The previous couple years have proven to be a turbulent time for the crypto industry. As if a string of major crypto institutions failing or going under wasn’t enough, the industry saw many tourist investors running for the gates as the broader macroeconomic climate worsened.
However, a recent surge in interest in cryptocurrencies, driven by rising Bitcoin and Ethereum prices, is rebuilding momentum, and many believe the coming year could be promising for crypto startup valuations.
Fundraising has been tough for both startups and venture capitalists in 2023, according to Lydia Chiu, vice president of business development at Ava Labs. “On the startup side, we’ve seen a correction in valuations, with fewer deals,” he said. “VCs also had more leverage to negotiate better terms when they lead, much more so than in 2021 or 2022. We’ve seen more follow-on and exit opportunities from groups that had raised during the bull market than the new projects [today].”
The aftermath of the 2021 hype is still reverberating across the crypto business landscape. “[In] 2021, [there were] outrageous valuations with a number of terrible ideas funded by traditional Silicon Valley VC firms who entered the space at the top and had absolutely no idea what they were doing,” said Michael Anderson, co-founder of Framework Ventures. In 2022, the crypto venture capital deck “saw a complete reshuffle,” with “many tourist VCs on the back foot and their weaker portfolio investments bleeding,” he added.
The drier funding climate of 2023 only worked to weed out the weaker businesses that were able to secure capital in 2021. According to Marc Bhargava, CEO of General Catalyst, a lot of dry dust from the good days has still arrived this year.
Valuations “came back down to earth,” Anderson added.
And when FTX blew up in November 2022, many funds, even those focused on web3, “hit the brakes on new deals,” said Alex Marinier, founder and general partner of New Form Capital.
“Anyone should have expected venture funding to dry up in 2023, and it did,” said Will Nuelle, general partner at Galaxy Ventures. “Funding has returned to levels not seen since 2020 in the crypto and blockchain business markets.”
“In 2023, most people seemed to finally get the message that we’re in a new market and that the investing class is thinking and behaving more rationally than before,” Anderson said.
Early-stage deals have dropped, but they’re not done
Flat or declining valuations were not uncommon in 2023 for the broader tech industry, so it was no surprise that the most beleaguered crypto startups also had to take significant haircuts. According to Nuelle, there has been a dispersion in valuation – competitive rounds still fetch multiples that can be “stomach churning”, but a successful raise is no longer a foregone conclusion, as it was 18 months ago.
