Crypto Venture Market Heats Up in 2024, Mirroring 2021 Boom

In Q1 2024, the crypto venture landscape is experiencing a surge in funding, with $2.52 billion raised across crypto and blockchain sectors, surpassing the previous quarter by 25%. This surge is fueled by positive sentiment, legal wins, and increased demand for cryptocurrencies. VCs are actively investing in startups across sectors such as DeFi, SocialFi, Bitcoin layer-2 growth, and AI, while valuations are trending upwards. Founder-friendly dynamics are emerging, with startups leveraging their bargaining power in fundraising. The tokenomic landscape is also evolving, with a rise in token issuance. As the year progresses, the funding space is expected to remain buoyant, with projections for total funding exceeding $10 billion by year-end.

With the dawn of 2024, the crypto venture landscape is witnessing a resurgence of activity, mirroring the effervescence observed in the heady days of 2021. The first quarter of 2024 has witnessed a significant influx of capital, amounting to $2.52 billion, marking a 25% increase compared to the $2.02 billion accrued in the preceding quarter of 2023, according to data collated by PitchBook.

This resurgence has not escaped the notice of industry experts, with Tom Schmidt, a partner at Dragonfly Capital, aptly likening the current climate to "the part where the bubbles start to form right before water boils."

Echoing this sentiment, David Nage, portfolio manager at Arca, remarked that the market is experiencing an extraordinary surge in activity, akin to the "2021 feels" when "deals felt like you had a gun to the back of your head." Nage further noted that his firm has tracked over 690 deals across various stages during Q1, representing a substantial increase of 30 to 40% compared to the lows of 2023.

Underlying this renewed enthusiasm are several key factors, including the positive outcomes from legal battles waged by Ripple and Grayscale in the previous year, as well as a growing sentiment of optimism surrounding decentralized finance (DeFi) on Solana. Notably, the approval of spot bitcoin ETFs in the US has also fueled demand for the world's largest cryptocurrency.

Moreover, the resilience of the crypto market has contributed to this upswing, as Nage observed, "We didn't die. I know it's funny to say this, but after the [collapse of] LUNA, BlockFi, FTX, the banking crisis, the thought was that we would die and we didn't."

This momentum is expected to endure, according to crypto venture capitalists, bolstered by macroeconomic factors such as the launch of crypto ETF products, the impending Bitcoin halving, and anticipated interest rate cuts in the US ahead of the upcoming presidential election. Additionally, institutional interest is beginning to translate into tangible commitments and product offerings.

Deal flow has accelerated across diverse sectors, from DeFi to SocialFi to Bitcoin layer-2 growth. Nage reported a surge of 30 to 40 deals on a weekly basis, which represents a 10% to 20% increase over the previous quarter.

SocialFi, a burgeoning sector that encompasses decentralized social media platforms, has emerged as a particularly hot area. Bi.social's recent $3 million funding round and Mask Network's $100 million fund to support similar applications exemplify this trend. The success of decentralized social app networks like Farcaster, which leverages Web2.0 techniques to attract new users, has contributed to this growth.

Web3 gaming is another rapidly expanding segment, with hundreds of new games anticipated to enter the market later this year. Furthermore, the convergence of crypto and AI, blockchains, and zero-knowledge technologies has attracted the attention of venture capitalists.

Schmidt emphasized the "red hot" status of crypto and AI, blockchains, and zero-knowledge-related endeavors. Tekin Salimi, founder of dao5, anticipates this trend to persist "for the foreseeable future" given the grand expectations for AI's transformative impact on the global economy.

For instance, modular and AI-integrated blockchains like 0G labs, which recently launched with a $35 million pre-seed round, are attracting investor interest.

This upswing in activity has created a founder-friendly environment, with early-stage startups enjoying greater negotiating power in fundraising. Michael Anderson, co-founder of Framework Ventures, acknowledges the abundance of "hungry money" currently available.

Marthe Naudts, associate at White Star Capital's Digital Asset Fund, explains that investors are now actively pitching their value in oversubscribed rounds, a departure from the previous paradigm. This shift in dynamics has bestowed founders with more favorable terms and the ability to dictate conditions, leading to competitive rounds concluding before investors have ample time for due diligence.

However, Felix stresses that the balance between founders and investors remains largely intact, describing the current situation as "perfectly balanced" for both parties. Founders are benefiting from more urgent funding rounds and slightly higher valuations than recently experienced, while VCs are securing more protective and advantageous deal structures.

Despite these positive indicators, there are disparities based on team quality and sector, as Schmidt points out. Some startups that raised capital during the previous market cycle are now facing downrounds or extensions, while others, particularly in the crypto and AI sectors, are attracting valuations of $300 million or more.

Pre-seed rounds in crypto consumer ventures typically secure valuations below $10 million, while founders in sectors like crypto and AI can expect valuations of $300 million or higher. PredX, an AI-enabled prediction market, raised $500,000 with a $20 million post-money valuation, according to Messari data. CharacterX, a web3 AI social network, closed a $2.8 million seed round at a $30 million post-money valuation.

Seed rounds typically yield pre-money valuations of $25 million to $40 million, with several startups securing $80 million market valuations at this stage, according to Nage. Schmidt estimates the average seed round valuation to range from $30 million to $60 million post-money.

Anderson acknowledges a significant increase in valuations, even surpassing the levels commanded by established firms that may have rejected similar deals in the past. He cautions that some of the valuations being touted are already excessive, given the early stage of the current cycle.

Schmidt advises caution when interpreting market trends based solely on fundraising announcements, as they often trail the actual fundraising process by many months or even a year. He observes that funding rounds that would have faced protracted negotiations or outright rejection in the previous year are now being secured in weeks or less, with more favorable terms for founders.

This valuation shift is also driven by sentiment surrounding cryptocurrency prices, with Bitcoin reaching all-time highs, Solana surpassing $200, and Ether approaching $4,000, a significant catalyst for positive sentiment, according to Nage.

Seed rounds continue to offer the most accessible entry point for founders, with numerous small funds and angel investors willing to provide early-stage capital. However, Felix anticipates a slow improvement in the graduation rate from seed to Series A, which has declined from the upper 20% range to the mid-teens.

Venture capitalists are wary of falling prey to higher valuations driven by FOMO, yet they recognize the folly of inaction. Thomas Tang, VP of investments at Ryze Labs, notes that it is common for rounds to become oversubscribed within days of reaching the market, with allocations denied or deferred to subsequent rounds at higher valuations.

In a notable development, the tokenomic concept has re-emerged since the end of 2023, with Nage reporting that many companies and industry peers are exploring tokenomic designs for 2024. This shift marks a departure from the mid-2022 era, when most seed deals were financed with Simple Agreement for Future Equity (SAFE) or warrants.

"This new issuance phase is driven by valuations that have shifted violently," Nage explained.

This dynamic has led venture capitalists to accept "lofty valuations in private rounds since they expect that the tokens will be traded publicly at a significant markup," according to Tang.

While SAFE rounds continue to occur, Schmidt indicates that the market has coalesced around a combination of priced equity rounds and token structures, providing investors with protection while granting teams flexibility.

Clay Robbins, co-founder of accelerator and venture capital fund Colosseum, highlights the challenges faced by teams pursuing traditional business models. Crypto-native VCs, drawn by the potential for token trades and early liquidity, heavily favor this approach, while generalist investors remain somewhat skeptical.

Despite the long-term performance of these tokens remaining uncertain, Naudts acknowledges the