The global venture capital market has endured limited exits for an extended period of time. The IPO market remains frozen, as startups continue to go private for an extended period of time, M&A activity is quietly taking place due in part to increased regulatory oversight. This means that many historic venture deals are slowly rotting away from an IRR perspective.
The crypto market is no exception, but some investors in this space remain unfazed. New data from PitchBook’s Q4 2023 Crypto Report reveals that if the large startup market is suffering from an exit drought, crypto startups may be drying up even further.
The lack of exit volume and value of crypto startups may be related to the decline in total venture investment in emerging Web3 companies. If liquidity is low, the outlook for investment returns may be bleak. The good news for crypto founders is that venture capital investments increased by 2.5% in the fourth quarter of 2023 compared to the third quarter, even though they are less likely to sell their companies. , trading volume was reduced at a similar rate.
The fourth quarter was consistent with “low levels of activity seen throughout 2023,” the report said. Additionally, there were only 12 evictions during this period, the lowest number since Q4 2020.
Increased trading volumes despite limited exits means there is a surprising level of optimism among crypto investors. But the increase in investment doesn't shock us, as crypto prices are rising, major regulatory hurdles have been cleared, and there are other positive signals that cast a slightly warmer light on Web3 in general.
But exit problems remain, and recent investment totals are abysmal. Annual data shows that crypto-focused venture capital exits were worth $1.2 billion in 2012, but only $500 million in 2019-2020. In 2022-2023, the numbers were $1.4 billion and $1 billion. The outlier was 2021, when the exit value of cryptocurrencies was worth $88 billion.
Why the big difference? It's not difficult to parse. 2021 was active in exits across many startup categories, the year he saw Coinbase go public. The company was valued at more than $65 billion at its direct listing reference price, and even higher in early trading. This explains why 2021 stands out so much compared to the same year, even though Coinbase's current value is modest at $37 billion.
Stocks vs. Tokenomics
From a capital perspective, have While there has been one high-profile venture-backed crypto exit in recent years (Coinbase), all other Web3 exits measured using traditional methods are at best rounding errors.
However, in the case of cryptocurrencies, exits are primarily split between M&A and IPOs on the one hand, and token launches on the other, said Vance Spencer, co-founder of Framework Ventures. “The first is that the relatively low $1 billion exit number is a bit misleading, as it is not the main way VCs obtain liquidity in cryptocurrencies.”
“The majority of liquidity events in crypto VC are driven by tokens, which are probably much harder to assess holistically,” Spencer said. “We do not believe that declines in these metrics are evidence that VCs are finding it more difficult to obtain liquidity.”
“Year after year, we move away from the 'traditional VC exit model' to token-driven liquidity events where decentralization, public building, and community adoption are paramount to successful return to all stakeholders. We've seen an evolution in our approach,” said Brian Mahoney, vice president of business development at venture-focused studio Thesis.
But some investors believe this shows how the market is changing and how important it is to hold on to your investments with conviction (or HODL) while weathering a lack of exits. ing.
do not worry
While it is important that investors see returns from more mature investments, some companies are doubling down on support for early-stage projects.
For example, one of Ryze Labs' early investments in Solana is performing well thanks to its performance over the past year, said Thomas Tan, the company's vice president of investments. “Our experience during the bear market taught us that we need to rise above the current situation by resolutely supporting innovative ideas that have the potential to redefine the future of blockchain technology,” Tan said. Told.
Frameworks' Spencer said investors also recognized that such an exit could take years. “Smart VCs bought in 2022 and 2023, but now the smarter investor class is waiting for new all-time highs before thinking about exit opportunities,” he said. said. “We are known for being more long-term oriented, especially in our venture investments, and we believe that mindset positions us well for the next cycle.”
As the venture landscape focuses on 2024 and crypto market caps continue to expand, there remains cautious optimism and a desire to maintain seemingly strong bets in the space.
