Startup funding falls, crypto funding surges: what’s driving this divergence?

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The first quarter of 2024 has seen a significant surge in investment activity in the crypto sector. Zama, a company focused on fully homomorphic encryption development, raised $73 million in a Series A round, marking a large investment in this space. Valuations across all stages have increased, with pre-seed/seed stages reaching a median pre-money valuation of $21.8 million (an 85.5% year-over-year increase), early stages at $72.0 million (a 148.3% increase), and late stages at $51.1 million (a 7.6% increase). Deal sizes have also increased, with median figures at $2.7 million for pre-seed/seed stages, $5.0 million for early stages, and $5.8 million for late stages.

How do the investment trends in Q1 2024 differ between traditional startups and crypto projects?

In the past few months, there’s been a significant drop in global funding for startups as indicated by Crunchbase. Although Q1 of 2024 showed some improvement over the previous quarter, the amount invested still ranked among the second-lowest since the year 2018.

In the first quarter of 2022, the total funding for global startups amounted to a substantial $171.4 billion. However, by the first quarter of 2023, this figure had experienced a significant decrease, reaching only $82.4 billion – a decline of approximately 52% compared to the previous year. The downward trend persisted into the first quarter of 2024, with startup funding further decreasing by nearly 19.7% to reach $66.1 billion.

Startup funding falls, crypto funding surges: what’s driving this divergence?

The decline is quite noticeable in North America, which is the biggest sector for startup investment, indicative of a wider decrease in venture capital deals.

In contrast to the tech industry facing funding downturns, the crypto sector tells a distinct story when it comes to financing.

In the first quarter of 2024, crypto startups secured a total of $2.4 billion in funding through 518 deals, according to PitchBook’s data. This represents a significant jump of 40.3% in terms of investment capital and a notable rise of 44.7% in deal count when compared to the previous quarter, Q4 2023.

Startup funding falls, crypto funding surges: what’s driving this divergence?

It’s intriguing to note that despite reaching a high of $11.1 billion in cryptocurrency venture capital investments during Q1 2022, the sector experienced a downturn for seven successive quarters. This trend reached its lowest point in Q4 2023 with investments amounting to only $1.7 billion. The recent surge in investment indicates that investors are regaining trust in the crypto market.

As a researcher exploring the current economic landscape, I am intrigued by the increasing fascination with cryptocurrencies against the backdrop of declining traditional startup investments. This situation raises several questions: what factors are driving this shift, and is it a fleeting phenomenon or a sign of a more profound trend? To gain a deeper understanding, let’s examine the underlying reasons and potential implications.

A deep dive into Q1 2024’s investment trends

As a researcher studying the cryptocurrency market trends in the opening months of 2024, I’ve observed a significant shift in investment priorities towards innovative and infrastructure-enhancing projects.

London-based Exohood Labs secured an impressive $112 million investment during their seed funding round. This substantial infusion of capital was raised to support the development of their innovative AI project, which combines quantum computing and blockchain technology. Consequently, the company’s valuation has been estimated at a noteworthy $1.4 billion.

As a crypto investor, I’d describe it like this: I’m excited about Together AI, the team behind the development of an open-source, decentralized cloud platform for large foundation models. They recently closed an impressive early-stage funding round, raising $106 million, with Salesforce Ventures leading the way. The pre-money valuation came in at a substantial $1.1 billion.

As a researcher studying the technology sector, I’ve observed that infrastructure startups have achieved significant success in securing funding recently. For instance, EigenLayer, a Seattle-based company specializing in an Ethereum (ETH) restaking platform, successfully raised $100 million during their Series B financing round.

In a significant funding announcement, Zama, a company specializing in the advancement of fully homomorphic encryption (FHE), raised $73 million during its first round of financing.

Valuations across all stages in the crypto sector have surged compared to full-year 2023. 

As a researcher studying the venture capital landscape, I’ve discovered that the median pre-money valuation for pre-seed and seed stages has jumped to an impressive $21.8 million, representing an 85.5% surge year over year. Intriguingly, early-stage valuations have experienced a significant boost, skyrocketing by 148.3% to reach a staggering $72.0 million. Conversely, late-stage valuations have only seen a moderate increase of 7.6%, settling at $51.1 million. Surprisingly, early-stage deals now command higher valuations than their late-stage counterparts.

The median deal sizes have grown significantly in various stages: $2.7 million for pre-seed/seed rounds, $5.0 million for early stages, and $5.8 million for late stages. This signifies a substantial rise of 24.9% and 25.0% for the pre-seed/seed and early stages respectively. However, late-stage deals experienced a slight decrease of 9.7%.

In Q1 2024, there was a notable change in investment sources according to Crypto Koryo, a well-known crypto analyst. Unlike the preceding quarters where banks and traditional non-crypto venture capital firms dominated the investments, this quarter witnessed a significant rise in funding from specialized crypto venture firms.

In contrast to the previous quarters when banks and non-crypto venture capitalists (VCs) held the majority of investments, this quarter has seen a significant shift with crypto VCs taking the lead. Notable crypto VCs, such as @a16zcrypto, @OKX_Ventures, @multicoincap, @paradigm, and @polychain, are making the most investments.

— Crypto Koryo (@CryptoKoryo) April 4, 2024

This quarter, several notable cryptocurrency-focused venture capital firms made significant investments. Among them were Andreessen Horowitz’s crypto division (a16z), OKX Ventures, Multicoin Capital, Paradigm, and Polychain.

The buzz in the crypto investment circles

The crypto venture capital market has been invigorated by the first quarter of 2024, with an air of optimism akin to the vibrant activity experienced in 2021, as reported by David Nage, Arca’s portfolio manager.

As an analyst, I’ve reviewed our firm’s deal tracking data from Q1, and I discovered we identified over 690 potential business transactions. This number represents a significant surge of approximately 30-40% compared to the minimal activity levels we encountered in 2023.

Alex Felix, the co-founder and CIO of CoinFund, expressed a guarded sense of optimism regarding Q1 2024, signaling a recovery from the difficult fundraising landscape of the previous two years.

In contrast to the significant 65% drop in venture capital and cryptocurrency funding observed between years in 2023, there has been a marked increase in deal-making transactions as of late, according to Felix.

A number of influences have led to this revival. In the year 2023, Ripple (XRP) and Grayscale achieved legal successes, while optimistic views towards decentralized finance (DeFi) on Solana (SOL) emerged. These events have all significantly influenced the current trend.

The approval of Bitcoin ETFs in the United States has increased the desire for cryptocurrencies among investors, leading to heightened interest in the asset class.

As a crypto investor, I believe in the forecast made by Mike Giampapa, the general partner at Galaxy Ventures. He anticipates a robust expansion in crypto venture capital investments due to an optimistic global economic climate.

Anticipating these developments, he believes the crypto ETF launches, Bitcoin’s halving event, and potential U.S. interest rate reductions prior to the presidential election will significantly contribute to the ongoing expansion in the cryptocurrency market.

Based on the optimistic outlook towards cryptocurrencies among investors and assuming no significant market crashes occur, PitchBook expects the amount and speed of investments in this sector to grow steadily throughout the year.

Currently, there’s a sense of enthusiasm among crypto stakeholders and their projects regarding the future. It is anticipated that the total amount of capital raised in the year 2024 could surpass the $10 billion threshold and even hit the $16.2 billion mark.

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2024-05-20 21:25