Leading up to the FTX fiasco, cryptocurrency startups were leaders among budding technology companies — at least in terms of funding.
According to Pitchbook’s latest Emerging Tech Indicator report, Web3 and decentralized finance secured the most investment dollars in the category in the third quarter, with $879 million across 24 deals. The third-quarter report tracked 153 early and seed-stage deals across the top 15 venture capital firms; according to Pitchbook, these represent the standouts in a universe of 5,997 total deals.
As of September, the startups had outperformed the broader VC industry, with 10.5 percent of the companies having attained unicorn status (a private valuation of over $1 billion), versus a mere 1.1 percent for the overall industry, according to Pitchbook data. What’s more, 7.1 percent of emerging tech companies went on to exit, compared with only 4.3 percent for the broader group.
Nevertheless, cryptocurrency investing and the companies most exposed to digital trading activities are expected to see a decline, given the collapse of the digital currency exchange FTX in November. According to the report, “[cryptocurrency] deal activity in general is trending downward — in Q1 2021 it peaked at over $2.3 billion invested across 33 deals.” But the report added that “while the strength of investment in this category suggests sustained interest from ETI investors, the recent failure of cryptocurrency trading platform FTX and the subsequent contagion across the industry is likely to have a negative impact on future investment levels.”
Still, blockchain products and services, which are less exposed to trading activity, were found to be bright spots. Two of the largest investments were in Mysten Labs and Aptos Labs, companies that aim to disrupt existing blockchain protocols; they secured $300 million and $200 million, respectively. Other growing areas for Web3 and DeFi involve software designed to “apply [the] traditional tools of finance.” Safe, a digital asset management platform specializing in secure custody, boasted the next largest deal in the category, at $100 million.
“Much of the investment we’ve recorded through our ETI research shows that top investors were prioritizing startups focused on infrastructure, not so much those focused on trading services and exchanges,” said Paul Condra, head of emerging technology research at Pitchbook. “While capital for such infrastructure projects will likely remain available, consumers are less likely to drive up crypto prices in the near term, given the losses they have sustained over the past year, and this is likely to limit new investment in crypto exchanges.”
To be sure, the quarterly $879 million total for Web3 and DeFi marks the lowest deal sum for the category in the last five quarters. However, while the emerging tech segment fell for the third consecutive quarter to $4.7 billion, it still boasted $6.5 billion of capital invested over the last 12 months, easily surpassing the next highest category, fintech, which had $2.7 billion.
Larger deals that feature totals of at least $100 million are “returning to normal levels,” the report noted, and PitchBook added that these deals have been above the historical five-quarter average since 2015.
Overall, most leading categories are down, including healthcare, which fell from $384 million to $158 million; enterprise SaaS, which dropped from $344 million to $199 million; and artificial intelligence and machine learning, which decreased from $598 million to $204 million.
