Crypto VC challenges persist, but Q3 brings hope with $1B raised

Venture capital funding for crypto startups remains challenging after a tumultuous year, but signs of improvement are emerging.

Galaxy published research on Friday that revealed venture funds raised over $1 billion in the third quarter (Q3) of 2023, marking the first increase since declines started in the third quarter last year.

This suggests a potential reversal in the crypto VC ecosystem, following a challenging year in which venture capitalists faced a lack of enthusiasm from their investors for additional investments in the sector.

The number of new funds launched rose to 15 in Q3, up from 12 in Q2, but median and average fund sizes have notably decreased from their peak during the bull market, it said.

Although VCs have more capital to deploy, Q3 saw the lowest numbers in terms of both deals and total capital actually invested in the crypto industry since Q4 2020, the report showed.

The crypto and blockchain industry experienced a low point in capital invested in Q3, at $1.9 billion, marking a continued decline from the peak of $12 billion in the first quarter of 2022. The number of deals also hit a new low for this cycle, totaling only 376 transactions.

Investments in the crypto sector have been on a downward trajectory since hitting a peak in Q1 2022, primarily due to declining enthusiasm for digital assets and a series of scandals that tarnished the reputation of the industry.

Companies founded in 2021 and 2022 led in terms of the number of venture deals during Q3 2023, according to the report.

US leads, but others close in

The US remains a major player in the crypto VC investment landscape, both in terms of deal count and capital invested. 

Yet, companies in other regions with more well-defined regulatory frameworks for the industry made substantial advancements in both these categories, Galaxy’s Alex Thorn and Gabe Parker said.

Crypto VC funding was primarily secured by companies in the US (34.5%), followed by the United Arab Emirates (23.5%), the UK (9.5%) and Singapore (6.2%).

Read more: Billionaire-backed Hong Kong crypto VC pours $100M into blockchain fund

In deal count, US-based companies accounted for 35% of all crypto VC deals, with Singapore (10.6%), the UK (7.9%) and China (4.7%) following closely behind.

AI-crypto overlap takes the spotlight in Q3

Trading, exchange, investing and lending startups received the most venture capital funding for the third straight quarter (32.5% of total investment), while Web3, NFTs, Gaming, DAOs and Metaverse startups came in second (14.2% of total investment) for the second consecutive quarter.

According to Galaxy, growing interest in Artificial Intelligence (AI) prompted the development of a fresh dataset that specifically identifies the intersection of AI and the crypto sector.

This new category revealed that startups focused on AI-related products secured more than $60 million in Q3 2023, accounting for 3.2% of the total venture capital investment during that period.

Web3 gaming, NFTs, DAOs and metaverse companies continued to lead in deal count, followed by trading, exchange, investing and lending firms, mirroring trends from Q1 and Q2 2023.

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