Crypto & Blockchain Venture Capital – Q1 2022
Venture funding for crypto and blockchain startups reached another new all-time high despite a drawdown in broader markets.
In Q1 2022, venture capitalists invested more than $10bn in crypto startups, the largest quarterly sum ever. Indeed, every quarter since Q1 2021 has seen an all-time high in the amount of capital invested in such startups.
A near equal number of deals occurred at earlier stages as later stages in Q4 2021, but the share of capital allocated to later stage companies reached its highest ever.
Valuations and deal sizes in crypto and blockchain continue to dramatically outpace the broader VC landscape.
Web3, NFTs, DAOs, Metaverse, and Gaming deals had the largest share of capital invested and deal count.
Despite a tumultuous macro environment punctuated by drawdowns in across traditional and cryptoasset markets, the amount of money invested in crypto and blockchain startups by venture capitalists continues to rise. After a reversion in Q4 2021 where more capital went to earlier stage deals, later stage deals accounted for most investment dollars, returning to a trend that held for most of 2020 and 2021. Demand from investors for inclusion into crypto and blockchain deals remains healthy while the number of Preseed deals continues to remain depressed. Competition for access to deals increase, with founders raising more on a median basis while selling less equity, leading to higher valuations.
Prior to 2020, venture investment in the crypto and blockchain ecosystem tended to follow digital asset prices closely, albeit on a slightly delayed basis. This dynamic is evident when reviewing the money invested against the price of Bitcoin in 2017 and 2019. However, while investment grew with the bitcoin price in 2020 and 2021, investment continued to grow during major bitcoin price drawdowns in Summer 2021 and in Q1 2022. This decoupling is demonstrative of investors’ disbelief that a prolonged bear market in digital assets is forthcoming as well as the significant amount of dry powder held by funds seeking to allocate to the sector.
VC Money & Deal Count
The money invested by venture capitalists continues to grow to new highs, even while the total number of venture deals in crypto and blockchain companies is down slightly from last quarter.
Investment by Stage
In terms of money invested by stage, vast amounts of capital continue to go later stage companies.
Indeed, in Q1 2022, more capital went to later stage companies (series B+) than earlier stage companies (pre-seed, seed, and series A).
Deal Count by Stage
Total deal count in Q1 2022 was slightly below the all-time high in Q4 2021, but nonetheless very robust. Nearly half of all deals went to Pre-seed, Seed, or Series A stage companies, reversing a trend seen in 2021 where later stage deals accounted for the largest share.
The recent rise in earlier stage deals is demonstrative of increased interest in the crypto and blockchain sector by entrepreneurs in the face of unprecedented market growth over the last 18 months. However, most of that rise was accounted for by Seed and Series A stage companies—these companies were previously Pre-Seed companies that launched in prior quarters. Indeed, Q1 2021 had the largest count of Pre-Seed deals of any quarter since Q1 2020, but that count continues to decline.
The share of deals at the earliest stage rose in Q1 2022 for the first time since we began tracking this data, though is more a function of slightly lower total deal count than a rise in pre-seed deals, as the number of investments in the earliest stage companies continues to decline on an absolute basis.
Later stage deals (Series B+) reached their largest share on record at more than 14%. This metric shows the growing maturity of the cryptocurrency ecosystem. There are simply more later stage companies operating in the crypto and blockchain sector today.
Valuation & Deal Size
Median valuation and deal size for crypto and blockchain venture deals continues to rise.
When comparing crypto and blockchain VC to the broader market, crypto deal sizes continue to rise dramatically while the median deal size for all venture deals in Q1 2022 declined for the first time since Q1 2020. Valuations in the crypto ecosystem also continued to outpace the broader VC landscape, an indication of the significant and growing competition to allocate to the sector.
Investment By Category
Examining the breakdown in capital allocated by subsector shows the continued rise of Web3, NFT, Metaverse, and Gaming companies in the crypto and blockchain ecosystem, which have taken the largest share of raised funds for the first time.
Looking at deal count further highlights the rise of the Web3, NFT, DAO, Metaverse, and Gaming sectors, which accounted for more than 40% of all deals done in Q1 2022.
Examining the data from Q1 2022 leads to several takeaways on trends in the crypto and blockchain startup investment landscape:
Money continues to flow into the space. Despite a significant drawdown in cryptoasset markets (BTC and ETH are each down about 40% from their all-time highs last Fall), venture investment continues at a rapid pace. This is a new dynamic—prior to Summer 2021, major drawdowns in cryptoasset prices led to a decline in venture deals and dollars invested, albeit typically on a delayed basis. While it may be too early to call the correlation dead if the bear market in liquid cryptoasset continues and deepens, the crypto venture landscape is also significantly larger and more aggressive than during prior cryptoasset price cycles. Huge funds have been raised by incumbents like Paradigm and new entrants like Hivemind, and there is an enormous amount of dry powder that must allocate to this space over the next several years.
Pre-seed deals remain on the decline, despite growing adoption. Despite growing adoption of cryptoassets and a flood of talent entering the ecosystem, the data shows that the number of Pre-Seed deals (i.e., newly formed companies raising their first round of venture financing) continues to decline in nominal terms. Several reasons account for this decline.
The 2017 crypto bull market occurred on the back of an incredibly immature market structure—there were no institutional custodians, prime brokerages, settlement platforms, lenders, etc. Entrepreneurs seized on this immaturity from 2018 to 2020 and built some of the major infrastructure companies in the cryptoasset ecosystem today, including FTX, Galaxy Digital, Fireblocks, FalconX, BlockFi, Paradigm, etc. These mature companies have since been raising venture funding at much higher valuations, helping to account for the rise in later stage deals and money invested. Many of these market opportunities have now been filled, leaving fewer “picks and shovels” opportunities for would-be entrepreneurs.
Since “DeFi summer,” many new entrants have built entities on-chain and issued no equity, or instead sold tokens if they did raise capital at all. The rise of DeFi, decentralized autonomous organizations (“DAOs”), and other on-chain entities depresses the earlier stage data both in real terms (if they do not raise) and due to the nature of data gathering by companies like Pitchbook, upon which this report relies heavily.
These intersecting trends account for both the decline in Pre-Seed deals on a real and relative basis and highlight growing maturity of the broader cryptocurrency ecosystem. There are more large companies operating in the ecosystem than ever before and many new ventures are launching in more decentralized manners, perhaps fulfilling some of the original vision for the promise of blockchain technology.
Valuations and deal sizes in crypto continue to rise. The decline in the number of early-stage deals coupled with intense demand from a growing number of larger funds, as well as the entrance of large traditional growth capital and private equity investors into the ecosystem, has resulted in an extremely competitive investment environment. Founders can raise more money while selling less equity, leading to higher median valuations across the ecosystem. This dynamic can make it difficult for smaller early-stage funds to avoid dilution in future rounds and therefore realize a positive outcome for their fund overall, leading many of those funds to seek additional capital.
Newer subsectors like Web3 continue to attract attention from investors. Whereas prior to 2021 most successful startups operated in one of two verticals (trading/exchange or mining machine manufacturing), today we see large companies operating across a range of diverse verticals. The expansion of the digital assets ecosystem both in terms of breadth of offering and adoption as well as intensity of interest has given rise to a host of large companies that service other large companies, including in the compliance, settlement, accounting, tax, and consulting verticals. Today, the dominant narrative among crypto VCs is clearly Web3, NFTs, DAOs, Metaverse, and Gaming, which for the first time comprised the largest share of both capital raised and deal count. These new subsectors effectively expanded the investable landscape significantly, drawing in investors that typically focus on digital transformation, gaming, and the creator economy.