Crypto's Venture Capital Landscape

https://blog.stratos.xyz/articles/cryptos-venture-capital-landscape

Venture fund landscape

‍More than 3300 funds made venture investments in crypto since 2018. Of these funds, only 339 made 10 or more investments since the beginning of 2021 — meaning that most of these funds are casual investors as opposed to focused & active crypto funds.

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To refine things further, we can break down the 339 active crypto funds into two relevant sub-segments for our analysis:

• 190 funds are active at the early stage, as defined by having made at least 10 seed or pre-seed investments since the beginning of 2021.
• 40 of these funds who are active at the early stage are emerging managers who launched in 2020 or later. Our firm Stratos would fall in this category.

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Early stage deal landscape

‍There have been over 1500 early stage (seed and pre-seed) crypto fundraising rounds since the start of 2021 — accounting for nearly $7.5b raised with a median round size of $3m. Given the sheer volume of investments, we used a data-driven approach to gauge the quality of these 1500 rounds by looking at which companies ended up raising a subsequent follow-on round of funding. Path dependence is a significant factor in early-stage investing, and companies that go on to raise a subsequent follow-on round of funding are much more likely to ultimately be successful. Significant research has been done to back this up.

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The below graph shows the number of early stage rounds by month from January 2021 to March of 2022, overlaid with the number of companies in that cohort that have already raised a follow-on round. The reason we selected this timeframe is that it is most representative of the current seed landscape in crypto venture — it includes emerging managers as well as incumbents. We excluded new company cohorts after March of 2022 because companies in those cohorts have not matured enough to generally warrant follow-on rounds.

There were just shy of 1000 early stage rounds between the start of 2021 and March of 2022. DeFi was the most popular category, accounting for 31% of the rounds, followed by NFTs, Web3, Infrastructure, then CeFi. As time went on the number of rounds per month increased significantly. In January 2021 there were 19 early stage rounds while in January of 2022 there were 92. Interestingly, the number of DeFi and Infrastructure deals stayed relatively flat throughout the timeframe. Most of the growth came from the NFT and Web3 categories. Starting in September 2021, a majority of rounds were in those categories.

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As one would expect, a small percentage of companies that raised an early stage round during that period have since raised a follow-on round — about 20%. As time goes on, we can expect that this percentage will increase as our expectation is that high performing companies will tend to raise follow-on capital somewhere between 12–18 months after their initial seed round.

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To get a sense for the types of companies included in this data, the table below shows the top 20 companies that were initially funded in the January 2021 through March 2022 period, based on the amount of funding raised in subsequent follow-on rounds:

Sub-sector details are telling: 4 out of the top 5 companies and 12 out of the 20 are infrastructure related. Given that only 16% of early stage rounds were in infrastructure, this sub-sector appears to outperform the others. This includes scaling solutions like Fuel and Subspace (both Stratos portfolio companies) as well as centralized infra providers like Moralis and QuickNode. Recur was the most well funded NFT company, raising a $5m seed round and a subsequent $50m follow-on round. Element Finance and Goldfinch Finance (Stratos portfolio company) led the way for DeFi, raising $32M and $25M respectively.

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There are a number of funds that appear a few different times in the data. Hypersphere, Maven 11, Stratos, A_capital, and Andreesen Horowitz each appeared in at least 3 of the top 20 early stage rounds. The list below shows funds which invested in at least 5 early stage companies in 2021 that have already raised subsequent rounds (and were therefore marked up).

The above graphic highlights the investors that invest in top early stage companies at the greatest frequency. The list includes most of the well known investors in the space. Coinbase Ventures led the way with 22 seed investments that have already been marked up.

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In order to get a more accurate picture of a fund’s investment judgment or “hit rate”, it’s necessary to consider the total number of investments made during the same period. Some investors simply invest in a greater volume of companies so naturally they will have a higher number of mark ups. The next graph takes that into account and instead shows the follow-on/markup rate.

In this dataset, Maven 11 led the way with 8 of their 17 early stage investments leading to a subsequent follow-on round. Stratos was first amongst emerging managers (we define emerging managers as being founded since the beginning of 2020). It is interesting to note that 3 of the top 4 performing crypto-dedicated venture firms are emerging managers. Given that only 21% of the active early stage crypto funds are emerging managers, this could imply that newer funds have a better hit rate than established funds.

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Another interesting insight is that the firms with the highest follow-on rate also happen to have most recently raised funds between $50M-$150M, on the smaller end of the 2021–2022 crypto venture fund vintage. If we assume that follow-on rates are predictive of future success for these portfolio companies, and that this sample set of companies represents a large percentage of those funds’ invested capital, it is likely that the smaller funds will outperform larger funds over time.

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The above chart shows the follow on rate for funds which made 10 or more early stage investments in 2021. It’s worth mentioning that Variatn, Volt, Nascent, and A_capital would all be near the top of the chart had the cutoff been lower.

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Conclusion

‍There are 339 funds actively investing in crypto. However, the data shows that only a handful of emerging and established funds consistently invest in high quality companies at scale.

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As founders consider which investors to work with, it’s important to focus on funds with a track record of having invested in successful early stage companies. The intent of the above data is to assist founders in identifying the funds with the best track record in early stage crypto, especially where an early investment from one of these funds can increase the likelihood of a successful follow-on fundraising. It is statistically highly unlikely that a company that doesn’t raise follow-on financing after a seed round will go on to be successful — and the best early-stage funds can help increase the likelihood of a follow-on round through targeted support and relationships with later stage investors.

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Founders should also consider the pros & cons of working with early stage focused funds (e.g. Nascent, Maven 11, Stratos) vs. full lifecycle funds (e.g. Pantera, Polychain, a16z). Smaller early stage focused funds typically can be more involved and have more bandwidth; larger full lifecycle funds have more resources and will be better positioned to layer on capital over time.

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Another consideration is the firm’s area of expertise. One investor may be specialized in Infrastructure while others are specialized in DeFi, Gaming, etc. We plan to dig further into sector specific data in a follow up to this blog post.