Crypto & Blockchain Venture Capital – Q2 2022
Despite the drawdown in crypto markets, venture funding for the crypto and blockchain industry has continued to pour in.
In Q2 2022, venture capitalists invested more than $8 billion in crypto startups, the fourth-largest quarterly sum ever. The conclusion of Q2 marks the first down quarter in total money invested since the beginning of 2021, but the haul was still more than $6 billion above the 7-year average.
For six quarters in a row, valuations and deal sizes in crypto and blockchain have dwarfed the broader VC landscape.
Later-stage companies attracted the largest sum of VC money, but early-stage companies attracted the largest share of deals completed.
Trading/exchange/investing/lending led all subsectors in total capital invested, but Web3/NFT/DAO/Metaverse/Gaming led in the share of deal count by a large margin.
VC Money & Deal Count
For the first time since the beginning of 2021, venture capitalists invested less money in the crypto and blockchain sectors than in the previous quarter. Despite the decrease, the $8 billion invested in Q2 is more than $6 billion greater than the 7-year average of $2.1 billion. The reduction in capital invested was accompanied by a significantly lower deal count of 582, but still the third-highest deal count of all time.
Companies founded in 2018 attracted the most VC money in Q2 of 2022, with over $1.9 billion invested.
Investments by Stage
Continuing a trend from the last two quarters, the share of capital allocated to later-stage companies continued to rise and outpaced earlier stage companies for the first time in Q3 2021.
Deal Count by Stage
Last quarter’s total deal count was well below the all-time high in Q1 2022, although the deal count remains robust with Q2 2022 seeing the third most deals completed in history. Q2 2022 saw less than half the pre-seed deals as Q1, with pre-seed deals now accounting for less than 10% of all deals for the first time.
Valuation & Deal Size
After a brief respite in Q1 2022, both Median Pre and Median Post valuations have made all-time highs.
Venture capital valuations and deal size in Crypto/Blockchain continue to dwarf the broader VC industry.
Investments by category
Q1 2022 saw the meteoric rise of VC money in Web3, NFT, DAO, Metaverse, and Gaming, but Q2 2022 capital flow painted a different picture. Trading, Exchanges, Investing, and Lending took the pole position with more than $2.3 billion invested; data and infrastructure attracted $1.6 Billion and $1.3 billion, respectively.
VC deal count by subsector paints a different picture, with Web3, NFT, DAO, Metaverse, and Gaming sectors far outpacing that of any other subsector.
In almost every subsector, seed and early-stage deals accounted for most deals completed. Notably, nearly 30% of deals completed in the compliance subsector occurred at the pre-seed stage, indicating market demand for new compliance offerings.
Examining the data from Q2 2022 leads to several takeaways on trends in the crypto and blockchain startup investment landscape:
Total VC money invested remained extremely robust, despite the falling Bitcoin price YTD. Q2 2022 saw the price of Bitcoin fall from peak to trough by -62% and the price of Ethereum by more than -75%. Despite the significant drop in liquid crypto asset prices, venture capital flows remained extremely robust in the crypto and blockchain sectors. While Bitcoin and Ethereum each fell below their 2017/2018 highs, the total money invested in the industry reduced by only 20%, from $10bn to $8bn, and remained more than $5bn above 2018 levels. Despite declining crypto prices and tightening financial conditions, VC investor appetite remains resolute and will likely result in elevated investments throughout the year.
For the first time, pre-seed deals accounted for less than 10% of all deals. In just six years, the share of deals done by pre-seed companies fell from 53% to 8% in Q2 of 2022. Our Q1 VC report provided insight into the causes of this decline, and in Q2 2022 they appear to persist.
Early in the crypto industry, the market was immature and lacked the necessary infrastructure to build upon efficiently. Entrepreneurs saw this need and jumped at the opportunity, resulting in an explosion in early-stage equity investments. Today, many of those same companies are some of crypto’s major players and are now raising at higher valuations and later stages. With most of the glaring structural needs now met, the opportunity for to create new startups to meet glaring market infrastructure needs is diminished.
A decentralized ethos is fueling many of the builders and entrepreneurs today. New entrants are building products or services on-chain and thus do not raise capital through traditional channels that are trackable through Pitchbook. Defi, DAOs, and NFTs are use cases that allow founders to raise capital and deploy products or services more anonymously.
Later Stage companies attracted the largest share of VC money in Q2 2022. However, along with this outperformance, the stage remained flat in QoQ deal count and saw a decrease in median pre-money valuations.
The greater share of capital allocated to later-stage companies last quarter could signal that mature companies with proven business models were more attractive to capital allocators due to recent market dynamics. In crypto bear market cycles, bitcoin market cap dominance typically rises, illustrative of a “flight to safety” away from new projects and protocols and back to Bitcoin. During bear markets, this dynamic is not always due to an increase in Bitcoins price but more a relative decrease in altcoins price. Transposing this to the VC market, the dominance of later-stage firms may be less the result of their performance and more the result of tepidness on the part of venture investors to make riskier, early-stage bets. The crypto and blockchain industry has matured tremendously and now has a collection of established reputable companies that can attract a more consistent flow of capital during market turmoil. The data provided in this report shows that older and more mature companies founded in 2018 led in VC money invested; firms founded in 2017 and 2015 attracted the 2nd and 3rd most VC money.
The divergence between an increase in money invested and a decrease in median pre-money valuations is most likely a sign that VC investors have still been investing, the founder-friendly dynamic we have seen may be starting to abate. Said differently, VC investors are getting a better deal, with founders in precarious capital situations suffering more dilution to attract investment.
Trading/exchange/investing/lending and Web3/NFT/DAO/Metaverse/Gaming continue to show strength compared to other subsectors. Although the subsectors have given up ground in their share of deal count and VC money raised, they continue to be a central focus for VC investors. Trading/exchange/investing/lending increased its share of VC money invested, pulling in $2.4 billion, but decreased slightly in its share of deals. Web3/NFT/DAO/Metaverse/Gaming saw its share of VC money invested and deal count decline but still managed to attract over $1.1 billion in Q2 2022.
More money and deals are flowing to the data & Infrastructure subsectors; together, they accounted for $2.97 billion of all venture investment in Q2 2022, a 33% share. Data companies saw their share of money invested grow by 16% from Q1 to Q2. The closely related subsectors play an integral part in the adoption of crypto, user experience, and regulatory compliance. Crypto & blockchain adoption is accelerating rapidly, and along with it comes a demand for expertise in data analytics, network architecture, and UI optimization. Infrastructure and data companies are instrumental in stress testing and fortifying the industry to ensure systems run optimally. As crypto crosses the chasm into the early majority phase, more capital and attention will likely flow to the data and infrastructure subsectors.
Crypto and Blockchain companies continue to garner higher median pre-money valuations and deal sizes than the broader VC landscape. In Q2 2022, median pre-money valuations for crypto/blockchain companies were double that of the median across all venture capital, $40 million and $20 million, respectively. The median deal size from the quarter paints a similar picture, with crypto/blockchain companies seeing 28% more money invested in their deals than the median across all venture capital. The strength of crypto and blockchain deal sizes and the high valuations are testaments to the significant amount of capital seeking to allocate to the crypto and blockchain sector. While there have been some reported instances of down rounds or another repricing, on balance, we have yet to see the type of reduction in valuations that a prolonged bear market would suggest.