Investment trends across all categories are cyclical. As discussed, funding deals are a lagging indicator of the sector's health. The 2017 boom was followed by a 200% rise in deal count, whereas the 2020 bull run saw a 150% rise. In 2022, 1923 deals have been raised as of this writing, the highest deal count in a calendar year.
A growing interest in a particular market category leads to more developers entering the space, thereby increasing the number of projects entering the field. By proxy, the number of deals in the infancy stage rises. We consider Pre-Seed, Seed & Pre-Series A, and Strategic deals to be the 'Infancy Stage' deals of the projects.
This trend can be observed in DeFi during 2019-2021 and NFTs/Gaming during 2020-2022. DeFi narrative picked up in 2020, and NFTs blasted off in 2021. One year prior to and post the narrative development are considered for this comparison. The number of deals in DeFi increased by more than 11x concerning Infancy Stage deals as the introduction of liquidity mining by Synthetix, the rise of Uniswap, the staggering growth of YFI, etc., helped build the DeFi composability narrative.
Similarly, the rise of Axie Infinity, Facebook joining the metaverse bandwagon, and the cheaper L1 alternatives for high-volume in-game transactions led to a boom in new NFTs/Gaming projects during 2020-2022. During this period, yearly deals in the infancy stage rose from 45 to 568.
In the last six quarters, the exponential growth of deal count for DeFi was replaced by NFTs/Gaming.
42% of the total deals in the sector recorded since 2017 are at the Seed level. 1,023 deals occurred in the Pre-Seed rounds. Early Stage deals have risen in the last two years, as 66% of Early Stage deals have occurred since 2021.
Aligning with every trend we've noticed until now, North America is the frontrunner for most deals concerning deal counts. North America contributes to 65% of the Later Stage deals, the highest % of the total deals of a specific deal type for any continent.
However, Asian projects lead in attracting angel investment rounds. 27 out of 82 Angel rounds are attributed to Asia. India-based Polygon raised an Angel round in May 2021, which was participated by Mark Cuban. Alan Howard, the co-founder of Brewan Howard Digital, has invested in two Hong Kong-based firms: Kikitrade, a trading platform, and OrBit Markets, a liquidity provider and a market maker.
Asia also leads in the number of strategic rounds, witnessing a massive rise of 775% in strategic deals in 2018. 35% of the total strategic rounds belong to Asia.
Analysis Based on Amount Raised
The digital asset sector has raised $73 billion in the last six years, with maximum capital injected in Mid Stage rounds.
$14.1 billion was raised in 207 Mid Stage rounds. Apart from FTX's swashbuckling $900 million Series B raise, Forte had a huge Mid Stage raise of $725 million led by Sea Capital and Kora Management.
88 Later Stage deals have been executed with an average amount of $149.2 million. Fireblocks, an asset management firm that offers custody and a settlement platform, raised $550 million in a Series E round. Notably, the Fundamental Categories contributed 68% of the Later Stage deals.
The recent wave of interest in NFTs/Gaming steered maximum Seed rounds to the category. $3.89 billion has been raised by projects classified under NFTs/Gaming in Seed rounds. The category has raised 781 Seed & Pre-Series A deals, and a staggering 724 out of those have been raised since the start of 2021.
CFS has raised the maximum amount in the Early Stage, Mid Stage, and Later Stage deals. Infrastructure projects have consistently raised across deal types in all the years, making it the category least affected by bear markets.
What May the Future Have For Us?
Another reason for the segregation of projects into various categories was to analyze projects of specific types and gauge the possible fate the future holds for projects and the categories it is classified under. Usually, an investor's capital injection in a company will correlate with the state of the category the company identifies with. The occurrence of variations in the investment trends for a category is often an indicator of a change in the category's development status or its perceived notion. The variation could result from a change in community sentiment, technological development, regulations, etc. Whatever the cause, the evolution of the investment trend can point us to what the market may have for us in the future. The Block Research maintains that the inferences made are purely speculatory.
The yearly trend of the average deal amount of a particular category can be a helpful metric for analyzing its development phase.
The average deal size of the blockchain sector is $15.2 million. Fundamental Categories record the average deal size above $15.1 million, courtesy of the growth in Mid and Later Stage deals since 2021.
The average deal size of Data/Analytics/Information between 2017-2019 was $2.3 million.However, data analytics platforms have caught the attention of venture firms over the last two years, as the average deal amount since 2021 is $13.9 million.
Crypto. com's Crypto Market Sizing report from January 2022 found that the number of cryptocurrency owners worldwide rose from roughly 106 million in January 2021 to 295 million in December 2021. As the number of users increases, there is an increasing need for efficient data scraping, visualization, analysis, and surveillance.
Most users are introduced to cryptocurrencies through centralized exchanges, as 93% of the trading volume in 2021 was facilitated by centralized exchanges. A rise in the user base increases the requirement for market surveillance and compliance, which may provide new opportunities to upcoming entrants in the DAI category. A notable deal in DAI was a $45 million raise by Solidus Labs. Solidus Labs is an automated market surveillance and risk monitoring platform for digital assets that offer solutions to exchanges, crypto-financial services, and government agencies.
Consequently, growing on-chain interaction can also be expected with the rise of L1s competing against Ethereum and Layer 2 solutions. On-chain compliance regulation and analytics firms also have gained more attention as the last twelve months have seen a few of the largest investment rounds in DAI, led by companies like Chainalysis, Nansen, and Dune Analytics.
Such developments create opportunities for new entrants in Data analytics and, consequently, for venture capitalists, as it offers a chance to make potentially lucrative investments in a potentially booming sector. We see Data/Analytics/Information category playing a more significant role in the further development of the digital asset sector.
Per our category segregation, growth in decentralized creator economy would point to growth in subcategories hailing from NFTs/Gaming and Web3.We consider monetization platforms of NFTs by artists and creators as "creator economy"- "NFTs/Gaming." Social networks would fall under the "Web3".
The Creator economy will be an exciting theme in the next few years. In the age of web2, creators are usually at the mercy of traditional media platforms. More often than not, the revenues and the royalties generated by content creators are siphoned away from them by centralized multinational social media conglomerates, which could disincentivize many interested people to consider a transition from a part-time hobby to a full-time passion.
In 2021, Spotify paid $7 billion to the creators, $636 on average.YouTube distributed $15 billion to creators, an average of $2.47 per channel. Meta, which infamously has decided to charge an egregious 47.5% fee to metaverse sales, paid a paltry $0.1 per user, per a report from a16z. In stark contrast, Ethereum distributed $3.9 billion, meaning creators have generated $174,000 per user. Of course, the amount is heavily influenced by the NFT Mania and the disparity in the number of users of Spotify, YouTube, and Meta, which are in millions as opposed to a mere 22,400 artists on Ethereum.
There is merit in noting that creators and marketplaces will have the freedom to choose the minting and royalty fee along with the revenue distribution model, no matter on which blockchain they establish their presence. The ability to monetize their own work through on-chain activity is one of the reasons that attracted creators to NFTs. This independence may also inspire creators to morph their business models from ad-focus content to more authenticity.
Moreover, centralized platforms also have allegedly discriminatedagainst marginalized communities. If the President of the United States can be banned from a social media platform, censoring an ideology, a group, or even a race from the platform is not a far-fetched scenario. Media platforms with more degree of decentralization in power concentration may be a boon to creators and consequently to the users as the era of Web3 dawns upon us.
Nevertheless,Web3 will also witness its challenges, and decentralized platforms may also surprise us with iconoclastic approaches, such as the enforcement of marketplace royalties on secondary sales. Royalties are technically not enforceable on-chain but are a social construct that can only be honored on the marketplace level. In the battle to increase market share and trading activity, marketplaces are reducing royalty fees and increasing trading functionalities. Sudoswap was the first to bypass creator fees altogether and was followed by X2Y2. Recently, Magic Eden, the largest decentralized NFT marketplace on Solana, decided to make the creator royalty fees optional for traders in response to depleting market share. However, Opensea has taken a different route to tackle the depleting market share by the launch of an on-chain royalty enforcement tool that is aimed at re-establishing royalty payments as the norm for creators- thereby potentially attracting various NFT market.
Venture capitalists' investment trends indicate a rising interest in the creator economy. DeSo, Nation, Farcaster, and Braintrust are decentralized alternatives for the social, professional, and talent acquisition networks, respectively, which have already raised upwards of $100 million each. Royal, All Saints Music Group, One Of, are a few of the active creator economy platforms building music NFTs that have raised upwards of $50 million in investments.
NFTs have been the most talked about crypto theme in recent times. NFT as a concept can offer multidimensional utility. A Yuga Labs metaverse NFT, be it a CryptoPunk, a Bored Ape, or a Doodle, can be considered a blue chip asset. A Starbucks digital stamp could be ventured as the blockchain gamification of brand immersion. On-chain tokenization of real-world assets, NFT-based financial applications, digitization of event tickets to mitigate ticketing issues, blockchain gaming, etc., are various potential use cases that NFTs currently exhibit.
Growth in user adoption is the harbinger of proliferation for these various sectors mentioned in this section. Consequently, the user base growth hinges upon on-chain infrastructure development, lowering transaction costs, and seamless asset interoperability.
Web3 and NFTs possess the capacity to unlock higher revenue potential and greater transparency for artists and creators. If the competitive multi-chain landscape improves user experience, investments into NFTs/Gaming and Web3 projects may see growth in the near future as more mainstream artists and content creators may embark upon their web3 journey.
Almost nonexistent Early, Mid, and Later Stage deals in the digital asset sector until 2020 were noticeable in 2021 and 2022. A rise in the deal count for these deal types increased the average deal size($) for the respective years. The average deal size in the blockchain sector increased from $6.3 million to $18.2 million from 2020 to 2021.
During the euphoric bull run of 2017, the amount raised skyrocketed in Q1 2018, mainly due to growth in Token Sales and Early Stage deals where the TON blockchain Token Sale of $1.7 billion was the primary catalyst, followed by a $650 million Early Stage raise by OneConnect, a company offering DLT-based digital infrastructure solutions for fintech companies.
The dynamics of the Maturation Phase funding rounds changed in the 2020 bull run. The number of deals in the Early Stage, Mid Stage, Later Stage, and Growth Equity raised significantly. During Q4 2021 alone, these deal types added a staggering $7.5 billion.