As crypto fundraising sees an uptick, where’s the capital set to go?

As the crypto market rebounds after its longest bear market to date, venture capital into the space is also starting to pick back up.

Infrastructure projects are still in need of investments, while startups focused on the intersection of AI and blockchains are also likely to attract funding, industry watchers said.

There were 444 disclosed private financings during the first three months of 2024, according to a report by crypto advisory firm Architect Partners — amounting to $3.1 billion raised.

This was a substantial quarter-over-quarter increase in both categories, with capital raised up 36% and the number of financings increasing by 77%.

Despite the uptick, the current pace of $12.4 billion for the year would be more than 50% below the crypto financing capital totals seen in 2021 and 2022.

Architect Partners managing partner Eric Risley said he expects the first quarter bump in crypto venture capital funding to persist throughout 2024 and beyond — barring a crypto market crash or regulatory challenges.

“Crypto has recently emerged from a challenging phase marked by fraud, inadequate risk management and instances of irrational exuberance,” he told Blockworks. “Architect Partners is optimistic that enduring lessons have been learned from this period, shaping ongoing best practices as we move into the path to maturity.”

Though the quarter’s number of early-stage financings (seed and Series A) was more than double those seen in the fourth quarter of 2023, the amount of late-stage equity financings rose at a slower rate — by 32% from the prior quarter.

“It’s common for early-stage financing to lead late-stage financing,” Risley added. “In this case, late-stage crypto investors have been adversely impacted by downward reset valuation marks, the outright exit of investors such as Coatue and Tiger, and crypto-focused growth funds like 1RoundTable currently focused on fundraising.”

Follow the money

Venture capital investors have shown a growing interest in using blockchain-based technologies as the backbone for other activities, KPMG executives wrote in the company’s first quarter Venture Pulse report.

The rebound of funding for crypto- and blockchain-related projects has so far led to several companies gaining unicorn status this year.

Polyhedra Network’s $20 million fundraise last month in a round led by Polychain Capital gave it a $1 billion valuation.

Monad Labs raised $225 million earlier this month as part of a Series A round led by Paradigm — giving it a roughly $2 billion valuation, according to Pitchbook data.

Asia crypto financial services company HashKey Group raised $100 million in a January Series A funding round at a $1.2 billion valuation.

Also notably, Eigen Labs’ development studio — responsible for creating Ethereum staking-focused startup EigenLayer — raised $100 million in Series B funding from Andreessen Horowitz in February.

Looking ahead, one subsection of start-ups within crypto that could see more funding this cycle are infrastructure-based projects, according to Pitchbook analyst Robert Le.

“I still think infrastructure is still underdeveloped,” he said, citing prices he’s seen on Base. “There’s no way that we can say infrastructure [and blockchains are] mature when you pay $5 to sign a transaction.”

He doesn’t expect a lot of funds to go toward layer-1s this time around, but layer-2s could “see a lot of capital go into that space.”

The segment has already seen a decent chunk of funds go towards infrastructure projects, according to ByBit’s institutional report.

“These projects span a wide range of sectors, from hardware wallets to blockchain data providers, offering essential solutions to address various industry challenges and facilitate innovation,” the report said.

Outside of infrastructure, ByBit’s report highlights two emerging trends: projects leveraging AI and those building atop Bitcoin’s blockchain ecosystem.

In February, Exohood Labs — a start-up leveraging AI technology — raised $112 million at a valuation of $1.4 billion.

“Likely the hottest area of investment in the space is [and] will be models that include an overlap of blockchain and AI,” Conor Moore, the global Head of KPMG Private Enterprise, told Blockworks. “Also, companies focused on the Lightning Network are getting attention.”

The rise of decentralized network Bittensor and The Render Network — focused on the blockchain-fueled rendering of 3D graphics — exhibit the possibilities of combining blockchain and AI, ByBit’s report notes.

“These technologies’ rapidly evolving natures, combined with regulatory uncertainties, presents both opportunities and risks,” it adds. “As the AI sector continues to expand and evolve, the synergy between these two areas of technological advancement is expected to fuel further innovation and growth in the cryptocurrency space.”

We’re not back…yet

But don’t get too optimistic about a bull market yet, Le cautioned. He told Blockworks that he’s not seeing enough data to firmly say the overall market — much less the VC landscape — is there yet, though the money is coming back.

Crunchbase, in a report Thursday, noted that the three biggest rounds of last quarter came in below $300 million.

KPMG’s first quarter Venture Pulse report noted that crypto venture capital funding could see positive momentum through the second quarter of this year.

There have been some sizable raises early in the second quarter too. Most notably, Andreessen Horowitz said it raised $7.2 billion for venture funds focused on sectors that include gaming, which the firm previously said could invest in Web3.

While a slew of smaller deals have been announced, the horizon for bigger deals looks bright as start-ups like Citadel-backed Hidden Road Partners look at founding rounds over $100 million, per Bloomberg. The potential raise follows a $100 million raise for Berachain earlier this month.

“The regulatory landscape is still somewhat of an inhibitor to exits,” KPMG’s Moore said. “And with so many global elections in the next 12 months, things may get more uncertain on that front.”

While due diligence into crypto and blockchain-related investment opportunities can delay a flood of money into the space, KPMG executives said venture capital firms are bolstering staff focused on that.

“Due diligence involves a lot, including size of total addressable market, technology ownership and protection…and regulatory concerns, to name a few,” Moore said.

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