Crypto Venture Capital Sees Resurgence in 2024 with $2.2 Billion Raised, Signaling Shift Towards Sustainable Growth

Crypto venture capital is on the rise in 2024. Over $2.2 billion has been raised across 24 funds, according to PitchBook. This is a welcome change after a slow 2023. The market could even surpass last year's total of $2.6 billion.

Robert Le, a senior analyst at PitchBook, points out, “We've seen an upward trend quarter over quarter for the last three.” However, he also notes that we’re still in a capital-constrained environment. Typically, venture investments in crypto follow the performance of publicly traded tokens. In March 2024, the market cap bounced back to 93% of its previous peak. Yet, we’re still far from the $30 billion raised in the last cycle. Many investors are cautious after facing losses in the past.

Macroeconomic factors like inflation and rising interest rates have affected investments in riskier assets like crypto. Banafsheh Fathieh, co-founder and general partner at Lightspeed Faction, believes the crypto industry needed a correction. With the excesses of the last bull run behind us, investors are returning, but they are being more careful. Early-stage investments now make up about 80% of the activity. Fathieh explains that the excitement of 2021 created some market distortions, but the current environment is healthier and more focused on growth and innovation.

As the market recalibrates, investors are looking at specific sectors that show promise. Infrastructure within the Solana ecosystem is gaining attention. Matthew Graham, founder and managing partner at Ryze Labs, says, “Solana is taking market share from Ethereum and others.” He expects to see more consumer-facing applications that fit the market well, supported by Solana’s technology.

Graham also highlights the potential of consumer applications that combine gaming with practical use, such as fitness apps like STEPN. However, he warns investors to pay attention to revenue sources. Understanding whether returns come from tokens, equity, or hybrid models is crucial for long-term success.

Venture capitalists are also excited about Decentralized Physical Infrastructure Networks (DePINs). These networks coordinate machines and devices. Examples include Helium, a blockchain-based wireless network; Hivemapper, a decentralized mapping service; and GEODNET, which focuses on improving location data accuracy. Rob Hadick, general partner at Dragonfly Capital, says, “All of those guys have started to show some ability to go to market on demand. We need to see that continue to grow.”

The potential of decentralized AI is also drawing attention. While some believe decentralized networks could replace cloud giants like AWS, Fathieh is more cautious. “To be candid, I don't think that will happen, but there are a few places where crypto is not an optional piece of technology but a critical piece.”

AI developers often cite access to computing power as a major hurdle. Fathieh points to innovations like decentralized GPU marketplaces that pool idle computing resources for AI workloads. She also notes that cryptography can provide a verification layer for data integrity and model integrity, enhancing AI systems.

Late-stage investments, which saw inflated valuations during the last bull run, are now under greater scrutiny. “There’s been a recommitment to being more thoughtful about how much and at what price to put capital into,” says Hadick. Seed-stage valuations remain somewhat high, but later-stage unicorns are trading at significant discounts. Non-token equity businesses are seeing discounts of around 60%. Some, like Chainalysis and Fireblocks, are trading at 70% discounts. OpenSea has experienced discounts as steep as 90%.

Despite these markdowns, Fathieh believes quality companies will bounce back as the economic environment shifts. “Even if you have a contraction on the multiple side, if they are good businesses—and many of them are—they’ll have some time to recover,” she says. As interest rates change, she expects a return to more normalized equity multiples. In the meantime, investors are focusing more on seed-stage opportunities, where growth potential and risk are more evident.

Looking ahead, PitchBook’s Le predicts an influx of first-time fund managers. “Over the next year or two, we’re going to see many of these new funds come to market, marking a new cycle of innovation,” he says. The focus will be on sustainable, long-term growth rather than short-term hype.

The cyclical nature of the crypto market often aligns with bitcoin’s halving events, which cut mining rewards in half. Historically, peaks in crypto fundraising have coincided with these cycles, with notable surges in 2014, 2018, and 2022. Le writes, “If these historical trends continue, we anticipate another fundraising peak in 2026, aligning with the next expected major cycle in the crypto market.”