Crypto and blockchain startups haven’t been having a good time raising funds for quite a while now, given the overall slowdown in funding, a stronger focus on due diligence, and concerns over the macroeconomic environment and regulations in the U.S.
At first glance, August seemed to bring some relief to startups in the space, with venture capitalists investing $819 million across 91 companies, per fresh data from PitchBook. That was about 51% more than the $542.8 million that companies in the space raised in July.
However, August only looks good because of the huge $400 million round raised by “Shariah-compliant” digital asset exchange Haqqex, and the $100 million round raised by crypto custodian BitGo. Without these two rounds, we’d actually have seen a dip in investment last month compared to July.
Things look a bit worse when you compare last month’s totals to the same time last year, when $1.74 billion was raised — that’s a 53% decline, the data showed.
This isn’t a new trend, either. Venture capital investors haven’t been as excited about the digital asset industry since about Q1 2022 — by the second quarter, investments into the space had dropped for five consecutive quarters.
August’s good numbers might not be able to stem the bleeding, though. To date, web3 startups have raised $1.38 billion in the third quarter, which means that in order for funding in the space to surpass second-quarter levels, startups would need to raise an additional $960 million in September. Looking back at how things have been for the past two months, that seems quite unlikely.
To put an optimistic spin on it, maybe Q3 2023 will break the trend since a few investment vehicles like Vessel Capital’s $55 million fund and MoonPay’s venture arm were launched in recent weeks and will start deploying capital soon. But it’s anybody’s guess whether investors will move quickly — or sign bigger checks.
Why does this matter? With the crypto industry struggling through this seemingly endless bear market (a crypto winter, in the lingua franca), the fact that startups raised more capital in August compared to July is a positive signal, even if the quarterly totals are looking less than favorable.
Crypto vs. fintech
Considering these trends from a different angle affords us a valuable perspective on what’s actually happening in the space. Can the declining pace of capital investment into crypto startups be chalked up to the changes we are seeing in the larger fintech space? Crypto, generally regarded as largely a subset of fintech proper, should hardly be immune to changing sentiment in its parent sector, right?
That is a reasonable perspective to take, even though it is incomplete. Yes, fintech funding is down from prior highs, and, yes, fintech valuations have taken a battering in recent quarters. That makes fintech startups a less attractive bet than they used to be (strong exit value comparables make for tastier startup valuations, after all). But you can’t dismiss crypto’s fundraising decline as simply being driven by forces outside of its control — there’s a lot going on behind that trend.
The fact that we’re seeing declining crypto fundraising coincide with lower crypto-related activity implies that both venture investment and the revenue that those companies can generate are likely constrained. That double-squeeze is tantamount to a death sentence for many startups, which will likely include some of the high-fliers of the last crypto bull run.
Fintech startups, meanwhile, seem to be in somewhat better shape. Sure, trading revenues are down, but companies like Robinhood were until recently benefiting from strong interest-based revenues. Crypto startups may not have the same luxury. Even other areas of fintech that are out of favor, like buy now, pay later, are posting strong operating results — just look at Klarna, which has made real strides toward becoming profitable.
Could those effects extend to crypto? Perhaps not. After all, the web3 world does sit separately from the rest of the economy to a degree. So while Klarna is benefiting from the continued digital transformation of commerce, crypto is not likely to find its sails being filled with those winds.
That’s why the decline in fundraising feels more existential for crypto startups. Throw in their inability to raise money via token sales as they could in the past, and we wonder just how many crypto startups might be able to grow their way out of this predicament.
At this point, it seems the only thing that could shake up the seemingly never-ending decline in venture interest in crypto would be a drastic thawing of the crypto winter. But what could be the catalyst that brings about that spring? That’s an open question facing an industry that crowed that it was the future when things were going well, but now that it is struggling, seems content to tell its detractors that it’s still early days.
Fair enough. But slowing revenue and lack of capital is not a setup that’s conducive to generating mountains of cash.
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