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Crypto & Blockchain Venture Capital – Q3 2021

venture capital, vc, galaxy research, crypto vc

Q3 2021 saw a resurgence of digital assets markets, with both Bitcoin and Ethereum rallying strongly off summer lows. The money flowing into venture-backed startups in the space hit all-time highs for the third quarter in a row, even as the total number of deals remained below its Q1 2018 peak. The gap between crypto VC valuations and valuations in the broader venture market continued to widen.

Key Takeaways

  • In Q3 2021, venture capitalists invested nearly $8.5bn in crypto startups, the largest quarterly sum ever.

  • Later stage deals continue to account for a growing portion of total consummated deals, while the earliest stage deals (pre-seed) comprised less than 10% of all deals, the lowest portion ever.

  • Valuations and deal sizes for crypto companies dramatically outpaced the broader VC market, with the median deal crypto VC deal valuation surpassing $40m (vs. $25m for all VC) and the median crypto VC deal size reaching $5m (vs. $3.35m for all VC).

After retreating 55% from Spring highs, BTC and ETH both rallied into the end of Q3, ultimately hitting new all-time highs in November above $67,000 and $4,700, respectively. In a volatile market, venture investing has continued to grow significantly. Total capital allocated toward private crypto companies this quarter shattered previous highs, with nearly $8.5bn invested. At nearly $2.8bn, the quarter-over-quarter increase in total capital invested between Q2 and Q3 2021 was also the largest ever.


Markets recovered from summer lows in Q3, with bitcoin trading as high as $52,000 and closing the quarter at $43,850, up from lows around $29,000. While private market investing has tended to track the price of Bitcoin, it’s perhaps not surprising that the price recovery from summer lows failed to dampen VC investment. Indeed, investment accelerated significantly on the back of growing institutional interest in the asset class.

Capital Invested vs. Bitcoin Price

VC investment in the crypto ecosystem has typically tracked the Bitcoin price, albeit on a small lag. The trend has mostly continued since 2017, but despite a major decline in the exchange rates for bitcoin and other digital assets in Q3, venture investment continued to explode, seemingly unaffected by the summer dip.


Capital Invested & Deal Count

VC funding of crypto startups dramatically increased last quarter, making Q3 2021 the largest quarter in history for allocation to the sector. Despite this, total deal count still remained below the Q1 2018 all-time high.


Investment by Stage

In Q1 2021, most capital went to later stage crypto companies for the first time in the history of the asset class; Q2 saw a return to the norm, with most VC money again going to earlier stage companies. In Q3, the share of capital allocated to earlier and later stages was nearly identical at 50%.


Q3 saw the most capital ever invested in earlier stage crypto companies at just over $4bn (pre-seed, seed, and early series). The enormous amount of capital invested in earlier stage companies last quarter shows significant appetite to invest in the expansion of the crypto ecosystem, although the trend of more capital going to later stage companies may be resuming. Despite the parity in capital invested, the number of pre-seed deals continues to trend downward, accounting for less than 10% of deals done, the lowest ever. Meanwhile, the portion of later stage deals continues to climb, reaching an all-time high of nearly 14% of deals done.


While the portion of capital allocated to the earliest stage deals remained mostly consistent QoQ, the percentage of late-stage deals by count also increased. This dynamic illustrates two intersecting trends: the growing size of early-stage deals and the increasing number of later stage companies, both of which can be seen to show the maturation of the crypto startup ecosystem. And we still haven’t seen a big influx of new entrepreneurs into the space, as exhibited by the fact that pre-seed deal counts remain well below their prior highs from the 2017 bull run.

Crypto Venture Deal Valuations

Average deal size and valuation both breached previous all-time highs in Q3, continuing a trend of growth that’s largely persisted since Q1 2019. Demand (for allocation) has outpaced supply (available deals), resulting in an increasingly competitive market for investors seeking to allocate.


Comparing Crypto VC to the Broader VC Market

Since Q1 2020, valuations in crypto have equaled or exceeded the broader market. Throughout this year, crypto valuations have exploded, outpacing the growth in the rest of the market.


As we discussed in our prior two reports on Q1 and Q2, industry valuations exceeding those in the broader market despite smaller deal sizes supports the thesis that there’s a surplus of capital in the space, leading to an exceptionally founder-friendly environment. With larger funds continuing to enter the space, the environment for investors may get more expensive before it gets cheaper.

Valuations at the seed stage are also outpacing, exceeding the broader VC market by nearly 70%.


Key Takeaways

Crypto VC outpacing broader VC market shows institutional demand for crypto allocation. In Q3 2021, crypto valuations continued to outpace the broader market, exceeding all VC by a whopping 72%. This trend has been accelerating QoQ – crypto valuations exceeded the broader market in Q1 by 34% and by 51% in Q2. The delta in median valuations (and its continued expansion), demonstrates that institutional capital continues to seek allocation to the crypto ecosystem in outsized proportion to other industries.

Rising valuations and deal sizes show increasing maturity of ecosystem. Valuations and deal sizes in Q3 2021 continue to rise dramatically, showing the growing maturity of the ecosystem with more later stage companies raising more money than ever before. At the same time, at these heightened valuations, seed stage investors will ultimately find it difficult to return their funds with such expensive early rounds.

Fund size is exploding. Crypto VC funds are getting larger, and the ecosystem is bifurcating between larger and smaller players. As the race for allocation heats up, fund size opens another dimension for VCs to differentiate themselves: larger funds are less elastic in their demand, and as such can offer better terms and purchase larger chunks of startups’ rounds. Larger funds also offer additional value-added services, like security audits, design resources, media support and placement, and assistance with hiring whether direct or through their extensive networks. Late-stage deals are increasingly inflated, with larger growth equity funds increasingly entering the market.

Is Crypto VC still cyclical? Venture investing is tied to public crypto markets in both magnitude and deal composition. In bull markets, more deals are struck, and early-stage companies receive funding they perhaps wouldn’t otherwise. Q2 manifested both trends: overall investment and deal count accelerated dramatically; and early-stage investment picked back up from its relative lull in Q1, once again outpacing late-stage investment. But in Q3, as crypto markets languished over the summer, with BTC and ETH down ~55%, deals continued at a rapid pace, with capital invested reaching all-time highs. Institutional capital wants to allocate, and the summer volatility didn’t diminish interest. Whether a more prolonged downturn will see a return to the norm, with VC investment declining during a longer bear market for publicly traded digital assets, remains to be seen.