Q2 witnessed a staggering $2.34B influx of capital through 382 blockchain and cryptocurrency transactions.
Funding for crypto startups is experiencing a temporary scarcity, as venture capital flowing into the industry has declined for the fifth consecutive quarter since Q1 2022. Global investments have reached $2.34 billion, reflecting a cautious approach from investors who are concerned about regulatory uncertainties and the state of the economy.
Although the current tally of $2.34 billion raised across 382 deals in Q2 2023 is a significant decrease from the industry’s peak of $12.14 billion in Q1 2022, there have still been notable funding rounds, such as LayerZero’s $120 million Series B and Worldcoin’s $115 million Series C.
Lydia Chiu, VP of business development at Ava Labs, explains that investors are adjusting their strategies due to lower valuations in the industry. Consequently, they are writing smaller checks to accommodate these changes.
The decline in capital deployment can be attributed, in part, to regulatory challenges in the U.S. This has led to a shift in the structure of crypto-related deals, with a greater emphasis on traditional venture structures like equity investments, rather than token investments or SAFTs (simple agreement for future tokens).
While regulations have dampened optimism in the industry, other factors have also influenced the funding landscape. The bankruptcy filings of several prominent crypto companies last year have undermined confidence, and some traditional firms and entrepreneurs have chosen to leave the U.S. ecosystem during market fluctuations. Additionally, investors have adopted a more discerning approach, prioritizing profits over rapid growth.
Valuations in the industry have experienced a significant decline, with a 50% drop in the second half of 2022 compared to the first half. Since then, crypto startups’ valuations have further decreased by an additional 15% in the first half of 2023, amounting to an overall 70% decline year over year.
Despite these challenges, crypto-native founders and investors remain resilient and optimistic. Lydia Chiu suggests that while the current trend may continue, it could potentially slow down in Q3 or become less severe.
Lasse Clausen, founding partner at early-stage crypto investing firm 1kx, points out that although funding appears to be down, there is still a substantial amount of capital being deployed. Comparing the current situation to previous all-time highs, which were arguably unsustainable, puts the decline into perspective.