Blockchain projects still stuck in venture capital’s crypto winter

by Arthur · March 1, 2023

cryptocurrency, nor the blockchain projects that bring crypto to life. Venture capital plummeted in the third and fourth quarters and is trudging into 2023. What’s the mood?

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Just two years ago, any running blockchain project could walk into the office of a venture capitalist in Silicon Valley and sing that Lego Movie tune “Everything is awesome!” and walk away with a cool million. Yes, it’s over for now.

“FTX pushed confidence away from the space in general, and while it’s a distraction for new owners and for investor acquisitions, it just means that the main focus (for us) is now on maintaining the existing user base,” says Bryan Legend, co-founder of OOXY Labs and Vulcan Blockchain in Australia.

Andriy Velykyy, co-founder and CEO of Allbridge, a two-year-old cross-blockchain solutions provider in Lisbon, is launching new products in the midst of “VC winter.”

“We are in active fundraising mode,” he says from his offices in Portugal, adding that the company’s latest interoperability program, called Burst, was inspired by the FTX collapse. Entrepreneurs like Velykyy see the opportunities rising from the market chaos, with investors still taking meetings. These investors are more likely to emphasize conservative estimates and due diligence.

Venture capital poured $25 billion into blockchain startups in 2021, according to CB Insights. November and December VC flows into blockchain companies were the lowest ever raised, according to PitchBook data. By the end of the fourth quarter of 2022, VC crypto investments totaled 345 deals worth $2.5 billion, a decrease of 57.7% from 2021, although capital raising was 4.7% greater than in 2021. The real crash was felt from the third quarter of 2022 into the fourth quarter, which is when the FTX debacle was in full swing. The number of deals fell by over 39%, and the amount of capital raised fell by 72%.

Although venture capital firms invested heavily in fintech startups last year, blockchain as a category declined, TechCrunch reported Sunday.

In the fourth quarter of 2022, crypto-focused VC venture firms raised the smallest amount of capital since the first quarter of 2021, despite 2022 seeing the largest amount ever raised by crypto VCs at more than $33 billion, according to Galaxy, a digital asset and blockchain solutions provider.

“What you’re seeing now is that due diligence cycles are going months instead of days and weeks,” Robert Le, a senior emerging technology analyst with PitchBook, told CNBC’s Crypto World show last week. He said he suspects VC flows into blockchain projects will continue to fall through the first quarter of 2023.

the crypto market on ice. True believers still believe. VC firms, known to be risk takers, now feel less apprehensive about blockchain projects.

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According to CoinMetrics, blockchain project-related coins are down over 10% in the week ending February 22. The second worst sector was specialized coins, things like meme coins and privacy coins like MoneroXMR, down 2.6%.

Carl Szantyr, Managing Partner at Blockstone Capital, a London-based hedge fund, says he sees existing startups with short runways struggling to raise additional VC funding.

“Most of the dry powder now seems to be allocated to distressed assets at fair values rather than to an overvalued company,” he says in an interview. “We expect to see downturns for startups, thus a good vintage for closed-end VC crypto funds, finding good deals at a fair value.”

“We still see lax risk management and risk control from too many players in our industry. We know of some funds that thought trading on FTX was a money maker and had more than 50% of their assets frozen on the exchange, says Szantyr. “Last year was a crazy year, but the market is slowly returning to a better normal.”

Idiosyncratic events in the space – from the FTX debacle to the Luna stablecoin crisis – have affected both venture capital appetites and blockchain startups that are still in their infancy.

“Trading volume and user activity, including on our platform, have decreased drastically,” says Max Kalmykov, CEO of Bitsgap.com, a five-year-old Estonian algorithmic cryptocurrency trading platform. He added that the industry is currently in recovery mode.

“We are cautiously optimistic for 2023,” says Will Cai, co-founder and managing partner of Wilshire Phoenix, an asset management firm located in New York City.

Some deals are still happening. Back in Lisbon, blockchain startup Allbridge raised $2 million in January 2023 with a round led by Race Capital, a venture fund that previously invested in SolanaSOL and Lightning Labs.

Chain Reaction, a blockchain-focused chip designer based in Tel Aviv, raised $70 million in a Series C round led by Morgan Creek Digital this month. India-based blockchain game company Kratos Studios has raised $20 million in a seed round led by Silicon Valley VC firm Accel, The Block reported on February 22.

“For funds like ours at LBank Labs, this is the period where we make some of our most important investments, where the valuation of projects is more realistic,” says Czhang Lin, board member of UAE-based LBank’s investment arm, known as LBank Labs. Trading volume on the LBank exchange has been relatively flat, and Lin says they expect that situation to last a little longer. But for the investment wing of LBank, Lin says they managed to retain a “healthy degree” of investment even through the FTX collapse in 2022 and into this year. “I think this is a great time frame to observe which projects can withstand this type of market and can continue to build,” he says.

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I write about global business trends, big business dramas and investments, primarily in emerging markets. I am also a private investor with interests in cryptocurrencies, so I tend to write about the investment ideas that I consider myself. Ex-WSJ in Brazil. China-focused analyst at the Coalition for a Prosperous America.