Cryptocurrency exits remain low but investors remain unfazed

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The global venture capital market is experiencing a long period of limited exits. Startups are staying private longer, mergers and acquisitions remain quiet partly due to strict regulatory oversight, and the IPO market remains frozen. This means that many historical venture deals are slowly rotting away, in terms of internal rate of return.

The cryptocurrency market is no different, but some investors in this space are unfazed. New data in PitchBook's Q4 2023 Cryptocurrency Report shows that if the larger startup market is experiencing an exit drought, emerging crypto companies are likely to be even drier.

The lack of cryptocurrency startup exit volume – and value – can be linked to a related decline in overall venture investment in web3 startups; When liquidity is tight, the prospects for investment returns can become bleak. The good news for cryptocurrency founders is that despite the slim chances of selling their companies, venture capital investment was up 2.5% in the fourth quarter of 2023 compared to the third quarter, although deal volume fell by a similar percentage.

The fourth quarter was consistent with “low-level activity seen throughout 2023,” the report said. With only 12 exits during this time frame, this was the lowest number since Q4 2020.

The increase in transaction value despite limited exits implies a level of optimism among cryptocurrency investors that we might find surprising. But with crypto prices rising, major regulatory hurdles cleared, and other positive signs casting a bit of a warm light on web3 overall, more investment doesn't shock us.

However, the exit question remains, namely the total recent investments. Looking at annual data, crypto-focused and venture capital exits were worth $1.2 billion in 2012, which is just $500 million between 2019 and 2020. In 2022 and 2023, the numbers reached $1.4 billion and $1 billion. 2021 was an exceptional year, with crypto exits reaching $88 billion.

Why the huge discrepancy? It's not hard to parse: exits were popular in 2021 for many categories of startups, and Coinbase went public that year. The company was valued at more than $65 billion at the direct listing reference price, and more than that in early trading. This explains why 2021 stands out sharply compared to similar years, even if Coinbase's value is a more modest $37 billion today.

Equity versus token economy

In terms of equity, then, there it is he have One project-backed cryptocurrency exit has been notable in recent years (Coinbase), while all other web3 exits measured traditionally are at most a rounding error.

However, in cryptocurrencies, exits are largely split between mergers, acquisitions and IPOs on the one hand, and token launches on the other, said Vance Spencer, co-founder of Framework Ventures. “The first two methods are not the primary ways through which VC firms obtain liquidity in cryptocurrencies, so the relatively low exit figure of $1 billion is likely a bit misleading.”

“The vast majority of liquidity events in cryptocurrencies will come from cryptocurrencies, and that will likely be more difficult to measure holistically,” Spencer said. “I don't see a decline in these metrics as evidence that VC firms are having a harder time generating liquidity.”

“Year-over-year, we have seen an increasing evolution from the 'traditional venture capital exit model' to a token-based liquidity event approach where decentralization, public building and community adoption are critical to a successful return for all stakeholders,” said Brian Mahoney, Vice President of Business Development. In the project-focused studio Thesis.

But some investors believe this is an indication of how the market is changing and how important it is to hold on to investments – or HODLs – with conviction, even as they navigate exit scarcity.

not worried

While it is important to generate returns for investors from more mature investments, some companies are doubling down on their support for early-stage projects.

For example, one of Ryze Labs' early investments in Solana remains strong, thanks to its performance last year, said Thomas Tang, the company's vice president of investment. “Our experience during bear markets has shown us that we need to rally by remaining consistent in supporting innovative ideas that have the potential to redefine the future of blockchain technology,” Tang said.

Investors also realize that such exits could take years, said Frameworks' Spencer. “Smart VC firms bought in 2022 and 2023, and now the most efficient class of investors are waiting for all-time highs before they even consider exit opportunities,” he said. “We are known for being more long-term oriented, especially with respect to venture investments, and we believe this mindset has positioned us well for this upcoming cycle.”

With the venture landscape focused on 2024 and the cryptocurrency market capitalization continuing to grow, there remains cautious optimism in the space and an appetite to hold onto seemingly aggressive bets.