Venture Capital Investment Report in Blockchain Projects

editorFebruary 16, 2025

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Venture Capital Investment Report in Blockchain Projects

Given Bitcoin’s (BTC) fluctuations since March and the inability of other major cryptocurrencies with high liquidity to break their historical highs, venture capital (VC) activity in the crypto sector has declined in 2024. In this bipolar market, where Bitcoin leads on one side and interest in meme coins is rising on the other, the weak enthusiasm of major investors and public investment funds is a key reason for the downturn in crypto venture capital investments.

However, many opportunities still exist, and local crypto managers are taking the lead in making deals. Lower interest rates and potential regulatory easing could accelerate investments in Q4 2024 and early 2025.
This quarterly report analyzes both key aspects of the venture capital equation:

1. Venture capital funds investing in cryptocurrency startups
2. Institutional investors allocating resources to venture capital funds

This analysis is based on proprietary research using public data sources, including PitchBook and the VisionTrack performance database owned by Galaxy Research.

Venture Capital

Venture capital is a type of financing provided to companies and startups in the early stages of development that have high growth potential but also significant risks. This type of investment is carried out by venture capital funds or individual venture investors. If the company succeeds, VC investment can yield significant returns, as investors enter at an early stage and acquire a large ownership stake. Beyond financial support, venture capitalists often provide expertise, professional networks, and resources to help startups grow. Typically, in exchange for their investment, venture capitalists receive an equity stake in the company.

Stages of Venture Capital Investment

Venture capital investment is divided into several stages:

Pre-seed funding: Initial capital for developing an idea or product prototype.
Early-stage funding: Financing for product development and launching business operations.
Growth capital: Funding for business expansion and entry into new markets.
Later-stage funding: Strengthening market position or preparing for an initial public offering (IPO).

The Importance of Venture Capital

Venture capital plays a crucial role in developing innovative technologies and creating successful companies in the global economy. Many major corporations today, such as Google, Amazon, and Facebook, initially benefited from venture capital. This type of investment helps innovative ideas reach execution and success.

Number of Deals and Investments

In Q3 2024, venture capital investors invested $2.4 billion in cryptocurrency and blockchain startups, marking a 20% decline from the previous quarter. This included 478 deals, a 17% decrease from the previous quarter.
Given this trend, 2024 is expected to perform similarly to or slightly better than 2023.

“Our job as venture capitalists is not to predict the future, but to support those who build it.”
— Ben Horowitz, entrepreneur and venture capitalist

Relationship Between Investment and Bitcoin Price

The multi-year correlation between Bitcoin prices and investments in crypto startups has broken down. While Bitcoin’s price has significantly increased since January 2023, venture capital activity has failed to keep pace with this growth. Weak investor interest and a stronger focus on Bitcoin compared to other crypto projects are among the reasons for this divergence.

Investment by Stage

In Q3 2024, 85% of investments were allocated to early-stage companies, while 15% went to late-stage companies. Native crypto funds are still utilizing capital raised in previous years, leveraging networks and access to entrepreneurs to identify new and promising deals.

At the same time, the share of pre-seed deals has slightly declined but remains in a strong position compared to previous periods.

Valuation and Deal Sizes

In 2023, valuations of crypto companies backed by venture capital funds fell sharply, reaching their lowest levels since 2020 in Q4. However, valuations and deal sizes (the amount of investment made by investors) improved in Q2 2024 as Bitcoin prices rose. In Q3, the average pre-money valuation reached $23 million, and the average deal size was $3.5 million.

Investment by Category

In Q3 2024, companies in the trading/exchange/investment/lending sector attracted the highest amount of venture capital investment, totaling 18.43% of all investments, valued at $462.3 million. Within this category, two major deals included Cryptospherex and Figure Markets, raising $200 million and $73.3 million, respectively.

“The best venture investors are like great coaches. They don’t play the game for you but help you become the best version of yourself.”
— Mark Andreessen, entrepreneur and investor

AI-related crypto startups saw a fivefold increase in VC investment. Companies such as Sentient, CeTi, and Sahara AI secured $85 million, $60 million, and $43 million, respectively, totaling $188 million.
Layer-1 projects and companies in the trading/exchange/investment/lending sectors recorded a 50% increase in venture capital investments compared to the previous quarter. Meanwhile, Web3, DAOs, NFTs, the Metaverse, and gaming projects saw a 39% decline, the largest drop in venture capital funding.

A closer look at broader investment categories reveals that in Q3 2024, infrastructure-focused crypto projects led the market with 64 deals, followed by blockchain gaming companies with 48 deals and DeFi companies with 38 deals.

Investment by Stage and Category

Breaking down investments by category and stage provides a clearer view of which types of companies attract funding. In Q3 2024, a significant portion of venture capital investments in Layer-1, enterprise blockchain, and DeFi sectors went to early-stage companies and projects. Conversely, a large share of venture capital in the crypto mining sector was allocated to late-stage companies.

Analyzing the distribution of investments across different stages highlights the maturity and progress of investment opportunities in each category.

“Good investing is about recognizing the true value of businesses when others can’t see it.”
— Peter Thiel, investor and co-founder of PayPal

As in Q2 2024, the majority of deals in Q3 were in early-stage companies. Late-stage venture capital investment remained unchanged across all categories compared to the previous quarter.
Examining the share of deals by stage within each category provides valuable insights into investment opportunities at different maturity levels.

Investment by Geographic Location

In Q3 2024, 43.5% of all deals were in companies based in the United States, followed by Singapore (8.7%), the United Kingdom (6.8%), the UAE (3.8%), and Switzerland (3%).

U.S.-based companies accounted for 56% of total venture capital investments, a 5% increase from the previous quarter. The UK attracted 11%, Singapore 7%, and Hong Kong 4% of total investments.

Investment by Year of Establishment

Companies founded in 2021 gained more investor attention due to their progress, securing more funding. Meanwhile, companies established in 2022 had the highest number of deals. While these companies may not have raised as much capital as their 2021 counterparts, their sheer volume suggests a surge in new and innovative ideas within the crypto sector in 2022.

Venture Fundraising

Fundraising for crypto venture capital funds remains challenging. Macroeconomic conditions and volatility in the crypto market throughout 2022 and 2023 have led some investors to shy away from making commitments similar to those seen in 2021 and early 2022. At the beginning of 2024, investors expected significant interest rate cuts, but these reductions only began in the latter half of the year. The total capital allocated to venture funds has been steadily declining since Q3 2023, and the number of new funds raised in Q3 2024 hit its lowest level since Q3 2020.

“Investing is about managing opportunities more than managing risks.”
— Warren Buffett, investor and economist

2024 appears to be the weakest year for crypto venture fundraising, with only 39 new funds raising a total of $1.95 billion—the lowest amount since 2020.

The decline in investor interest has led to a drop in both the number and size of new crypto venture funds. The average fund size in 2024 (through Q3) has reached its lowest level since 2017.

Historically, as seen in 2017 and 2021, there was a strong correlation between venture capital activity and crypto asset prices. However, over the past two years, despite rising crypto prices, investment activity has remained low. As noted earlier, this stagnation in venture capital investment is due to multiple factors, including Bitcoin’s dominance, the rise of new Bitcoin ETFs, and speculative activity in meme coins, which are difficult to finance and have uncertain longevity.

Bitcoin ETFs could present significant competition for startups and venture capital funds. Large investors, such as pension funds and endowments, may prefer investing in liquid and easily tradable ETFs rather than directly funding crypto startups. While Ethereum-based ETFs currently attract less attention, they could eventually divert some capital away from startups, particularly if interest in DeFi and Web3 grows.

Conclusion

Venture capital investment in crypto will thrive when investors conduct thorough research, identify real innovations, and maintain a long-term market outlook. Given the growing adoption of blockchain technology and the expansion of decentralized financial tools, the sector remains a strategic investment opportunity. Despite regulatory challenges in the United States, the country remains the primary hub for crypto investments, and potential regulatory reforms could improve the investment landscape.