3Q23 VC Market Update
Summary
- Q3 was marked by mixed news flow, predominantly negative, leading to a downwards listed crypto market trend amid subdued trading activity and general investor exhaustion;
- Crypto VC funding continued to be scarce, with total capital deployed falling 14.5% QoQ to $2.0bn;
- In total 376 deals were completed vs 382 in 2Q23, implying an average deal size of $5.3m, falling from $6.1m — aligning with DACM’s in-the-market experience;
- Q3 saw growth in the median valuation of deals completed over the quarter per data confirmed by Pitchbook and Galaxy Research — attributed to an increase in later stage rounds;
- Global venture is showing signs of life, rebounding 11.0% from 2Q23, driven by increased deal flow in electric vehicles, sustainable manufacturing, and Ai (per CB Insights);
- Recurring focus-sectors seen by DACM include account abstraction infrastructure, liquid staking / restaking, Ai, and gambling projects; and
- DACM made a number of new investments for the quarter, including BSX, a decentralized spot and perpetuals exchange on Base, and Portal Gate, a DeFi protocol that offers dark pool trading.
3Q23 Market Update
Q3 was marked by mixed news flow that predominantly favored negativity, leading to a downwards trend amid subdued trading activity. It commenced with the Curve Finance exploit, which had extensive repercussions within the DeFi sector, particularly due to the founders’ multiple loans and associated liquidation risks. Furthermore, the approval for FTX asset liquidation exerted downward pressure on specific altcoins as market fears of a “selling overhang” grew. Broader macroeconomic uncertainties, including concerns about inflation and interest rate decisions, also played a role in fostering the overall negative sentiment. Adding to the complexities, the market continued its sustained decline in liquidity - notably, the total spot trade volume on the top 15 centralized exchanges plummeted by 30.6% during the quarter, reaching the lowest levels recorded in the past three years.
Despite the challenges and subdued activity that characterized Q3, notable progress was made on the regulatory and legal fronts. The digital asset space cotinues to solidified its framework for future growth.
Turning to the primary market, venture funding declined for the seventh straight quarter since its peak in 4Q21. In aggregate, crypto startups raised $2.0bn, down 14.5% from the previous quarter, and marking the lowest quarterly deployment of funds since 4Q20. Likewise, deal count fell lower, to only 376 deals compared to 382 last quarter.
Combining the quarterly deal count with the total capital deployed, we can imply a fall in the average deal size from $6.1m to $5.3m. Aligning with DACM’s experience in the market, where we have seen falling round sizes, taking into consideration over reduced investor appetite.
Interestingly, Q3 saw growth in the median valuation of deals completed over the quarter per data confirmed by Pitchbook and Galaxy Research. This can most likely be attributed to an increase in later stage rounds, such as Series A or Series B deals, versus Seed and Pre-Seed. Albeit far away from their 2021 highs, it is promising to see valuations potentially find a floor after multiple down quarters.
The trading and exchange category was the key beneficiary of inflows this quarter, with Haqqex (a Shariah Compliant digital asset exchange) raising $400m alone. Gaming and metaverse startups have continued to be a hot thematic receiving c.14.2% or $266.5m of all crypto venture capital deployed over the quarter. It is worth noting the rise of decentralised Ai businesses coming to market, and companies in this category successfully raised over $60m in the quarter.
Compared to the traditional venture market, crypto appears to be lagging. Global venture funding showed signs of life over the quarter, rebounding 11.0% from 2Q23, driven by increased deal flow in electric vehicles, sustainable manufacturing, and Ai (per CB Insights). It is worth noting that the overall deal count fell to the lowest levels since 2016, showing the impact of so-called “mega rounds”. The chart below from CB Insights illustrates these global venture trends:
DACM VC Market Observations
With the sector-wide lull in capital deployment continuing, the quarter was certainly slower in terms of sheer deals coming across the desk. However, DACM was fortunate to see a number of high-quality teams continue to build and who are looking to raise capital to propel their product to the next stage of growth. Recurring project-sectors seen include account abstraction infrastructure, liquid staking / restaking, Ai, and gambling projects.
Key themes in the market include:
- Teams requiring significant time to secure leads, building momentum at the fundraising level more critical than ever;
- Primary market valuations have firmly reduced from Q4 2022, with only the most hyped deals receiving a significant premium;
- Ai deals in particular maintained a significant premium, likely due to public market comps; and
- Sentiment swinging back toward token deals, away from equity structures.
DACM 3Q23 Portfolio Update:
DACM made a number of new investments for the quarter, including:
- BSX: BSX is a decentralized spot and perpetuals exchange. The exchange runs on Base, Coinbase’s L2 Network. BSX operates with a hybrid model, off-chain orderbook with on-chain settlements. BSX’s testnet is current live.
- Portal Gate: Portal Gate is a DeFi protocol that offers dark pool trading with an integrated compliance solution which has the potential to revolutionize the financial industry. The key innovation is a decentralised darkpool with hidden prices, anonymous pools, hidden orders, and hidden swaps.
