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Crypto & Blockchain Venture Capital - Q2 2023

Crypto & Blockchain Venture Capital – Q2 2023

This report utilizes data from Pitchbook. Data on venture deals is often reported on a lag and thus the Q2 2023 data is subject to revision by Galaxy Research in future reports.

Key Takeaways

  • Crypto VC still hasn’t bottomed. While deal count ticked up slightly in Q2, the sum of capital invested by venture capitalists into crypto and blockchain startups continued to decline QoQ.

  • Valuations continue to decline. The median pre-money valuation of a crypto VC deal in Q2 2023 was $17.93m, the lowest since Q1 2021, while median deal size increased slightly QoQ.

  • Companies building in the broad Web3 category dominated deal count, while companies in the Trading category raised the most total capital. The Q2 results continue the trend from last quarter.

  • The United States continues to dominate the crypto startup landscape. US-based crypto startups accounted for more than 43% of all deals completed and raised more than 45% of the capital invested by VC firms.

  • VC fundraising environment remains extremely challenging. Only $720m was raised by 10 new crypto VC funds in Q2 2023, the lowest since Q3 2020 at the beginning of the COVID-19 pandemic.


Crypto VC Investing

Deal Count & Capital Invested

The crypto and blockchain sector saw $2.32bn invested in Q2 2023, marking a new cycle low and the lowest since Q4 2020, continuing a downtrend that began after a peak of $13bn in Q1 2022. Crypto and blockchain startups raised less money across the last three quarters combined than they did in just Q2 of last year.


While capital invested has not yet found a clear bottom, deal activity increased slightly in Q2, with 456 deals completed vs. 439 deals in Q1 2023. The slight gains were driven by an increase in Series A deals to 174 vs. 154 in Q1.


In terms of capital invested, earlier stage deals (Pre-Seed, Seed, and Series A) accounted for the vast majority of investment (73%) vs. later stage deals (27%).


VC Investing by Company Vintage

Companies founded in 2021 and 2022 completed the most venture deals in Q2 2023.


Unlike Q1 of this year, 2022 vintaged companies raised the most capital of any annual cohort, though 2021 vintages were close behind.


Crypto VC Investing by Company HQ

Companies based in the United States dominated by both deals completed and money raised. US-based companies raised 45% of all crypto VC money in Q2 2023, followed by United Kingdom (7.7%), Singapore (5.7%), and South Korea (5.4%).


The picture is similar when looking at deals completed. US-based companies completed 43% of all crypto VC deals in Q2 2023, followed by Singapore (7.5%), United Kingdom (7.5%), and South Korea (3.1%).


Crypto VC Deal Size & Valuation

In Q2 2023, valuations continued to recede across the venture landscape and crypto was no exception. The median pre-money valuation for a crypto or blockchain venture deal reduced to $17.93m, the lowest since Q1 2022. The median crypto VC deal in Q2 2023 was $3m on a $17.93m pre-money valuation.


The declines in crypto VC deal size and valuation follow a trend seen across the broader venture capital industry.


Crypto VC Investing by Category

Trading, Exchange, Investing, and Lending startups raised the most venture capital money in Q2 2023 ($473mn, 20% of capital deployed). Web3, NFTs, Gaming, DAOs, and Metaverse startups raised the second most capital at $442mn, representing 19% of all venture capital deployed in Q2 2023. The Layer 2/ Interop sector witnessed the largest deal of the quarter, LayerZero, raising a $120mn series B round. Magic Eden had the largest Web3/NFT deal at $52mn, Auradine had the largest infrastructure deal at $81mn, and River Financial had the largest Trading/Exchange deal at $35mn.


By deal count, companies building products in the Web3 Gaming, NFT, DAO, and Metaverse realm sustained their top spot followed by Trading, Exchange, Investing, and Lending companies. These trends are unchanged from Q1 2023. Notably, companies building privacy and security products saw the largest QoQ increase in deal count (275%) followed by Infrastructure (114%).


The largest share of deals done at a later stage was in the Mining and Enterprise Blockchain categories, while the Compliance category, which includes chain analytics and regulatory tools, had the largest share of deals done at the pre-seed stage.


In terms of capital raised, Mining and Layer 1 deals were mostly later stage, while Custody, Media/Education, Compliance, and DeFi had significant portions raised at earlier stages.


Crypto VC Fundraising

We worked with Galaxy Asset Management to compile information on venture capital fundraises in Q2 2023 – that is, money raise by VCs for new funds or new fund vintages. Q2 2023 saw the fewest new fund launches (10) and lowest money allocated ($720m) since Q3 2020.


Incorporating data from the first half of 2023, average new fund size is now $236m while the median is $50m, both down substantially from last year.


Analysis & Conclusions

The crypto VC bear market continues. While deal counts remain robust, the total amount of capital being allocated to crypto startups is still declining QoQ. But the declines in crypto VC activity are not particularly unique to crypto, as the wider venture capital industry faces headwinds in the face of rising rates. Other important takeaways from Q2 2023’s crypto VC data include:

  • Crypto VC activity remains robust relative to the prior bear market. Deal count and capital invested is still about double what it was during the 2017-2020 bear market, suggesting net growth of the startup ecosystem on a longer time frame.

  • Venture investors continue to face a tough fundraising environment. Rising rates continue to reduce allocator appetites to bet on long-tail risk assets like venture funds than they were during the prior decade of near-zero interest rate policy. When combined with the bear market in cryptoasset prices and the fact that many allocators feel burned after the spectacular blowups of several venture-backed companies in 2022, venture investors will continue to find it difficult to raise new funds in 2023. Indeed, Q2 saw the fewest new funds launched and capital allocated since Q3 2020, which was one of VC investing’s bleakest quarters as investors around the world grappled with the COVID-19 asset crash.

  • A lack of significant new venture dollars will continue to pressure founders. Venture-backed startups have had more difficulty raising new rounds this year and will continue to face a difficult fundraising environment for the foreseeable future. Many of the more speculative and ambitious blockchain use cases funded during the bull market are struggling to find investment now that bull market users and hype have receded. Founders must focus on revenues and sustainable business models and be prepared to raise smaller rounds and give up more equity.

  • Pre-seed deal activity remains decently robust. Although slightly lower than Q1, the number of pre-seed deals remained mostly intact QoQ. When combined with Seed and Series A deals, these earlier stage deals comprised almost 75% of all deals done, an indication that entrepreneurs are active and venture investors remain attentive, despite muted activity overall. With many exiting crypto entirely in the bear market, savvy investors may find gems among the die-hards who launch companies in a challenging environment, as they did during the prior bear market.

  • The United States continues to dominate the crypto startup ecosystem. Despite a mostly hostile regulatory environment, crypto startups based in the United States continue to pull the vast majority of venture capital activity. US-based companies dominate the crypto ecosystem, and American policymakers seeking to retain top talent, promote technological and financial modernization and dominance, and extend American leadership into the economy of the future would be wise to develop progressive policies that foster growth an innovation.

  • Web3 continues to lead deal count while Trading still commands the largest amount of capital invested. This is now a multi-quarter trend, with the traditional money makers – companies that build exchanges, trading tools, etc. – are raising the most capital, but with the largest number of individual deals going to firms building in the emergent Web3, DAO, metaverse, and gaming categories.