The persisting bear market in the world of cryptocurrency is vividly illustrated by the industry’s fundraising statistics. Q3 2023 continues the multi-quarter decline we’ve been observing since the start of 2022, hitting new lows in both total funding and deal counts that haven’t been witnessed since Q4 2020. In this quarter, the figures came in at just under $2.1 billion across 297 total deals, representing a significant 36% decrease in both categories compared to the previous quarter.
Fundraising by Stage
Analyzing Q3’s deal landscape reveals a clear trend – the majority of deals are prominently concentrated in early stage rounds. Notably, seed funding stands out as the primary driver, securing an impressive $488 million across 98 rounds. This shift is more pronounced when observing deal counts over the last three years, showing a substantial departure from later stage endeavors in favor of early stage ventures.
Early stage deals, encompassing Pre-Seed, Seed, and Series A investments, have surged from a 37% market share in Q4 2020 to an impressive 48% in Q3 2023. In contrast, later stage deals, defined by Series B or beyond, have dwindled from an 8% share in Q4 2020 to a mere 1.4% in Q3 2023. This shift is emblematic of strategic market positioning, reflecting investor’s eagerness to back projects with the potential for significant returns once market sentiment takes a more positive turn.
Furthermore, Q3 witnessed a notable uptick in strategic investments, with corporate and private equity deals like the $200 million injection into Islamic Coin leading the way. The prevalence of strategic funding has steadily risen throughout the bear market, in stark contrast to the peak of the
Fundraising by Sector
Sector Trends
The sector funding distribution in Q3 closely mirrors the consistent trends observed over the past year. Chain infrastructure, DeFi, and gaming sectors have consistently maintained their position as the most well-funded sectors during this period. Notably, the services sector, encompassing functions like marketing, incubators, security, and legal services, has consistently averaged over $100 million in funding over the past 12 months. While other sectors play crucial roles in the growth of the crypto industry, these four sectors continue to dominate investor attention.
One noteworthy development in the past year is the increasing emphasis on infrastructure-based projects over user-facing applications. This shift is evident when we group consumer, DeFi, and gaming sectors as “applications” and application infrastructure, chain infrastructure, custody, and DePIN sectors as “infrastructure.”
Analyzing the funding ratios for these two buckets reveals a subtle but discernible shift away from user-facing applications in favor of infrastructure projects. This shift is underpinned by the consistent funding flowing into infrastructure projects compared to the more volatile application bucket. However, it’s important to note that this trend may not persist for long, as more investors are recognizing that the success of user-facing crypto applications is integral to achieving their desired returns on infrastructure investments.
Leading Sectors
In Q3, funding was diversely allocated across various sectors. Chain infrastructure took the lion’s share of capital, comprising 18% of the total, while DeFi dominated in terms of the number of funded deals, boasting a remarkable 67. Furthermore, the gaming sector continued its robust performance, attracting nearly $250 million in investments.
Chain Infrastructure
The chain infrastructure sector dominated Q3 funding despite a relatively modest 21 deals. Notably, one-third of these transactions were centered in the smart contract platform subcategory, exemplified by Fhenix’s successful $7 million fundraising campaign for fully encrypted smart contracts.
Scaling solutions emerged as the primary driver of capital generation, accounting for a substantial 43% of sector financing. This trend signifies a sustained shift away from smart contract platforms towards scaling solutions. In fact, Q1 2022 marked a pivotal moment when scaling solutions secured more funding than smart contract platforms, with Polygon’s remarkable $450 million injection into its scaling suite. Over the past four quarters, the ratio of capital invested in scaling solutions versus smart contract platforms has consistently surpassed the Q1 2022 high, reaching a remarkable 7x during Q4 2022, primarily due to reduced investment activity in the smart contract platform category.
In Q3 2023, over 40% of the chain infrastructure’s total funding of $387 million was attributed to the Optimism Foundation’s sale of approximately 116 million OP tokens, reinforcing their commitment to development in late September. Other notable transactions featured Flashbots’ $60 million Series B round to advance SUAVE and Bitmain’s strategic investment of $54 million in Core Scientific, a prominent Bitcoin mining company.
DeFi
In Q3, DeFi emerged as the most prolific sector, boasting an impressive 68 funded projects. Notably, investments in this sector exhibited a pronounced focus on the exchange category, representing a significant 38% of the total invested capital across 33 deals. The DeFi landscape, as a whole, secured a remarkable $210 million in funding, with an average deal size of $3 million.
During this quarter, Binance Labs displayed a strong presence as an active investor in the DeFi sector, partaking in seven deals. Their strategic investments amounted to $10 million each in both Helio Protocol, a robust liquid staking platform on the BNB Chain, and Radiant Capital, a cutting-edge money market platform built on LayerZero. The standout investment of the quarter was a substantial $16.5 million Series A funding round for Brine, an order-book decentralized exchange (DEX) powered by Starkware technology.
Notably, three out of the top four DeFi investors by deal count in Q3 were ecosystem entities. Binance Labs, the Base Ecosystem Fund, and Polygon jointly executed an impressive total of 16 deals, underlining their strong commitment to the DeFi space.
Gaming
In the dynamic realm of gaming, Q3 witnessed remarkable strides as the sector clinched an impressive $249 million through 33 deals, ultimately claiming its spot as the third-highest funded sector. Gaming, which captivated 67% of the capital invested in user-facing applications in the consumer sector during this quarter, demonstrated its exceptional growth potential.
The gaming sector experienced a wave of investments predominantly originating from a diverse range of investors. Out of the 111 investors involved, only seven engaged in multiple projects, highlighting the sector’s appeal to a wide array of backers.
One standout milestone in the gaming sector was the monumental $54 million Series A funding secured by Futureverse, a groundbreaking platform that seamlessly integrates AI and the metaverse. Notably, other metaverse-centric gaming ventures like Mocaverse and Mahjong Meta also successfully secured funding during this dynamic quarter.
Additionally, Proof of Play made a significant mark by raising an impressive $33 million in seed funding, with the support of lead investors a16z and Greenoaks. Co-founded by Amitt Mahajan, one of the original creators of the immensely popular Zynga game Farmville, this onchain gaming studio aspires to replicate the growth trajectory witnessed by early free-to-play mobile games in the burgeoning world of blockchain-based gaming.
Investors
During Q3, the crypto industry witnessed remarkable activity from its most engaged investors, who spearheaded a total of 144 investments. However, it’s worth noting that this enthusiastic group accounted for just 7% of all investor deals, underscoring the continued dominance of the crypto fundraising landscape by a diverse range of investors.
The standout performers in this quarter were undeniably Outlier Ventures and Binance Labs, with an impressive 23 and 22 deals, respectively—more than double the next closest investor, Robot Ventures. Outlier Ventures primarily focused its investments in the payments sector with six deals and DeFi with five deals.
As previously highlighted in August, Binance Labs has maintained its active investment strategy throughout 2023, with a particular emphasis on the DeFi and gaming sectors. Furthermore, Binance Labs has shown a keen interest in projects related to zero-knowledge and privacy technology. It’s noteworthy that 12 of Binance Labs’ 22 deals involved projects participating in its accelerator program. Even if we exclude these, Binance Labs’ remaining 11 investments would still tie it for second place in Q3 deal activity with Robot Ventures.
Lastly, a significant 54% of the active investors during Q3 were based in the United States. This statistic aligns closely with the quarterly average from the past four years, which stood at 55%. Despite a gradual shift of project founders towards more regulation-friendly jurisdictions, the United States continues to be the primary home for the majority of accredited investors in the crypto space.
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