Crypto Startups Bring In Billions Even With Lofty Valuations, For Now

(Bloomberg) -- Investors drawn to cryptocurrency startups are doing a lot of double-takes these days.

The industry continues to draw venture capital even amid broad market angst, luring roughly $5 billion in the first quarter, double the year-earlier period, according to data compiled by PitchBook Data Inc. But ever-lofty valuations of new companies, some less than a year old, are giving some potential backers pause.

Prominent investors, including at Sequoia Capital and SoftBank Group Corp., rang the alarm in January as prices of technology stocks and cryptocurrencies slumped. Blockchain Capital LLC, which has completed 130 deals since its founding in 2013, recently passed on a deal it was originally excited about after the startup’s asking price was five times the firm’s “walk-away” figure.

“Compared to just a year ago, there’s been financing events that we’re just shocked at by the amount they were able to raise,” said Spencer Bogart, general partner at Blockchain, which counts Coinbase, Uniswap and Kraken among its portfolio of companies. “We’re passing and letting the founders know we’re interested, but that valuations are in excess of what we’re comfortable with.”

A slowdown in deal activity into the summer is the norm, according to Multicoin Capital partner John Robert Reed, though he also acknowledges a shift in market dynamics. Multicoin has completed 36 deals since 2017 and its portfolio includes crypto marketplace operator Bakkt and analytics firm Dune Analytics.

“The market is swinging to neutral from a founder’s market,” Reed said. “Top operators are still commanding top valuations but investors are getting more disciplined, not trying to spray as much.”

‘Pendulum Swinging’

Pantera Capital, which has backed 90 blockchain companies since 2013, also sees a shift underway. 

“I am already starting to see the pendulum swinging in favor of investors and expect early-stage to dip later this year,” said Paul Veradittakit, a partner at Pantera Capital. As to his own firm’s strategy, he said that for companies “we don’t see with an obvious large total addressable market, we may pass due to price.” 

Some venture capitalists are more upbeat about future prospects and point to activity in the past few weeks alone. Blockchain developer Near Protocol raised $350 million, more than double what it received in January. The nonfungible token, or NFT, project Bored Ape Yacht Club, raised $450 million in a seed round investment that pushed its valuation to $4 billion. And the project is less than a year old.

Shan Aggarwal, head of corporate development and ventures at cryptocurrency exchange Coinbase, said the pace of investments into crypto “remains strong” and the firm’s investment decisions are market agnostic. 

“Some of the most successful projects of today were funded during the bear market of 2018 and 2019 and we’ll continue to invest in quality founders and projects moving forward regardless of crypto market conditions,” he said. 

Indeed, volatility in crypto lately hasn’t deterred investments to the extent seen in previous cycles, which venture capitalists say is indicative of a maturing market. Coinbase Ventures is among the most active investors in the industry, according to data compiled by PitchBook. The unit of the crypto exchange operator said in January it closed almost 150 deals just in 2021, accounting for 90% of its transactions since its inception four years ago.

“Funding is starting to dry up in some of the other areas of tech financing -- some IPOs and term sheets are dwindling. Some companies are struggling to get backers. But in crypto, we’re not seeing that yet,” Noelle Acheson, head of market insights at Genesis Global, said in an April 12 interview. “Every day, in fact, so far this month, there have been notable $100 million-plus raises for funds, so there’s a lot of money waiting to deploy.”

©2022 Bloomberg L.P.