Author | @joel_john95
Compiled by | Huohuo
If you only read the news, you might think that venture capital firms are withdrawing from the cryptocurrency field on a large scale. This may be true before researching their actions in mature fields such as fintech and software as a service (SaaS).
Over the weekend, I conducted data analysis on 25,000 financing events at various stages in these related fields to study the common patterns between them.
The following is a speculation on how venture capital firms view the industry.
01. Investment Trends
Referencing the chart below, the upward trend in January 2021 refers to a large number of venture capital fundraising announcements that occurred between the end of November and December. (Companies usually wait until before the new year to announce these news, which is a phenomenon in various industries every year, with the most fundraising announcements made in January.)
Did you see the initial increase in SaaS investments in January 2021? Due to the lockdown measures caused by staying at home for those years, SaaS revenue reached a new high, and investors’ interest in investing in SaaS also increased significantly.
Several quarters later, the frequency of fundraising for cryptocurrencies also experienced a similar increase. My understanding is that as other industries (gaming, SaaS, biotechnology, fintech) begin to gain liquidity from larger-scale venture capital, interest in cryptocurrency investments has also increased. By the end of 2021, everyone was creating NFTs on the blockchain like never before, hoping to make quick money, and the frequency of fundraising related to cryptocurrency assets reached a new high.
02. Reasons for Change in Direction
Does this trend also apply to the amount of funds raised? Yes, after other (mature) industries reached their peaks several quarters later, native cryptocurrency companies began to attract funds. In a sense, multiple forces were at play in recent situations:
1) Investments in mature industries are at a high level, as the low-yield environment means more venture capital funds flow to existing portfolios. Managers are willing to take on more risk for higher returns, and cryptocurrency provides this opportunity.
2) Liquidity assets within the cryptocurrency space are rising and reaching new highs. Consumer interest in this field has also reached new heights. If you didn’t have cryptocurrency assets in your venture capital portfolio at that time, it means you missed out on potential returns.
The ensuing market crash seems to have occurred in various industries. Although I only have two samples here, ideally, I would like to cover ten industries to support my point of view. For general entrepreneurs, what matters is not the decline from peak to trough, but the trend over the past few years. As the frenzy in the venture capital market gradually subsides, what we need to see is whether this decline has weakened interest in cryptocurrency assets altogether.
In order to study this point, I specifically focused on the frequency of early-stage venture capital rounds in the encryption field.
Compared to 2021, the frequency of early-stage fundraising is actually higher. There are two reasons why founders are finding it difficult:
1) In the past few quarters, the number of founders has increased. There are now more founders competing for a limited pool of funds.
2) We compared it to January 2022, when founders only needed to send a PDF file and hope to be asked “where should I send the money?” by the end of the day.
We see that the challenges in the market are actually the result of several factors working together:
1) The reserve funds and grants for recent protocols have decreased rapidly compared to the token price. The interest in investing funds into a market with a large number of monthly active users to build experimental technology has disappeared. This means that founders need to find lower user acquisition costs faster to achieve market fit for their products.
2) The equity value of most teams has declined rapidly. Employees joining the team now wonder if their ownership is valuable and if they will be able to achieve liquidity. Morale tends to decrease. When recruiting in this market, people will demand higher compensation, while dollar liquidity is low at this time.
The good news is that so far, venture capital investment in crypto assets has not disappeared completely. Although the number of funding rounds has decreased, the scale is larger. While it is a challenging market to raise funds in, it is a mistake to assume that there is no funding available. For founders, these markets are critical in determining whether they still have another 18 months to develop their business or have to shut down their company in a bear market. Their ability to build, retain users, or sell products is the dividing line between success and failure.
03. Summary
Is the market difficult? Yes. But it’s difficult for everyone.
Will this improve the situation? I don’t know, but at least let’s stop pretending that this is a crypto phenomenon without actual data support.
Note: Data source: Crunchbase.
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