Crypto startups now getting overlooked by VC firms for funding

Venture capital (VC) interest in crypto startups has dramatically shifted, with many firms now overlooking the sector for funding opportunities. Despite a modest investment of $659 million in September, the overall trend shows a sharp decline, especially compared to the previous peak.

Even with a 3% increase from August, September’s total investments still represent a dramatic fall of over 90.6% from 2021’s peak. According to Defillama’s data, crypto startups have received over $103.56 billion in 5566 funding rounds since 2014.

VC Funding into crypto startups plummets 

VC firms were initially not keen on funding crypto, with poured-in investments as low as $17 million in May 2014 and even lower at $9.7 million in October 2015. However, in 2017, funding amounts spiralled to the billion levels, with crypto startups attracting about $1.13 billion in August, $1.07 billion in September, and another $1.76 billion in November.

2017’s highs set the pace for 2018, with investors topping up their funding amounts. The highest funding amount raised in 2018 was at $2.16 billion in May. However, with the raging COVID pandemic crippling economies, VC funding slumped throughout 2019 and 2020 before peaking in 2021.

The highest VC investment in crypto startups was in October 2021, with firms raising an impressive $7.08 billion. The next highest amount raised was in February 2022, with crypto startups bringing home $3.678 billion. 

Moving into 2024, crypto funding levels are nowhere near these peak levels. At the start of the year, venture capital firms only invested $551.9 million before rising to $1.045 billion the next month. In June 2024, funding amounts dropped to $550 million, and in July 2024, crypto startups received only $638.9 million.

In September 2024, venture capital firms only gave about $659 million, a 90.6% drop compared to 2021’s peak. 

Investor confidence in crypto is regaining momentum

In 2022, venture capitalists invested more than $30 billion in crypto and blockchain startups, nearly surpassing the $31 billion invested in 2021. However, most of these investments occurred during the first half of the year. 

A decline in investment during the year’s second half, continuing into 2023, was primarily attributed to a loss of investor confidence following a string of crypto bankruptcies.

For starters, in November 2022, FTX filed for bankruptcy protection, sinking multiple tokens. Before this, crypto hedge fund Three Arrows Capital had declared bankruptcy in July following the fall of cryptocurrencies Luna and TerraUSD in May. 

New Jersey-based crypto lender Voyager Digital also filed for bankruptcy on July 6 after Three Arrows Capital (3AC) defaulted on a crypto loan worth more than $650 million. Besides, several other crypto firms have reported losses due to hacks and social engineering attacks, lowering investor confidence in the crypto industry.

However, more investors are recovering their confidence in crypto even as regulators approve multiple Bitcoin and Ether spot ETFs, and Bitcoin’s price attracts bullish sentiment. Investors have also found a new interest in developers of blockchain infrastructure, Celestia. The firm received over $100 million in a September 2024 funding round. Huma Finance also raised nearly $40 million to build its blockchain-based payment network.