The global venture capital market is enduring a long period of limited exits. Startups are staying private longer, M&A is quiet in part due to sharpened regulatory oversight, and the IPO market remains frozen. This means many historical venture deals are slowly rotting on the vine, in IRR terms.
The crypto market is no different, but some investors in the space are unfazed. New data from PitchBook’s Q4 2023 Crypto Report makes it clear that if the larger startup market is suffering from an exit drought, crypto startups are possibly even more parched.
The lack of crypto startup exit volume — and value — can be linked to a related decline in total venture investment into upstart web3 companies; when liquidity is light, investment return prospects can darken. The good news for crypto founders is that despite slim chances at selling their company, venture capital investment ticked 2.5% higher in Q4 2023 compared to the third quarter, though deal volume fell a similar percentage.
The fourth quarter was consistent with the “low-level activity seen throughout 2023,” the report stated. And with only 12 exits during that time frame, it was the lowest number since Q4 2020.
More deal value despite limited exits does imply a level of optimism among crypto investors that we might consider to be surprising. But with crypto prices rising, key regulatory hurdles cleared, and other positive signals casting a bit of warm light on web3 more generally, more investment doesn’t shock us.
The exit question, however, remains, recent investment totals be damned. Looking at yearly data, crypto-focused, venture capital–generated exits worth $1.2 billion in 2012, just $500 million between 2019 and 2020. In 2022 and 2023, the numbers came to $1.4 billion and $1 billion. The outlier was 2021, with $88 billion worth of crypto exit value.
Why the massive discrepancy? It’s not hard to parse: Exits were hot in 2021 for many startup categories, and Coinbase went public that year. The company was worth more than $65 billion at its direct-listing reference price, and even more in early trading. That explains why 2021 stands out so sharply compared to its peer years, even if Coinbase is worth a more modest $37 billion today.
Equity vs. tokenomics
In equity terms, then, there has been a single venture-backed crypto exit of note in recent years (Coinbase), while all other web3 exits measured in a traditional manner are a rounding error at most.
However, in crypto, exits are largely bifurcated between M&A and IPOs on the one hand, and token launches on the other, said Vance Spencer, co-founder of Framework Ventures. “The first two are not the primary ways in which VCs get liquidity in crypto, and so the relatively low, 1-billion-dollar exit number is likely a bit misleading.”
“The vast majority of liquidity events in crypto VC will come from tokens, and that’s likely much harder to gauge holistically,” Spencer said. “I wouldn’t see a decline in these metrics as a proof point that VCs are having more difficulty achieving liquidity.”
“Year over year, we have witnessed an increasing evolution from the ‘traditional VC exit model’ to more of a token-driven liquidity event approach where decentralization, building in public, and community adoption are paramount to driving a successful return for all stakeholders,” said Brian Mahoney, VP of business development at venture-focused studio Thesis.
But some investors believe this is indicative of how the market is changing and how important it is to hold — or HODL — investments with conviction, even as they are navigating the exit dearth.
Not worried
While it’s important for returns to be delivered to investors from the more mature investments, some firms are doubling down on their support of early-stage projects.
For example, one of Ryze Labs’ early investments in Solana is holding strong, thanks to its performance in the past year, said Thomas Tang, the firm’s VP of investment. “Our experience during the bear markets showed us that we need to rise above by being steadfast in supporting innovative ideas that have the potential to redefine the future of blockchain tech,” Tang said.
Investors also recognize that these exits could take years, said Frameworks’ Spencer. “Smart VCs did their buying in 2022 and 2023, and now the more competent class of investors are waiting for new all-time highs before even thinking about exit opportunities,” he said. “We’re known for being more long-term oriented, especially with venture investments, and we believe that mindset has put us in a good position for this coming cycle.”
As the venture landscape focuses toward 2024 and the crypto market cap continues to grow, there’s still cautious optimism in the space and an appetite to hold on to seemingly strong bets.