Despite the robust growth of the crypto market, venture capital (VC) firms focused on the sector are struggling to raise new capital, according to a new report from Galaxy Digital Research.
The report, which looks at the fundraising landscape of crypto VC funds and the number of new funds, found that only eight new funds launched in Q3 2024, raising a total of $140 million, the lowest level since Q3 2020.
According to Galaxy Research, the decline in VC fund allocations continues a trend that began in Q3 2023. Since then, allocations have been declining each quarter, reaching their current lows. The report attributes the decline to events in 2022 and 2023, which have caused many investors to withdraw from the crypto sector.
“The macro environment and crypto market uncertainty in 2022 and 2023 have combined to discourage some investors from committing at the same high levels as in 2021 and early 2022,” the report notes.
If this trend continues, 2024 could be the worst year for crypto VCs in terms of fundraising since 2020. So far, 39 new funds have raised just $1.91 billion, and most VCs have raised smaller amounts. The average and median fund sizes in 2024 are the lowest since 2017.
VC investment in crypto companies fell 20% in Q3 2024
Not only are there fewer new VC funds focused on crypto, existing VCs have also reduced their investments in the space. In Q3 2024, VCs invested just $2.4 billion in blockchain and crypto startups across 478 deals. This represents a 20% decline in value from the previous quarter and a 17% decline in deal count.
The report notes that this trend could see 2024 end at or slightly below 2023 in terms of VC investment in crypto. This year has marked a sharp divergence between Bitcoin’s performance and investment in crypto startups.
This divergence is due to a number of factors, including the massive attention on Bitcoin thanks to spot ETFs that have fueled the current bull run. In addition to BTC, memecoins have also contributed to the bulk of on-chain activity, forcing many traditional VCs to shift their attention away from crypto.
“Weak investor interest in crypto VCs, combined with market narratives favoring Bitcoin and ignoring many of the hot stories from 2021, may partly explain this discrepancy.”
That said, crypto-focused VCs are still investing in the industry, albeit not to the same extent as before. The majority of investments (85%) are in early-stage companies, while the remainder are in established companies. VCs’ retreat from crypto startups is understandable, given the sharp decline in the value of these deals. The good news is that valuations are starting to recover, with the median transaction size in Q3 2024 now at $3.5 million and the median transaction valuation at $23 million, the highest since 2022.
DeFi, Layer-1 networks, and AI projects attract the most VC investment
While VC allocations declined in Q3, the distribution is uneven. The majority of VC funding now favors startups in the decentralized finance (DeFi) space, including projects focused on lending, trading, exchanges, and investing.
Companies in these sectors raised $462.3 million (18.43%) of the total VC funding in Q3 2024. Other top sectors include the Layer-1 sector, with over $400 million, and the Web3/NFT/Gaming/DAO sector, with over $350 million.
However, the Web3 sector saw a 39% decrease in VC funding this quarter, compared to the DeFi sector, which saw a 50% increase. However, AI-focused crypto projects saw the largest increase in VC funding, with a 500% increase resulting in over $250 million raised. This demonstrates that VCs are very interested in artificial intelligence, even in the crypto industry.
Interestingly, US-based crypto startups received the most VC funding, with 44% of deals having US recipients. This comes despite the country’s lack of regulatory clarity, which isn’t entirely surprising since 55% of equity investments are also from US-based VCs.