Emerging Trends in Crypto Venture Capital in Q3 2024

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The crypto industry has seen major changes over the past decade, with venture capital driving much of the innovation and growth. From the ICO boom in 2017 to the rise of decentralized finance (DeFi) in 2020, the sector has experienced cycles of rapid expansion followed by periods of adjustment. Now, as we enter Q3 2024, the crypto VC space is beginning to recover after a challenging phase. For a more detailed look at the historical context of the VC landscape, we explored this extensively in our paper — The Evolution of Crypto Venture Capital: A 15-Year Review.

Fundraising Rebound

Crypto Venture Capital Fundraising Activity (As of August 30, 2024)

As of August 30, 2024, $2.2 billion has been raised across 24 funds, indicating a potential rebound that could surpass 2023’s total capital raised. The recovery can be attributed to:

• Market Stabilization: The total crypto market cap reached 93% of the previous cycle’s watermark in March 2024.

• Institutional Adoption: Traditional financial institutions like BlackRock, Fidelity Investments, and Franklin Templeton have entered the crypto space, boosting confidence.

• Maturation of Projects: Investments made during the 2020-2022 boom are maturing, offering attractive opportunities.

Investor Sentiment

According to a Coinbase Institutional survey, 64% of current institutional investors plan to increase their allocations to crypto over the next three years, and 45% of those not currently invested expect to start allocating during the same period. Additionally, nearly 60% of respondents believe that cryptocurrency prices will trend higher in the coming year.

Shift Towards Midsized Funds

Crypto Venture Capital fund count by size bucket (As of August 30, 2024)

Historically, smaller funds (worth $100 million or less) dominated crypto VC fundraising, reflecting the industry’s nascent stage. However, there has been a shift towards midsized funds ($100 million to $500 million) since 2018. The median fund size increased by 76.0% to $41.3 million in 2024 from $25.0 million in 2023.

Megafunds (valued at $1 billion or more) experienced significant growth from 2019 to 2022 but have been notably absent in 2023 and 2024. Key challenges include:

• Deployment Challenges: Large funds face difficulty identifying viable opportunities in a market with a limited number of startups requiring substantial capital.

• Valuation Pressures: The necessity to make large investments drives up valuations, thereby increasing the associated risks.

Notwithstanding, large funds like Pantera Capital ($1 billion target) and Standard Crypto ($500 million target) are still in the market. These funds are broadening their investment mandates to include areas beyond crypto, such as artificial intelligence (AI), to effectively deploy capital.

Dominance of Emerging Managers

Emerging managers continue to dominate in terms of fund count, raising between 77% to 87% of funds annually over the past five years. This trend is due to:

• Specialized Expertise: Crypto requires deep technical knowledge and skills that new managers often possess.

• Niche Focus: Generalist VCs are less likely to launch new crypto funds, given the specialized nature of the industry.

The share of first-time funds decreased from around 58% in 2020 to 45.8% in 2024. However, as the market recovers, we anticipate a “barbell effect,” where both first-time managers and established crypto-native fund managers will have the most success in raising capital.

Extended Fundraising Cycles

*Note: Data as of August 30, 2024

From 2021 to 2024, the median time between fundraises increased from 1.1 years to 2.4 years, and the median time to close funds rose from 6.0 months to 21.4 months. Factors contributing to this trend include:

• Investor Caution: LPs are more selective, requiring thorough evaluations.

• Market Conditions: Fund managers are deploying capital more slowly during the bear market.

Without material distributions back to LPs, crypto-savvy investors may remain cautious. Fund managers with token holdings might start liquidating positions, even at losses, to demonstrate returns.

Venture Capital Investments in Q3 2024

Crypto Venture Capital Investments by Quarter (2016–2024)

In Q3 2024, venture capitalists invested approximately $2.7 billion in crypto and blockchain startups, marking a 10% quarter-over-quarter (QoQ) decline from $3 billion in Q2 2024. This downward trend reflects a more cautious approach by investors amid ongoing market uncertainties.

Despite the quarterly decline, 2024 remains on track to meet or slightly exceed the total VC investment figures of 2023. This suggests that while short-term fluctuations persist, overall interest in crypto and blockchain ventures remains stable on an annual basis.

Most Active Investors

Most Active Investors (July 1, 2024 – October 15, 2024)

Between July 1, 2024, and October 15, 2024, the most active investors in the crypto space demonstrated continued commitment to fostering innovation, particularly in early-stage ventures. Leading the pack was Robot Ventures, which completed 23 investments during this period. Animoca Brands followed closely with 22 investments, while Andreessen Horowitz (a16z) and Binance Labs each made 18. OKX Ventures secured 16 deals, and Polychain Capital along with Anagram Crypto, were both involved in 14 investments. CMS Holdings, HashKey Capital, and Amber Group each made 13 investments, rounding out the top players in the crypto investment landscape.

Fundraising Rounds Between July 1, 2024 – October 15, 2024

Total Funds Raised and Number of Funding Rounds (July 1, 2024 – October 15, 2024)

Between July 1 and October 15, 2024, several significant fundraising rounds highlighted continued interest in high-potential projects, even amidst a general decline in venture capital investment. Praxis Society topped the list, raising $525 million at an undisclosed stage, with backing from notable figures like Dan Romero, Fred Ehrsam, Brian Armstrong, and Erik Voorhees.

In Q3 2024, Celestia secured $100M for its modular data availability network, leading the funding rounds. It was followed by Sentient, which secured $85M for its open-source AI development platform. Story Protocol raised $80M for blockchain-based intellectual property management, while Infinex brought in $65.2M for its decentralized exchange. Chaos Labs, focused on crypto protocol security, raised $55M, and Sahara AI secured $37M for its decentralized AI network. Other notable rounds included Drift Protocol ($25M), Helius ($21.7M), B3 Fun ($21M), and Caldera ($15M) for modular blockchain development.

Breakdown of Crypto VC Deal Count by Category in Q3 2024

An analysis of deal counts shows Crypto Infrastructure Projects led the way with 64 deals, followed by Gaming Projects with 48, and DeFi Projects with 38. This highlights a strong focus on infrastructure and blockchain development, alongside growing interest in gaming and decentralized finance.

Capital Invested and Bitcoin Price

Historically, there has been a strong correlation between Bitcoin’s price and the amount of capital invested in crypto startups. However, since January 2023, this correlation has weakened significantly. Bitcoin has reached new all-time highs, while VC investment activity has struggled to keep pace.

Possible Explanations:

• Weak Allocator Interest: Institutional investors may be hesitant due to regulatory uncertainties and market volatility.

• Shift in Market Narratives: Current market narratives favor Bitcoin, potentially overshadowing other crypto investment opportunities.

• Venture Capital Landscape: The broader venture capital market is experiencing a downturn, which impacts crypto investments.

Investment Trends

In Q3 2024, 85% of venture capital was directed toward early-stage companies, while 15% went to later-stage firms. This highlights investors’ focus on startups with high growth potential, likely due to their lower valuations and higher potential returns. Though pre-seed deal activity saw a slight decline, it remains strong compared to previous cycles, reflecting ongoing interest in early-stage ventures.

Valuations for VC-backed crypto companies hit their lowest point in late 2023 but began to recover by Q2 2024, as Bitcoin reached new highs. In Q3 2024, the median pre-money valuation was $23 million, and the average deal size was $3.5 million.

In terms of capital allocation by stage, Layer 1s, Enterprise Blockchains, and DeFi saw the majority of investments directed toward early-stage companies, signaling a focus on innovation. In contrast, Mining Companies attracted more capital at the later-stage level, likely due to the resource-intensive nature of their operations.

The analysis of sector maturity highlights that early-stage dominance persists across most categories, indicating a continued emphasis on new entrants and innovative ventures. Later-stage investments are more concentrated in sectors such as mining and infrastructure, where established companies require substantial capital for growth.

The proportion of early-stage deals remained high across all categories, in line with the trend from Q2 2024. The number of later-stage deals remained stable compared to the previous quarter, indicating consistent investment in more mature companies.

Emerging trends in Q3 2024

AI emerged as a significant theme in venture capital rounds throughout Q3 2024, particularly in terms of year-over-year (YoY) growth, although it did not dominate in the number of announced rounds. The surge in interest was driven by open-source models, AI’s influence on content creation, and the potential for decentralized inference. AI crypto projects saw an impressive 340% YoY increase in funding compared to Q3 2023, reflecting strong investor enthusiasm for the sector. Leading the charge were Sentient, which raised $85 million, Sahara AI, securing $37 million, and Balance — $30 million. 

Amounts raised by AI crypto projects between Q3 2023 and Q3 2024

One of the standout areas of growth was Decentralized Physical Infrastructure Networks (DePIN), which saw fundraising rise by 691% in Q3 2024 compared to the same period in 2023. Major deals included $18 million raised by DAWN Internet (Detailed analysis available here), $12 million by Project Zero 2050, $10 million by Mawari XR, $10 million by Pipe Network, and $9 million by Daylight Energy.

Amounts raised by DePIN projects between Q3 2023 and Q3 2024

Conclusion

The crypto venture capital landscape in Q3 2024 exhibits cautious optimism, marked by a rebound in fundraising activities and growing institutional interest. The shift towards midsized funds and the continued dominance of emerging managers signal a maturing industry adapting to evolving market dynamics. Despite short-term declines in VC investments and extended fundraising cycles, the sustained focus on early-stage ventures and emerging trends like AI integration underscore a resilient ecosystem poised for future growth. Overall, the sector demonstrates underlying strength, suggesting that renewed momentum may be on the horizon.

Sources

1. https://cryptorank.io/

2. https://www.galaxy.com/

3. https://messari.io

4. https://pitchbook.com

Risk Disclaimer:

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The content reflects only the writer’s views and not financial advice. Please conduct your own due diligence before engaging with cryptocurrencies, DeFi, NFTs, Web 3 or related technologies, as they carry high risks and values can fluctuate significantly.