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Crypto Startup Valuations “Very Generous” With VC’s Scaling Back and Looking at AI Instead

Last Updated April 18, 2024 1:26 PM
Giuseppe Ciccomascolo
Last Updated April 18, 2024 1:26 PM

Key Takeaways

  • Overall VC enthusiasm for crypto seems to be waning.
  • Crypto.com’s venture capital arm is concerned about the high valuations of crypto startups, suggesting a potential bubble.
  • Venture capitalists are looking into artificial intelligence (AI) as a more attractive investment than crypto.

The recent uptick in investments by cryptocurrency venture capital companies has prompted some concerns, with some crypto experts suggesting a widespread overvaluation of crypto startups.

However, despite this resurgence, overall VC funding for crypto startups remains subdued on an annual basis, as venture capital firms have opted to divert their investments toward artificial intelligence (AI) projects instead.

Very Generous Valuations

Amid a surge in billion-dollar funding rounds for early-stage crypto startups following the recent upswing in virtual currencies, Crunchbase data  released on April 18, 2024, confirms that venture capital funding for cryptocurrency and blockchain projects has witnessed its first quarterly increase since 2021.

In Q1 2024, Web3 startups secured nearly $1.9 billion across 346 deals, marking a 58% surge from the previous quarter. However, despite this positive momentum, the overall decline in crypto VC interest persists, with figures from a year ago down by 17%, and the deal count approximately halved.

Investors exhibiting a more “long-term thesis” regarding Web3 have been the primary drivers behind recent capital deployments. This stands in stark contrast to the hype-chasing “tourist investors” prevalent in recent years, as noted by Chris Metinko, the report’s author. “To be honest,” he added, “they are probably sitting in AI.”

While significant funding rounds remained relatively rare in Q1, the largest three rounds collectively amounted to less than $300 million.

Notable among them was a $112 million seed round for Exohood Labs, a company pioneering the convergence of AI, quantum computing, and blockchain, valued at $1.4 billion. EigenLabs, facilitating developers to “restake” Ether tokens, secured $100 million in a Series B led by a16z crypto, while Freechat, a decentralized social network leveraging blockchain technology, garnered $80 million in a Series A round.

Other Inflated Valuations

Crypto.com’s CEO Kris Marszalek thinks many crypto startups are overvalued. Crypto.com Capital, which boasted $500 million for investments in sector startups as of January 2022, has noticeably curtailed its investment activities over the past 18 months.

Indeed, Crypto.com’s CEO’s observations hold weight, especially considering the recent upturn in VC investments into crypto startups during the first quarter of 2024.

In recent industry highlights , notable venture capital deals feature Berachain, a blockchain project helmed by pseudonymous founders adorned with bear-themed avatars. Securing an impressive $100 million at a valuation of at least $1 billion, Berachain stands as a testament to the burgeoning interest in the sector.

Merkle Manufactory, the software firm behind the decentralized social-media network Farcaster, and blockchain developer Monad Labs, have both achieved billion-dollar valuations in recent weeks.

Global VCs activity for crypto startups
Global venture capital activity for crypto companies. l Source: PitchBook/Bloomberg News

Crypto.com Capital actively participated in Berachain’s funding round, alongside a $17 million raise by staking firm Kiln and a $4.8 million investment in the gaming startup Arcade2Earn , according to Marszalek. The venture arm primarily focuses on seed-stage and Series A rounds.

However, despite the industry’s resurgence of enthusiasm, some limited partners (LPs), like Marszalek, remain cautious of the hype reemerging in the sector. LPs are reluctant to inject additional capital until venture funds begin yielding tangible returns.

VCs Scale Back To Focus On AI

Venture capitalists are increasingly finding AI investments more lucrative compared to the crypto sector. In 2023, the venture capital landscape experienced a notable phenomenon: a surge in investments devoted to AI, totaling an unprecedented $50 billion. This figure , topping the previous year’s $45.2 billion, underscores venture capitalists’ confidence in AI as a pivotal driver of future growth.

Venture capital firms investiments in AI companies
Venture capital firms investments in AI companies. l Source: CrounchBase

Among big rounds in the AI sector, Anthropic recently secured a multibillion-dollar investment from Amazon, and Microsoft took over Inflection AI’s top talent for $650 million. Additionally, an increasing number of AI companies are attracting investments, with 1,812 AI startups  announcing funding in 2023, marking a 40.6% increase compared to 2022.

Another recent report  reveals a significant drop in crypto VC-raising activity. VC rounds raised $2.3 billion for crypto businesses, marking the lowest since Q4 2020. Historically, funding in the blockchain and cryptocurrency sectors has been robust, especially during the boom periods of 2017-2018 and 2020-2021.

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