A Clear Understanding of the Evolution of Crypto Venture Capital Over 15 Years

PANews
2024-08-05 15:47:35
Collection
Cryptocurrency VC is struggling, but overall it's on the rise. It is also noteworthy that the long-term correlation between Bitcoin prices and financing amounts did not disappear until 2023.

Original Title: 《The Evolution of Crypto Venture Capital: A 15-Year Review》

Author: insights4.vc

Compiled by: Felix, PANews

This article will introduce the dynamic evolution of venture capital in blockchain-related entities over the past 15 years, focusing on the transition of some companies towards liquidity investments. In these investments, VCs did not acquire equity but instead acquired tokens with vesting plans. Additionally, notable investment institutions such as a16z will be listed for their initial investments in the crypto space, such as their investment in OpenCoin (later Ripple Labs) in April 2013.

In the early development of Bitcoin, from 2009 to 2012, venture capital showed little interest in the crypto space. Therefore, this article will begin its analysis from 2012. It is also worth noting that the long-term correlation between Bitcoin prices and financing amounts did not disappear until 2023.

Venture Capital and Bitcoin Prices

2009 - 2018: The First Decade of Bitcoin and the Beginning of VC Investments in the Blockchain Space

Bitcoin and Blockchain Independent Investors (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 companies to invest in blockchain projects, both investing in Coinbase in 2013.

Ribbit Capital, founded by Meyer "Micky" Malka in 2012, focused on disruptive financial technology and was an early investor in Bitcoin-related companies like Coinbase. Boost VC, founded by Adam Draper in 2012, initially served as an accelerator and venture 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 companies to focus on blockchain and cryptocurrency investments.

Annual Breakdown of Blockchain and Bitcoin Transaction Shares (2011 - 2015)

2012

Bitcoin startups received only $2.1 million in investments.

2013

Key milestones include:

  • Coinbase: The largest single financing round, supported by Andreessen Horowitz, Union Square Ventures, and Ribbit Capital. Coinbase is now a publicly traded company and a key player in the Bitcoin space.
  • Bitcoin China: The largest and earliest Bitcoin exchange in China, which raised $5 million from Lightspeed China. Although this investment ultimately failed, it remains an important part of early crypto history in China.
  • Circle Internet Financial: Circle initially started as a Bitcoin application company, raising $9 million from Breyer Capital and Accel Capital. Jeremy Allaire aimed to promote the use of Bitcoin, similar to Skype or email. Circle later became known for issuing USDC in 2018.

Investments and significant breakthroughs:

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

Major breakthroughs in 2013:

  • In November, Bitcoin prices first broke the $1,000 mark.
  • The first Bitcoin ATM was launched at Waves Coffee Shop in Vancouver.
  • Bitcoin mining power surged from 20 Th/s to 9,000 Th/s.

Notable venture capital firms and projects:

  • 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 industry investments, supporting projects like Ethereum, AAVE, and Arbitrum.

Top 5 Blockchain Startup Fundings in 2013

2014

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

500 Startups became the most active investment institution, supporting Bitcoin application companies alongside Boost VC, Plug and Play Technology Center, and CrossCoin Ventures. 500 Startups initially focused on the crypto industry before shifting to early-stage investments.

Significant investments in Bitcoin applications included:

  • Blockchain: $30.5 million
  • BitPay: $30 million
  • Blockstream: $21 million
  • Bitfury: $20 million

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

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

OKcoin (now OKX) raised $10 million, with investors including Sequoia Capital, Mandra Capital, and venturelab. Notably, Sequoia's co-founder Feng Bo founded Dragonfly Capital in 2018, which launched numerous crypto funds in the following years.

Overall, crypto venture capital steadily grew in 2014.

2015

Although Bitcoin prices fell from their 2013 peak in 2015, blockchain technology attracted increasing capital and entrepreneurial interest. Total funding for Bitcoin startups reached $380 million.

Major fundings included:

  • Coinbase: $75 million Series C funding
  • Circle: $50 million Series C funding
  • BitFury: $20 million Series B funding
  • Chain: $30 million Series B funding, including strategic investors like Visa and Nasdaq

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

Canadian OMERS Ventures announced plans to invest in blockchain, showcasing growing institutional interest. Notable active venture capital firms included a16z, Union Square Ventures, Ribbit Capital, Boost VC, and DCG.

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

2016

With a decrease in fintech investments, venture capital in the crypto market declined. According to CB Insights, funding activities for Bitcoin and blockchain startups fell by 27% compared to 2015, returning to 2014 levels.

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

  • Circle: $60 million Series D funding
  • Digital Asset Holdings: $60 million Series A funding
  • Ripple: $55 million Series B funding
  • Blockstream: $55 million Series A funding

Circle shifted from Bitcoin trading services to remittance and payment services, paving the way for its stablecoin. Polychain Capital, founded by former Coinbase employee Carlson-Wee, raised $750 million for its third venture fund with support from a16z, Union Square Ventures, and Sequoia Capital.

In 2016, ICO-based project funding began to grow, with The DAO raising $150 million, marking the start of the ICO craze.

2017

Liquidity Investments

Driven by the ICO craze and interest in tokenized assets, the venture capital landscape for liquidity investments began to form around 2017-2018. Pioneer funds like 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 an ICO fund in 2017 targeting ICOs and token projects, while Blockchain Capital introduced the BCAP token, a security token representing shares in its fund. Multicoin Capital, founded in 2017 by Kyle Samani and Tushar Jain, and 1confirmation, led by former Coinbase employee Nick Tomaino, also emphasized token investments. Amentum Investment Management joined in 2017, focusing on long-term capital appreciation through blockchain and token economics. These funds recognized the potential of tokenized assets, shifting from traditional equity models to liquidity-driven token strategies.

In 2017, the blockchain industry experienced a period of both frenzy and regulation, with the Ethereum ERC-20 protocol triggering the ICO boom, but regulation led the crypto industry into a prolonged bear market.

Performance of ICOs vs. VCs:

  • Q1 2017: 19 ICOs raised $21 million.
  • Q4 2017: Over 500 ICOs raised nearly $3 billion.
  • Throughout 2017: ICOs raised $5 billion across nearly 800 projects, five times the $1 billion VC investment across 215 deals.

Notable ICO projects:

  • Filecoin: $257 million
  • Tezos: $232 million
  • Bancor: $152.3 million
  • Polkadot: $140 million
  • Quoine: $105 million

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

Geographical Distribution:

  • EU: 40% of ICOs, raising $1.76 billion.
  • North America: $1.076 billion raised.
  • Following regulatory policies, Chinese venture capital firms shifted to regions like Hong Kong and Singapore. The ICO bubble burst due to regulatory pressure and unsustainable business models.

2018

ICO activity continued into 2018, with over 400 projects raising $3.3 billion in Q1. CoinSchedule reported that there were 1,253 ICO projects globally in 2018, raising $7.8 billion.

Largest ICO projects:

  • EOS: Raised over $4 billion.
  • Telegram: Two rounds raised $1.7 billion, but the project was later abandoned.
  • Petro: The Venezuelan government raised $740 million but ultimately failed.
  • Basis: Raised $130 million, but the project later faced difficulties.

VC equity financing:

  • Bitmain: $400 million in Series B funding, backed by Coatue Management; Pre-IPO funding of $1 billion, with investments from Tencent, SoftBank, and China International Capital Corporation.
  • Total venture capital: $4.26 billion.

Major developments:

  • Coinbase launched 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 launched a cryptocurrency institutional platform.

In 2018, various "blockchain +" applications emerged, many of which were still in the conceptual stage, laying the groundwork for future innovations.

Evolution of ICOs from 2013 to 2018

Empirical Analysis of Whether to Conduct an ICO

  • Total Sample (N=316): 14.9% - Among the 316 ICOs analyzed, 14.9% received VC support before launch, indicating that about one-seventh of ICOs received VC backing prior to token sales.
  • Underfunded (did not meet minimum funding goals) (N=43): 0.0% - All underfunded ICOs did not receive VC support, suggesting a possible link between lack of VC support and failure to meet minimum funding goals.
  • Funded (met minimum funding goals) (N=89): 9.7% - Among funded ICOs, 9.7% received VC support, indicating that nearly one-tenth of successful ICOs had VC backing.
  • Mean Difference (Average Funding Goal - Minimum Funding Goal): 9.7% - Compared to underfunded ICOs, the proportion of funded ICOs that received VC support was significantly higher, highlighting the positive impact of VC backing on funding success.

Equity Investments by Union Square Ventures and Andreessen Horowitz from 2013 to 2018

Most Active Investors from 2014 to 2019

2019: The Post-ICO Boom Era

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

The focus of blockchain transactions shifted, with 68% of investments in 2019 classified as fintech, down from 76% in 2017, indicating broader applications beyond "cryptocurrency." North America accounted for 45.3% of blockchain transactions, while Asia accounted for 26.8%, reflecting a more global distribution.

In 2019, blockchain accounted for 2.8% of global venture capital and 1.1% of total capital, down from 3.6% and 2.7% in 2018, respectively. The median transaction valuation fell from $16.6 million in 2018 to $13 million in 2019. Notable non-crypto blockchain companies included Securitize, Figure, PeerNova, and Spring Labs.

CB Insights reported 806 global blockchain investment transactions in 2019, down from 822 in 2018, with investment volume decreasing by 27.9% to $4.26 billion. Zeroone Finance identified Digital Currency Group as 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, gaming, digital wallets, digital asset management, smart contracts, and DeFi. Hong Kong mobile game developer Animoca Brands, listed on the Australian Securities Exchange, played a significant role in the blockchain gaming sector. FTX was established with strong support from Alameda Research.

In 2019, global enthusiasm for blockchain investment significantly declined, with traditional institutions becoming more cautious. The performance of investment institutions during the bear market indicated their rigorous approach.

2020 - 2021: Financing Amounts Surge Again

In 2020, driven by high return potential, blockchain venture capital became an important part of the global private equity market. Since 2012, 942 venture capitalists have invested in over 2,700 transactions involving blockchain startups. Top blockchain VC funds consistently outperformed traditional VC funds and the broader tech industry.

Blockchain Private Equity Outperforms Traditional Private Equity (IRR since Fund Inception from 2013 - 2020)

Despite the significance of blockchain private equity, it accounted for less than 1% of the global venture capital market, reaching about 2% during the 2017 crypto bull market.

Overall, blockchain venture capital demonstrated resilience, performing well during market downturns. Its high return potential and diversification advantages made it an attractive choice for investors.

In 2020, DeFi began to gain widespread attention. According to PANews' PAData, the total investment and financing amount in the crypto industry was approximately $3.566 billion, comparable to the figures from 2019. DeFi projects raised $278 million, accounting for 7.8% of the total. Although the amount was relatively small, DeFi had the highest number of financing rounds, with over a quarter of the 407 disclosed projects related to DeFi. This indicated growing interest in this new type of crypto-native project.

Prominent DeFi applications attracted significant investment in 2020. Uniswap completed $11 million in Series A funding, 1inch raised $2.8 million in seed funding, and lending platform AAVE raised $25 million in Series A funding. Throughout the year, DeFi's locked value grew nearly 2,100%, and the number of unique addresses increased tenfold. While these numbers may seem small compared to future data, the "DeFi Summer" marked a significant turning point.

Notably, native blockchain VC firms showed a preference for industry application projects (especially DeFi), adopting more aggressive and higher-risk approaches. Investment strategies varied among institutions. PAData reported that over 700 institutions and individuals invested in blockchain projects in 2020, with NGC Ventures being the most active investor, followed by Coinbase Ventures and Alameda Research.

2021

With advancements in blockchain technology, global VC institutions increasingly recognized the importance of blockchain, especially with the emergence of concepts like Metaverse and Web3. In 2021, blockchain startups raised approximately $33 billion, the highest amount ever recorded in a year. According to PwC data, the average funding amount for projects in the crypto industry reached $26.3 million in 2021.

The number of blockchain venture capital transactions also reached an all-time high in 2021, exceeding 2,000 transactions, double that of 2020. The frequency of late-stage funding increased, leading to 65 startups achieving valuations of $1 billion or more, reflecting the crypto market's shift from a niche market to a mainstream market.

VC Investment in Crypto/Blockchain vs. Total Investment

According to Galaxy statistics, there were nearly 500 global blockchain VC firms in 2021, with both the number and size of funds reaching historic highs. Major institutions such as Morgan Stanley, Tiger Global, Sequoia Capital, Samsung, and Goldman Sachs entered the blockchain market through late-stage equity investments, providing ample capital to the market.

In 2021, the crypto space experienced a surge of new users and investments:

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

Proportion of new users:

  • Latin America: 46%
  • Asia-Pacific: 45%
  • Europe: 40%
  • United States: 44%

This influx laid 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 funding round at a valuation of $18 billion, marking the largest private equity financing in crypto history. This round involved 60 investment institutions, including SoftBank Group, Sequoia Capital, and Lightspeed Venture Capital.

Active investors:

Coinbase Ventures was the most active blockchain investment institution in 2021. After going public in April, the firm invested in 68 blockchain startups. Before its IPO, Coinbase raised nearly $547 million in 13 funding rounds. Other notable investors included AU21 Capital (based in China), which invested in 51 companies, and a16z, which invested in 48 companies.

Venture Capital:

In Q4 2021, investments exceeded $10.5 billion, bringing the total venture capital investment in the cryptocurrency and blockchain space to a historic high of $33.8 billion, accounting for 4.7% of total venture capital investment that year. The number of transactions that year was also the highest, totaling 2,018, nearly double that of 2020 and surpassing the previous record of 1,698 transactions in 2019.

2021 VC Investment in Cryptocurrency/Blockchain by Category

Of the $33.8 billion VC investment in the cryptocurrency and blockchain startup ecosystem, the largest portion went to companies providing trading, investment, exchange, and lending services, receiving over $13.8 billion (41.83%). An increasing number of VCs invested in Web3 companies, including those developing NFT, DAO, and metaverse tools, infrastructure, and games, accounting for 17% of total investment.

2022 and 2023: Significant Decline in VC Investment

2022

Investment Overview:

  • VCs invested over $30 billion in cryptocurrency and blockchain startups, nearly matching the $31 billion in 2021.
  • Investments peaked in the first half of the year, with significant declines in Q3 and Q4.
  • The number of transactions and capital investment in Q4 2022 was the lowest in two years.
  • Notable 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 worth of FTX shares also became "worthless."

Trends:

  • Late-stage companies received a larger share of capital, while pre-seed investments continued to decline.
  • Web3 led in the number of transactions, but trading and investment platforms raised the most funds.
  • Transaction sizes and median valuations were at their lowest levels since Q1 2021.

VC Financing:

  • 2022 was the highest year for crypto VC financing, exceeding $33 billion, although the amount raised in Q4 was the smallest since Q1 2021.
  • Average fund sizes increased, with over 200 funds raised, averaging over $160 million per fund.

2023

Investment Overview:

  • Crypto VC investment significantly declined, with investment amounts only one-third of the previous two years.
  • The number of transactions and investment capital continued to set new lows each quarter.

Trends:

  • Early-stage companies accounted for the majority of transactions, with a decrease in the share of pre-seed transactions in the second half of the year.
  • Valuations and transaction sizes fell to their lowest levels since Q4 2020.
  • Transaction companies raised the most funds, followed by Layer 2 and interoperability projects, as well as Web3.

VC Financing:

Due to macroeconomic conditions and turmoil in the crypto market, fundraising faced challenges.

Crypto VC Fundraising Fund Sizes

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

Interest and investment significantly declined in 2022 and 2023, with a particularly notable drop in 2023. Nevertheless, Web3 still led in transaction numbers, while trading platforms dominated in fundraising. Despite regulatory challenges, the U.S. remains the dominant player in the crypto startup ecosystem. Furthermore, macroeconomic and market turmoil has created a challenging environment for founders and investors, posing significant challenges for fundraising.

2024: Current State of VC

The venture capital landscape for Q1 and Q2 2024 has been detailed in previous articles. Here, we focus only on the trends visible in the following chart, which shows a continuing trend since the end of Q1 2021, where early-stage investments clearly outpace late-stage investments.

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