Crypto and blockchain startups have not had a good fundraising period for quite some time now, given the overall slowdown in funding, an increased focus on due diligence, and concerns about the macroeconomic environment and regulations in the US. US
At first glance, August appeared to bring some relief to startups in this space, as venture capitalists invested $819 million in 91 companies, according to recent data from PitchBook. That was about 51% more than the $542,8 million that companies in the sector raised in July.
However, August is only looking good thanks to the massive $400 million round raised by the “Shariah-compliant” digital asset exchange. Haqqex and the $100 million round raised by cryptocurrency custodian BitGo. Without these two rounds, we would have seen a drop in investment last month compared to July.
Things are a little worse when you compare last month's totals to the same period last year, when $1.740 billion was raised: that's a 53% decrease.
It is not a new trend. Venture capital investors haven't been this excited about the digital asset industry since around the first quarter of 2022: by the second quarter, investments in this space have fallen for five consecutive quarters.
However, August's strong numbers may not be able to stop the bleeding. To date, web3 startups have raised $1.380 billion in Q960, meaning that for funding in this space to surpass QXNUMX levels, startups would need to raise an additional $XNUMX million in September. Looking back at how things have been over the past two months, that seems pretty unlikely.
To be somewhat optimistic, perhaps the third quarter of 2023 will break the trend, as some investment vehicles such as Vessel Capital's $55 million fund and MoonPay's venture arm have been launched in recent weeks and will soon begin to launch. deploy capital. But no one knows whether investors will act quickly or sign larger checks and therefore with more analysis.
Why does this matter? With the cryptocurrency industry struggling in this seemingly endless bear market (a crypto winter, by all accounts), the fact that startups raised more capital in August compared to July is a positive sign, even if the quarterly totals look less than favorable.
Crypto versus Fintechs
Considering these trends from a different angle gives us valuable insight into what is really happening in this space. Can the declining pace of capital investment in cryptocurrency startups be attributed to the changes we are seeing in the broader fintech space? Cryptocurrencies, generally considered largely a subset of fintech proper, should not be immune to changing sentiment in their parent sector.
This is a reasonable, if incomplete, perspective. Yes, fintech funding is down from previous highs and, yes, fintech valuations have taken a hit in recent quarters. That makes fintech startups a less attractive bet than they used to be (after all, strong comparable exit values make startup valuations more attractive). But the decline in cryptocurrency fundraising cannot be discounted simply because it is driven by forces outside their control; There are many factors behind this trend.
The fact that we are seeing a decline in crypto fundraising coinciding with lower cryptocurrency-related activity means that both venture investment and the revenue those companies can generate are likely limited. That double pressure amounts to a death knell for many startups, which will likely include some of the biggest names in the latest cryptocurrency bull run.
Meanwhile, fintech startups appear to be in better shape. Sure, trading revenue has declined, but companies like Robinhood until recently benefited from strong interest-based revenue. Crypto startups may not have the same luxury. Even other areas of fintech that are out of favor, such as buy now, pay later (BNPL), are posting strong operating results; Just look at Klarna, which has made real progress in becoming profitable.
Could those effects extend to cryptocurrencies? Maybe not. After all, the web3 world is to some extent separate from the rest of the economy. So while Klarna is benefiting from the continued digital transformation of commerce, cryptocurrencies are not likely to find their sails sailing into that scenario.
That's why the decline in fundraising seems more existential for cryptocurrency startups. Add to that their inability to raise money through token sales like they did in the past, and we wonder how many cryptocurrency startups could emerge from this situation.
At this point, it seems like the only thing that could shake the seemingly endless decline in risk interest in cryptocurrencies would be a drastic thawing of crypto winter. But What could be the catalyst that causes that spring? That's an open question facing an industry that boasted it was the future when things were good, but now that it's struggling, seems content to tell its detractors that it's still early.
It's a good argument. But slowing revenues and a lack of capital are not a setup conducive to generating large sums of cash.
