from Galaxy Digital Research, crypto-focused venture capital firms are facing significant challenges in raising funds, even amid bullish market conditions. The report highlights that only eight new funds were launched in Q3 of 2024, collectively raising a mere $140 million—the lowest total since Q3 of 2020.
The report indicates that the decline in capital allocation to crypto venture capital continues a trend that began in Q3 of 2023. This downward trajectory has persisted quarter on quarter, attributed to the negative impacts of events from 2022 and 2023 that led many investors to withdraw from the crypto sector.
The report states, “The macro environment and turmoil in the crypto market from 2022 and 2023 has dissuaded some allocators from making the same level of commitments to crypto venture investors that they did in 2021 and early 2022.”
If this trend continues, 2024 could end up being the worst year for crypto venture capital fundraising since 2020. To date, 39 new funds have raised just $1.91 billion, with most funds securing smaller capital amounts. The average and median fund sizes in 2024 are at their lowest since 2017.
Simultaneously, existing venture capitalists have reduced their investments in crypto startups. In Q3 2024, VCs invested only $2.4 billion across 478 deals, reflecting a 20% decline in value and a 17% decrease in the number of deals compared to the previous quarter.
The report suggests that if this trend continues, total VC investment in crypto for 2024 may end up at similar levels or slightly lower than those in 2023. This year has shown a notable disconnection between Bitcoin’s performance and investments in crypto startups, primarily due to increased attention on Bitcoin, driven by the rise of spot exchange-traded funds (ETFs) fueling the current bull run.
The report notes, “Weak allocator interest in crypto venture, combined with market narratives favoring Bitcoin, has left many promising narratives from 2021 overlooked.”
Despite the decline in overall VC funding, some areas within the crypto industry continue to attract investment. Approximately 85% of the capital went to early-stage companies, while the remainder was directed at more established firms. Although the VC pullback from crypto startups is justifiable given the significant drop in deal valuations, there are signs of recovery, with the average deal size in Q3 2024 at $3.5 million and the median pre-money valuation at $23 million—the highest since 2022.
Despite the overall decline in VC funding, certain sectors are outperforming. The decentralized finance (DeFi) sector has emerged as a major beneficiary, raising $462.3 million (18.43%) of total VC funds in Q3 2024. Other strong performers include Layer-1 networks, which garnered over $400 million, and the Web3/NFT/Gaming/DAO sectors, attracting more than $350 million.
However, the Web3 sector experienced a 39% drop in VC funding, while DeFi saw a 50% increase. Notably, AI-focused crypto projects enjoyed the most significant surge in funding, with a 500% increase leading to over $250 million in investments, indicating that VCs remain keen on artificial intelligence within the crypto landscape.
U.S.-based crypto startups received the most funding, accounting for 44% of deals, despite ongoing regulatory uncertainty in the country. This is not surprising, as 55% of capital investments also originated from U.S.-based VCs.
As the crypto market continues to evolve, the challenges facing venture capital firms will require adaptation and strategic focus on the most promising sectors to leverage emerging opportunities.
October 2024, Cryptoniteuae