Q2 2024: Crypto Startups Raise $3.2B While US’s AI Investments Skyrocket to $55.6B

Crypto VC Funding Ticks Up in Q2, but Trails 2022 Highs

Venture capitalists (VCs) are showing renewed interest in crypto startups, but their enthusiasm hasn't quite reached the fever pitch of 2022.

While crypto startups raked in $3.2 billion in investments during Q2 2024, this represents a modest 28% increase compared to Q1's $2.5 billion.

This growth pales in comparison to the nearly $10 billion invested in crypto projects during the second quarter of 2022.

Web3, Layer 1s, and Bitcoin Layer 2s Attract Investors

Within the crypto investment landscape, VCs gravitated towards web3 projects in Q2. Web3 startups, DAOs (decentralised autonomous organisations), metaverse and gaming projects collectively captured 24% of VC capital, or $758 million.

Farcaster, a social media protocol, secured the largest funding round in this category at $150 million.

Investors also showed strong interest in layer 1 blockchains (independent blockchains with their own unique protocols) and Bitcoin layer 2 solutions (technologies built on top of Bitcoin to improve transaction efficiency).

Monad Labs, aiming to build a faster version of Ethereum, attracted the biggest investment in this space at $225 million.

Bitcoin layer 2 protocols also witnessed a surge in investor interest, with total funding reaching nearly $95 million, a significant 174% increase from Q1.

Crypto Market Hits $90 Billion Milestone

By February 2024, the total investment in crypto and blockchain companies surpassed a whopping $90 billion since 2017.

This data point, courtesy of The Block Research, highlights the long-term potential VCs see in the industry, even amidst a funding slowdown.

The report further indicates that over 9,500 investments have been made during this period, with DeFi, infrastructure, NFTs/gaming, and web3 projects attracting the most significant allocations in early 2024.

AI Heats Up VC Investments in the US

While crypto funding inches up, the US venture capital market is experiencing a boom in artificial intelligence (AI) investments.

Q2 2024 saw a staggering 47% increase in VC funding compared to Q1, reaching a total of $55.6 billion – the highest quarterly total in two years.

This surge is primarily driven by significant investments in AI companies, with Elon Musk's xAI securing a whopping $6 billion and CoreWeave bringing in $1.1 billion.

This influx of capital into AI startups reverses a previous downward trend that began after a peak of $97.5 billion in Q4 2021.

AI Market Boom, But Exits Remain Elusive

The AI market's rapid growth isn't without its challenges.

Despite the influx of VC money, the number of successful exits (acquisitions or initial public offerings) for AI startups hasn't kept pace.

In fact, exit values in Q2 2024 fell to $23.6 billion, compared to $37.8 billion in the previous quarter.

This disconnect indicates that while VCs are eager to invest in promising AI companies, they're still waiting to see a strong return on their investment.

AI Market: Exuberance Meets Challenges

The robust investments in AI, particularly in areas like code generation and productivity tools, highlight a strong market interest in the technology's potential.

However, a potential roadblock lurks beneath the surface – despite the surge in deal activity, the IPO market hasn't kept pace.

Even with notable VC-backed companies like Rubrik going public, the overall public offering landscape remains sluggish.

This disconnect underscores the ongoing challenges in achieving profitable exits for VC firms, a crucial factor for maintaining investor confidence in the long run.

Cautious Optimism: Big Funds Dominate

While the overall US venture capital climate suggests a recovery, fundraising commitments for the first half of 2024 only totaled $37.4 billion.

Large, established firms like Andreessen Horowitz, which closed over $7 billion in new funds, continue to dominate the fundraising scene.

For the industry to fully rebound, a combination of robust fundraising and consistent exit opportunities through successful IPOs is essential.

Until then, the venture capital landscape will likely remain cautiously optimistic.

What Does it Mean for Us?

The contrasting trends in VC funding for AI and crypto paint a fascinating picture.

The surge in AI investment reflects an optimistic outlook on the technology's ability to revolutionise various industries and potentially improve our lives.

However, the challenges associated with achieving successful exits for AI companies could dampen investor enthusiasm in the long run.

On the other hand, the modest growth in crypto funding suggests a more cautious approach from VCs, potentially a consequence of the market volatility witnessed in 2022.

This cautious stance could slow down the development and adoption of new crypto technologies.

Overall, these trends in VC funding will likely shape the future of technological innovation, impacting the way we work, live, and interact with the world around us.