Exploring the Investment Landscape in Q1 2024: A Tale of Two Sectors
In the realm of global startup funding, a noticeable downturn has been observed in recent times. Crunchbase reports that while there was a slight uptick from Q4 2023, the first quarter of 2024 saw startup investments hit their second-lowest point since 2018.
To put this into perspective, global startup funding stood at $171.4 billion in Q1 2022, only to plummet to $82.4 billion by Q1 2023. The downward trend continued into Q1 2024, with funding dropping even further to $66.1 billion. This trend equates to a 52% decline from 2022 to 2023 and an additional 19.7% drop from 2023 to 2024.
The decline has been particularly pronounced in North America, the largest market for startup investments, indicating a broader slowdown in venture capital activities.
However, amidst this downturn in traditional startup investments, the crypto sector tells a different story.
Data from PitchBook reveals that in Q1 2024, crypto startups raised a total of $2.4 billion across 518 deals. This represents a 40.3% increase in capital invested and a 44.7% rise in deal volume compared to Q4 2023.
Interestingly, although crypto venture capital flows peaked at $11.1 billion in Q1 2022, the sector experienced a downward trend for seven consecutive quarters, hitting a low of $1.7 billion in Q4 2023. The recent uptick suggests a resurgence in investor confidence within the crypto space.
This raises the question: why the growing interest in crypto while traditional startup investments are on the decline? Is this a temporary shift or a sign of a longer-term trend? Let’s delve deeper to uncover the answers.
A Deep Dive into Q1 2024’s Investment Trends
In the first quarter of 2024, crypto funding has been notably directed towards innovative projects with a strong focus on infrastructure.
For instance, London-based Exohood Labs secured $112 million in a seed round for an AI project utilizing quantum computing and blockchain, valuing the company at $1.4 billion. Likewise, Together AI, which develops a decentralized cloud platform for large foundation models, raised $106 million in an early-stage round, with a pre-money valuation of $1.1 billion.
Infrastructure startups have also been successful in securing funding, with EigenLayer, based in Seattle and specializing in an Ethereum (ETH) restaking platform, raising $100 million in a Series B round. Zama, a platform focused on fully homomorphic encryption (FHE) development, secured $73 million in a Series A round.
Valuations across all stages in the crypto sector have surged compared to full-year 2023. The median pre-money valuation for pre-seed/seed stages reached $21.8 million, marking an 85.5% year-over-year increase. Early-stage valuations soared by 148.3% to $72.0 million, while late-stage valuations saw a more modest increase of 7.6%, reaching $51.1 million. Interestingly, early-stage deals are now commanding higher valuations than late-stage ones.
Deal sizes have also seen an increase, with median figures at $2.7 million for pre-seed/seed stages, $5.0 million for early stages, and $5.8 million for late stages. These represent increases of 24.9% and 25.0% for pre-seed/seed and early stages, respectively, although late-stage deals saw a 9.7% decrease.
Crypto Koryo, a prominent crypto analyst, noted a shift in funding sources, with a surge of interest from crypto-focused venture firms in Q1 2024. Top investors included well-known crypto-native venture capital firms such as Andreessen Horowitz Crypto (a16z), OKX Ventures, Multicoin Capital, Paradigm, and Polychain.
The Buzz in the Crypto Investment Circles
The first quarter of 2024 has injected a sense of optimism into the crypto venture capital market, reminiscent of the bustling pace seen in 2021, according to David Nage, portfolio manager at Arca. Nage mentioned that his firm tracked over 690 deals during Q1, marking a 30 to 40% increase from the lows of 2023.
Alex Felix, co-founder and chief investment officer at CoinFund, described the Q1 2024 situation as “cautiously optimistic,” marking a rebound from the challenging fundraising environment of the past two years. Despite a 65% year-over-year decrease in both VC and crypto funding in 2023, there is now a noticeable uptick in deal-making activity, Felix added.
Several factors have contributed to this resurgence, including legal victories by Ripple (XRP) and Grayscale in 2023, along with positive sentiments around decentralized finance (DeFi) on Solana (SOL). Additionally, the approval of spot Bitcoin ETFs in the U.S. has boosted demand for crypto assets, further stimulating investor interest.
Mike Giampapa, general partner at Galaxy Ventures, foresees continued growth in crypto venture capital, driven by a bullish macroeconomic backdrop. He expects the launch of crypto ETF products, the Bitcoin halving, and projected rate cuts in the U.S. ahead of the upcoming presidential election to further fuel this growth.
PitchBook predicts that with positive investor sentiment returning to crypto and barring any major market downturns, the volume and pace of investments will continue to increase throughout the year. Meanwhile, stakeholders and crypto projects are optimistic about the future, with many expecting total capital raised in 2024 to exceed the $10 billion range and potentially reach as high as $16.2 billion.