Galaxy Digital Cryptocurrency and Blockchain Investment and Financing in the Second Quarter of 2023

Galaxy Digital's Q2 2023 Crypto and Blockchain Investment and Financing

Original Title: Crypto & Blockchain Venture Capital – Q2 2023

Original Authors: Alex Thorn, Director of Firmwide Research & Gabe LianGuairker, Research Analyst

Original Source: galaxy

Translation: Kate, Marsbit

This report uses data from Pitchbook. Reports on venture capital transaction data often lag behind, so Galaxy Research may revise the data for the second quarter of 2023 in future reports.

Key Points

• Venture capital in the crypto space has yet to hit bottom. Although the number of transactions in the second quarter has increased slightly, the total investment amount from venture capitalists in cryptocurrency and blockchain startups continues to decline compared to the previous quarter.

• Valuations continue to decline. The median pre-money valuation for crypto venture capital transactions in the second quarter of 2023 was $17.93 million, the lowest level since the first quarter of 2021, while the median transaction size has increased slightly.

• Companies in the broad Web3 category dominate the number of transactions, while companies in the transaction category raise the most capital. The performance in the second quarter continues the trend from the previous quarter.

• The United States continues to dominate the crypto startup space. U.S. crypto startups accounted for over 43% of all completed transactions and raised over 45% of the funds invested by venture capital firms.

• The venture financing environment remains extremely challenging. In the second quarter of 2023, only 10 new crypto venture capital funds raised a total of $720 million, the lowest level since the start of the COVID-19 pandemic in the third quarter of 2020.

Crypto Venture CapitalTransaction Volume and Capital Investment

The investment in the crypto and blockchain industry in the second quarter of 2023 was $2.32 billion, hitting a new cyclical low and the lowest level since the fourth quarter of 2020, continuing the downward trend that began after the peak of $13 billion in the first quarter of 2022. The total funds raised by crypto and blockchain startups in the past three quarters have been lower than in the second quarter of last year.

Although capital investment has not yet bottomed out, second-quarter transaction activity has increased slightly, with 456 completed transactions compared to 439 in the first quarter of 2023. This small increase is due to an increase in Series A transactions from 154 in the first quarter to 174.

In terms of capital investment, early-stage transactions (Pre-Seed, Seed, and Series A) account for the majority (73%) of investments, while later-stage transactions (27%).

Investing in Companies by Year

Companies established in 2021 and 2022 completed the most venture capital transactions in the second quarter of 2023.

Unlike the first quarter of this year, companies established in 2022 raised the most funds among companies of the same year, followed closely by those established in 2021.

Headquarters of Cryptocurrency Venture Capital Companies

Companies based in the United States dominate both completed transactions and funds raised. In the second quarter of 2023, US companies raised 45% of cryptocurrency venture capital funds, followed by the United Kingdom (7.7%), Singapore (5.7%), and South Korea (5.4%).

A similar situation can be observed in completed transactions as well. In the second quarter of 2023, US companies completed 43% of all cryptocurrency venture capital transactions, followed by Singapore (7.5%), the United Kingdom (7.5%), and South Korea (3.1%).

Scale and Valuation of Cryptocurrency Venture Capital Transactions

In the second quarter of 2023, the overall valuation of the venture capital industry continued to decline, and cryptocurrency investments were no exception. The median pre-investment valuation of cryptocurrency or blockchain venture capital transactions dropped to $17.93 million, the lowest level since the first quarter of 2022. The median transaction size for cryptocurrency venture capital in the second quarter of 2023 was $3 million, with a pre-investment valuation of $17.93 million.

The decline in the scale and valuation of cryptocurrency venture capital transactions follows the trend of the entire venture capital industry.

Cryptocurrency Venture Capital by Category

Trading, investment, and lending startups raised the most venture capital funds in the second quarter of 2023 ($473 million, accounting for 20% of capital deployment). Web3, NFT, gaming, DAO, and Metaverse startups raised the second most funds, reaching $442 million, accounting for 19% of all risk capital deployed in the second quarter of 2023. The Layer 2/Interop sector witnessed the largest transaction of the quarter—LayerZero, which raised $120 million in Series B funding. Magic Eden had the largest Web3/NFT transaction, amounting to $52 million, Auradine had the largest infrastructure transaction, amounting to $81 million, and River Financial had the largest trading/exchange transaction, amounting to $35 million.

From the perspective of transaction volume, companies developing products in the Web3 games, NFT, DAO, and Metaverse sectors maintain the first position, followed by companies in the trading, exchange, investment, and lending sectors. These trends have remained unchanged compared to the first quarter of 2023. It is worth noting that companies building privacy and security products have seen the largest increase in transaction volume (275%), followed by infrastructure (114%).

In terms of completed transactions in the later stages, the largest share is in the mining and enterprise blockchain categories, while the compliance category (including chain analysis and regulatory tools) has the largest share in transactions completed in the seed stage.

In terms of financing, mining and Layer 1 transactions are mostly in the later stages, while custody, media/education, compliance, and DeFi have a significant portion raised in the early stages.

Crypto Venture Capital Financing

We worked with Galaxy Asset Management to compile information on venture capital financing for the second quarter of 2023, which refers to funds raised by venture capital firms for new funds or new fund years. Since the third quarter of 2020, the second quarter of 2023 has seen the fewest number of new fund issuances (10) and the lowest amount of allocated funds ($720 million).

Combining the data from the first half of 2023, the average size of new funds is currently $236 million, with a median of $50 million, both significantly lower than last year.

Analysis and Conclusion

The bear market for crypto venture capital continues. Although transaction volume remains strong, the total capital allocated to crypto startups is still declining on a month-on-month basis. However, the decline in crypto venture capital activity is not unique to the crypto industry, as the broader venture capital industry is facing resistance in the face of rising interest rates. Other key conclusions from the second quarter of 2023 crypto venture capital data include:

•Relative to the previous bear market, crypto venture capital activity remains strong. Transaction volume and investment capital are still about twice as high as during the bear market period of 2017-2020, indicating that the startup ecosystem will continue to experience net growth over a longer period of time.

•Venture capitalists continue to face a challenging funding environment. Rising interest rates have reduced investors’ willingness to bet on long-tail risk assets such as venture funds compared to the previous decade of near-zero interest rate policies. In addition to the bear market in crypto assets and the fact that many allocators have been left reeling from the sharp declines of several venture-backed companies in 2022, venture capitalists will continue to find it difficult to raise new funds in 2023. In fact, the second quarter saw the fewest new fund launches and capital allocations since the third quarter of 2020, which was one of the weakest quarters for venture capital as global investors struggled to cope with the COVID-19 asset collapse.

•The lack of significant new venture capital will continue to put pressure on founders. Venture-backed startups have faced more difficulties in fundraising this year and will continue to face a challenging financing environment in the foreseeable future. Many speculative and ambitious blockchain use cases that were funded during the bull market are now struggling to find investments as the bull market hype and user frenzy have subsided. Founders must focus on revenue and sustainable business models and be prepared for smaller-scale fundraising while giving up more equity.

•Pre-seed stage transactions remain quite active. Although slightly lower than the first quarter, the number of pre-seed stage transactions has remained relatively stable. If seed rounds and Series A rounds are counted together, these early-stage transactions account for almost 75% of all transactions, indicating that entrepreneurs are still active and venture capitalists remain engaged. Savvy investors may find gems among the tenacious individuals starting companies in challenging environments, as they did during previous bear markets.

•The United States continues to dominate the crypto startup ecosystem. Despite mostly unfavorable regulatory environment, crypto startups based in the United States continue to attract the majority of venture capital activity. American companies hold a dominant position in the crypto ecosystem, and U.S. policymakers seek to retain top talent, promote technological and financial modernization, and maintain leadership in the future economy. It would be wise to formulate progressive policies that foster growth and innovation.

•Web3 continues to lead in transaction volume, while transactions still account for the largest investment amounts. This has been a multi-quarter trend where traditional moneymakers, such as companies building exchanges and trading tools, are raising the most funds, but the largest number of individual transactions flow into emerging companies in the Web3, DAO, metaverse, and gaming sectors.