Last week, market intelligence firm Messari, Inc., published a report titled “State of Crypto Fundraising: Q3 2023,” where it reported a drop in fundraising by cryptocurrency startups during the third quarter (Q3) of 2023 compared to 2022.
The Messari report notes that the collection “marked new lows in both the overall financing amounts and the number of agreements that had not been seen since the fourth quarter of 2020.”
Hence, the emphasis is placed on the fall in financing of the cryptocurrency startup sector, showing a decline to the levels of the fourth quarter of 2020 in the midst of the current bear market for cryptocurrencies, although there was a significant increase in financing strategy.
For the market intelligence company, this panorama “ is indicative of strategic positioning in the bear market, as investors try to finance projects with asymmetric advantages that can generate higher multiples when market sentiment finally changes in a positive direction. ”
According to the report, the cryptocurrency industry recorded an investment of just under $2.1 billion through some 297 total agreements, which is, 36% less, both in overall financing amounts and in the number of agreements. than the last quarter.
However, when reviewing the strategic financing agreements it can be seen in contrast that these have increased steadily throughout the entire bear market, but especially in the third quarter of 2023.
The report details the comparison during the peak of the bull market in the fourth quarter of 2021, when these strategic financing rounds barely had a total financing share of 0.2%, while in the third quarter of 2023, the financing in those same rounds rose to 22%.
For Messari, this “suggests that tough market conditions are forcing projects to raise short-term bridge rounds or, ultimately, be acquired by larger projects.”
In fact, the report notes that there was a significant amount of this strategic financing, which was closed through corporate and private equity agreements such as the $200 million investment made in the Islamic Coin cryptocurrency.
This project based in the United Arab Emirates (UAE) designed a cryptocurrency that complies with Sharia law or Islamic law, which is one of the pillars of Islamic law. This cryptocurrency has so far obtained 400 million dollars in financing and is one of those that stands out for the amount reached in the rounds.
However, when reviewing the third quarter agreements classified by stages, it can be seen that the majority of these are concentrated in the initial rounds (Pre-Seed), (Seed), and (Series A), since the early financing of the Cryptocurrency startup projects represented the largest amount with $488 million raised in 98 rounds.
This is a clear trend, showing “a significant shift from later-stage projects to early-stage projects over the past three years,” according to the market intelligence company’s report.
These agreements from the early stage rounds have also registered an increase, going “ from an agreement participation of 37% in the fourth quarter of 2020 to a participation of 48% in the third quarter of 2023 ”.
Compared to later-stage deals (Series B or later), these have decreased significantly, going from an 8% share during Q4 2020 to a 1.4% share in Q3 2023.
Likewise, the Messari company report discriminates fundraising by sector, pointing out that the best-financed sector during this period has specifically been the services sector.
In this sector, you will find crypto projects defined by complementary business functions such as marketing, incubators, security, and legal services. This sector “ was the only other sector that averaged more than $100 million in funding over the past 12 months .”
The report indicates that although other sectors are also important to the growth of the crypto industry as a whole, financing particularly in these four sectors continues to attract the majority of investors’ attention.
While these sectors garnered investor attention, funding for infrastructure-based projects versus user-facing applications also saw an increase.
In this sector, there are other subsectors of consumer, DeFi, and gaming in a group of “ applications ” as well as the sectors of application infrastructure, chain infrastructure, custody, and DePIN (an acronym for Decentralized Physical Infrastructure Networks) in a group of “ infrastructure ”.
Messari says in his report that in terms of the proportion of amounts raised for each of these groups, a slight variation can be observed from user-oriented applications towards infrastructure projects, whose change was driven “by constant financing for infrastructure projects compared to the highest variation applications segment .”
Despite this, for the market intelligence company, this trend is unlikely to last long. In any case, the report indicates that financing for the third quarter of 2023 was practically distributed between the chain’s infrastructure, DeFi, and games.
The report notes that on-chain infrastructure financing “represented the largest proportion of capital at 18%,” while DeFi only “led in terms of number of deals funded with 67” and that the gaming sector had “another solid quarter with almost $250 million invested in the sector.”
Among investors, Binance Labs stands out, which has invested the most in the DeFi and gaming sectors, but which has been by far “ the most active investor: its 23 deals during the third quarter were more than double those of the next most active investor.” nearby, Robot Ventures ”, according to what Messari points out.
In addition, the 10 most active crypto startup investors generated 98 investments during the third quarter and of course, as relevant data, 54% of the active investors in the third quarter were based in the United States.
This indicates that beyond the controversies that have been generated about crypto projects by the United States Securities and Exchange Commission (SEC ), causing many project founders to slowly leave that country In favor of more regulation-friendly jurisdictions, “this country remains home to the majority of accredited cryptocurrency investors.”
It is possible that this downward trend in the financing of startups in the crypto industry is being pressured by the bear market and the variety of regulations that are being developed in several countries, which, without having a defined global regulatory framework, could be what investors see as a stepping stone to bet on this sector.
