Investors Approach With Cautionary Hunger
20 APR 2023
As a summary to the latest Q1 2023 quarterly crypto report by Pitchbook, it is noted that crypto companies raised $2.6B across 353 deals in global venture capital in the quarter. This would represent a 78% decrease in Q1 2022 and the lowest amount invested in the sector since Q4 of 2020. On the bright side, the report goes on to say that Web3 and DeFi are still leading funding activity in the venture capital space, even as the quarter represented a 12.2% decline in number of deals for the period in question.
In even better news, venture capital firms’ dry powder continues to grow since 2017, even as cash piles fell across other private investment strategies, according to a separate report by Pitchbook. Global venture funds were sitting on a whopping $585.5B of capital raised but not deployed as of Q3 2022, noting that venture capital is the only private investment strategy in which dry powder is on track to rise from the levels seen in 2021.
If there is one thing we can infer from the above 2 paragraphs, we could logically conclude that investors in early-stage companies are still hungry to allocate their idle cash into projects, but taking a more cautious approach, obviously due to current market conditions. Having spoken to numerous venture capital firms and projects here at Omni3, we believe this is true.
From our experience, investors are telling us that gone were the days they would write a cheque to a project as early as ideation stage. Investors now mostly want to see some ability to generate revenues by the projects before diving deeper in their due diligence process. At the very least, its what we are told, the project has to have some form of traction, such as number of users or DAUs, beta launches, number of community members, LOIs or MOUs signed, with the best stamp of approval being already having committed investors in the same funding round.
The projects we have spoken to second what we say coming from investors. Even when their ideas are very captivating and investors could see the potential of getting a return on their investment, investors are still holding out for that concrete evidence, or a qualitative signal that the project could work. One reason why this could be the case is because VC funds are probably facing heightened scrutiny of their due diligence process from their limited partners (LP). We have heard of cases where limited partners are calling up VC firms demanding for explanations for investing in a project that went south.
It is quite a precarious time for general partners (GP) of VC funds. GPs are pressured by their LPs to deploy their funds with utmost caution while also feeling the squeeze by them to not leave their funds around idling (if not, why are they investing in your fund when they can better put their money to work elsewhere). Heading closer into the second half of 2023, we expect that though there could possibly be further fallout from the crypto markets, investors should be more adapt to current market conditions and become more willing to deploy capital, after getting a better sense of what works and what does not.
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