Author | @joel_john95

Compiled by | Huo Huo

If you only read the news, you might think that venture capital firms are moving away from crypto en masse. That may be true until you examine their actions in mature sectors like fintech and software as a service (SaaS).

Over the weekend, I ran a data analysis on 25,000 funding events at all stages in these related fields to study the common patterns among them.

Here’s a guess as to how venture capital firms view the industry.

01. Investment Trends

Referring to the chart below, the upward trend in January 2021 refers to the large number of venture capital fundraising announcements that occurred in late November and December. (Companies usually wait until the new year to announce these news, which is a phenomenon across industries every year, with the largest number of fundraising announcements in January)

Did you see the initial uptick in SaaS investments in January 2021? As lockdowns caused by those years of staying at home forced people to work from home, SaaS revenues reached new highs and investor interest in putting money into SaaS increased significantly.

A few quarters later, crypto asset fundraising frequency saw a similar uptick. My understanding is that as other industries (gaming, SaaS, biotech, fintech) began to receive liquidity from larger venture capital, interest in crypto investing also increased. By the end of 2021, everyone was creating NFTs on the chain for the first time, hoping to make a quick buck, and the frequency of fundraising related to crypto assets hit a new high.

02. Reasons for the change in wind direction

Does this trend also apply to the amount of money raised? Yes, crypto-native companies are starting to attract funding a few quarters after other (mature) industries peaked. In a sense, there are multiple forces at work in the recent situation:

1) Investment in mature sectors is at a high level, as the low yield environment means more venture capital flows to existing portfolios. Managers are willing to take more risk for more returns, and crypto provides this opportunity.

2) Liquid assets within crypto are rising and hitting new highs. Consumer interest in this space is also at a new high. If you don’t have crypto assets in your venture portfolio at the time, it means you (the liquidity pool) are missing out on potential gains.

The ensuing market crash seemed to be seen across industries. While I only have two samples here, ideally I would have liked to have covered ten industries to support my point. For the average entrepreneur, what matters is not the drop from peak to trough, but the trend over the past few years. As the frenzy in the venture capital market gradually subsides, what we need to see is whether this decline has weakened all interest in crypto assets.

To study this, I looked specifically at the frequency of early-stage venture capital rounds in the crypto space.

Early-stage rounds are actually raising more often than in 2021. Founders are finding it difficult for two reasons:

1) The number of founders has increased over the past few quarters. There are now more founders competing for a limited pool of capital.

2) We contrast this with January 2022, where founders can simply send a PDF and hopefully be asked “where should I send the money” at the end of the day.

The difficulties we see in the market are actually the result of several factors:

1) The reserve funds and grants of recent protocols have been decreasing rapidly compared to the token price. The interest in investing funds into building experimental technologies with a market with large monthly active users has disappeared. This means that founders need to find lower user acquisition costs faster to achieve product-market fit.

2) The value of equity is decreasing rapidly for most teams. Employees joining the team will now wonder if their ownership is valuable and if liquidity will be achieved. Morale tends to decrease. When hiring in this market, people will demand higher compensation while dollar liquidity is low.

The good news is that venture capital investment in crypto assets has not completely disappeared so far. While there are fewer funding rounds, they are larger. While this is a difficult market to raise money in, it would be a mistake to assume that there is no money. For founders, these markets are the difference between whether they have another 18 months to grow their business or have to shut down in a bear market. Their ability to build, retain users, or sell their product is the difference between success and failure.

03. Summary

Is the market tough? Yes. But it’s tough for everyone.

Will this improve the situation? I don’t know, but at least let’s stop pretending this is a crypto phenomenon with no real data to back it up.

Note: Data source: Crunchbase.