Original Title: Nine crypto VCs on why Q1 investments were so hot and how it compares to previous bull market

Author: Jacquelyn Melinek

Translation: Luffy, Foresight News

Dragonfly Capital partner Tom Schmidt told TechCrunch that if the cryptocurrency investment landscape in 2023 was like a pot of cold water, then the first quarter of 2024 is when the water starts to boil before the bubble forms.

He's not wrong. According to PitchBook data, the cryptocurrency and blockchain sector raised a total of $25.2 billion in the first quarter of 2024, about 25% higher than the $20.2 billion raised in the fourth quarter of 2023.

Arca portfolio manager David Nage said, "It's an unusually busy period, it feels like 2021 again. The funding in 2021 felt like being held at gunpoint, you had to do it, and that feeling is back." Nage said his firm tracked over 690 cross-stage financings in the first quarter, about 30% to 40% higher than the low point in 2023.

Alex Felix, co-founder and chief investment officer of CoinFund, said, "In the first quarter, the financing prospects for crypto venture capital are cautiously optimistic, and companies have emerged from the financing difficulties of the past two years."

Felix added that although venture capital and cryptocurrency financing in 2023 decreased significantly compared to the previous year (about 65%), trading activity has increased significantly.

Why the resurgence now?

Part of the reason for the warming of the cryptocurrency venture capital market is the positive impact of last year's Ripple and Grayscale litigation victories, as well as the positive sentiment towards DeFi on Solana. In addition, the approval of a spot Bitcoin ETF by the SEC has also increased demand for Bitcoin.

"Another thing that is affecting the market is that we are still alive," Nage said. "I know it's funny to say, but after the collapse of LUNA, BlockFi, FTX, and the banking crisis, people thought we would die, but we didn't."

When combined with the macroeconomic backdrop, this trend in cryptocurrency may not stop soon. Mike Giampapa, general partner at Galaxy Ventures, said, "With the launch of cryptocurrency ETF products, Bitcoin halving, expected interest rate cuts before the U.S. presidential election, cryptocurrency investment will continue to heat up." "We also see institutional interest in cryptocurrency beginning to translate into actual action."

For example, BlackRock is launching a tokenized currency market fund on the Ethereum blockchain, which could intensify competition pressure on traditional financial institutions and bring about more adoption.

Where the trading influx is going

Overall, financing for crypto startups in multiple areas, from DeFi to SocialFi to Bitcoin L2, is on the rise. "We see 30 to 40 transactions every week, which is 10% to 20% higher than the previous quarter," Nage said.

Giampapa said the number of new companies and old companies that have been performing poorly during the bear market seeking financing has increased. "The market in 2024 will be a story of 'rich' and 'poor,' with new companies developing according to popular narratives, obtaining financing at high valuations, while many other companies will fail," he added.

Currently, SocialFi in the Web3 world mainly refers to decentralized social media, which is very popular. Bi.social recently completed a $3 million financing round, and the fund for the decentralized social network protocol Mask Network raised $100 million to further support similar applications. Some success in this area can be attributed to decentralized social application networks like Farcaster, which are using Web 2.0 technology to attract new audiences. Web3 games are also rapidly expanding, with hundreds of new games expected to be launched later this year.

Schmidt said that cryptocurrencies, artificial intelligence, blockchain, and anything related to zero-knowledge "are all hot right now."

Tekin Salimi, founder of dao5, said, "Given the huge expectations for the potential impact of artificial intelligence on the global economy, we expect this trend to continue in the foreseeable future."

For example, blockchain with modular and integrated artificial intelligence (such as 0G Labs, which raised $35 million in seed funding) has also attracted the attention of venture capitalists.

Founder-friendly market

Salimi said that competition between venture capital firms is creating an environment where project founders have more leverage in financing negotiations. Michael Anderson, co-founder of Framework Ventures, said, "Recently, the market is not lacking in greedy capital."

Marthe Naudts, partner at White Star Capital's digital asset fund, said, "This is advantageous for founders because in oversubscribed financing rounds, investors are now selling their value in reverse." This means that some investors have to show founders why they should choose them. "Founders now have the ability to choose and set terms."

But Felix said that power has not really shifted from investors to founders, but both parties have reached a "perfect balance." "Founders benefit from more urgent financing rounds, valuations have also rebounded slightly from the recent lows, and venture capital firms have obtained more protective and favorable deal structures."

It is worth noting that there is a huge difference in valuations based on the quality of the team and industry, Schmidt said. Some startups that were successful in the previous market cycle are repricing through down rounds or delaying financing, while others are new faces.

Schmidt pointed out that the valuation of consumer-focused cryptocurrency projects before the seed round is usually less than $10 million, but valuations in industries such as cryptocurrency and artificial intelligence can reach $300 million or even higher. For example, according to Messari data, the AI prediction market PredX raised $500,000 and was valued at $20 million after investment. In addition, Web3 artificial intelligence social network CharacterX raised $2.8 million in seed funding and was valued at $30 million.

For the seed round, Nage expects pre-investment valuations to be between $25 million and $40 million, with some startups having seed round valuations of $80 million. Schmidt said that the average seed round valuation is between $30 million and $60 million.

"Valuations have risen significantly, even though larger and more mature companies have already completed financing, founders still have many choices," Anderson said. "Given that we are in the early stages of this cycle, some of the valuations we see are a bit out of line."

Schmidt said that because financing announcements are usually made months to a year after actual financing, if market participants judge the private market situation based solely on news headlines, they will misunderstand the latest private market situation.

"Last year, even high-quality teams took several months to finance or couldn't raise funds at all, and now it only takes a few weeks or even less time, and the conditions for founders are better," Schmidt said. "Teams that wasted time and money during the bear market are still in transitional financing, but new teams are starting with larger amounts of financing and higher valuations."

The shift in valuations is also being driven by the sentiment in the cryptocurrency market, as Bitcoin hits all-time highs, Solana surpasses $200, and Ether approaches $4,000, which is a "huge emotional shift," Nage said.

For founders, seed round financing is still the easiest because many small funds and angel investors are willing to write the first check at the lowest threshold, said Felix. "However, I don't expect the completion rate of Series A financing to improve immediately, as the rate has dropped from over 20% to around 15%. Raising over $10 million in financing will still be a quite challenging task."

Many venture capitalists are still trying to avoid falling into the trap of overvaluation due to hype, while also realizing that they cannot just sit and wait. Thomas Tang, Vice President of Investments at Ryze Labs, said, "Oversubscription of a financing round within a few days, and rejections or transfers of investments to higher-valued subsequent financing rounds are quite common."

Token economy resurgence

Nage said that since the end of 2023, he has been hearing about companies and peers researching token economic designs for 2024. As a result, there has been a new growth in token issuance, and many of Arca's portfolio companies are working towards this goal this year. He added that this is different from the era after the mid-2022 Terra/LUNA crash, when most seed round transactions were done through Simple Agreements for Future Equity (SAFE) or warrants financing.

"The new phase of token issuance we are about to enter is a stage of dramatic valuation shifts," Nage said.

Tang stated that this dynamic is prompting venture capital firms to accept "high valuations in private rounds, as they expect the tokens to rise significantly in public trading."

This does not mean that there is no longer SAFE financing, Schmidt said. The market has shifted towards priced equity rounds and token structures, "as a way to protect investors, while also providing flexibility for the teams."

Clay Robbins, co-founder of accelerator and venture capital fund Colosseum, stated that teams adopting traditional business models face greater difficulty in financing. He added that crypto-native venture capitalists see token trading and early liquidity as the driving force behind this, so they have a strong bias in this regard, while some other investors are still not fully convinced about this market.

In this regard, Naudts stated that the long-term performance of these tokens is still to be observed. Her company, White Star, takes a cautious approach to tokens that can be used as speculative assets and as a means of payment. "But we are seeing a lot of experimentation with token economic models here, which undoubtedly excites us about the innovation within it."

What's next

Robbins stated that early-stage financing will continue to heat up in the remaining time of this year. Given the "relatively weak IPO market, lack of fundamental underwriting for growth-stage cryptocurrency companies, and the trial between the SEC and Coinbase, I expect the situation for growth-stage crypto companies to be inconsistent."

April will be an important month for the cryptocurrency market sentiment. With the Bitcoin halving event, which occurs only once every four years, there is a lot of uncertainty about how it will impact the crypto industry. Past halving events have driven the price of Bitcoin up, but historical data does not always predict the future.

"Although a short-term market correction may be imminent, we expect the next three quarters of 2024 to be very optimistic," Salimi said. "Historically, financial markets make positive progress in election years. Additionally, we expect the macro environment to start improving later this year, first reflected in interest rate cuts."

Many venture capitalists are confident that, compared to last year, the market will continue to see the same surge in venture capital in the coming quarters, as long as there are no large-scale fraud cases, lawsuits, or negative regulatory impacts. "Regulation remains an uncertain factor and could be a catalyst for driving the market higher again or hindering growth," Giampapa said.

Robbins stated that if there is positive progress in regulation, a strong momentum in on-chain development, more institutional products being launched, and continued improvement in the overall macro environment, there could be a "crazy deployment of funds" scenario.

"There will be more activity, more trading, and most importantly, funds are being raised," Nage said. "Last year, many companies couldn't raise funds from LPs because the industry 'had reached its end, and LPs were not interested in it.'"

Schmidt stated that as the industry recovers from the FTX event, LPs are also starting to return to the field, but some are also starting to differentiate between "cryptocurrency" and "cryptocurrency venture capital," which could lead some to only focus on Bitcoin.

Traditional venture capital firms or crossover funds are not "diving headfirst into the cryptocurrency field, but they are slowly trying more trades," Schmidt said. "With the return of these larger market participants, cryptocurrency funds are re-entering the market, regaining capital from limited partners, and the entire field is becoming more institutionally attractive again. I wouldn't be surprised if the bubble intensifies again."

In any case, there has been a huge change in sentiment in the last quarter, so as the sentiment continues to improve, it should also have a positive impact on the venture capital market, Nage added. "If companies are able to raise funds in the next two to three quarters, they won't hold onto the funds like they did last year. With this situation easing, you will see more checks being written."

Nage stated that last year, most funds only made one to two transactions per month, or several transactions per quarter. "The situation has changed dramatically now. In December alone, we completed six or even more transactions."

In comparison, CoinFund completed 17 transactions in 2023 and 4 transactions in the first quarter of 2024, according to Felix.

PitchBook data shows that the entire cryptocurrency and blockchain industry raised a total of $101.8 billion in funding last year. I asked each company how much they expect to raise by the end of 2024, and most companies' estimates are higher than $100 billion, but some companies even expect as much as $200 billion.

Felix believes that venture capital investment in Web3 may account for over 10% of the global financing total, so based on PitchBook's 2023 financing data, this figure could reach as high as $16.2 billion by the end of the year. In any case, it is expected to be lower than the nearly $30 billion raised by crypto startups in 2022 and the over $33 billion raised in 2021.

Robbins stated, "The current market situation is somewhere between the frenzy of 2021 and 2022 and the downturn of last year."

Although Giampapa also believes that many managers will accelerate deployment and raise funds in the next 6 to 12 months, there is one thing to be cautious about. In the last bull market, some large capital deployers were companies like FTX and Three Arrows Capital, which are no longer in business. "I find it hard to imagine that the funds deployed into crypto venture capital will return to the levels of 2021 to 2022 without these participants."

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。