Where Did VC Money Go in 2021? Crypto Startups.

Institutional investors almost doubled the amount of money they put into venture capital over the past year. But if there was another winner in the category of record-breaking fundraising, it would be startups in the crypto and blockchain sector. 

According to a report published Friday from Galaxy Digital Research, venture capital firms poured $32.8 billion into startups in the crypto and blockchain technology sector, a figure that was higher than all prior years combined. This massive amount of dry powder minted at least 47 companies with valuations above $1 billion — so-called “unicorns” — in the crypto market. In 2021, deal count also stood at an all-time high of more than 2,000, almost twice as many as the year before. Galaxy Digital, founded by Michael Novogratz, provides asset management, investment banking and other financial services for digital assets, cryptocurrencies, and blockchain technology. 

About 43 percent of crypto funding went into companies involved in trading, exchange services, investing, and lending of crypto assets, while 17 percent was directed toward startups in NFTs (non-fungible tokens), DAOs (decentralized autonomous organizations), Web3 (a decentralized online ecosystem based on the blockchain), and the Metaverse (a network of 3D virtual worlds). Other categories that drew significant VC interest include custody, infrastructure, and decentralized finance. 

According to the report, more than half of crypto VC investments in the first quarter of 2021 were in late-stage companies, but early-stage crypto firms began to draw more attention toward the end of the year. In fact, they accounted for more than 60 percent of all crypto VC investments in the fourth quarter. 

Bill Barhydt, founder and CEO of the crypto wealth management platform Abra, told Institutional Investor that one of the most eye-catching trends in crypto investments is the rise of late-stage funding. “A few years ago, there was no late-stage funding in the crypto space,” he said. But recently, crypto startups have become so profitable that they’ve started to attract growth-stage capital. According to the Galaxy report, “This dynamic can be partially attributed to the growing maturity of the space, with early-stage companies founded during the bear market of 2018-2020 reaching later stages successfully.” 

The report added that crypto venture managers are raising capital “at a record pace.” Leading crypto funds, such as Paradigm, a16z, and Hivemind have managed to raise billions of dollars in the past year. The average vintage size of crypto funds reached roughly $300 million in 2021, double the figure for 2020.

In the fourth quarter, the median valuation of crypto and blockchain companies stood at $70 million, more than twice the $29 million valuation seen in other sectors. According to the report, this highlights the “founder-friendly environment and the intense competition among investors for allocation.” Abra, for example, raised $55 million in its Series C funding round in September, and according to Barhydt, the company is looking for more late-stage financing in 2022, a figure that he said will probably run into the hundreds of millions.

The Galaxy report also noted that the maturing crypto space might bring more companies in the ecosystem to the public markets. In 2021 alone, 43 crypto-native companies reached the $1 billion valuation mark, but the major crypto stocks are limited to the trading platform Coinbase and a few crypto miners. “Many of these still-private crypto unicorns will undoubtedly seek to tap public capital markets in the coming years,” the report concluded. “Investors seeking exposure to crypto through public equities will soon find a much more diversified set of options ranging from NFT and gaming firms to compliance and infrastructure plays.”