Venture Capital Is Struggling, and Not Just in Crypto

Late-stage fundraising from venture capital firms is drying up, and not just in the crypto sector, according to Marc Weinstein from crypto investment firm Mechanism Capital.

Weinstein told Blockworks that companies like Near and Alchemy raising hundreds of millions of dollars marked the tail end of the bull run. 

“We’ve seen seed valuations come back to reality,” Weinstein said. 

He pointed to Tiger Global as an example of a firm whose investments — FTX being a major inclusion in its portfolio — got wiped out following the tech rout of 2022. 

The Wall Street Journal reported that its markdowns “erased $23 billion in value from Tiger’s giant holdings of startups around the globe.”

“[Tiger Global was] one of the players that had come into crypto in a really big way, and were writing these later stage checks,” Weinstein said. “When you see public company valuations in the tech sector dropping below the cash value of their previous rounds, down 50 to 80% in some instances, it’s not a surprise that later stage VC [venture capital] funding has really dried up.” 

Blockworks previously reported on a Crunchbase report that showed Web3 VC funding dropped 82% year to year from $9.1 billion to $1.7 billion. Deal flow also slowed. 

Recent data from “Big Four” accounting firm KPMG demonstrates that this phenomenon isn’t isolated to crypto and Web3. 

“Global VC investment fell to $57 billion in Q1 2023 — a particularly low note when compared to the high of $200+ billion seen in the same quarter just one year ago,” KPMG’s April Venture Pulse report said. 

“A myriad of factors combined to buffet the global VC market, from the protracted war in Ukraine and other geopolitical uncertainties to concerns about the global banking system following the sudden turbulence seen in Q1 2023. Stubbornly high inflation and still-increasing interest rates have also posed their own challenges.”

Weinstein agreed, adding that the fair value for a late stage growth equity business has changed as a result of rate hikes. Money is tighter now, he said, but his advice for founders of startups — should a bull market return — is to not raise money at too high of a valuation so as to avoid the crunch of the next bear market.

“If you went out in the bull cycle, and you raised at a $50 [million] to $100 million valuation, and you had seed-stage traction, and now you’ve launched your product and the market is down because retail investors and participants are bearish and institutions are cautious, you haven’t hit growth metrics. And now you’re in a position where you have to raise a down round.”

A down round simply means a company is raising money at a lower valuation than the prior round, diluting ownership of the company for everyone involved. Weinstein said this scenario can “feel like death for founders.”

And founders aren’t necessarily to blame when this happens. Weinstein explained the VCs are assets-under-management businesses, which means they make money off management fees. The larger their fund is, the more fees they can collect. 

This dynamic affects startups because “oftentimes, venture funds will convince a founder that they need to raise more capital…at a higher valuation,” he said, adding that VCs will nudge them to accept dilution.

“I think that’s a practice of the bull market that when we look back on it we’re gonna say, ‘this was not a good idea for founders to listen to.’”

Weinstein’s advice? Raise enough capital to cover your expenses for the 12 to 18 months, build a minimum viable product, discover your customers, and iterate a version of your product or service that people will actually pay for.

---

Get the news in your inbox. Explore Blockworks newsletters:

• Blockworks Daily: The newsletter that helps thousands of investors understand crypto and the markets, by Byron Gilliam.
• Empire: Start your morning with the top news and analysis to inform your day in crypto.
• Forward Guidance: Reporting and analysis on the growing intersection of crypto and macroeconomics, policy and finance.
• 0xResearch: Alpha directly in your inbox. Market highlights, data, degen trade ideas, governance updates, token performance and more.
• Lightspeed: Built for Solana investors, developers and community members. The latest from one of crypto’s hottest networks.
• The Drop: For crypto collectors and traders, covering apps, games, memes and more.
• Supply Shock: Tracking Bitcoin’s rise from internet plaything worth less than a penny to global phenomenon disrupting money as we know it.