The Growing Difficulty Crypto Startups Face in Raising Capital

In Brief

  • Crypto venture capital funding has dropped by 90% compared to the prior year.
  • The funding squeeze is fueled by regulatory constraints and significant decreases in assets under management (AUM) for prominent VC companies.
  • GET Protocol’s co-founder, Maarten Bloemers, champions a revival of crypto’s original ethos.

The cryptocurrency sector confronts a harsh truth: securing funds is progressively turning into a challenging endeavor. Investment from venture capitalists in crypto-linked initiatives is noticeably waning.

As emphasized in a recent study, merely eight crypto-centric venture capital funds had garnered a total of $500 million on a global scale by May 16, 2023. This showcases a 90% decrease in funded initiatives in contrast to the prior year. Hence, what factors are inducing this crypto funding constraint, and what are its transformative effects on the sector?

Venture Capitalists Funding Declines

Maarten Bloemers, co-founder of GET Protocol, confidently offers his insightful perspective on the evolving landscape of venture capital investment in the crypto and blockchain startup space.

Currently, venture capitalists are directing their efforts towards sustaining their existing portfolio companies, resulting in limited capital allocation for new ventures, as Bloemers explains to BeInCrypto.

This assessment underscores a significant trend. As the adoption curve takes shape, venture capitalists may face challenges in securing new limited partners for emerging Web3 funds. This potential scenario could dampen the growth prospects within the crypto industry, impeding its expansion into wider adoption.

Recent times have witnessed substantial declines in the assets under management (AUM) of various crypto venture capital firms. Notably, Multicoin’s AUM contracted from an initial $8.9 billion to a reduced $1.4 billion by the close of 2022. Similarly, Paradigm’s AUM saw a drop from an impressive $13 billion to approximately $8.7 billion during the same period, according to Newcomer’s data.

While AUM serves as a valuable gauge of financial health, it’s important to note that it isn’t the sole determinant of a firm’s success and can be influenced by factors beyond fund performance.

These shifts in the venture capital landscape have far-reaching implications. The collapse of centralized exchanges like FTX, followed by banking crises, has intensified regulatory scrutiny within the crypto industry. This is exemplified by the United States Securities and Exchange Commission’s (SEC) lawsuit against Binance, the world’s largest crypto exchange.

Bloemers highlights a noteworthy paradox in this context. Despite possessing the tools to operate independently from central entities within the ecosystem, there’s a failure to fully utilize them. He emphasizes a return to the foundational principles of the crypto space to address this dissonance.

In summary, Bloemers’ insightful perspective boldly navigates the changing dynamics of venture capital investment in the crypto realm, shedding light on challenges and opportunities while advocating for a renewed commitment to crypto’s core values.

The Role of Artificial Intelligence

In addition to the tightening of regulations, a striking and decisive shift in the focus of venture capital has become evident, transitioning from the realm of cryptocurrency to the realm of artificial intelligence (AI).

Fortune has unveiled a remarkable surge in the median pre-money valuation for enterprises specializing in generative AI. The current year has witnessed an astonishing ascent, with this valuation soaring to an impressive $90 million. This data is grounded in the meticulous tracking of nine deals documented by PitchBook until March 29. This surge is nothing short of extraordinary, given its substantial divergence from the $42.5 million benchmark established in 2022.

Prominent transactions involving entities like Anthropic and Tome have not only multiplied but also underscored this transformative trend. What’s more, nascent AI startups concentrating on diverse applications, spanning software development, elevation of customer experiences, and innovative media production, are amassing lofty valuations that underscore their potential.

Bloemers, a discerning voice in this discourse, recasts this paradigm shift as an opportune challenge for the crypto industry to reorient, rather than a perceived abandonment by venture capitalists.

“Let’s not castigate a dog for barking, for VCs will invariably pursue their nature,” he asserts, provocatively urging the industry to undertake the ambitious task of “constructing solutions capable of onboarding the next billion users” in a strategic riposte.

He categorically dispels the notion of crypto initiatives haphazardly integrating AI components solely to entice investors. Instead, he ardently advocates for purposeful development, guided by the principle of “enriching a sufficiently extensive market.”

Increasing Regulatory Scrutiny

Bloemers asserts unwavering confidence in the crypto industry’s resilience despite regulatory pressures. He firmly dismisses any notion of the establishment aiming to dismantle crypto, highlighting that the current regulatory challenges are a passing phase. He perceives it as a period where regulators grapple to comprehend the intricacies of this novel and intricate field.

According to Galaxy Digital, venture capital funding for crypto startups has seen a consistent decline over the last five quarters due to unfolding regulations. In Q2 2023, the crypto and blockchain sector attracted $2.32 billion in investments, marking a new low cycle since Q4 2020, following a decline from the peak of $13 billion in Q1 2022. Notably, US-based crypto startups have maintained a substantial 45% share of total capital investments, despite the intensifying regulatory scrutiny they face domestically.

To newcomers grappling with the current funding hurdles in the crypto sphere, Bloemers offers pragmatic counsel. He advises them to prioritize user-friendliness and engender genuine user appreciation for their products.

The challenges of securing funds in the crypto sector are multifaceted, stemming from regulatory ambiguities, cautious investors, and global economic challenges. Nevertheless, industry veteran Maarten Bloemers perceives this phase as more a time for introspection and adaptation than an existential crisis.

In Bloemers’ concise summation, traversing the current crypto landscape is akin to a marathon rather than a sprint.

Within this endurance challenge, a return to the foundational principles and values of crypto holds the potential for enduring success. The emphasis should be on creating tangible transformative value, eschewing speculative fervor.


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