Even amid widespread market anxiety, the industry continues to attract venture capital, attracting about $5 billion in the first quarter, twice as much as a year ago, according to data compiled by PitchBook Data Inc. But the increasingly high valuations of new startups, some less than a year old, have unnerved some potential backers.

Prominent investors including Sequoia Capital and SoftBank Group sounded the alarm in January as tech stocks and cryptocurrency prices slumped. blockchain Capital LLC, which has closed 130 deals since its founding in 2013, recently dropped a deal it was interested in after the startup’s asking price was five times the company’s “walk away” figure.

“There were a number of funding events compared to a year ago where we were just shocked at the amount they were able to raise,” said Spencer Bogart, general partner at Blockchain, which has Coinbase, Uniswap and Kraken in its portfolio. “We were coming through and letting the founders know we were interested, but the valuation was more than what we were comfortable with.”

John Robert Reed, partner at Multicoin Capital, said a slowdown in trading activity is the norm heading into the summer, though he acknowledged that market dynamics have changed. Multicoin has completed 36 deals since 2017, and its portfolio includes cryptocurrency marketplace operator Bakkt and analytics firm Dune Analytics.

“The market is swinging from founder’s market to neutral,” Reid said.” The top operators are still getting top valuations, but investors are becoming more disciplined and not trying to jet as much as they used to.”

The Pendulum Swings

Pantera Capital, which has backed 90 blockchain companies since 2013, is also seeing a shift taking place.

“I’ve started to see the pendulum swinging in favor of investors, and expect a dip in the early stages later this year,” said Paul Veradittakit, a partner at Pantera Capital. As for his own firm’s strategy, he said that for companies “where we don’t see an obvious large total addressable market, we’ll probably pass because of price.”

Some venture capitalists are more optimistic about the future, noting activity in the past few weeks alone. Blockchain developer Near Protocol raised $350 million, more than double the funding it received in January. The non-forgeable token, or NFT, project Bored Ape Yacht Club, raised $450 million in a seed round, pushing its valuation to $4 billion. And the project is less than a year old.

Shan Aggarwal, head of corporate development and venture capital at cryptocurrency exchange Coinbase, said the pace of investment in cryptocurrencies “remains strong” and that the company’s investment decisions are market-independent.

“Some of the most successful projects today were funded in the bear market of 2018 and 2019, and we will continue to invest in quality founders and projects moving forward regardless of cryptocurrency market conditions,” he said.

In fact, the recent volatility in cryptocurrencies has not deterred investment as it has in previous cycles, which venture capitalists say indicates the market is maturing. Coinbase Ventures is one of the most active investors in the sector, according to data compiled by PitchBook. The cryptocurrency exchange operator’s unit said in January that it closed nearly 150 deals in 2021 alone, representing 90 percent of the volume since its inception four years ago.

“In some other areas of tech financing, funding is starting to dry up – some IPOs and term sheets are dwindling. Some companies are struggling to get backers. But in the cryptocurrency space, we haven’t seen that,” Noelle Acheson, head of market insights at Genesis Global, said in an April 12 interview.” In fact, so far this month there have been notable $100 million-plus fund raises every day, so there’s a lot of money waiting to be deployed.

Read More