Meet the startups winning VC funding in the crypto ice age

It was a grim 2022 for crypto startups.

Money allocated by venture capital firms plummeted 40% last year, dropping to $21.5 billion from a record $36.3 billion in 2021. Much of the decline can be attributed to falling crypto asset prices that precipitated a series of bankruptcies and bank runs at firms like Celsius, BlockFi, Voyager Digital and FTX.

But there are some bright spots. Key areas are continuing to attract capital despite the downturn. For projects involved in scaling Ethereum, digital asset infrastructure, and even crypto insurance, the decline in venture investment has barely been felt.

At the top of venture capital shopping lists is crypto infrastructure – specifically, firms targeting the growing demand for institutional participation in the crypto market.

“We continue to be heavily interested in both DeFi and regulated infrastructure,” said Chia Jeng Yang, investor at Pantera Capital, a crypto hedge fund with $3.8 billion in assets under management. Pantera has several venture funds as well. “The opportunity for regulated infrastructure has expanded post-FTX, as many have realised the problems for non-regulated centralised entities.”

In November, digital asset market maker Keyrock announced a $72 million raise with participation from Ripple and Middlegame Ventures. Keyrock specialises in crypto market making services, as well as trade execution for institutions, brokerages, and qualified individuals.

Kevin De Patoul, CEO and co-founder of Keyrock, said the firm’s existing relationships with investors allowed it to buck the trend and successfully raise in the current hostile environment. “We have been working closely with our investors for many years, which means we have a strong relationship with each and every one of them,” he said.

“Our vision hasn’t changed, and our investors understand the cycles of this industry very well.”

‘Real projects, solving real problems are still able to attract investors’

The next month, Amber Group, an institutional digital asset management company, raised $300 million in a Series C led by Fenbushi Capital. Amber Group’s raise was the largest of the quarter.

Even smaller, less established infrastructure projects have managed to fill their coffers. Evertas, which describes itself as the world’s first crypto insurance company, announced a $14 million Series A round in early December.

“Real projects, solving real problems are still able to attract investors,” Evertas CEO Jared Gdanski told DL News. Gdanski said that calamitous events of the previous year, like the Celsius and Voyager Digital bankruptcies that cost investors millions, have actually helped his company meet its funding goals. “It was our easiest funding round to date,” he said.

Another significant area of venture capital interest is in projects using Zero-Knowledge Proofs – a cryptographic method that lets one party prove to another that something is true, without revealing any information apart from the fact that the statement in question is true.

While the potential of ZK proof technology is vast, currently its primary use is in scaling Ethereum. ZK proofs can be used to create a “ZK rollup” – a network that sits on top of Ethereum and offers huge increases in throughput while reducing transaction fees to cents on the dollar.

In November, Matter Labs, the company behind the ZK Proof-based network zkSync, announced a $200 million Series C round co-led by crypto investing heavyweights Blockchain Capital and Dragonfly.

“We were oversubscribed and unfortunately, couldn’t accommodate quite a few investors who were interested in joining our cap table,” Matter Labs’ CFO Ankur Rakshit told DL News.

‘A lot of FTX, Celsius and BlockFi investors were traditional VCs and they are feeling the pain and reputation risk’

When asked about why there had been so much venture capital interested in Matter Labs compared to other crypto startups, Rakshit noted that many of the company’s investors believe that zkSync technology is the most compelling Layer 2 solution to bring about mass adoption of crypto. “That belief was reflected in our raise.”

And Matter Labs isn’t the only company exploring zero-knowledge proofs to raise significant sums during the crypto winter. Aztec Network, a privacy-focused Ethereum ZK rollup, announced a $100 million Series B led by Andreessen Horowitz in December.

These recent raises show that there are still hot pockets of funding in areas like ZK technology and infrastructure. But the damage done by all the high-profile bankruptcies and bank runs in 2022 is far from healed.

“A lot of FTX, Celsius and BlockFi investors were traditional VCs and they are feeling the pain and reputation risk,” crypto angel investor Santiago R Santos told DL News.

And after losing their shirts betting on crypto, many of these “traditional” venture firms will likely be hesitant to try again so soon.

In December, the crypto industry recorded its lowest month of funding since 2020, with a reported $720.5 million in announced raises. This represents a significant decline compared to the same period the previous year, where the figure stood at $4.26 billion.

But the real impact of the FTX collapse on the crypto funding landscape has yet to fully materialise, said Santos.

Santos explained that it is common for companies to secure funding months in advance, which implies that the majority of the recently announced funding rounds were negotiated prior to the FTX collapse.

“It’s tough if you’re a project that raised at a $100 million valuation with 12 months of runway – many of these will have to face the reality that the next round, if it comes, will be at a lower valuation,” said Santos. “Some may not even be able to raise.”