Crypto VC funding: “And I’m free, free falling”

The first quarter of 2023 witnessed a significant decline in venture capital (VC) funding for cryptocurrency companies, marking the fourth consecutive quarter of diminishing investment activity. According to research published on May 12, 2023 by capital market analytics firm PitchBook , crypto businesses globally raised $2.6 billion in VC during this period, representing an 11% decrease in quarter-on-quarter (QoQ) deal value. When compared to the first quarter of 2022, the decline is even more pronounced, with funding plummeting from $9.1 billion to $2.6 billion, reflecting a staggering 71% drop year-on-year.

The dwindling investment activity can be attributed, in part, to regulatory uncertainties that have plagued the cryptocurrency industry. Furthermore, the number of investment rounds also saw a decline, with 353 rounds completed during this period, marking a 12.2% decrease compared to the previous year.

The rationale behind the plunge

However, it is essential to consider various factors influencing this downturn. Many companies that secured high valuations in 2021 or early 2022 are now facing difficulties when attempting to secure funding extensions at the same valuations, resulting in downward valuation adjustments. Notable companies like Yuga Labs , Consensys , Polygon Labs , FTX , and FTX US , which raised substantial amounts between $400 million and $450 million in 2022, contributed to the inflated valuations.

The reduced deal flow and decline in sector funding levels observed in Q1 2023 are reminiscent of or even below levels last witnessed in Q4 2020. Former prominent institutions like FTX and Silvergate have experienced a significant shift in their standing within the market (i.e., they're dead).

Crunchbase data reveals that only three companies managed to secure substantial funding in Q1 2023, and out of those, only two surpassed the $100 million mark. Vancouver-based technology provider Blockstream raised $125 million through convertible notes and secured loans, while French hardware wallet maker Ledger secured $108 million, bringing its Series C funding to a total of $488 million (rock on, France! ????). Israel-based semiconductor startup Chain Reaction raised $70 million in a Series C funding round.

In addition to lower valuations and a shift towards incubation stages instead of growth stages with reduced valuations, the secondary market is also witnessing a rise in lower-value growth stage companies attracting fewer buyers. Market conditions have led to some companies sidelining token launches as prices remain depressed, resulting in reduced fundraising compared to their initial expectations.

Despite Ethereum and Bitcoin maintaining strong positions, potential investors are becoming more cautious about investing in other crypto assets due to concerns over potential regulatory factors. Even tokens considered blue-chip investments by the broader market are facing doubt.

A broader investment focus driven by AI

Venture capitalists are beginning to shift their focus, influenced in part by the increasing popularity of deep learning modules like ChatGPT. Paradigm , a renowned crypto VC firm, recently rebranded itself as a new frontier VC, expanding its interests to encompass AI and other related fields. Multicoin Capital has also hinted at diversifying its portfolio by conducting research at the intersection of crypto and AI. These examples demonstrate a growing trend of VCs exploring AI-related investments.

Prominent figures in the crypto space, such as Andreessen Horowitz and Tron founder Justin Sun, have made substantial investments in AI ventures, further highlighting the allure of AI products.

While the crypto bear market persists, many venture capitalists view this as an opportune time to double down on sector-focused investments. However, it is evident that investors are becoming more selective, which ultimately benefits the industry as a whole.

The convergence of crypto and AI

IMHO, the convergence of cryptocurrency and AI technologies presents an abundance of opportunities to tackle critical challenges and unlock innovative solutions across multiple industries. By exploring the intersections of these fields, we can discover new ways to enhance resource allocation in AI training, utilize token incentives for domain-specific reinforcement learning through human feedback, and combat the authenticity concerns posed by deep fakes in digital media.

As an example, the concept of renting AI chip power suggested by Multicoin Capital holds the potential to decentralize and democratize access to high-performance GPUs, enabling a broader range of individuals and organizations to contribute to AI research and development. Token-incentivized reinforcement learning from human feedback can be applied in various sectors such as engineering, finance, education, and environmental sciences, enhancing AI models by incorporating the expertise of domain specialists. The use of zero-knowledge proof systems will facilitate on-chain updates of financial states based on complex real-world changes, providing greater efficiency and security.

Moreover, by integrating public key cryptography, real-world identity verification, and blockchain technology, we can establish a robust system to address the challenges presented by deep fakes and maintain trust in digital media. This approach ensures the authenticity and integrity of content, bolstering the reliability of information in an era of increasing digital manipulation.

As we delve deeper into the synergies between cryptocurrency and AI, we will undoubtedly uncover further opportunities to drive innovation, generate value, and tackle the most pressing societal issues we face. Embracing the intersections between these two domains will enable us to push the boundaries of technology, fostering a more connected, efficient, and trustworthy future.