While some crypto-focused venture capitalists are bullish for 2023, others see it as a hazardous time.
“I think it’s going to be a fairly choppy year,” David Nage, venture capital portfolio manager at Arca, said to TechCrunch. “You’re going to have a pretty strong stomach for this over the next few years here. We’re trying to be healthy, mindful and have grounding out there and not let emotions affect us.”
Many investors are trying to put last year’s chaotic market behind them and look forward to the future in a still investor-centric environment. But the competition in the market will heat up as investors write fewer checks and become more selective.
Internal sentiment among VCs is a “wait and see” game, Nage said. “We’ll wait and see how things roll out for the beginning of the year.”
The first quarter of 2023 may be slower than 2022. “I’d probably put money on that if I had to,” Nage said. “Rounds will also be fewer too; probably up to 50% less if I were to predict.”
In the first quarter of 2022, there was about $12.26 billion in capital raised for crypto and blockchain companies across 945 deals, PitchBook data showed. The amount of capital raised fell consecutively for each quarter after that, all the way down to $2.38 billion in the last quarter of 2022.
We’re only two weeks into 2023, but there has been about $43.23 million in capital raised for crypto and blockchain companies across 19 deals so far, according to PitchBook data. The comparison might not be fair, as the first quarter has just begun, but at that pace, it’ll never come close to where the market was a year ago: $12.26 billion.
“You have to be an absolutely insane founder to go out and start a crypto company now,” Ed Sim, founder and managing partner at boldstart ventures, said to TechCrunch. “It was hard enough to start last year, but now there’s no money, no capital … who are your customers?”
The founders who are building crypto startups now “are in it for the right reasons, opposed to the wrong reasons like those who were trying to make a quick buck,” Sim said.
Pre-seed rounds for crypto startups are raising about $5 million and below, while seed rounds are about two times higher around $10 million up to $15 million, post-valuation, Nage noted. In terms of Series As, they will be hyperfocused on annual recurring revenue, he added.
“We started to see this, multiples on ARR have gone down significantly from about 10 to 15 times. That’s what we’re going to see more of,” Nage said. “So if you’re doing $5 million in revenue, you may get term sheets that are $50 million to $75 million post-[valuation], whereas this time a year ago, or even in 2021, it would have been a half-a-billion-dollar kind of deal.”
The median post-valuation across all deals in 2022 dropped 41% from $34 million in the second quarter to $20 million in the fourth quarter, PitchBook data shows.
On the other hand, companies that launched in 2015, 2016 and 2017 are in the late stages now, Sim said.
“So [as an investor], you want to make sure those companies manage their burn rates and don’t have to raise more capital,” Sim added. “What you don’t want to do is be a late-stage company that has to raise capital in this market. Overall, I’m excited because I think the nuttiest and best founders are building shit right now and there’s still a lot of problems to be solved, still.”
The macroeconomic environment is also impacting the space. VCs are wondering how inflation will play out, whether there will be retraction in the economy and quantitative tightening, to name a few elements, Nage noted.
“I think it’s a great time to build,” Sim said. “Hopefully by 2024, I’m not going to say 2023, but by 2024 or the middle of the year, things may start to come back on track and people will build more trust with the system.”
“It’s going to become more competitive,” Nage said.
And it’s true, investors want unique perspectives, not regurgitations of protocols or projects that exist on a different blockchain — or a revamped version of something old. Utility, real use cases and innovation are top of mind for VCs.
“I’m looking for highly effective founders who are building something new,” Sim said.
This is Sim’s third “crypto winter market cycle,” he shared. “We look for the same thing we’re always looking for, which is hardcore, highly technical founders building infrastructure.”
Many investors believe that crypto needs to become usable for mainstream audiences, not just the basement dwellers who live, sleep and breathe crypto. Until the infrastructure and products are built, it will be hard to onboard people outside of the space.
Even making terminology understandable to non-crypto-focused people can help, he added. “When I go on Amazon I don’t call it a DNS — a domain name system — I call it Amazon.com. So possibly in the future we might not refer to NFTs as NFTs, but they’ll be part of the technology and not the front and center of the conversation.”
Looking to 2023, the design and user experience are going to be a huge emphasis for investors, Nage said. “We need to make these things much more usable to the everyday person.”
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