Venture capital funding in the crypto industry has experienced a significant decline, reaching levels not seen since the fourth quarter of 2020, amidst an ongoing bearish market.
According to a report published on October 5, 2023, by Messari, a blockchain analytics firm, the numbers are clear: in the third quarter of 2023, crypto startups raised a total of $2.1 billion through 297 deals. This represents a alarming decrease of 36% compared to the previous quarter and an impressive drop of 70% compared to the third quarter of 2022.
The funding landscape has been influenced by several factors. First and foremost, seed funding has become the largest fundraising category, generating a total of $488 million through 98 agreements. This phenomenon is associated with a significant shift in investor preference, moving away from late-stage projects and focusing on early-stage projects over the last three years. Surprisingly, less than 1.4% of the agreements involved companies in the Series B round or later.
Private Investment pulls its strings in the matter
On the other hand, strategic financing rounds have experienced a notable increase. Going from representing only 0.2% of the total deal share in the fourth quarter of 2021, they now constitute over 22% in the third quarter of 2023. A prominent example of private investment during this quarter was the injection of $200 million into Islamic Coin, a company based in the United Arab Emirates, by the family office Alpha Blue Ocean’s ABO Digital.
However, this market dynamic also reveals a concerning reality. Challenging market conditions are compelling projects to seek short-term bridge funding or, ultimately, consider acquisition by larger projects as a viable option.
Despite the regulatory uncertainty surrounding the world of crypto, a noteworthy fact is that 54% of all active venture capital investors originate from the United States, outnumbering the rest of the world combined. Nevertheless, there is a noticeable shift in investor appetite, moving from user-facing applications to blockchain infrastructure. The latter has consistently outperformed the former in terms of funding over the past three months.
Despite this trend, researchers caution that the focus on infrastructure may not be sustainable in the long term. Increasingly, investors are realizing that, without successful user-facing crypto applications, investments in infrastructure may fail to yield the desired returns. This balance between infrastructure and user applications remains one of the key uncertainties in the future evolution of crypto funding.