Crypto Venture Funding Drops 63% in Run-Up to FTX Trial

Hannah Miller, Bloomberg News

A demonstrator holds a sign reading "SBF Evil" outside court in New York, US, on Wednesday, Oct. 4, 2023. Former FTX Co-Founder Sam Bankman-Fried is charged with seven counts of fraud and money laundering following the collapse of his cryptocurrency empire last year. , Bloomberg

(Bloomberg) -- Venture capitalists have been under fresh scrutiny for their role hyping up the crypto industry during the criminal trial of FTX co-founder Sam Bankman-Fried, but new data shows that those investors are have pulled back sharply from the industry they once helped build and promote.

Global venture funding for crypto startups plunged to its lowest level since 2020 during the third quarter, tumbling 63% from the same period last year, according to data from research firm PitchBook. VCs invested just $2 billion in crypto worldwide during the quarter, a fraction of the funds they invested during happier times in the crypto world.

“We aren’t seeing the big deals anymore,” PitchBook analyst Robert Le said. “That’s one of the drivers of the decline – deals are smaller.”

Mega fundraises during the crypto bull market once benefited companies like exchange FTX, nonfungible token marketplace OpenSea and NFT creator Yuga Labs. Now, the VC pullback could force difficult choices for companies already cutting costs and enacting layoffs.

“If they’re not able to raise a round, even a down round, they’re either going to go out of business or get acquired at a valuation that’s much, much lower,” Le said.

While crypto deals might still be happening for early-stage companies, Le said, many late-stage tech investors have exited the space completely.

The continuing fallout of the FTX scandal adds a fresh wrinkle to crypto startups’ conundrum. VCs including the prestigious Sequoia Capital once cut large checks to FTX, which also made venture bets of its own. Both FTX and its trading arm, Alameda Research, were active investors prior to their executives facing criminal fraud charges. They amassed a roster of portfolio companies that included major names in the industry, such as stablecoin providers Circle and Paxos, blockchain developer Aptos Labs and crypto bank Anchorage Digital.

FTX and Alameda’s startup stakes have been pegged as some of the companies’ most valuable assets as they go through bankruptcy proceedings. Talks of a new funding round that would potentially see a rising valuation for artificial intelligence startup Anthropic, which FTX invested in, even gave hope to the crypto exchange’s creditors that they would be made whole through an eventual sale of the equity.

But a massive liquidation sale of the companies’ various stakes could send the value of crypto startups plummeting further if the equity is sold on the cheap, Le cautioned.

“Because FTX and Alameda have such a huge portfolio, it could further depress valuations in this space,” he said.