Crypto withdrawals remain low but investors are surprised

The global venture capital market is enduring a long period of limited exits. Startups are staying private longer, M&A is quieter partly due to tighter regulatory oversight, and the IPO market remains stagnant. This means that in terms of IRR, many historic venture deals are slowly rotting away.

The crypto market is no different, but some investors in the sector are surprised. New data from PitchBook’s Q4 2023 Crypto Report makes it clear that if the larger startup market is suffering from an exit drought, crypto startups are potentially even more parched.

The lack of crypto startup exit volume – and value – may be linked to a related decline in total venture investment in upstart Web3 companies; When liquidity is light, prospects for investment returns may be bleak. The good news for crypto founders is that despite the reduced likelihood of selling their company, venture capital investments were 2.5% higher in the fourth quarter of 2023 compared to the third quarter, although deal volume declined by the same percentage.

The report said the fourth quarter was in line with the “low-level activity seen in 2023.” And with only 12 exits during that time frame, it was the lowest number since Q4 2020.

The high deal value despite limited exits reflects a level of optimism among crypto investors that we can consider surprising. But with crypto prices rising, major regulatory hurdles cleared, and other positive signs generally warming up to Web3 a bit, more investment doesn’t shock us.

However, the question of exit still remains, recent investment totals will suffer. Looking at annual data, crypto-focused, venture capital-generated exits were $1.2 billion in 2012, up just $500 million between 2019 and 2020. In 2022 and 2023, the numbers come to $1.4 billion and $1 billion. The outlier was 2021, which had $88 billion worth of crypto exit value.

Why such a huge discrepancy? It’s not hard to parse: Exits were hot for many startup categories in 2021, and Coinbase went public that year. The company was worth more than $65 billion at the direct-listing reference price, and even more in early trading. This explains why 2021 stands out so bullish compared to its peer years, even though Coinbase is worth more than $37 billion today.

Equity vs Tokenomics

In terms of equity, then, there Is There has been a single venture-backed crypto exit of note in recent years (Coinbase), while all other Web3 exits measured in the traditional manner are at most an integer error.

However, in crypto, exits are largely split between M&A and IPOs on the one hand, and token launches on the other, said Vance Spencer, co-founder of Framework Ventures. “The first two are not the primary ways that VCs get liquidity in crypto, and so the relatively low, 1-billion-dollar exit number may be a bit misleading.”

“The majority of liquidity events in crypto VC will come from tokens, and it is very hard to measure this in aggregate,” Spencer said. “I wouldn’t view the decline in these metrics as a proof point that VCs are having more difficulty obtaining liquidity.”

“Year after year, we have seen a growing evolution from the ‘traditional VC exit model’ to a token-powered liquidity event approach, where decentralization, public building, and community adoption are paramount to driving a successful return for all stakeholders.” said Brian Mahoney, vice president of business development at enterprise-focused studio Thesis.

But some investors believe it is a sign of how the market is changing and how important it is to HODL – holding investments with conviction, even if they are short of an exit.

not worried

While it is important for investors to get returns from more mature investments, some companies are doubling their support for early-stage projects.

For example, one of Rise Labs’ early investments in Solana remains strong, thanks to its performance over the past year, said Thomas Tang, the firm’s vice president of investments. “Our experience during bear markets has shown us that we need to rise above by remaining steadfast in supporting innovative ideas that have the potential to redefine the future of blockchain technology,” Tang said.

Investors also recognize that these exits could take several years, Framework’s Spencer said. “Smart VCs made their purchases in 2022 and 2023, and now the more competent class of investors are waiting for new all-time highs before thinking about exit opportunities,” he said. “We are known for being more long-term oriented, especially in terms of venture investments, and we believe that mindset has us well-positioned for this coming cycle.”

As the enterprise landscape focuses toward 2024 and crypto market cap continues to grow, there is still cautious optimism in the space and seemingly strong appetite for making bets.