Only two years ago, any run-of-the-mill blockchain project could walk into a Silicon Valley venture capitalist’s office singing that Lego Movie tune “Everything is Awesome!” and walk out with a cool million. Yeah, that’s over for now.
“FTX pushed trust away from the space in general, and while it is a distraction for new holders and for investor acquisition, it just means that the primary focus (for us) is now pointed toward maintaining the existing user base,” says Bryan Legend, co-founder of OOXY Labs and Vulcan Blockchain in Australia.
Andriy Velykyy, co-founder and CEO of Allbridge, a two-year-old cross-blockchain solutions provider in Lisbon, is launching new products in the middle of the “VC winter.”
“We are in active fundraising mode,” he says from his offices in Portugal, adding that his company’s latest interoperability program, called Burst, was inspired by the FTX collapse. Entrepreneurs like Velykyy see opportunity rising from the market chaos, with investors still taking meetings. Those investors are just more likely to emphasize conservative projections and due diligence.
Venture capital poured $25 billion into blockchain startups in 2021, according to CB Insights. November and December VC flow into blockchain companies were the lowest ever raised, according to PitchBook data. By the end of the fourth quarter of 2022, VC crypto investments totaled 345 deals worth $2.5 billion, down 57.7% from 2021, even though the amount of capital raised was 4.7% greater than in 2021. The real crash was felt from the third quarter of 2022 into the fourth quarter, which is when the FTX debacle went full bore. Deal count fell by over 39%, and the amount of capital raised dropped by 72%.
Even though venture capital firms invested heavily in fintech startups last year, blockchain fell as a category, TechCrunch reported on Sunday.
In the fourth quarter of 2022, crypto-focused VC venture firms raised the smallest amount of capital since the first quarter of 2021, despite 2022 seeing the largest amount ever raised by crypto VCs at more than $33 billion, according to Galaxy, a digital assets and blockchains solutions provider.
“What you’re seeing now is that diligence cycles are going months instead of days and weeks,” Robert Le, a senior emerging technology analyst with PitchBook told CNBC’s Crypto World show last week. He said he suspects VC flow into blockchain projects will continue to fall throughout the first quarter of 2023.
According to CoinMetrics, blockchain project-related coins are down over 10% in the week ending February 22. The second worst sector was specialized coins, things like meme coins and privacy coins like Monero
Carl Szantyr, Managing Partner at Blockstone Capital, a London-based hedge fund, says he is seeing existing startups with short runways struggling to raise extra VC funding.
“Most of the dry powder is now looking to be allocated to distressed assets at reasonable valuations rather than to an overvalued company,” he says in an interview. “We expect to see down rounds for start-ups, and thus a good vintage for close-ended VC crypto funds, finding good deals at a reasonable valuation.”
“We still see lax risk management and risk controls from too many players in our industry. We know of some funds who thought trading on FTX was a money maker and got more than 50% of their assets frozen on the exchange,” Szantyr says. “Last year was a crazy year, but the market is slowly returning to a better normal.”
Idiosyncratic events within the space – from the FTX debacle to the Luna stablecoin crisis – have impacted both venture capital appetites and blockchain startups still in their infancy.
“Trading volumes and user activity, including on our platform, have decreased drastically,” says Max Kalmykov, CEO of Bitsgap.com, a five-year-old Estonian cryptocurrency algorithmic trading platform. He added that the industry is currently in recovery mode.
“We are cautiously optimistic for 2023,” says Will Cai, co-founder and managing partner at Wilshire Phoenix, an asset management firm located in New York City.
Some deals are still happening. Back in Lisbon, the blockchain startup Allbridge raised $2 million in January 2023 with a round led by Race Capital, a venture fund that previously invested in Solana
Chain Reaction, a blockchain-focused chip designer based in Tel Aviv, raised $70 million in a Series C round led by Morgan Creek Digital this month. India-based blockchain gaming company Kratos Studios got $20 million in a seed round led by Silicon Valley VC firm Accel, The Block reported on February 22.
“For funds like ours at LBank Labs, this is the period where we do some of our most important investing, where the valuation of projects is more realistic,” says Czhang Lin, a board member at UAE-based LBank’s investment arm, known as LBank Labs. Trading volume on the LBank exchange has been relatively flat, and Lin says they expect that situation to linger for a bit longer. But for the investment wing of LBank, Lin says they managed to retain a “healthy degree” of investing even throughout the FTX collapse in 2022 and into this year. “I think this is a great time frame to observe which projects endure this kind of market and can continue building,” he says.