Introduction
With Bitcoin trading in a range since March and other major liquid cryptos failing to retake prior all-time highs, venture capital activity has remained cool in 2024. The “barbell market” – in which Bitcoin is leading on one end and memecoin activity is driving activity on the other, when combined with minimal interest from large allocators and generalist venture funds, has kept the crypto VC market mostly tepid in 2024. Opportunities nonetheless abound, with crypto-native managers leading the way in deal activity. Declining interest rates and the possibility of an easing regulatory environment could see venture activity accelerate in Q4 and Q1 2025. Our quarterly report analyzes both sides of the venture capital equation – investment by venture funds into crypto startups, and allocation to venture funds by institutional investors – utilizing proprietary research derived from public filings, data providers like Pitchbook, and Galaxy Research’s own VisionTrack fund performance database.
Key Takeaways
Venture capital investment in crypto startups was $2.4bn (20% decline QoQ) across 478 deals (-17% QoQ) in Q3 2024.
After three quarters, venture capitalists have invested $8bn in crypto startups, putting 2024 on track to meet or slightly exceed 2023.
Early-stage deals captured the most capital investment (85%), while later stage deals accounted for only 15% of capital, the lowest since Q1 2020.
Median valuations across venture capital rose in Q2 and Q3, with crypto-specific deal valuations rising at a faster rate than the broader VC industry. Q3 2024 deals had a median valuation of $23.8m, down slightly from $25m seen in Q2.
Layer 1 projects and companies raised the most capital, followed by cryptocurrency exchanges and infrastructure companies, while most deals involved infrastructure, gaming, and DeFi projects and companies.
The U.S. continued to dominate the crypto venture landscape, with the most capital investment (56%) and deals (44%) involving U.S.-headquartered recipients.
On the fundraising side, allocator interest remains tepid, with only 8 new funds raising $140m in Q3 2024.
Median crypto-VC fund size continues to decline, with 2024 seeing the lowest median ($40m) and average ($67m) new fund size since we began tracking in 2017.
Venture Investing
Deal Count & Capital Invested
In Q3 2024, venture capitalists invested $2.4bn (-20% QoQ) into crypto and blockchain-focused startups across 478 deals (-17% QoQ).
2024 is on track to meet or just barely exceed 2023’s numbers.
Capital Invested & Bitcoin Price
The multi-year correlation between Bitcoin price and capital invested into crypto startups has broken down, with Bitcoin rising significantly since January 2023 while venture capital activity has struggled to keep pace. Weak allocator interest in crypto venture, and venture broadly, combined with market narratives that favor Bitcoin and have left out many of the hot narratives from 2021 can partially explain the divergence.
Investment by Stage
In Q3 2024, 85% of venture capital was invested in early-stage companies, while 15% went to later stage companies. Crypto-native funds may still have access to dry powder from large raises several years ago, and access to entrepreneurs means they can source new deals emerging from renewed enthusiasm in crypto.
On the deal side, the share of pre-seed deals declined slightly, though remains healthy relative to prior cycles.
Valuation & Deal Size
VC-backed crypto company valuations declined significantly in 2023, with Q4 2023 reaching the lowest level since Q4 2020. However, valuations and deal sizes began to rebound in Q2 2024 as Bitcoin made new all-time highs. In Q2 and Q3 2024, valuations hit their highest levels since 2022. The rise in crypto deal sizes and valuation in Q2 and Q3 tracks with similar rises across the broader VC landscape, though crypto has rebounded more sharply. Q3 deals had a median pre-money valuation of $23m and average deal size of $3.5m.
Investment by Category
Companies and projects in the “Trading/Exchange/Investing/Lending” category raised the largest share of crypto VC capital in Q3 2024 (18.43%), totaling $462.3m in VC fundraising. The two largest deals in this category were Cryptospherex and Figure Markets, raising $200m and $73.3m respectively.
In Q3 2024, crypto startups building AI services witnessed a 5x QoQ increase in crypto VC funding. Sentient, CeTi, and Sahara AI contributed significantly to the increased VC allocation in AI crypto projects, raising $85m, $60m, and $43m respectively. Trading/Exchange/Investing/Lending and Layer 1 crypto projects also had a notable 50% QoQ increase in crypto VC funding. Web3/NFT/DAO/Metaverse/Gaming projects had a 39% reduction in crypto VC funding, the largest QoQ decrease in VC investment across all categories.
If we break down the larger categories in the charts above into more granular segments, crypto projects building Layer 1 blockchains raised the largest share of crypto VC investment in Q3 2024 (13.6%), totaling $341m. In our Layer 1 category, the top two deals (Exochain & Story Protocol) raised a total of $183m, representing 54% of total VC funding into Layer 1s in Q3 2024. Following Layer 1s, crypto exchanges and infrastructure companies raised the second and third most funding from crypto VCs at $265.4m and $258m respectively.
In terms of deal count, Web3/NFT/DAO/Metaverse/Gaming led the way with 25% of deals (120), a 30% QoQ increase, driven by 48 gaming deals. The largest gaming deal in Q3 2024 was Firefly Blockchain raising $50m in their Series B round.
Projects and companies providing crypto infrastructure ranked second in deal count with 16.5% of the total deals (79), a 12% QoQ increase. Following crypto infrastructure, projects and companies building Trading/Exchange/Investing/Lending products ranked third in deal count with 11.5% of the total deals (55). Notably, crypto companies building media/education and data businesses had the largest QoQ reduction in deals at 73% and 57% respectively.
Breaking down the larger categories in the charts above into more granular segments, projects and companies building crypto infrastructure had the highest deal count (64) across all sectors. Gaming and DeFi related crypto companies followed with 48 and 38 deals completed in Q3 2024.
Investment by Stage & Category
Breaking down capital invested and deal count by category and stage gives a clearer picture of what types of companies in each category are raising funds. In Q3 2024, the vast majority of capital in Layer 1s, Enterprise Blockchains, and DeFi went to early-stage companies and projects. In contrast, a large share of crypto VC money invested in Mining went to later stage companies.
Analyzing the distribution of invested capital across different stages in each category reveals the relative maturity of various investment opportunities.
Similar to the crypto VC capital invested in Q2 2024, a substantial portion of deals completed in Q3 2024 involved early-stage companies. The total amount of later stage crypto VC deals across all categories remained unchanged from Q2 2024.
Examining the share of deals done by stage in each categories offers insight into the various stages of each investable category.
Investment by Geographic Location
In Q3 2024, 43.5% of all deals involved a company headquartered in the United States. Singapore followed with 8.7%, United Kingdom had 6.8%, UAE had 3.8%, and Switzerland had 3%.
Companies headquartered in the United States pulled in 56% of all venture capital invested, a slight 5% QoQ increase. The United Kingdom had 11%, Singapore had 7%, and Hong Kong had 4%.
Investment by Cohort
Companies and projects founded in 2021 took in the largest share of capital, while those founded in 2022 accounted for the most number of deals.
Venture Fundraising
Fundraising for crypto venture funds continues to be challenging. The macro environment and turmoil in the crypto market from 2022 and 2023 has combined to dissuade some allocators from making the same level of commitments to crypto venture investors that they did in 2021 and early 2022. At the start of 2024, investors widely believed that rates would recede significantly over 2024, though rate cuts have only begun to materialize in the back half of the year. The total capital allocated to venture funds has continued to decline QoQ since Q3 2023, and the number of new funds raised in Q3 2024 is the lowest since Q3 2020.
On an annualized basis, 2024 is shaping up to be the weakest year for crypto VC fundraising since 2020, with only 39 new funds raising $1.95bn, well below the frenzy of 2021-2022.
The decline in allocator interest has led to fewer new crypto VC funds raising smaller funds, with the median and average fund sizes in 2024 (through Q3) reaching their lowest levels since 2017.
Summary
Sentiment and activity remain well below bull market levels. While liquid cryptoasset markets have recovered significantly from the end of 2022 and beginning of 2023, venture activity still remains well below prior bull markets. Prior bull runs in 2017 and 2021 featured a high correlation between VC activity and liquid crypto asset prices, but for the last two years activity has remained low while cryptos have rallied. The venture stagnation is due to a number of factors, including a “barbell market” that has seen Bitcoin (and its new ETFs) in center stage and marginal net new activity coming from memecoins, which are difficult to fund and have questionable longevity.
Early stage deals continue to lead the way. Despite the VC headwinds, interest in early-stage deals continues to bode well for the long-term health of the broader cryptocurrency ecosystem. While later stage companies have struggled to raise capital, entrepreneurs continue to find willing investors for new, innovative ideas. Projects and companies building Layer 1, scaling solutions, games, and infrastructure have raised well in a difficult fundraising environment.
Bitcoin ETFs may be pressuring funds and startups. Several high-profile investments in the spot-based Bitcoin ETFs in the United States by allocators suggest that some large investors (pensions, endowments, hedge funds, etc.) may be gaining exposure to the sector via the large, liquid vehicles rather than turning to early stage VC investing. While interest in the new spot-based Ethereum ETFs has been quite minimal, should demand for exposure in further afield crypto categories like DeFi and Web3 increase, it’s possible that the Ethereum ETFs will also capture some of the interest that previously went to the venture complex.
Fund managers still face a difficult environment, though new, smaller funds have begun seeing some fundraising success. The number of new funds launched and the capital allocated to those funds in Q3 was at the lowest level in 4 years (since Q3 2020). With fewer new funds launching at smaller levels, and generalist VCs and allocators still not very active in the market, later stage companies may continue to struggle. Should the U.S. regulatory approach to digital assets ease materially following the Nov. 5 presidential election, later stage companies may be able to tap public markets as an alternative.
The United States continues to dominate the crypto startup ecosystem. Despite a remarkably tricky and often hostile regulatory regime, companies and projects headquartered in the United States continue to account for most deals completed and the majority of capital invested. Policymakers should be conscious of how their actions or inaction could impact the cryptocurrency and blockchain ecosystem if the U.S. is to remain the center of technological innovation long-term. There may be good news on the horizon, as both former President Donald Trump and current Vice President Kamala Harris have signaled support for the industry ranging from extremely supportive to mildly supportive, respectively.
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