The return of crypto venture capital

Hello and welcome to the FT Cryptofinance newsletter. This week, we’re looking at the state of crypto fundraising.

Crypto start-ups trying to raise money have found it very difficult over the past few years. They’ve had to face tepid demand from investors wary of getting burnt again after the collapse of crypto companies, stock valuations and token prices in 2022.

Now, however, the clouds seem to be slowly parting.

Investments by venture capitalists and others into crypto businesses rose to $3.2bn in the second quarter of this year, the highest amount for a three-month period since 2022, according to Galaxy Research, and up from $2.5bn in the first quarter.

The numbers are welcome news for digital asset companies, and underline how the surging price of bitcoin this year has brought renewed enthusiasm for the industry, and made investors more willing to open their wallets.

Despite the recent slide to about $58,000 now, bitcoin is still up 34 per cent this year, a bigger gain than the benchmark S&P 500 index, helped by the approval of spot bitcoin ETFs in January.

The median size of deals being done this year is also climbing slowly, from $3mn in the first quarter to $3.2mn in the second quarter, according to Galaxy Research. But what’s quite staggering is the jump in companies’ valuations. Median pre-money valuations — the value before a company receives financing from investors — have surged from $19mn to $37mn, highlighting how companies are positioning themselves and are back on an upswing.

In a potential sign of a return to past market froth, companies in the web3, NFT, metaverse and gaming sectors raised the most money from investors in the second quarter of this year, said Galaxy, while infrastructure companies came second. Lest we forget, the metaverse and NFTs were two of the most hyped sectors, and were where valuations were rapidly slashed during the crypto downturn.

The intersection of crypto and AI has also been a notably active, albeit eyebrow-raising, area as some companies pivot to the much-hyped artificial intelligence sector, such as by saying they will somehow combine blockchain and AI uses. This comes as raising money is proving much easier, as investors seek to grab a slice of the AI boom.

In a sign of this interest, blockchain-based AI company Sentient Labs, which was founded only this year, raised $85mn from Pantera Capital, Peter Thiel’s Founders Fund and other investors this month.

Meanwhile, crypto investors have also been actively raising new funds.

California-based venture capital firm Paradigm raised $850mn for its third crypto fund recently, while crypto trading firm Auros has created a new venture arm and plans to invest $50mn into digital asset start-ups.

But there could be trouble ahead for some investors.

Ari Paul, chief investment officer of BlockTower Capital, said the US Securities and Exchange Commission is eyeing up crypto venture capitalists as its next target. Speaking on a podcast, he said the regulator had launched a “bunch of investigations into VCs for acting as unregistered securities dealers”.

Maybe the clouds of the past few years haven’t all passed just yet.

What’s your take on the crypto fundraising environment? Email me at nikou.asgari@ft.com

Weekly highlights

Former FTX executives Nishad Singh and Gary Wang are set to be sentenced later this year. They’ve both pleaded guilty to fraud.
Tulip Siddiq has been appointed as the UK’s new City minister, in charge of overseeing crypto.
Standard Chartered-backed Zodia Markets is in talks to buy Elwood Capital from billionaire Alan Howard, Bloomberg revealed.
The German state of Saxony is selling down the bitcoin that it seized from criminal investigations.

Data mining

PayPal was the first big, traditional financial institution to push heavily into crypto payments when it launched its PYUSD stablecoin last year.

Its investment in crypto at a time when many traditional firms were still wary appears to be paying off. PYUSD’s market cap soared 84 per cent last month, according to CCData, hitting $500mn, after expanding to be used on Solana, as well as Ethereum.