Despite Growing Crypto-Corn Numbers, Sector Not Immune To Macro Trends

Crypto sometimes seems like the darling of venture capital—impervious to a slowdown as rounds and valuation only go up.

However, while a dozen unicorns were minted in the crypto space so far this calendar year, venture dollars dipped in Q1 compared to both the previous quarter and last year’s first quarter.

According to Crunchbase data, the first quarter saw VC-backed companies in the crypto space raise about $5.1 billion—less than the $6.6 billion that cascaded into the sector in Q4 of last year, and also less than the $6.3 billion seen in the first quarter of 2021.

However, the market also does not appear to be falling apart. Venture funding globally was down in the first quarter, as fears of interest rate hikes, inflation and geopolitical tensions heated up. Also, Q1 still saw significant deal flow on par with any quarter, and actually saw more venture dollars than either of the middle quarters of last year.

More crypto-corns

With so much news around the digital currency market and new funds popping up seemingly every day dedicated to crypto, the funding numbers may surprise some.

But while funding numbers may be uneven, crypto’s unicorn class grew larger. A dozen new companies joined the ranks so far this year, including:

• San Francisco-based FTX US ,which raised $400 million at an $8 billion valuation.
• Binance.US—the American franchise of Binance—raising more than $200 million in a seed round at a pre-money valuation of $4.5 billion.
• Miami-based Yuga Labs closed a $450 million seed round at a $4 billion valuation.

In total, last year saw just more than 30 unicorns born in the crypto space. On top of that, this year more than a half dozen previously crowned crypto-corns raised even more money at even higher valuations.

Big money

Investors still see a white-hot market. Six rounds of $400 million or more have been raised in the first quarter of this year alone, including:

• Brooklyn-based startup ConsenSys raised a $450 million round at a valuation of over $7 billion last month.
• Nassau-based FTX Exchange closed a $400 million round—which valued it at $32 billion in January.

“I think there’s no secret about it—the public market has had an effect on tech and consumer companies,” said Yash Patel, general partner at Telstra Ventures, who invests in crypto companies, including FTX. “But that changes when it comes to crypto and blockchain. There has been no pullback.”

Crypto startups have weathered the downturn by showing real revenue and strong cash flow, Patel said. Both the build out of crypto infrastructure, as well as the current trend of creating utility tokens to help disrupt different sectors like gaming, health and even telecommunications continues to attract investors, he added.

Newly minted Helium provides a good example of the latter. The San Francisco-based company is building a blockchain-powered decentralized wireless network that provides bandwidth while collecting data from devices, with users able to receive Helium tokens. In February, the company raised a $200 million Series D at a $1.2 billion valuation.

Changing tide?

While crypto, in general, seems immune to the current slowdown in funding, some in the space see things changing.

Jai Das—partner, president and co-founder at Sapphire Ventures, who invests in crypto—said he has seen crypto companies this year trying to raise large rounds that have not been able to get all the investors needed.

“They can get a lead, but they can’t fill out the round,” he said. “These are $200 million and $300 million rounds.”

Similar to Patel, the revenue many crypto companies are generating along with increasing value many tokens are seeing in the market prove attractive to investors, Das said.

Tokens, in particular, are intriguing because they also enable companies to raise cash.

While still optimistic on crypto, blockchain and Web3, Das said he believes the sector started to see a downturn in venture investment in the fourth quarter last year and expects it to continue as market uncertainty unfolds.

“It is taking longer for deals to get done,” he said. “When you reach out to a company, they no longer say, ‘sorry, we already have three term sheets.’

“Crypto is not immune to macro trends,” he added.

Illustration: Dom Guzman

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