Recent trends suggest that crypto startups are passing through a difficult phase in attracting private financiers. Venture Capital (VC) funding took a hit in the general technology space towards the end of 2022, and the blockchain sector wasn’t exempted from this downturn.
According to data from research firm Pitchbook, in the last quarter of 2022, investment in crypto startups fell by 75% compared to the same time in 2021, and the lowest since 2020.
This has brought to the fore conversations surrounding whether this is just a resilience test of the nascent blockchain technology or the hype and buzz surrounding it is finally fizzling out.
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More on the report
Only $2.30 billion was invested into crypto startups in Q4 2022, a 75% drop from the same period in 2021. However, the figures do not entirely reflect how VC funding went in the crypto space in 2022.
The PitchBook data says a record $26.7 billion was invested in blockchain startups in 2022, the majority of which came in the first quarter due to enthusiasm for cryptocurrencies which was high at that point. Compared to 2021, that figure represents a slight increase from $21.2 billion raised in the year.
The hype and buzz for cryptocurrencies were high in early 2022. VC firms like Andreessen Horowitz, Haun Ventures, and Electric Capital raised billions of dollars to support crypto entrepreneurs, and FTX raised $400 million in a Series C funding round that gave the cryptocurrency exchange a mammoth $32 billion valuation
And here in Africa, prominent startups like Bitmama, Mara, Afriex, Jambo, Hashgreed and others raised hefty figures, especially in H1 2022. However, those numbers slowed down in the second half of the year. With many crypto startups announcing layoffs and insolvency.
What could be the cause of the slowdown?
Although FTX’s implosion can be considered the last straw that broke the camel’s back for some Venture Capitals, earlier setbacks like the Terra crash and the bankruptcy of crypto lenders like the Celsius Network had already slowed down investments in crypto startups.
The crypto market crash, started by Terra, pushed the prices of virtually all digital assets into the pit, and spooked investors from the crypto scene. Generalist Venture Capital firms started paying attention to lower-risk tech sectors to invest huge funds in, while little to no crypto startups got venture capital funding.
What should be expected in 2023
The contagion caused by the collapse of various crypto empires last year made private investors realise how wobbly a burgeoning sector like crypto could be. A significant number of them were exposed to some of those major blow-ups so they are hesitant now and waiting for what’s going to happen next.
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Going into 2023, the market is showing early signs of recovery/stability, but there seems to be no rush to deploy capital. FTX and Alameda Research were both active venture capital investors hitherto the implosion. And there were reports that they swooped into deals and wrote fat cheques while asking founders a few questions in a fast process that often pushed out other venture investors.
But now, Venture capitalists still interested in crypto are expected to take more time to conduct due diligence. Valuations should also become more realistic, going by the lessons of 2022, where startups with trite products raised outrageous figures.
In this new year, crypto startups’ Venture Capital investment will pick up as the general market recovers from the unfavourable conditions of 2022. Also, startups are expected to roll out novel, unique, day-to-day problem-solving products and initiatives with blockchain technology that would attract investors to the crypto space as the future of finance continue to become mainstream.
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