Crypto VC Behavior Reveals Market Trends for 2023 and Beyond

The venture capital space has been somewhat shaky lately due to general economic uncertainty, rising inflation, interest rate spikes, fears of recession, and volatile economic situations.

Some obvious evidence of this can be seen in overall VC deal value from 2021 to 2022. More precisely, the overall VC funding fell from $713B in 2021 to $230B by Q2 of 2022. Interestingly, deal volume had a contrary spike of 4,567 to 15,652 deals in the same period.

Analysts reported reasons for VC investment reservations as a refocus on business fundamentals amid the global economic downturn and a focus on profitability rather than growth.

Image source: Pitchbook

Crypto VC Fund Directions - More Web3 deals, less NFT & DeFi deals

Similar to other high growth industries, overall VC deals across the blockchain industry have also declined this year, dropping 71% from Q1 to Q2. But more interestingly, the most active blockchain VCs have slowly tilted their portfolio towards Web3 solutions as opposed to DeFi and NFT, which were the biggest sectors to attract capital in 2021.

As displayed in the diagram above, there were quite a number of significant raises by both traditional and crypto VCs throughout 2022. Industry titans such as Sequoia Capital and Andreessen Horowitz (a16z) were particularly active, raising billions in funding to enhance the growth of Web3 ecosystems. Below is a highlight of the top crypto VC raises this year:

• Andreessen Horowitz (a16z) launches two billion-dollar crypto funds

Andreessen Horowitz, also known as a16z, announced a $2.2 billion crypto fund in Q1 targeting infrastructure and Web3 projects. Later in Q2, this established American VC launched another $4.5 billion fund to support the ‘Golden Era of Web3’.

• Sequoia Capital actively expanded its crypto VC footprint

Earlier in the year, Sequoia Capital raised $500 million to $600 million for a token fund to invest in popular DeFi protocols. Sequoia also featured prominently in Q2 with a $2 billion early-stage venture growth fund for the Indian market and $850 million Southeast Asia fund.

• FTX Ventures $2 billion fund

Although now defunct, FTX exchange had launched a $2 billion crypto fund dubbed ‘FTX ventures’. The fund was designed to exist in parallel with FTX sister company Alameda Research, focusing on fintech, gaming and healthcare.

• Haun Ventures raises $1.5 billion Web3 fund

Following Katie Haun’s departure from a16z, she started Haun ventures which managed to raise $1.5 billion during the first quarter of 2022. Haun ventures has been investing this capital towards Web3 startups and innovations that are building the next generation of the internet.

• World Innovation Lab (WiL) $1 billion fund features Web3 Innovations

WiL is also jumping into the Web3 bandwagon, this U.S-Japan focused fund raised $1 billion in Q2 and noted that it would invest in the Web3 domain as well. Given their experience in B2B Saas investment rounds, the interest in funding Web3 projects comes as no surprise.

• Binance Labs $500 million investment fund

Binance Labs, along with key partners DST Global and Breyer Capital, as well as other private equity, family offices, and limited partners, closed a $500 million investment fund in Q2. The fund spreads capital across different growth stages to promote the adoption of blockchain and Web3.

• Multicoin Capital debuts $430 million Venture Fund III

Multicoin's $430 million Venture Fund III was one of the biggest raises in Q3. Venture Fund III targets to invest $500,000-$25 million in early-stage blockchain and Web3 startups, as well as companies in growth rounds that can benefit from $100 million or more in capital.

• Coinfund Ventures announces $300 million early stage Web3 Fund

While the third quarter of 2022 saw a massive capital flight following the collapse of prominent crypto VCs like Three Arrows capital, CoinFund established a $300 million fund to support infrastructure development and Web3 companies that have a significant potential of market capitalization.

Funding flow topped early in the year

2022 started with quite a bullish trajectory, VC interest was still very high as most digital assets had recorded all-time highs towards the end of 2021. The estimated funding invested across the cryptocurrency and blockchain space peaked at around $11 Billion in Q1 of 2022, a number that had been on a steady rise two years prior.

However, in the wake of Q2, things took a different turn as the Fed started to tighten economic policy. Add on top an escalating situation between Russia and Ukraine and all of a sudden the environment became vastly more difficult for investors to be risk tolerant in than the months before.

The crypto industry was extraordinarily plagued in this regard, as major actors such as TerraLuna and their stablecoin UST went bust, setting off cascading effects in the industry.

Overall, Q2 of 2022 saw drawback in VC funding across the space, with the figure slightly dropping below $10 billion. On the brighter side, the cascading streak of insolvencies from the Terra Luna fiasco came with its lessons and wisdom for VCs, shaping new investment patterns in Q3.

Even with the market turning bearish, crypto VCs continued to invest in Q3 particularly in the under-explored sub-niches. Cointelegraph’s venture capital database report revealed an unusual shift in individual deals towards Web3 projects with strong infrastructural leaning; examples are GameFi and metaverse-related infrastructure projects. Contrary to the trends seen in 2021, mostly DeFi and NFT-related, over 44% of individual deals are Web3 based.

High Ticket Crypto Deals of 2022

Aptos raised $150 million in a Series A in July

Launched by two former Meta developers, the Aptos project is a reincarnation of Meta’s 2019 Diem blockchain project. Aptos is an infrastructural web3 project with plans to build more efficient developer tools for Web3 solutions. The Aptos Series A round included investments from Andreessen Horowitz, Multicoin Capital, Circle Ventures, and others, which ended up at $150 Million.

Limit Breakers, the creators of DigiDaigaku, raises $200Million

Limit Breakers raised over $200 million in two funding rounds for its novel “free-to-own” gaming incentive model. The funding was led by Josh Buckley, the chair of Mino Games and investment firm Paradigm and Standard Crypto. Limits breakers Free to own model goes beyond virtual earnings to allow players to own their preferred gaming character, which cuts at the heart of gaming infrastructures over web3.

Mytsten Lab raises $300 Million at a $2+ Billion valuation

Mysten Lab is a web3 infrastructure project building their flagship project, the Sui blockchain protocol, which is targeted at optimizing web applications’ speed and cost possibilities over a blockchain.

Some of the leading VCs who participated in this funding round include Binance Labs, Coinbase Ventures, Andreessen Horowitz, Circle Ventures, Lightspeed Venture Partners, Jump Crypto, Apollo, Franklin Templeton, Sino Global, and several others.

Looking Into the Horizon

It’s obvious that such a strong start of the venture capital sector for crypto this year that expectations were high for the remainder of the year. Needless to say, cheques got smaller and deals less frequent as the traditional economy started showing severe signs of instability. Q2 and Q3 in particular saw a sharp decline in funding volume across tech related sectors.

In hindsight, it seems obvious that the venture space (much like the rest of crypto) was a bit  inflated and now we’re slowly awaiting for the risk willingness to return to the space.

Although it is hard to predict when exactly the overall crypto markets will take off again, it is evident that crypto VCs are keeping close tabs on the developments especially in Web3 and that the large amount of funding available should come as a good reassurance that continued innovation will take place in the space.