Over $486M in funding flows into VC-backed projects in August

Inflows of new VC funding into crypto projects continued in August, with several deals above $50M. The funding supports projects with relatively small social media footprints. 

VC funding for new on-chain and crypto projects has not dried up. In August, several platforms closed deals for a total of $486M, with several investments above $50M. The August trend extends the general recovery of funding in Q2, 2024. 

A selection of the top 14 projects produces the bulk of August’s investment, but the funding has a long tail of smaller startups. The August level of activity, while robust, is still 18% below the monthly average. Not all backing is in fiat, as some funds rely on their ETH reserves, or have a USDT treasury. 

The current focus of VC investors is on the Ethereum ecosystem, as well as DEXs, developer tools and the AI narrative. Even NFTs are back as a potential growth model. Most of the funding comes from insiders, including Binance Labs, Animoca Brands, and OKX Ventures. The presence of large-scale ETH treasuries allow insiders to back new projects, even with on-chain inflows and liquidity support. 

The revival of VC backing for crypto projects in 2024 follows the global trend in capital allocation. At the top of global funding, venture software is still the biggest attractor of funding. On-chain AI projects can benefit from the trend, as top allocations are turning toward Generative AI, model-makers, and GenAI applications. 

On-chain projects rely on a group of dedicated funds

In August, deals of more than $10M in support also came from DragonFly Capital, Sequoia Capital, Coinbase Ventures, Andreessen Horowitz, Pantera Capital, Blockchain Capital, Polychain Capital, and others. Some groups of VC backers have a strong overlap in fostering the new crop of projects. Coinbase Ventures specifically focuses on its Base ecosystem, funding products like Iskra to launch their versions on the tokenless chain.

The entire list of VC-backed projects is even longer, generating smaller seed rounds for niche products. 

VC funding has remained surprisingly resilient, with relatively small fluctuations even during the bear market. In its heyday, crypto projects received upward of $30B in 2021 and a similar amount in 2022. The last few years of VC funding produced most of the L2 chains and big platforms, with some support for smaller product-oriented startups.

VC funding is part of the fundraising mix for startups, whereas other avenues of funding are now harder to achieve. The ICO model still exists, but fundraising is slower. Airdrops are one way for token distribution, as retail buyers are no longer interested in early-stage tokens. Previously, ICO buyers deposited valuable ETH and BTC into ICO treasuries, meaning some of the previous cycle startups could return as VC backers.

VC funding puts new narratives in focus

The presence of VC funding also exposes the dominant narratives during the current stage of the crypto market. The first stage of funding before 2016 focused most on infrastructure projects, centralized exchanges and L1 networks. 

This stage built the biggest markets, as well as the first influential L1 chains like Ethereum. Solana was also a product of large-scale VC backing, producing the current ecosystem of decentralized trading and meme tokens.

VC backers like Blockchain Capital also have on-chain traces of their supported projects. For some of the backers, holding the token, voting, and providing liquidity is part of the support system. Some of the early VC allocations may also be locked, forcing the entities to hold the tokens for months or even years. 

The middle period, between 2016 and 2020, also focused on platforms and exchanges, but for the first time, funds were set aside for DeFi projects. 

In the 2020-2024 investment cycle, DeFi took up more than 10% of investments. Another 6.5% went toward Web3 gaming. L1 building has almost fallen out of favor, with no interest in supporting new chain creation. Instead, some of the funds are now testing L2 projects on Bitcoin. 

Most of the funding still goes toward infrastructure. Several new niches are appearing, especially the much-touted zero-knowledge rollups. 

Narrative projects also rotate for the attention of investors. The Web3 space was among the hot destinations for funding but lost backing in 2023. However, even without the Web3 narrative, niche projects drew in about $1B in funding, offering platforms, SocialFi, advertising and other forms of distributed economic activity.

Cryptopolitan reporting by Hristina Vasileva