Hard Time for Crypto Startups: VC Investments See a Downturn

Crypto Startups Struggle as VC Funding Drops to Lowest Level in Four Years

Coinbase Global Inc. is one of the most major bitcoin investors. According to PitchBook data, it is the all-time largest funder of industry startups in terms of the number of agreements. However, its investment activity has slowed in recent months.

The drop is part of a bigger trend away from investing in crypto firms, which sometimes have strong venture capital arms. According to PitchBook crypto analyst Robert Le, while global crypto venture financing fell 63% to US$2 billion in the third quarter compared to the same period last year, many corporate VC firms pulled back even faster.

The drop, along with a bigger trend towards smaller stakes, implies "a more cautious approach" from corporate investors, according to Le, noting an industry-wide need to save cash. "In this environment, they want to focus on their core business," he went on to say.

Coinbase is still spending cash, but its strategy has shifted. According to Hoolie Tejwani, director of corporate development and ventures, Coinbase Ventures, the company's venture arm, is investing in more firms headquartered outside of the United States as governmental scrutiny of the crypto industry grows.

Other large cryptocurrency firms are likewise rethinking their plans. Kraken Ventures, the venture arm of crypto exchange Kraken, managing partner Brandon Gath stated the division's deal count has decreased in the last year, but his team is still actively investing.

"Over the last two years, we've typically done three to four new deals a quarter and deployed about $3 million in capital," Gath said, adding that Kraken Ventures was also hitting that pace in the third quarter of this year.

Kraken Ventures is still building a new US$100 million fund and continues to invest outside of the crypto business, according to Gath. Approximately 40% of Kraken Ventures' companies are situated in the United States, 40% in Europe, and 20% elsewhere in the world. Last year, the group invested in Pinwheel, a non-crypto firm. However, Gath pointed out that, while the firm primarily provides payroll services, it may also benefit the crypto sector by making it simpler for employees to be paid in digital currencies such as stablecoins.

Kraken has conflicting feelings about the startup industry. values for very young firms haven't dropped as substantially, according to Gath, who adds that he frequently hears pre-money values of US$10 million to US$30 million for early-stage companies. However, at a later point, both crypto and IT businesses in general have seen their valuations decrease by 30% to 50%.

"These companies raised valuations that were probably a little bit too high," he added.

Binance Labs, the venture arm of Binance Holdings Ltd., the world's largest cryptocurrency exchange by trading volume, also invests in crypto. So far, the corporation has stated that it would not change its plan.

"We are more proactively looking for founders," said Dana Hou, who handles the division's business strategy and operations. "It's easier to find builders who are more committed to the industry."

Binance has encountered significant regulatory hurdles in the United States, including legal action that crippled its American subsidiary, Binance.US, and forced numerous staff to flee the country. However, according to Hou, the venture arm, which has $9 billion in funds under control, has continued to invest in more crypto ventures, including some headquartered in the United States.

She stated that recent layoffs at Binance have had no impact on Binance Labs, stating that the team is "stable" and that all of its members are mentioned on the company's website. According to a study of the team members mentioned on the Binance website, Binance Labs has lost ten of its team members since January, reducing its size from 18 to eight.

"Binance Labs continues to hire, and we have welcomed new members to the team," the business stated when questioned about the departures in a statement to Bloomberg.

Binance, which invested in the defunct crypto exchange FTX, is likewise dedicated to thoroughly assessing the enterprises in which it invests, according to Hou. Following FTX's demise, venture investors came under assault, with opponents claiming that their firms did not undertake adequate due diligence on the company.

Hou stated that she was not working at Binance at the time the business invested in FTX, but that the company has learnt from the startup's dramatic failure and has increased its supervision of portfolio companies and their founding teams.

"It's so important to identify who the founder really is," she told me.

Binance Labs and other venture investors are now more focused on funding firms with genuine products and income, rather than merely favourable hype, according to Hou. "In the past, a project gets very hyped, just because that project got invested by a VC," she went on to say. In the crypto business, hype has suddenly been less of an issue.