Galaxy Digital recently published a comprehensive report on Q1 venture capital investments in blockchain ventures. This analysis was based on data from PitchBook and examined factors such as the volume of investments, deal frequency, jurisdiction, and the sectors that startups operate in.
At a superficial glance, the quarter appears to be a financial success with an impressive $2.4 billion in investments. However, a closer look paints a less rosy picture. In fact, this quarter was the least successful in the past two years, even though the deal count rose from 366 to 439 compared to the previous quarter. The investment high tide was in 2022, as depicted in our graph, and the current drop to 2020 levels is primarily a reflection of the broader market downturn.
Investments and deal frequency by quarter. Source: Galaxy Official website.
Factors influencing venture capitalist decisions
1. The age of the company: Startups established in 2021 and 2022, having weathered various challenges, garnered substantial funding and made the most deals. In contrast, fledgling projects struggled to attract significant capital.
Investments divided by company founding year. Source: Galaxy Official website.
2. Jurisdiction: Despite the backdrop of tightening regulations, ambiguous legal status, and relentless onslaught from regulatory bodies, U.S. companies still command the lion's share of investments, accounting for 42.8% of all funds raised. Following the U.S., France and Canada secured the second and third positions with 19.4% and 6.6%, respectively. The U.S. also leads in deal numbers (42.3%), with the UK and Singapore ranking second (8.5%) and third (6.2%). This data suggests that with a more accommodating approach from U.S. authorities, U.S.-based crypto companies could reign supreme in the market.
3. Business sectors: An examination of venture capitalists' preferences can provide insights into what they view as the most promising areas. Notably, trading (22%), digital wallets (21%), and Web3 (approximately 12%) were the sectors that attracted over half the investment. Interestingly, the wallet sector, which accounted for a mere 5% of the market before the FTX downfall, saw Ledger raise $108 million in March alone.
4. Stages of fundraising: This factor provides a more granular view of each sector in terms of the fundraising stages. Infrastructure projects (like node hosting and staking), blockchain, and DeFi were the only sectors to secure investments at the pre-seed stage. In contrast, wallets, banking applications, and corporate blockchains collected the most funding at the later stages.
Investments by sectors and fundraising stages. Source: Galaxy Official website.
Yet, when considering the number of deals, a more balanced picture emerges. Almost every sector saw agreements signed at the initial stage, indicating that investors, while mitigating their risks, are not entirely averse to backing new ventures. However, sectors such as mining, media, and Web3 (NFT, DAO, etc.) saw little activity at the later stages, implying a lower likelihood of future returns.
Number of deals by sectors and fundraising stages. Source: Galaxy Official website.
Wrapping up
It's undeniable that this quarter hasn't been a beacon of success in the venture capital landscape, particularly when stacked against previous quarters. A combination of climbing interest rates and the looming economic crisis have driven the market into a downturn, the major culprit behind this lackluster performance. Yet, it's not all doom and gloom: deal volume is on an upward trajectory, and the overall statistics still overshadow those from the last bear market. The hope now is for these trends to maintain their momentum. However, fledgling startups should brace themselves for the reality that funds may not come as easily as they used to. The key to unlocking serious investment in the current climate lies in the creation of truly impactful products.
