What protocols are crypto funds and VCs investing in?
The price action of cryptocurrencies over 2022 indicates a bear market but fundraises from venture capitalists (VCs) paint a picture that is not as dire. Which crypto companies are VCs investing into, and what does this tell us about crypto’s path in 2023?
May of 2022 likely marked the worst of the bear market
In hindsight, December of 2021 was the beginning of crypto’s bear market, with May 2022 likely the darkest period. The collapse of Terra Luna spelled the ruin of over-leveraged hedge fund Three Arrows Capital (3AC), which in turn spelled doom for its lenders, which included industry-leading exchanges and lending companies. With prices significantly down, and sentiment palpably bearish, the fate of every venture-funded crypto startup was in question. But by the end of the summer, it seemed the worst of the damage is done, and venture dollars are now flowing once again.
Crypto VCs have lots of dry powder
VCs announced some massive new crypto-funds at the beginning of 2022, including a $4.5b fund from a16z announced just days after the Terra Luna de-peg event. Earlier in the year, the month of March saw a $1.5b raise from Haun ventures, $1b from Electric Capital, and $560m from Bain Capital.
It seems that LPs were not scared away by May’s market carnage, though, with Binance and Variant announcing $500m and $450m funds in June and July, respectively. VCs clearly have the capital to deploy, and the bear market gives them back the negotiating power at the cap table. So where are VCs putting capital to work?
- March: $1.5b Haun ventures
- March: $1b Electric Capital
- March: $560m Bain Capital
- March: $165m Okcoin
- March: $125m Dao5
- March: $100m Cake DeFi
- May: $4.5b A16z fund
- June: $500m Binance
- July: $450m Variant
Sui and Aptos complete large raises before the launch
VCs, like the rest of us, continue to have their attention captured by new Layer-1 blockchains. The month of September saw Sui and Aptos announcing raises of $300m and $150m respectively, making their development companies unicorns before the main net launch of their blockchains.
Aptos and Sui bring a new approach to scaling by allowing for the simultaneous execution of transactions that are unrelated to each other. They also bring the “Move” smart contract language to their blockchains, developed at Facebook as part of the shuttered stablecoin attempt Diem (prev. Libra).
Often slated as competitors to the Solana blockchain, Sui and Aptos have raised funds very early in their journey. Solana Labs, by comparison, raised a $20m series A nine months before a $1.76m public token auction and the launch of the blockchain’s mainnet. (That public auction was priced to value the entire token supply at $100m.) It wasn’t until a year after the launch of Solana’s mainnet that they completed a large $314m fundraise, on the order of what Aptos and Sui have already done.
Infer what you will: VCs paid hand over fist for two blockchains that had yet to launch. Once they do, we can assume that funds will begin to flow into a new ecosystem of tools, products, and services on these new chains.
- Helium: $200m in Feb 2022
- Trust Machines: $150m in Feb 2022
- NEAR: $350m in April 2022
- 5ire: $100m in July 2022
- Aptos: $350m in Sept 2022
- Sui/Mysten: $336m in Sept 2022
Big hopes for Ethereum Layer-2 scaling solutions
Layer-2 scaling solutions based on roll-up and sharding technology also raked in the cash this year, with a $450m raise from Polygon in February setting the tone for a $350m raise by NEAR in April, before the worst of the bear market in May. Polygon put that capital to work as part of their strategy to diversify into more scaling technologies - having already acquired Mir for $400m in December of 2021, (renaming it to Polygon Zero), Polygon went on to acquire Hermez for $250m in August of 2022 (renaming it to Polygon Hermez).
Other major layer-2 scaling solutions like Immutable, StarkWare, and Optimism completed large raises of between $100m-$200m, with StarkWare rising to an $8b valuation, setting high hopes for their zkRollup-based scaling solution.
- Polygon $450m raise in Feb 2022
- Immutable $200m in March
- Optimism $150m in March
- StarkWare $100m in May
DeFi and NFTs are not dead but command smaller valuations
On the back of sharply falling trading volumes in DeFi and NFT marketplaces, early-stage DeFi builders have made do with smaller valuations and raises. Gone are the 2021’s days of huge GameFi and NFT fundraises (like Sorare), although Yuga Labs did take home $450m from investors in March 2022 before the bear market’s carnage set in.
Most DeFi and NFT projects are still at an early stage, but investors are mostly playing along, with optimistic seed rounds and Series A’s in the latter half of this year from the likes of Hashflow, Exponential, Orderly Network, and Unstoppable Finance.
- Maverick Protocol $8m in Feb
- Yuga Labs $400m in March
- Thetanuts $18m in March
- Saga $6.5m in May
- Orderly Network $20m in June
- Nume (L2) $2m in June
- Hashflow $25m in July
- Ultimate $12.5m in August
- Exponential $14m in October
Conclusion: innovation and investment continue in crypto
While the pace of funding slowed after a red-hot 2021, VCs have massive funds to deploy, with $4.5b from a16z, $1.5b from Haun Ventures, and $1b from Electrical Capital all being raised this year. Indeed, this bear market gives VCs more leverage at cap tables, making this potentially an attractive time for VCs to invest their capital.
A look back at the fund raises mentioned in the article shows that most were completed before the meltdown of Terra Luna in May of 2022, but Sui and Aptos raising $300m and $150m respectively before the launch of their mainnets shows that some deals are too good to refuse, even at high valuations.
It’s not just layer 1 blockchains that are attracting high valuations - Ethereum layer 2 solution StarkWare raised $100m at an $8b valuation, and with competitors Optimism and Polygon raising $150m and $450m, the teams building scaling solutions for Ethereum should be able to make significant progress through the bear market.
While this is no doubt a crypto bear market, a look at recent VC activity gives confidence that crypto will continue to progress - VCs are deploying enough capital to ensure that builders will remain well-funded until the market brings better days once again.