Crypto startups are facing a harrowing time attracting private financiers after the collapse of digital-asset exchange FTX. Venture capital investment in the industry plunged to its lowest level in almost two years during the fourth quarter of 2022, according to data from research firm PitchBook.
Overall, VC firms invested $2.3 billion in crypto startups during the quarter, a 75 per cent drop from the same period the previous year, according to PitchBook. Venture capitalists had already begun slowing their investment activity, but the implosion of FTX in November prompted them to pull back even further, said Robert Le, a crypto analyst at the research firm.
“Investors are trying to see what’s going to happen next and there isn’t a rush to deploy capital,” Le said in an interview.
The pullback is a departure from the ardor for crypto at the beginning of 2022. FTX had raised $400 million at a $32 billion valuation last January, while VC firms like Andreessen Horowitz, Haun Ventures and Electric Capital raised billions of dollars to back crypto companies. Enthusiasm for the industry led to a record $26.7 billion being invested in blockchain startups last year, most of which came in the first quarter, according to PitchBook. That number represented a slight increase compared to 2021.
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FTX’s implosion was certainly the last straw for some VCs. Setbacks, such as the bankruptcy of crypto lender Celsius Network in July, had already given them pause, according to Alex Thorn, head of firmwide research at crypto financial services provider Galaxy Digital. The collapse of the TerraUSD stablecoin and the shutdown of disgraced crypto hedge fund Three Arrows Capital, both of which pushed the prices of digital assets lower, further spooked investors.
Generalist VC firms that dabbled in crypto while the market was hot are likely more hesitant about the industry now, especially if they were exposed to one of its major blowups, Thorn said. While such firms can turn to other areas of tech to invest in, smaller funds could be at risk if they’re dedicated solely to crypto.
“It is hard to see how some of those are going to last,” Thorn said.
The absence of FTX, which did not have a formal board and whose investors have been criticized for not conducting proper due diligence, is also changing the crypto venture landscape. FTX and its sister firm, Alameda Research, were both active venture investors prior to their collapse. PitchBook’s Le said that FTX had a reputation for swooping into deals and writing big checks, while asking founders few questions in a fast process that often pushed out other venture investors.
“I don’t know how price-disciplined they were,” Le said. “It will be better for other crypto investors because now you can go back to the correct valuations and the correct due diligence process.”
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Venture capitalists that are still interested in crypto are now taking more time to conduct due diligence, said David Pakman, managing partner at crypto VC firm CoinFund. They’re requiring stronger investor protections and pushing for board seats. Valuations are also becoming more realistic, he said.
Pitchbook’s Le still expects crypto VC investment to pick up over the summer, especially because many crypto funds are under obligation to deploy the massive capital they raised during the digital-asset boom.
“It’s not going to remain low forever,” he said.
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