Crypto startups boost valuations as investments pick up

Cryptocurrency Startups are putting valuations in the fast lane with an aggressive form of fundraising that reflects the digital asset sector’s recovery and venture funds’ desire to put money to work.

This approach involves open-ended fundraising that keeps cash coming in and rapidly raises valuations, as opposed to the traditional venture capital model of discrete rounds spaced out over a number of years. An open-ended funding round rewards earlier investors as they benefit from a rapid increase in a startup’s value, thanks to commitments from later backers.

“When a deal gets a lot of oversubscription, it’s becoming more and more common to see this type of structure,” said Michael Heinrich, co-founder of 0G Labs, a blockchain startup focused on the buzzy topic of decentralized artificial intelligence. “Investors are still willing to pay higher prices because this is seen as a sign of success in the market, even if in rapid succession.”

Last year, crypto firms struggled to access capital after a deep bear market in 2022 sparked an industry-wide crisis. But companies and digital asset prices have seen a recovery, highlighted by the doubling of Bitcoin’s value over the past 12 months. While the April token sell-off highlighted the inherent volatility of the cryptocurrency sector, the overall environment is healthier than in the recent past.

0G laboratories

0G Labs raised $35 million in March – a sizable sum for a pre-seed stage – through ongoing fundraising. Heinrich said the company submitted investment offers that collectively exceeded the planned raise by 20 times.

Depending on the investor, 0G’s valuation ranged from less than $40 million to hundreds of millions of dollars, according to investment documents seen by Bloomberg News. People familiar with the matter also confirmed the significance, although they asked not to be identified because the information is private. Hack VC, OKX Ventures, GSR and Animoca Brands participated in the round.

The average cryptocurrency Series A round reached $26 million in the first quarter, the highest level since the end of the last cryptocurrency bull market in early 2022, data from The Block Research shows. Overall investments in the sector rose to $2.5 billion from January to March.

Mezo, a platform based on the Bitcoin network, recently used the rolling structure to raise capital, people familiar with the matter said, asking not to be identified because the information is private. Backers have committed to valuations ranging from less than $50 million up to nine figures, the sources said.

“Capital formation in the cryptocurrency space is constantly evolving — governance, liquidity and other important concepts we understand in traditional startups are often a little different,” said Matt Luongo, CEO of Thesis, which helped develop of Mezo.

Crypto startups IO Research and Zeus Network have also reportedly used rolling, open-ended fundraising. Neither responded to a request for comment.

Uncommon structures

Such financing structures are rare outside the digital assets sector, said Amy Wu, partner at Menlo Ventures. The situation reflects a supply-demand imbalance, partly because cryptocurrency funds have a large amount of unspent money raised in 2021 and 2022, according to Ray Hindi, head of cryptocurrency investment firm L1 Digital.

“Disciplined investors won’t do that,” Hindi said.

The concept of fluid valuations may certainly perplex veteran venture capitalists. Some rising Web3 valuations are “riding the recent bull run in cryptocurrencies; it is difficult to see the underlying fundamentals driving the recovery,” said Rajive Keshup, partner at Cathay Innovation.

Others argue that the traditional approach to venture investing isn’t necessarily ideal for digital asset companies.

Priced rounds with a single, large, lead investor, while typical in the broader venture capital space, are poorly suited to crypto startups that generally prefer “decentralized cap tables” to help with governance, said Ed Roman, managing partner at Hack VC.

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