Crypto VC Financing Slides 78% In Q1 As Terrible 2022 Takes A Toll

Venture-capital investments in digital-assets slumped in Q1 as investors took a step back from an industry that served them poorly in 2022 and firms with diverse mandates began to look farther afield.

Funding fell 78% to $2.6 billion from $12.3 billion year-over-year and was down 11% from Q4, according to data provider PitchBook. The only areas in the crypto sphere that drew significant interest in the latest period were the relatively safe harbors of infrastructure and financial services.

Deal count in Q1 slid 64% to 353 transactions.

“Investors are really kind of slowing down their pace,” says Robert Le, senior analyst of emerging technologies at PitchBook and author of the report, and “are really get to know what teams are building, what the use cases are.”

After a two-year cycle fueled by massive investment and even larger valuations, Le says VCs are managing expectations in an environment fueled by regulatory uncertainty and a decrease in overall venture funding.

“Broader market macroeconomic conditions have made it so there are less venture capital dollars available,” adds Le. The Federal Reserve began pushing up overnight interest rates from virtually 0% in March 2022, discouraging risky investment. Two months after it started raising rates, it announced it would start reducing the amount of bonds it had purchased as it reversed easy-money policies that had been adopted to aid the U.S. economy during the Covid-19 pandemic.

Still, certain types of crypto and blockchain applications are luring investors.

Companies working in infrastructure–or “access”, as described by the PitchBook report–received the most VC funding by value and number of deals. These companies provide financial services and payments; hardware like wallets; asset management and tax services; and data and research tools. They raised $956.6 million from 18 different deals in Q1, and $5.1 billion in the last 12 months. They accounted for 36.8% of deal value in Q1.

Those working on network technology, like building new blockchains or cross-chain products, accounted for 12.5% of deal value, followed by t infrastructure and development tools at 11%.

“In times like these, there’s a tendency for entrepreneurs and VCs to fall back to the perceived safety of incremental infrastructure,” says Alok Vadusev, co-founder of Standard Crypto, a venture firm with over $1 billion in assets under management.

The cooler market may be discouraging some venture-capital recipients from revealing their valuations as they grow through rounds of investment. “We believe late-stage valuations are being skewed upwards as we suspect that only outsized, up-rounds are being disclosed and down-rounds are being kept private,” writes Le in the report.

It has been the practice for companies to announce the equity value implied by each round of new investment, often showing a higher number each time. Such a progression implies that all the investors would benefit when a new company eventually obtains a stock-market listing or is sold to a strategic buyer.

Crypto-related venture capital is following a retreat in the overall market, with global Q1 funding down 53% to $76 billion from $162 million last year, according to data from CrunchBase.

Large VCs that dove deep into crypto during the peak of the market in 2021 have also slowed, if not completely paused, their activity in the sector. Japanese conglomerate SoftBank Group paused its blockchain investments at the beginning of the quarter following a dismal quarter for returns on the group’s Vision Funds.

Those most likely to have stopped funding crypto altogether are generalist firms, says Le, likely moving on to artificial intelligence, the latest technology to capture widespread investor attention. They are also becoming more cautious.

“Investors in general ventures have shifted their mindset from risk-on”, says Le, “to a risk-off sentiment.” They are taking longer amounts of time and doing more research before making investments, he adds.

Crypto funds, whose mandates require them to invest in blockchain-related companies, remained active in Q1. “The general appetite for VC investing in crypto has definitely taken a hit –though the committed, full time crypto funds are still funding good deals,” says Valentin Pletnev, cofounder and CEO of interchain asset management firm Quasar Lab.

A retreat from generalist players may not be that bad, according to Michael Anderson, cofounder of crypto-focused Frameworks Ventures. Some crypto-focused funds put their cash into liquid investments, awaiting developments after the 2022 collapse of the digital-asset sector.

“That removes them from the opportunity table of investing in private venture deals, so the competition from other investment firms is lower,” adds Anderson.