The palpability of private market funding

Despite the downturn in crypto asset prices observed throughout 2022, a notable area of relative resilience within the industry has been venture capital dealmaking. Following a record breaking year in 2021 which saw ~US$29.1B in crypto-specific venture capital funding (~8.8x the 2020 total), funding through just the first half of 2022 already totals ~US$22.2B. Similar to how startup founders and developers may pivot to building new products and services during bear markets, private market investors have seemingly turned their attention to raising and deploying meaningful capital in anticipation of the next bull market. Further, relative to the broader venture capital complex, crypto-specific funding has continued to increase its share of the total market in recent years, rising from ~1.2% in 1Q20 to ~9.0% in 2Q22. We view these positive private market funding trends as a valuable proxy for the fundamental strength of the crypto industry going forward.

Relative strength

Given the tumultuous global macro backdrop and corresponding tightening of financial conditions over the past several quarters, it shouldn’t be entirely surprising that the broader venture capital complex has seen dealmaking volume decline thus far in 2022. Following a record quarter of dealmaking in 1Q22 (~US$12.5B), crypto-specific funding fell to ~US$9.8B in 2Q22, equating to a less severe year-to-date (YTD) decline relative to the entirety of VC funding (~7% YTD decline for crypto versus ~37% YTD decline for total VC). Accordingly, as shown in Chart 1, crypto-specific funding volume has increased its market share of total VC funding despite these challenging conditions, up from ~1.2% in 1Q20 to ~9.0% in 2Q22. It is worth reiterating that despite the recent decline from the record quarter in 1Q22, crypto-specific venture funding remains magnitudes higher than levels seen in years prior to 2021. This trend is supportive of the notion that the crypto industry continues to attract incremental mindshare from the broader investment community. 

Chart 1. Crypto-specific VC funding versus total VC funding

Another area of relative strength for crypto-specific funding is the average deal size. Since the beginning of 2020, the average deal size across the entirety of the VC universe has increased by ~49%, having peaked in 4Q21 at ~US$19.5M (most recent data points to ~US$14.2M in 2Q22). Conversely, the average deal size for crypto-specific VC funding has increased by ~285% over the same period and surpassed that of the broader VC space in 3Q21 (~US$19.2M versus ~US$16.9M). It is worth noting that both cohorts began to decline at the beginning of 2022, reflecting the dampening of valuations in light of tighter financial conditions. With respect to crypto-specific funding, the declining average deal size is also representative of increased contribution from capital deployed to earlier stage companies, as opposed to later stage deals which naturally draw larger commitments.

Chart 2. Average deal size (crypto-specific funding versus total)

Dealmaking trends within crypto

Given the growing diversity of subsegments within the crypto industry, it is useful to characterize which specific verticals are garnering the most attention from private market investors. As shown in Charts 3 and 4 below, the mix of funding contribution from the subsegments of Infrastructure, Decentralized Finance (DeFi), Centralized Finance (CeFi), Non-Fungible Tokens (NFTs) and Web3 have shifted over time. While the share of funding directed towards DeFi related opportunities has remained relatively flat over the past 18 months (~7% of total funding), the CeFi segment has experienced the largest decline in terms of its share of funding, falling from ~60% in 1Q21 to ~36% in 2Q22. The areas which absorbed this decline in CeFi funding share include Infrastructure, Web3 and NFTs, which each increased their share of total funding by 3%, 6% and 15%, respectively. That said, in absolute terms, CeFi remains the largest sector for crypto VC investing followed by NFTs and infrastructure. It is worth noting that an outsized contributor to the funding growth within NFTs this year has been gaming-related investments, which represent ~61% of the capital deployed towards the NFT space in 1H22.

Chart 3. Segmentation of crypto-specific VC funding

Chart 4. Fluctuations in funding contribution across crypto subsegments (% of total)

Dry powder

In addition to the robust level of capital deployment observed in recent quarters, the growth in terms of new fundraising has also exhibited immense strength despite the apparent “crypto winter.” Dry powder awaiting deployment is now at all time highs, as crypto-specific VC fundraising totaled ~US$35.9B in the first half of 2022, which compares to just ~US$18.8B raised in all of 2021. Some of the most notable fundraising efforts realized this year are detailed in Table 1. The accumulation of dry powder and subsequent deployment of capital towards the next rung of innovative ideas (i.e. companies currently looking to raise capital from investors) is what we think will allow the crypto industry to emerge from this crypto winter in a well-capitalized position, potentially sparking new catalysts and narratives to drive the market.

Table 1. Notable crypto-specific VC fundraises in 2022

Conclusions

Regardless of market cycle positioning, the venture capital space inherently forces investors to take a long-term perspective. During bear markets, this long-term orientation typically becomes even more acute as the excesses of prior bull markets are flushed out and liquidity dries up, naturally raising the bar for prospective fundraising. 

Given coin prices remain below their all time highs and have largely moved sideways for the last four months, we view the relative strength of crypto-specific VC funding during this period as a powerful indicator of investors’ conviction in the asset class. The continued ascendance of crypto as a meaningful segment of the broader venture capital market demonstrates the relative attractiveness of the opportunity set. Further, growth in terms of crypto-specific average deal size and new fundraising (i.e. dry powder), represent positive fundamental signals of crypto’s increasing mindshare amongst the broader investment community. Taken in aggregate, these trends and metrics give us confidence that the crypto industry can emerge from the current bear market in a well-funded position of strength.