Crypto VC funding down 50% from last quarter as volatility persists

After VC firms poured money into crypto startups during the 2021 boom — peaking at $9.8 billion in the fourth quarter — funding fell along with the prices of prominent cryptocurrencies such as Bitcoin and Ether. The latest decline, from $6.6 billion in the second quarter to $3.3 billion in the third, is the biggest quarterly decline in VC funding in the past two years.

Even with declining markets—total global VC funding fell from $121.8 billion in the second quarter to $80.1 billion, or about 34%—crypto startups are feeling the heat more acutely. Confidence in the industry seems to have fizzled after the collapse of high-profile projects such as the TerraUSD algorithmic stablecoin and the crypto lender Celsius.

“Web3 has been hit a little harder, just because people are getting more adverse in these times of uncertainty,” said Chris Metinko, an enterprise tech reporter at Crunchbase.

But a few large crypto-focused VC firms seem undecided. Haun Ventures, founded by former federal prosecutor Katie Haun, launched in March with $1.5 billion. Sam Rosenblum, a partner at Haun Ventures, said the firm’s funding distribution has not changed, with one exception. While many Web3 investors looked to consumer-facing companies during the bull market, Haun Ventures is now focusing more on infrastructure-focused startups.

“We’ve allocated more bandwidth to earlier-stage things and less to later-stage things, and that will continue to be a dynamic, based on what happens in the market,” he said Fortune.

In August, Haun Ventures backed a $24 million Series A round for Thirdweb, a technology platform that helps businesses build Web3 infrastructure.

Over the past month, several of the largest financing deals in the crypto space have been for infrastructure and security companies. This includes crypto fraud prevention service Sardine, which raised $51 million, and interchain security company Hyperlane, which raised $18.5 million.

Another dynamic has been the speed with which deals are made. Before the downturn, VCs drove to participate in rounds.

“Now it doesn’t feel like we need to compete on that vector as much,” Rosenblum said. “Big deals are still being made … but at a more sensible, rational pace.”

According to Crunchbase, the biggest crypto raise in the third quarter was by Mysten Labs, which closed a $300 million Series B in September to build a proof-of-stake, Layer-1 blockchain to challenge Ethereum and Solana.

As the recent global adoption index from crypto intelligence firm Chainalysis showed, emerging markets are driving growth. Kate Kiewel, an early stage emerging market investor in Mexico City at Rali Cap and the founder of Khora, said emerging markets are better equipped to deal with macroeconomic downturns.

Singapore, a growing hub for crypto startups despite regulatory uncertainty, saw two major Web3 funding rounds this quarter: bug bounty platform Immunefi, which raised $24 million in September, and predictive crypto risk and intelligence platform Merkle Science, which extended its series. A round to 24 million dollars in August.

“Many founders are used to idiosyncratic risk and political, economic and social instability,” Kiewel said Fortune. “A unique opportunity is emerging for the impact and potential of Web3 in economies struggling with deteriorating monetary systems, major political changes and economic opportunities.”

She said that after the boom in 2021 and the bust in 2022, 2023 is likely to be a critical year for startups.

“Building a company is a marathon, not a sprint,” Kiewel said.

Although the prices of the most prominent cryptocurrencies continue to fluctuate, Rosenblum said that short-term volatility will not affect the strategy of most VCs, which are diversifying into the crypto space.

“We see it as the natural cycle of crypto,” he said Fortune. “I would bet a lot on the fact that things like Ether and Bitcoin will survive the volatility of [Crypto] Winter just fine, as they always have.”