Looking back at the 15-year evolution of crypto venture capital: a difficult but generally upward trend

Original author: insights 4.vc

Original translation: Felix, PANews

This article will present the evolution of venture capital dynamics in blockchain-related entities over the past 15 years, focusing on the shift of some companies to liquidity investments, where VCs did not acquire equity but tokens with a vesting schedule. In addition, it will list the first investments in the crypto space by well-known investment institutions such as a16z, such as their investment in OpenCoin (later Ripple Labs) in April 2013.

In the early days of Bitcoin, between 2009 and 2012, VCs showed little interest in the crypto space. Therefore, this article will start with 2012. It is also worth noting that the long-term correlation between Bitcoin price and funding amounts does not disappear until 2023.

Venture Capital and Bitcoin Prices

2009-2018: Bitcoin’s first decade and VCs start investing in blockchain

Bitcoin and Blockchain Independent Investor (CBINSIGHTS)

The venture capital landscape for Bitcoin and crypto projects began to take shape in the early 2010s. Union Square Ventures (USV), led by Fred Wilson, and Andreessen Horowitz (a16z) were among the first firms to invest in blockchain projects, and both firms invested in Coinbase in 2013.

Ribbit Capital was founded in 2012 by Meyer “Micky” Malka and focuses on disruptive financial technologies. It was also an early investor in Bitcoin-related companies such as Coinbase. Boost VC was founded in 2012 by Adam Draper and was originally an accelerator and venture capital fund for emerging technologies, including Bitcoin and blockchain startups. Lightspeed Venture Partners invested in Blockchain.info (now Blockchain.com) in 2013.

Other notable early funds include Bitcoin Opportunity Corp, founded by Barry Silbert in 2013, and Pantera Capital, which shifted its focus to Bitcoin and blockchain in 2013. Blockchain Capital, founded in 2013 by Bart Stephens, Brad Stephens, and Brock Pierce, was one of the first firms to focus exclusively on blockchain and cryptocurrency investments.

Blockchain and Bitcoin transaction share by year (2011-2015)

2012

Bitcoin startups received just $2.1 million in investment.

year 2013

Key milestones include:

• Coinbase: The largest single round of funding, backed by Andreessen Horowitz, Union Square Ventures, and Ribbit Capital. Coinbase is now a public company and a key player in the Bitcoin space.

• BTCChina: China’s largest and oldest Bitcoin exchange, received $5 million in funding from Lightspeed China. Although this investment ultimately failed, it is still an important part of China’s early crypto history.

• Circle Internet Financial: Circle started out as a Bitcoin application company that raised $9 million from Breyer Capital and Accel Capital. Jeremy Allaire’s goal was to promote the use of Bitcoin, similar to Skype or email. Circle later became famous for issuing USDC in 2018.

Investments and major breakthroughs:

Total venture capital in 2013: $88 million, a significant increase from the previous year.

Major breakthroughs in 2013:

• In November, the price of Bitcoin surpassed the $1,000 mark for the first time.

• The first Bitcoin ATM has launched at Waves Coffee Shop in Vancouver.

• Bitcoins mining power soared from 20 Th/s to 9,000 Th/s.

Venture capital companies and projects worth noting:

• Union Square Ventures: Invested in major projects such as Protocol Labs, Dapper Labs, Arweave, Polygon, zkSync, Polychain and Multicoin Capital.

• Ribbit Capital: Active in early-stage industry investments, supporting projects such as Ethereum, AAVE and Arbitrum.

The 5 largest blockchain startup financings of 2013

Year 2014

In June 2014, the blockchain industrys financing exceeded the total amount for the whole of 2013, reaching US$314 million, a 3.3-fold increase from US$93.8 million in 2013.

500 Startups, which initially focused on the crypto industry but later moved to early-stage investments, became the most active investor, backing bitcoin application companies along with Boost VC, Plug and Play Technology Center, and CrossCoin Ventures.

Significant investments in Bitcoin applications include:

• Blockchain: $30.5 million

• BitPay: $30 million

• Blockstream: $21 million

• Bitfury: $20 million

Bitcoin payment platform BitPay has raised $30 million in a round led by Index Ventures, with participation from AME Cloud Ventures, Horizons Ventures, and Felicis Ventures.

Blockstream focuses on the Lightning Network, a major innovation in Bitcoin payments, and has developed the c-lightning client and the Bitcoin sidechain Liquid.

OKcoin (now OKX) received $10 million in funding from investors including Ceyuan Capital, Mandra Capital and venturelab. It is worth noting that Ceyuan’s co-founder Feng Bo founded Dragonfly Capital in 2018, which launched a large number of crypto funds in the following years.

Overall, crypto venture capital investment grew steadily in 2014.

2015

Although the price of Bitcoin fell from its 2013 peak in 2015, blockchain technology has attracted more and more capital and entrepreneurial interest. The total financing amount of Bitcoin startups reached US$380 million.

The main financing includes:

• Coinbase: $75 million Series C

• Circle: $50 million Series C

• BitFury: $20 million Series B funding

• Chain: $30 million in Series B funding, including strategic investors such as Visa and Nasdaq

Ripple Labs (formerly OpenCoin) raised $28 million in a Series A round, while 21 Inc. received $116 million from a16z, Qualcomm, Cisco, and PayPal.

OMERS Ventures from Canada announced plans to invest in blockchain, showing growing institutional interest. Notable active venture capital firms include a16z, Union Square Ventures, Ribbit Capital, Boost VC, and DCG.

Investment activity in 2015 highlighted that participation in capital markets continues despite the bear market.

2016

Venture capital investment in the crypto market has declined as fintech investment has declined. According to CB Insights, funding activity for Bitcoin and blockchain startups has fallen 27% from 2015 and returned to 2014 levels.

Despite the decrease in investment activity, total funding reached $550 million, primarily in more mature companies. Notable fundings included:

• Circle: $60 million Series D

• Digital Asset Holdings: $60 million Series A

• Ripple: $55 million Series B funding

• Blockstream: $55 million Series A

Circle’s pivot from bitcoin trading services to remittance and payment services paves the way for its stablecoin. Polychain Capital, founded by former Coinbase employee Carlson-Wee, raised $750 million for its third venture fund with backing from a16z, Union Square Ventures, and Sequoia Capital.

In 2016, ICO-based project financing began to grow, with The DAO raising $150 million, marking the beginning of the ICO boom.

2017

Liquidity Investment

The venture capital landscape for liquidity investing began to take shape around 2017-2018, driven by the ICO boom and interest in tokenized assets. Pioneer funds such as Polychain Capital, founded by Olaf Carlson-Wee in 2016, and MetaStable Capital, co-founded by Naval Ravikant, focused on tokens rather than equity. Pantera Capital launched its ICO Fund in 2017, targeting ICO and token projects, while Blockchain Capital launched the BCAP token, a security token representing shares of its fund. Multicoin Capital, founded by Kyle Samani and Tushar Jain in 2017, and 1coinfirmation, led by former Coinbase employee Nick Tomaino, also emphasized token investing. Amentum Investment Management joined in 2017, focusing on long-term capital appreciation through blockchain and token economy investments. These funds recognized the potential of tokenized assets and moved from the traditional equity model to a liquid token strategy.

In 2017, the blockchain industry experienced a period of enthusiasm and regulation. The Ethereum ERC-20 protocol triggered an ICO boom, but regulation caused the crypto industry to enter a long bear market.

ICO and VC performance:

• Q1 2017: 19 ICOs raised $21 million.

• Q4 2017: Over 500 ICOs raised nearly $3 billion.

• In 2017 as a whole: ICOs raised $5 billion across nearly 800 projects, 5 times more than the $1 billion in VC investments across 215 deals.

ICO projects worth noting:

• Filecoin: $257 million

• Tezos: $232 million

• Bancor: $152.3 million

• Polkadot: $140 million

• Quoine: $105 million

Institutions such as Union Square Ventures and Blockchain Capital also participated in ICOs, attracted by the quick returns.

Geographical distribution:

• EU: 40% of ICOs, raising $1.76 billion

• North America: US$1.076 billion in financing.

After the regulatory policies were introduced, Chinese venture capital firms moved to regions such as Hong Kong and Singapore. The ICO bubble burst due to regulatory pressure and unsustainable business models.

2018

ICO activity continued into 2018, with more than 400 projects raising $3.3 billion in the first quarter. CoinSchedule reported that there were 1,253 ICO projects worldwide in 2018, raising $7.8 billion.

The largest ICO projects:

• EOS: Raised over US$4 billion.

• Telegram: raised $1.7 billion in two rounds of funding, but the project was later abandoned.

• Petro: Venezuelan government raised $740 million, but ultimately failed.

• Basis: Raised $130 million, though the project later ran into trouble.

VC Equity Financing:

• Bitmain: US$400 million in Series B financing, invested by Sequoia Capital; US$1 billion in Pre-IPO financing, invested by Tencent, SoftBank and CICC.

• Total venture capital: $4.26 billion.

Main progress:

• Coinbase launches Coinbase Ventures.

• Paradigm was founded by Coinbase co-founders Fred Ehrsam and Matt Huang.

• A16z raised $300 million for its crypto fund, investing in projects like CryptoKitties and Dfinity.

• Fidelity launches institutional cryptocurrency platform.

In 2018, a variety of “blockchain+” applications emerged, many of which are still in the conceptual stage, laying the foundation for future innovation.

The evolution of ICOs from 2013 to 2018

An Empirical Analysis of To ICO or Not to ICO

• Total Sample (N= 316): 14.9% - Out of the 316 ICOs analyzed, 14.9% received VC backing before launching, which means that about one in seven ICOs received VC backing before the token sale.

• Underfunded (did not reach minimum funding target) (N= 43): 0.0% - All underfunded ICOs had no VC backing, suggesting a possible link between lack of VC backing and failure to reach minimum funding targets.

• Well-funded (reached minimum funding goal) (N=89): 9.7% - Of the well-funded ICOs, 9.7% had VC backing, indicating that nearly one in ten successful ICOs had VC backing.

• Mean Difference (Average Funding Goal - Minimum Funding Goal): 9.7% - A significantly higher percentage of well-funded ICOs received VC backing compared to underfunded ICOs, highlighting the positive impact of VC backing on funding success.

Equity investments by Union Square Ventures and Andreessen Horowitz between 2013 and 2018

List of the most active investors from 2014 to 2019

2019: The post-ICO boom

In 2019, the blockchain deal environment stabilized after a surge in 2018, with 622 deals totaling $2.75 billion, up from 322 deals totaling $1.28 billion in 2017. Blockchains share of VC deals rose to 2.8% from 1.5% in 2017, while seed and early-stage blockchain deals rose to 3.6% from 1.8%. The median valuation of early-stage blockchain deals was $12.5 million, 22% lower than the median of $16 million for all investments.

The focus of blockchain deals has changed, with 68% of investments in 2019 being categorized as fintech, down from 76% in 2017, indicating a wider range of applications beyond “cryptocurrency.” North America accounted for 45.3% of blockchain deals, and Asia accounted for 26.8%, reflecting a wider global distribution.

Blockchain accounted for 2.8% of global startup investment and 1.1% of total capitalization in 2019, compared to 3.6% and 2.7%, respectively, in 2018. The median deal valuation fell from $16.6 million in 2018 to $13 million in 2019. Notable non-crypto blockchain companies include Securitize, Figure, PeerNova, and Spring Labs.

CB Insights reported that there were 806 global blockchain investment deals in 2019, compared to 822 in 2018, with investment volume down 27.9% to $4.26 billion. Zeroone Finance believes that Digital Currency Group was the most active blockchain investor in 2019, with 14 investments, followed by Collins Capital, Coinbase Ventures, and Fenbushi Capital.

In 2019, investment institutions focused on digital currency exchanges, games, digital wallets, digital asset management, smart contracts and DeFi. Animoca Brands, a Hong Kong mobile game developer listed on the Australian Stock Exchange, has a significant position in the blockchain gaming sector. FTX was established with the strong support of Alameda Research.

In 2019, global blockchain investment enthusiasm dropped significantly, and traditional institutions became more cautious. The performance of investment institutions in the bear market showed their rigorous attitude.

2020-2021: Funding grows and surges again

In 2020, blockchain venture capital became a significant part of the global private equity market, driven by the potential for high returns. Since 2012, 942 venture capitalists have invested in more than 2,700 deals involving blockchain startups. Top blockchain VC funds have consistently outperformed traditional VC funds and the broader tech industry.

Blockchain private equity outperforms traditional private equity (since IRR fund inception 2013-2020)

Despite its importance, blockchain private equity accounts for less than 1% of the global venture capital market, having peaked at around 2% during the 2017 crypto bull run.

Overall, blockchain VCs have shown resilience and performed well during market downturns. Their high return potential and diversification advantages make them an attractive option for investors.

In 2020, DeFi began to attract widespread attention. According to PAData data from PANews, the total investment and financing amount in the crypto industry was about 3.566 billion US dollars, which is comparable to the figure in 2019. DeFi projects received 278 million US dollars, accounting for 7.8% of the total. Despite the relatively small amount, DeFi has the largest amount of financing, and more than a quarter of the 407 disclosed projects are related to DeFi. This shows that people are increasingly interested in this new type of crypto-native project.

Prominent DeFi applications attracted a lot of investment in 2020. Uniswap completed an $11 million Series A, 1inch received $2.8 million in seed funding, and lending platform AAVE raised $25 million in Series A. Throughout the year, DeFi locked up nearly 2,100% of its value, and the number of unique addresses grew 10 times. While these numbers may not seem large compared to future data, the “Summer of DeFi” marked an important turning point.

It is worth noting that native blockchain VC institutions have shown a preference for industry application projects (especially DeFi), adopting a more aggressive and riskier approach. The investment strategies of each institution vary. PAData reported that more than 700 institutions and individuals invested in blockchain projects in 2020, of which NGC Ventures was the most active investor, followed by Coinbase Ventures and Alameda Research.

2021

With the advancement of blockchain technology, global VC institutions are increasingly aware of the importance of blockchain, especially with the emergence of concepts such as Metaverse and Web3. In 2021, blockchain startups received approximately $33 billion in financing, the highest year ever. According to PwC data, the average financing amount for projects in the crypto industry in 2021 reached $26.3 million.

The number of blockchain venture capital deals also hit an all-time high in 2021, with more than 2,000 deals, double the number in 2020. The increased frequency of late-stage financings, which resulted in 65 startups reaching valuations of $1 billion or more, reflects the crypto market’s transformation from a niche to a mainstream market.

VC Investments in Crypto/Blockchain vs Total Investments

Galaxy statistics show that there are nearly 500 blockchain VC institutions in the world in 2021, and the number and size of funds have reached historical highs. Major institutions such as Morgan Stanley, Tiger Global, Sequoia Capital, Samsung and Goldman Sachs have entered the blockchain market through late-stage equity investments, bringing sufficient funds to the market.

In 2021, the crypto space has experienced a massive influx of new users and investments:

According to Gemini data, nearly half of users in major crypto regions started investing in 2021.

Percentage of new users:

• Latin America 46%

• Asia Pacific accounts for 45%

• Europe accounts for 40%

• The United States accounts for 44%

This influx has created a solid user base for the growth and development of crypto applications.

Major investments:

In July 2021, FTX announced the completion of a $900 million Series B financing at a valuation of $18 billion, the largest private equity financing in crypto history. This round of financing involved 60 investment institutions, including SoftBank Group, Sequoia Capital, Lightspeed Venture Capital, etc.

Active Investors:

Coinbase Ventures is the most active blockchain investment institution in 2021. After going public in the United States in April, the institution invested in 68 blockchain startups. Before going public, Coinbase raised nearly $547 million in 13 rounds of financing. Other notable investors include: AU 21 Capital (headquartered in China), which invested in 51 companies, and a16z invested in 48 companies.

Venture Capital:

In the fourth quarter of 2021, investments exceeded $10.5 billion, bringing total venture capital investment in the cryptocurrency and blockchain space to a record high of $33.8 billion, accounting for 4.7% of total venture capital investment that year. This year also saw the most deals, totaling 2018, almost double the number in 2020 and surpassing the previous record of 1,698 in 2019.

VC funding in cryptocurrency/blockchain in 2021 (by category)

Of the $33.8 billion in VC investment in the cryptocurrency and blockchain startup ecosystem, the largest portion went to companies that provide trading, investment, exchange, and lending services, receiving more than $13.8 billion (41.83%). More and more VCs are investing in Web3 companies, including those developing NFTs, DAOs, and metaverse tools, infrastructure, and games, accounting for 17% of total investment.

2022 and 2023: VC investment drops sharply

2022

Investment Overview:

• VCs invested over $30 billion in cryptocurrency and blockchain startups, almost the same as the $31 billion in 2021.

• Investment peaked in the first half of the year and fell sharply in the third and fourth quarters.

• The number of deals and capital investment in the fourth quarter of 2022 were the lowest in two years.

• Well-known venture capital firms that invested in FTX faced significant losses. Sequoia Capital wrote down its $200 million investment to zero, and Temasek’s $320 million FTX stake became “worthless.”

trend:

• Later-stage companies received a larger share of capital, while pre-seed investments continued to decline.

• Web3 leads in transaction count, but trading and investment platforms raised the most funds.

• Median deal sizes and valuations were at their lowest levels since the first quarter of 2021.

VC Financing:

• 2022 was the best year for crypto VC funding, with over $33 billion, although the amounts raised in the fourth quarter were the smallest since the first quarter of 2021.

• The average fund size increased, with more than 200 funds raised and the average fund size exceeding US$160 million.

2023

Investment Overview:

• Crypto VC investment has fallen sharply, with investment amounts accounting for only one-third of the previous two years.

• The number of deals and investment capital continue to hit new lows every quarter.

trend:

• Early-stage companies accounted for the majority of deals, with the share of pre-seed deals declining in the second half of the year.

• Valuations and deal sizes fell to their lowest levels since the fourth quarter of 2020.

• Trading firms raised the most funding, followed by Layer 2 and interoperability, and Web3.

VC Financing:

• Fundraising has been challenging due to macroeconomic conditions and volatility in the crypto markets.

Crypto VC Fundraising Fund Size

• The number of new crypto VC funds established in 2023 was the lowest since 2020, with the average fund size falling by 30% and the median fund size falling by 45%.

Interest and investment declined significantly in 2022 and 2023, with the decline being particularly significant in 2023. Despite this, Web3 still leads in transaction count, while exchanges dominate in funding. Despite regulatory challenges, the United States remains the dominant player in the crypto startup ecosystem. In addition, macroeconomic and market volatility have created a difficult environment for founders and investors, with significant challenges to funding.

2024: The State of VC

The venture capital landscape for Q1 and Q2 2024 has been detailed in previous articles. Here we will only highlight what is visible in the chart below, which is a continued trend since the end of Q1 2021, with early-stage investment clearly outpacing late-stage investment.