Hutt Capital: Overview of the 2022 Blockchain VC Landscape, New Trends in Venture Capital

Author: Hutt Capital

Compiled by: Wu Says Blockchain

Introduction

Hutt Capital is pleased to release our fourth annual review of the blockchain venture capital landscape. This year has been particularly busy for the blockchain venture capital sector. In the spirit of industry transparency, we are excited to publicly share the aggregated data.

This report focuses solely on blockchain venture capital funds, aiming to understand the investable areas for institutional limited partners, which aligns with our vision at Hutt Capital (a leading independent blockchain venture capital fund platform).

All data comes from Hutt Capital's internal tracking system, representing the current fund sizes (or actively raised target sizes) of closed-end blockchain venture capital funds.

Summary

This year has seen a record number of blockchain VC funds established, with a net addition of 76 blockchain VC funds in the past 12 months. We are currently tracking 155 venture funds, up from 79 a year ago, representing a year-over-year growth of 96%.

The blockchain VC space is growing rapidly, but the amount of capital controlled by these funds is growing even faster. These blockchain VC funds have $30.9 billion in committed capital in their liquid funds, up from $6.8 billion a year ago, representing a year-over-year growth rate of 357%. Venture capital is no longer a cottage industry as it was in previous years.

The average fund size has increased by 132% from a year ago, rising from $86 million to $199 million, indicating that existing funds are rapidly scaling up. The median fund size increased from $50 million to $75 million, a smaller increase of 50%, as a few of the largest funds skew the average numbers.

Among the 155 blockchain VC funds, there are 100 first-time funds, 36 second-time funds, and 19 funds that have gone through three or more rounds of financing.

More long-term funds hold the most capital. Funds with three or more rounds of financing account for 12% of all funds but represent 40% of the capital. There are 19 funds with three or more rounds of financing, whose total capital exceeds that of over 100 first-time funds.

If it weren't for large first-time funds like Hivemind Capital Partners and Haun Ventures (both reportedly raising $1.5 billion), this ratio would tilt even further.

There has been no substantial change in the categorization of these funds over the past year, as each category has experienced strong growth. Currently, there are 55 funds with more than two rounds of financing, up from 32 last year and only 15 two years ago.

Blockchain VC Fund Sizes

The sizes of blockchain VC funds have significantly increased over the past year, with the level of capital controlled by large funds reaching unprecedented levels.

$18.2 billion in capital, or 59% of the industry's capital base, is controlled by 14 funds with over $500 million. A year ago, these funds alone held nearly three times the entire industry's capital.

The industry is more fragmented than ever. 33 funds with an average size of $713 million control 76% of the capital. The remaining 122 funds control the remaining 24%, with an average fund size of $60 million.

Despite this disparity between large and small funds, the capital controlled by the 122 funds with less than $200 million is still 9% higher than the entire fund industry a year ago.

All categories of funds have significantly increased in size compared to last year, except for those below $50 million, which have somewhat remained insulated due to numerous peers growing and entering the market. 44 funds below $50 million manage $1.1 billion, a 28% increase from 35 funds managing $838 million in the same period last year.

As fundraising becomes easier, we have seen the emergence of opportunity funds and growth funds. These are growth-stage funds that supplement existing early-stage platforms, common in traditional venture capital but now entering the blockchain space.

Geographic Distribution of Blockchain VC Funds

North America remains the primary location for blockchain VC funds, with 68% of funds based in the region, representing 87% of the industry's capital base.

North America is also driving the trend of larger funds, with an average fund size of $259 million, compared to $61 million in Europe and $120 million in Asia. Among the 14 funds exceeding $500 million, only one is located outside North America.

For blockchain VC firms, geographic location is less important than for traditional VC firms. Many of these funds have a global focus, regardless of where they are based. Therefore, while this analysis does not cover blockchain venture capital transaction data, we expect that potential blockchain venture capital transaction data will lean more towards a global distribution relative to the location of blockchain venture capital funds.

Additional Observations

The blockchain VC investment market has seen significant developments over the past 12-18 months.

• The emergence of mega funds/asset aggregators
• The supply of capital has driven more competition for deals among funds
• High-quality blockchain venture capital funds have been heavily oversubscribed and are difficult to access.
• DAOs and guilds are capturing market share from traditional VC funds
• The increase of specialized funds
• Web3 has become a trend for generalist VC funds, but specialized funds dominate

The Emergence of Mega Funds/Asset Aggregators

There is sufficient demand to invest in blockchain venture capital funds that ambitious companies can now raise large amounts of capital for the first time. As fund sizes continue to grow, these players have turned to the high-end market and now need to write larger checks in large funding rounds to allocate their funds. This has led to more capital being allocated to growth-stage companies and liquid tokens, whether through direct purchases or treasury trades.

The move into the high-end market has opened a gap in the seed pre-sale and seed stages, filled by new and existing smaller funds that will support founders in the early stages. Many large funds (or their general partners) and industry strategists are acting as limited partners in new early-stage funds, creating a vetted deal flow for their own firms.

The Supply of Capital Has Driven More Competition for Deals Among Funds

One impact of the industry capital base growing by 357% in a year is that competition for deals has become fierce. Before 2021, almost everyone with capital could participate in lower-valued financing. That has changed. Funds are now competing fiercely based on reputation and value propositions (or in some cases, willingness to pay the highest price). Valuations have also risen as a result.

From the perspective of limited partners, it is crucial to understand which firms have established differentiated brands and value propositions to sustainably replicate historical successes. Each fund's track record looks good, but the environment that produced those records is far less competitive than it is today.

High-Quality Blockchain VC Funds Have Been Heavily Oversubscribed and Are Difficult to Access

In blockchain venture capital funds, limited partners have more investment options than ever, but the demand for limited partners to invest in blockchain venture capital funds has clearly grown faster than the capital base of these funds. Every fund is oversubscribed. Limited partners are vying for access, as many have been turned away. Institutions are coming in with the ability to write large checks. The access game we see in traditional VC has now entered the crypto space.

DAOs and Guilds Are Capturing Market Share from Traditional VC Funds

Risk DAOs and gaming guilds are accepting allocations from venture funds in the early stages (primarily during seed pre-sales and seed rounds). High-quality venture capital DAOs are an attractive source of capital because founders can access a diversified network of individual members who bring various expertise and relationships. We have seen this with Seed Club Ventures. Today, most venture capital DAOs are relatively small, so the amounts paid in very early rounds are smaller, but we believe this source of funding will grow over time.

Gaming guilds provide a unique source of strategic capital for blockchain gaming startups that traditional venture capital finds difficult to replicate. The number of gaming guilds is continuously increasing, and these groups are steadily capturing shares of the early gaming market. The guilds themselves are often venture capital funds, while venture capital funds that are less deeply involved in gaming may prefer to indirectly engage with a group of games rather than pick winners in a category they are less familiar with.

The Increase of Specialized Funds

We believe that specialization is increasing for two main reasons:

1. The industry is now too large and broad to cover everything; different categories require unique expertise and relationships, so funds must identify where they have a competitive advantage and strive to excel in that area.
2. Specialization is a way for emerging funds to differentiate themselves and gain an advantage relative to existing players, especially in younger categories like DeFi, gaming, NFTs, or DAOs, where we most often see specialized sub-industry funds.

Web3 Has Become a Trend for Generalist VC Funds, but Specialized Funds Dominate

Generalist venture capital firms are becoming increasingly interested in Web3, with many companies designating someone to focus on this area, but the vast majority are late to the game, and specialized blockchain venture capital firms are eating their lunch. This is especially true in the earliest stages. If you actively seek information, you will see that crypto-native funds and other industry participants dominate the capital tables in early-stage rounds.