Crypto Venture Funding Heats Up in Q1 2024, Surging Past Q4 2023

Amidst positive sentiment and promising legal developments, the crypto venture capital landscape has witnessed a significant upswing in Q1 2024, with $2.52 billion raised, surpassing last quarter's value and indicating a rebound from 2023's challenges. This surge is supported by increased deal activity, a rise in token issuance, and a competitive VC environment favoring founders. While valuations have increased, the power balance remains balanced, and caution persists among investors to avoid excessive valuations. With a robust pipeline of deals expected and LP interest re-emerging, the industry anticipates continued hyperactivity in the coming quarters, although regulatory uncertainties will remain a key factor shaping the market.

Crypto Venture Landscape Heats Up in Q1 2024, Surpassing 2023 Fourth Quarter

The crypto venture capital market has surged in the first quarter of 2024, with a total capital of $2.52 billion raised across the crypto and blockchain sectors, according to PitchBook data. This represents a 25% increase compared to the $2.02 billion raised in the fourth quarter of 2023.

"The market feels like 2021 again," said David Nage, portfolio manager at Arca. "Our firm has tracked over 690 deals across stages that have transpired during Q1, about 30 to 40% more than the lows in 2023."

Alex Felix, co-founder and chief investment officer at CoinFund, attributed the uptick in deal-making activity to factors such as positive legal outcomes for Ripple and Grayscale, growing interest in decentralized finance (DeFi) on Solana, and increased demand for Bitcoin following SEC spot ETF approvals in the U.S.

"The market is also buoyed by the fact that we didn't die," said Nage. "After the collapses of LUNA, BlockFi, FTX, and the banking crisis, we thought we would, but we didn't."

Analysts predict that the crypto venture market will continue to heat up, fueled by positive macroeconomic conditions, the launch of crypto ETF products, the upcoming Bitcoin halving, and projected rate cuts in the U.S. ahead of the upcoming presidential election.

"We're also seeing institutional interest start to convert into real budgets and products," said Mike Giampapa, general partner at Galaxy Ventures. "For example, BlackRock is launching its tokenized money market fund on the Ethereum blockchain, which could lead to heightened competitive pressure from traditional financial institutions and more adoptions."

Deal flow has picked up in areas ranging from DeFi to SocialFi to Bitcoin layer-2 growth. "We see 30 to 40 deals on a weekly basis, that's increased 10% to 20% over the last quarter," said Nage.

"The market in 2024 will be a tale of the 'haves' and 'have nots,' with newer companies building along popular narratives getting funded at rich valuations and many other companies going out of business," added Giampapa.

SocialFi, which refers to decentralized social media in the web3 world, is currently a hot sector. Bi.social recently closed a $3 million round, and Mask Network raised $100 million to support similar applications.

Crypto and AI, blockchains, and anything zero-knowledge related are also gaining significant attention. "Given the grandiose expectations for AI's potential to impact the global economy, we expect this trend to continue for the foreseeable future," said Tekin Salimi, founder of dao5.

"Valuations are up significantly, and even when larger, more established firms pass on a deal, founders still have plenty of options with others," said Michael Anderson, co-founder of Framework Ventures. "Some of the valuations we're seeing are already a bit outlandish given how early we are in this cycle."

However, venture capitalists are mindful of not getting trapped into higher valuations by blindly following the hype. "It is common to see rounds get oversubscribed within days of coming to market and allocations being denied or shifted to subsequent rounds at higher valuations," said Thomas Tang, VP of investments at Ryze Labs.

Since the end of 2023, there has been a resurgence in token issuance as companies explore tokenomic designs for 2024. "This is a shift from the mid-2022 post-Terra/LUNA collapse era, when most seed deals were funded with SAFe or warrants," said Nage.

"This new issuance phase we're entering into is that valuations have shifted violently," added Nage. "This dynamic has driven VCs to accept lofty valuations in private rounds since they expect that the tokens will be traded publicly at a significant markup."

While SAFe rounds are still happening, the market has congealed around those alongside priced equity rounds and token structures. "This gives investors protection but also provides teams with flexibility," said Schmidt.

Clay Robbins, co-founder of accelerator and venture capital fund Colosseum, noted that it is more challenging for teams raising around traditional business models due to the bias towards token trades and early liquidity among crypto-native VCs.

"The long-term performance of these tokens is yet to be seen," said Marthe Naudts, associate at White Star Capital's Digital Asset Fund. "We're seeing lots more experimentation with tokenomics models here and it's certainly a space where we are excited by the innovation at play."

Looking ahead to the rest of 2024, analysts expect the early-stage funding space to continue heating up, but there may be some variation at the growth stage. "Given the relatively anemic IPO market, lack of fundamentals-based underwriting of growth-stage crypto companies, and a confirmed trial between the SEC and Coinbase, I anticipate it will be inconsistent," said Robbins.

April will be a significant month for crypto market sentiment, as the Bitcoin Halving is approaching. "Past halving events have propelled the price of Bitcoin, but historical data doesn't always predict the future," said Salimi.

"If there's positive progress on the regulatory front, real on-chain momentum, more institutional-based products being launched, and continued overall improved macroenvironment, there could be 'frenzy levels of deployment,'" said Robbins.

Last year, most funds were doing about one to two deals a month, but there has been a significant increase in deal volume. "That has dramatically changed," said Nage. "In December alone, we've done half a dozen, if not more."

Despite the challenges faced in 2023, analysts are confident that the crypto venture market will remain active throughout 2024. "If [firms] can raise funds in the next two to three quarters, they won't hold on to their past dry powder as aggressively as they did the past year," said Nage. "As that eases, you'll see more checks."

While Felix projected that VC funding to web3 could exceed $16.2 billion by year end, most firms estimated that the total capital raised would surpass the $10 billion mark. "This market falls somewhere between the mania of 2021, 2022 and the muted market of last year," said Robbins.

Giampapa noted that some large deployers of capital in the previous bull market are no longer in business, which may impact the overall amount of capital deployed in crypto VC. "Without these pools of capital, I struggle to see how dollars deployed into crypto VC get back to the 2021 to 2022 levels."