VC in the “prime zone” for launching next unicorns
Although crypto venture funding declined in the second quarter, and the rate of failure among VC funded projects is likely to increase over the short-term, the net effect of the downturn in the crypto markets on the crypto VC landscape will put it in the "prime zone" for launching the next set of unicorns.
Despite the slowdown in venture investments in the second quarter, the quarter was still the third strongest on record, and aggregate volumes for the first half of the year exceed the extremely bullish, record breaking period of the second half of 2021. July and August saw lower volumes, with both months below $2bn vs the $3–4bn monthly flows we have seen for most of the past year.
Crypto venture capital has been producing unicorns at approximately twice the rate of other VC sectors: crypto VC accounted for 4.6 percent of all VC investment in 2021 but 7.8 percent of all unicorns. Not surprisingly, money is still flowing into the crypto VC space and new VC funds launches are met with strong demand. For example, the largest ever crypto venture fund yet was launched in May, raising USD 4.5 billion.
Many new VC firms that jumped on the bandwagon of crypto venture as the sector was grabbing headlines harvesting the batch of unicorns created during the previous bear market.
Some of the new VC entrants ended up with less competitive deals at often historically high valuations and may not have exercised a high level of due diligence. While the downturn will cause weaker projects to fail, the economics for crypto VC investments have improved as previously stretched valuations have become more attractive, and the balance of power shifted back towards investors and away from fighting for access to deals.
Bear markets have historically been a fertile ground for VC investing because the demand for innovation to address bottlenecks and impediments is strong, it is easier to hire talent, the pressures of the bear market encourage focus, endeavour and financial discipline and the entry points for investors are lower. The bear market of 2014–5 spawned tremendous innovation, including projects like Ethereum and the Crypto Winter of 2018–9 was the period when dozens of the 2021 unicorns were seeded.
Strong, well-funded crypto venture capital companies welcome downturns and most of them are excited about the current opportunities.
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