Startup funding falls, crypto funding surges: what’s driving this divergence?

How do the investment trends in Q1 2024 differ between traditional startups and crypto projects?

Global startup funding has experienced a notable decline recently. According to Crunchbase, despite an improvement over Q4 2023, first-quarter startup investment in 2024 reached its second-lowest point since 2018.

For context, in Q1 2022, global startup funding was $171.4 billion. By Q1 2023, this figure had plummeted to $82.4 billion. The decline continued into Q1 2024, with funding dropping further to $66.1 billion. This decline translates to a 52% drop from 2022 to 2023 and an additional 19.7% decline from 2023 to 2024.

The downward trend is particularly evident in North America, the largest market for startup investments, reflecting a broader slowdown in venture capital activities. 

Despite the broader tech sector experiencing funding slumps, the story is different in the crypto sector. 

Data from PitchBook shows that in Q1 2024, crypto startups raised $2.4 billion across 518 deals. This marks a 40.3% increase in invested capital and a 44.7% rise in deal volume compared to Q4 2023. 

Interestingly, while crypto venture capital flows peaked at $11.1 billion in Q1 2022, the sector faced seven consecutive quarters of decline, hitting a low of $1.7 billion in Q4 2023. The recent uptick suggests renewed investor confidence in the crypto space.

This begs the question: why is there a growing interest in crypto while traditional startup investments are dwindling? Is this a temporary shift or an indication of a longer-term trend? Let’s delve deeper to find out.

A deep dive into Q1 2024’s investment trends

In the first quarter of 2024, crypto funding has been notably focused on innovative and infrastructure-driven projects. 

London-based Exohood Labs, for example, raised $112 million in a seed round for an AI project utilizing quantum computing and blockchain, valuing the company at $1.4 billion. 

Similarly, Together AI, which develops an open-source, decentralized cloud platform for large foundation models, secured $106 million in an early-stage round led by Salesforce Ventures, with a pre-money valuation of $1.1 billion.

Infrastructure startups have also been successful in securing funding. EigenLayer, based in Seattle and specializing in an Ethereum (ETH) restaking platform, raised $100 million in a Series B round. 

Zama, a platform focused on fully homomorphic encryption (FHE) development, secured $73 million in a Series A round.

Valuations across all stages in the crypto sector have surged compared to full-year 2023. 

The median pre-money valuation for pre-seed/seed stages reached $21.8 million, marking an 85.5% year-over-year increase. Early-stage valuations soared by 148.3% to $72.0 million, while late-stage valuations saw a more modest increase of 7.6%, reaching $51.1 million. Interestingly, early-stage deals are now commanding higher valuations than late-stage ones.

Deal sizes have also increased, with median figures at $2.7 million for pre-seed/seed stages, $5.0 million for early stages, and $5.8 million for late stages. These represent increases of 24.9% and 25.0% for pre-seed/seed and early stages, respectively, although late-stage deals saw a 9.7% decrease.

Crypto Koryo, a prominent crypto analyst, noted a shift in the sources of funding. Unlike previous quarters, where banks and non-crypto venture capital firms led the investments, Q1 2024 saw a surge of interest from crypto-focused venture firms. 

Top investors this quarter included prominent crypto-native venture capital firms such as Andreessen Horowitz Crypto (a16z), OKX Ventures, Multicoin Capital, Paradigm, and Polychain.

The buzz in the crypto investment circles

The first quarter of 2024 has injected a sense of optimism into the crypto venture capital market, reminiscent of the bustling pace seen in 2021, according to David Nage, portfolio manager at Arca. 

Nage mentioned that his firm tracked over 690 deals during Q1, marking a 30 to 40% increase from the lows of 2023.

Alex Felix, co-founder and chief investment officer at CoinFund, described the Q1 2024 situation as “cautiously optimistic,” marking a rebound from the challenging fundraising environment of the past two years. 

Despite a 65% year-over-year decrease in both VC and crypto funding in 2023, there is now a noticeable uptick in deal-making activity, Felix added.

Several factors have contributed to this resurgence. Legal victories by Ripple (XRP) and Grayscale in 2023, along with positive sentiments around decentralized finance (DeFi) on Solana (SOL), have played a role. 

Additionally, approving spot Bitcoin ETFs in the U.S. has boosted demand for crypto assets, further stimulating investor interest.

Mike Giampapa, general partner at Galaxy Ventures, predicts continued growth in crypto venture capital, driven by a bullish macroeconomic backdrop. 

He expects the launch of crypto ETF products, the Bitcoin halving, and projected rate cuts in the U.S. ahead of the upcoming presidential election to further fuel this growth.

PitchBook anticipates that with positive investor sentiment returning to crypto and barring any major market downturns, the volume and pace of investments will continue to increase throughout the year.

Meanwhile, stakeholders and crypto projects are optimistic about the future, with many expecting total capital raised in 2024 to exceed the $10 billion range and potentially reach as high as $16.2 billion.