Adding to the complexity of the situation are the continuing consequences of the FTX scandal.
While early-stage crypto companies can still find willing investors, late-stage technology investors have largely abandoned the space. The cryptocurrency industry, which once thrived on investor exuberance and rapid growth, recently hit a rough patch as venture funding for cryptocurrency startups in the third quarter of this year fell to an all-time low. since 2020.
According to data from research firm PitchBook, Venture Capitalists (VCs) invested just $2 billion in the crypto space during the quarter, which is a staggering 63% decline from the same period last year.
The Decline of Crypto Funding
The dramatic decline in venture funding for crypto startups in Q3 2023 has many factors at play. One of the key reasons, as highlighted by PitchBook analyst Robert Le, is the notable absence of the “big deals” that were once common in the crypto space. Deals have become smaller in scale, leading to a decline in overall investment volume.
During the cryptocurrency bull market, companies like FTX Derivatives Exchange, OpenSea, and Yuga Labs enjoyed the benefits of mega fundraisings, attracting substantial investments from venture capitalists eager to ride the wave of digital assets and blockchain technology.
However, as the cryptocurrency industry faces increasing scrutiny and regulatory challenges, the tide appears to be turning and venture capitalists are pulling back significantly.
The declining interest of venture capitalists in the crypto industry poses a critical challenge for startups. The analyst expressed concern, saying, “If they can’t raise a round, even a down round, they will either go out of business or be acquired at a much, much lower valuation.”
This dilemma leaves startups with limited options, making survival a daunting task. While early-stage crypto companies can still find willing investors, late-stage technology investors have largely abandoned the space. This shift reflects a broader trend in which investors are becoming more cautious and discerning in their cryptocurrency investments.
Will Cryptocurrency Funds Return to the Golden Age Before the FTX Fall?
Collection trends have experienced a sharp decline throughout the year. Hence, these challenging conditions within the cryptocurrency industry peaked with the sudden and highly publicized collapse of the FTX exchange in November. A fact that further exacerbated investor confidence.
The report points out that crypto startup funding appears to be reaching the end of its hype, trending toward pre-pandemic levels.
The SBF Trial and the Impact on Venture Capitalists
Once a rising star, FTX has faced legal trouble, with its former CEO Sam Bankman-Fried and other executives facing criminal fraud charges. This has raised questions about the role of venture capitalists in the crypto industry and their investments in companies like FTX.
Sequoia Capital, a prestigious venture capital firm, was among those that had invested heavily in FTX. However, the scandal has forced venture capitalists to reevaluate their involvement in the crypto space.
FTX and its trading arm, Alameda Research, also made their own venture bets and built a diverse portfolio of companies, including stablecoin providers Circle and Paxos, blockchain developer Aptos Labs and crypto bank Anchorage Digital. Initial stakes held by FTX and Alameda are now being closely watched as FTX navigates bankruptcy proceedings.
The presence of a new round of financing for AI startup Anthropic, in which FTX invested, has raised some hope that creditors could be compensated through the sale of shares. However, there is serious concern that a massive fire sale of these startup stakes could lead to further devaluation of crypto startups.
By Leonardo Pérez
