Crypto start-ups finally show hit from storm as funding falls to 1-year low

SAN FRANCISCO (BLOOMBERG) – Crypto start-ups finally felt the effects of an economic storm that has been cooling digital currencies, public stocks and venture capital all year.

Funding to private crypto companies in the second quarter fell to its lowest level in a year, according to data from the research firm PitchBook.

The hype around crypto start-ups made the sector seem briefly immune to the economic turmoil. It set a record of US$9.85 billion (S$13.87 billion) in venture funds raised in the first quarter. That was, it turns out, only a factor of how long it takes for venture capital deals to finalise.

“Even though the crypto market started slowing down in November, December, those deals were already in discussion, so they closed in the first quarter,” said Robert Le, fintech analyst at PitchBook.

The second quarter gives a truer glimpse at the gloominess. Venture capitalists invested US$6.76 billion into crypto companies in the period that ended in June, a 31 per cent decline from the previous quarter, PitchBook said. The crypto industry now mirrors the sluggish activity among tech and venture capital investors.

“Everyone is really hesitant on closing deals right now,” Mr Le said.

There are many examples of trouble in the crypto industry. The collapse of the TerraUSD stablecoin, serious financial troubles at crypto lenders like Celsius and Babel Finance and waves of layoffs at Coinbase Global, Gemini Trust and Crypto.com have all contributed to the uncertainty.

Among start-ups, deals have fallen apart, and investors have revoked written offers in recent weeks, said David Pakman, a managing partner at the crypto VC firm CoinFund. More layoffs are likely, and valuations will come down further- troubled crypto lender BlockFi was already looking to raise money at a reduced valuation of US$1 billion.

“What you’re seeing now is seed valuations are down about 20 per cent, Series A valuations are down about 50 per cent, and then Series B and beyond are down about 70 per cent,” Mr Pakman said.

Mr Pakman is advising companies he backs to retain enough cash on hand to endure two years’ worth of hardship. “This is going to be a long-term down market,” he said. “It’s not going to come ripping back in a month.”

Despite the potential of a long crypto winter, some venture capitalists are still committed to the space. Crypto VC firm Multicoin Capital announced a new US$430 million fund on Tuesday (July 12). On the same day, Lightspeed Venture Partners said it formed an independent team dedicated to blockchain investments called Lightspeed Faction.