The big shift in venture capital funding away from crypto projects has come into stark focus.
A comparison between this and last year’s Q1 funding shows a drop from $9.1 billion during the first three months of 2022 to $1.7 billion in 2023, an 82% fall, according to a Crunchbase report.
However, while the dip in deal flow and sector funding harken back to or below levels last seen in Q4 2020, Delta Blockchain Fund Founder Kavita Gupta told Decrypt that there are many factors at play.
“There are multiple things happening. We are seeing more and more companies who have raised at a very high valuation in 2021 or early 2022 that are now coming back into the market trying to do extensions at the same valuations, which are not going through. So a lot of companies are doing their down rounds,” said Gupta.
Those high valuations were driven by companies such as Yuga Labs, ConsenSys, Polygon, as well as FTX and FTX US—all of which raised between $400 million and $450 million in 2022.
Reduced deal flow
In today’s market, the sword now cuts the other way. Where major institutions like FTX and Silvergate Bank once stood, there are ruins.
Overall only a trio of companies came out of Q1 2023 having secured sizable funding, and of those, only two saw more than $100 million, according to Crunchbase data.
Vancouver-based technology provider Blockstream raised $125 million in convertible notes and secured loans, and French hardware wallet maker Ledger raised $108 million to bring its Series C funding to a total of $488 million.
Israel-based semiconductor startup Chain Reaction secured a $70 million Series C funding round.
Reacting to market conditions
“With respect to funding, we are definitely seeing low valuations and more incubation stages instead of growth stages at slashed values,” said Gupta. “The secondary market and the lower value for the growth stage companies are also picking up with actually even lower buyers.”
In some cases companies planning on token launches saw projects sidelined amid sour market conditions, according to Gupta. “Prices are down and people are not raising as much money as they were initially aiming to raise from the token listings,” she said.
While Ethereum and Bitcoin “still have some balance” according to Gupta, those with capital may have second thoughts about sinking cash into other crypto assets. Potential regulatory factors “are causing investors to have their doubts around tokens,” she said, even if they may be considered blue chips by the wider market.
Likely hastened by the growing popularity of deep learning modules such as ChatGPT, venture capitalists are beginning to shift interest.
Mysten Labs co-founder and CEO Evan Cheng said this change is due to the wider appeal of AI products, which have drawn a number of recent investments over recent months.
Crypto investment veteran Andreessen Horowitz put $150 million behind Character AI last month. The team that built AI image generation tool Stable Diffusion raised $101 million from Lightspeed Venture Partners for Stability AI in October 2022.
In an effort to thwart OpenAI’s ChatGPT, billionaire Elon Musk days ago announced on CNBC the creation of X.AI, a company rumored to be headquartered in Nevada, according to a report from The Wall Street Journal.
The AI bug also seems to have bitten Tron founder Justin Sun who said that his company would create a $100 million fund for AI development.