The global venture capital market is experiencing a long period of constrained spending. Startups are staying private longer, mergers and acquisitions are quiet in part due to heightened regulatory oversight, and the IPO market remains frozen. This means that many historic business deals are slowly rotting on the vine, in IRR terms.
The cryptocurrency market is no different, but some investors in the space have not worried. New data from PitchBook’s Crypto Report Q4 2023 makes it clear that if the larger startup market is suffering an exit drought, crypto startups are likely even more faded.
The lack of crypto startup volume — and value — can be linked to the relative decline in overall venture capital investment in web3 startups. When liquidity is light, investment performance prospects can darken. The good news for cryptocurrency founders is that despite the slim chance of selling their company, venture capital investment grew by 2.5% in Q4 2023 compared to Q3, although transaction volume fell by similar percentage.
The fourth quarter was consistent with the “low-level activity seen throughout 2023,” the report said. And with only 12 exits during that time frame, it was the lowest number since Q4 2020.
More transaction value despite limited exits implies a level of optimism among crypto investors that we might consider surprising. But with cryptocurrency prices rising, key regulatory hurdles cleared, and other positive messages shedding some warm light on web3 in general, more investment doesn’t shock us.
The exit question, however, remains, recent sets of investments are doomed. Looking at annual data, crypto-centric exits generated from venture capital worth $1.2 billion in 2012, just $500 million between 2019 and 2020. In 2022 and 2023, the numbers reached 1.4 billion and 1 billion dollars. The extreme price was in 2021, with a crypto exit value of $88 billion.
Why the huge discrepancy? It’s not hard to break down: Exits were hot in 2021 for many categories of startups, and Coinbase went public that year. The company was valued at more than $65 billion at its IPO listing price and even more in early trading. This explains why 2021 stands out so strongly compared to its corresponding years, even if Coinbase is worth $37 billion today.
Equity vs. tokenomics
In stock terms, then, there he’s got has been a major venture-backed crypto outlet in recent years (Coinbase), while all other traditionally measured web3 outlets are at most rounding error.
But in crypto, exits are largely split between M&A and IPOs on the one hand, and token launches on the other, said Vance Spencer, co-founder of Framework Ventures. “The first two aren’t the main ways VCs get liquidity in crypto, and so the relatively low exit number of $1 billion is probably a bit misleading.”
“The vast majority of liquidity events in crypto VC will come from tokens, and that’s probably much harder to measure holistically,” Spencer said. “I wouldn’t see a decline in these metrics as evidence that VCs are having more difficulty achieving liquidity.”
“Having witnessed a growing evolution from the ‘traditional VC exit model’ to a token-based liquidity event approach where decentralization, audience building and community adoption are paramount to the successful performance of all stakeholders. said Brian Mahoney, VP of business development at enterprise-focused studio Thesis.
However, some investors believe this is indicative of how the market is changing and how important it is to hold on to — or HODL — investments with conviction, even as they experience a lack of exits.
He’s not worried
While it is important that returns are provided to investors from more mature investments, some companies are doubling down on their support for early-stage projects.
For example, one of Ryze Labs’ early investments in Solana remains strong, thanks to its performance over the past year, said Thomas Tang, the company’s vice president of investments. “Our experience during bear markets has shown us that we must rise high, standing firm in supporting innovative ideas that have the potential to redefine the future of blockchain technology,” Tang said.
Investors also recognize that these exits can take years, Frameworks’ Spencer said. “Smart VCs bought into 2022 and 2023 and now the savviest class of investors are waiting for new all-time highs before even considering exit opportunities,” he said. “We’re known for being more long-term oriented, especially with venture investments, and we think that mindset has positioned us well for this next cycle.”
As the venture landscape focuses towards 2024 and cryptocurrency market capitalization continues to grow, there is still subdued optimism in the space and an appetite to hold seemingly strong bets.
