The global venture capital market is going through a long period of limited exits. Startups remain private longer, mergers and acquisitions are quiet in part due to increased regulatory oversight, and the IPO market remains frozen. This means that many historic risk deals are slowly rotting, in IRR terms.
The cryptocurrency market is no different, but some investors in the space are unfazed. New data from PitchBook’s Q4 2023 Crypto Report makes it clear that if the larger startup market is suffering from an exit drought, crypto startups are possibly even more depleted.
The lack of crypto startup exit volume (and value) may be linked to a related decline in total venture investment in upstart web3 companies; When liquidity is tight, prospects for investment returns can dim. The good news for cryptocurrency founders is that despite the slim chances of selling their company, venture capital investment increased 2.5% in Q4 2023 compared to Q3, although volume of transactions fell by a similar percentage.
The fourth quarter was consistent with the “low-level activity seen throughout 2023,” according to the report. And with just 12 departures during that period, it was the lowest number since the fourth quarter of 2020.
Higher transaction value despite limited outflows implies a level of optimism among cryptocurrency investors that we might consider surprising. But with rising cryptocurrency prices, the removal of key regulatory hurdles, and other positive signs shedding some warm light on web3 in general, increased investment doesn’t surprise us.
However, the exit question remains, recent investment totals be damned. If we analyze the annual data, the outflows generated by venture capital focused on cryptocurrencies amounted to 1.2 billion dollars in 2012, barely 500 million dollars between 2019 and 2020. In 2022 and 2023, the figures reached 1.4 billion and 1 billion Dollars. The outlier was 2021, with a cryptocurrency output value of $88 billion.
What is the reason for this enormous discrepancy? It’s not difficult to analyze: exits were all the rage in 2021 for many categories of startups, and Coinbase went public that year. The company was worth more than $65 billion at its direct listing reference price, and even more in early trading. That explains why 2021 stands out so starkly compared to its even years, even if Coinbase is worth a modest $37 billion today.
Equity versus symbolic economy
So in terms of equity, there is has There has been only one crypto exit backed by notable companies in recent years (Coinbase), while all other traditionally measured web3 exits are, at best, a rounding error.
However, in the cryptocurrency sector, exits are largely divided between mergers and acquisitions and initial public offerings, on the one hand, and token launches, on the other, said Vance Spencer, co-founder of Framework Ventures. “The first two are not the main ways VCs raise cryptocurrency liquidity, so the relatively low $1 billion exit figure is probably a bit misleading.”
“The vast majority of liquidity events in crypto VC will come from tokens, and that will likely be much harder to measure comprehensively,” Spencer said. “I wouldn’t view a decline in these metrics as evidence that VCs are having a harder time raising liquidity.”
“Year over year, we have witnessed a growing evolution from the ‘traditional VC exit model’ towards a more token-driven liquidity event approach where decentralization, public building, and community adoption are critical to driving a successful return for all stakeholders. ”said Brian Mahoney, vice president of business development at enterprise-focused studio Thesis.
But some investors believe this is indicative of how the market is changing and how important it is to hold (or HODL) investments with conviction, even when facing a shortage of exits.
Not worried
While it is important for more mature investments to provide returns to investors, some companies are doubling down on their support for early-stage projects.
For example, one of Ryze Labs’ early investments in Solana remains strong thanks to its performance last year, said Thomas Tang, the company’s vice president of investments. “Our experience during bear markets showed us that we must rise above by being steadfast in supporting innovative ideas that have the potential to redefine the future of blockchain technology,” Tang said.
Investors also recognize that these exits could take years, Frameworks’ Spencer said. “Smart venture capitalists made their purchases in 2022 and 2023, and now the most competent class of investors are waiting for new all-time highs before even thinking about exit opportunities,” she said. “We are known for being more long-term oriented, especially with risky investments, and we believe that mentality has put us in a good position for the next cycle.”
As the corporate outlook turns to 2024 and the cryptocurrency market capitalization continues to grow, there is still cautious optimism in the space and an appetite to maintain seemingly strong bets.
