Back in August, I authored a brief post on VC spending. I was curious to see how and where VCs spent their money. As VC firms get the first look at new projects, keeping tabs on where VCs are putting money can tell us what the future of the crypto market looks like. As market conditions have only recently started to improve, and excitement still seems far off, VC funding is still compressed and much lower than in preceding years. At the same time last year, crypto markets had raised around $20B – four times the amount in 2023. If market conditions continue to improve, I expect this number to rise dramatically as fair-weather VCs return. But for now, VC funding has slowed to a crawl.

As of August, infra projects raised almost $975M from VCs. And now, as of October, infra projects have raised $1.07B. The next largest sector, Gaming, brought in a little over half of infra projects at $524M, and DeFi projects took up third place at $394M raised. I attribute the popularity of infra projects to bandwagon VCs who threw money at staking-related projects when ETH transitioned to PoS and liquid staking derivatives were all the rage. The app layer for crypto didn’t seem to hold much interest for VCs at the time (and not currently either, apparently).

But, a more interesting picture emerges when we dive deeper into the data. When we compare the sheer amount of projects, we see that DeFi projects have been the most common. YTD, there have been 98 DeFi projects, 92 infra projects, and 55 projects classified as Gaming. So even though there are roughly equal amounts of DeFi and infra projects, infra projects have commanded a high premium, been oversubscribed by eager VCs, or VCs are discounting and uninterested in DeFi.

VCs skewing towards infra projects can also be seen in the average amount raised. DeFi projects, on average, raised around $4M, while infra, on average, raised $11.5M for each project. Gaming projects meanwhile raised an average of $9.37M per project. The only project category to raise less than DeFi projects was data projects – of which there was only one.

The Take Away

I find this data extremely interesting as we get some insight into VCs and the future of the market. VCs see projects first, so what they fund can determine liquid markets later. The data seems to suggest a market with lots of infra projects at a high valuation, lots of DeFi with a relatively low valuation, with Gaming landing somewhere in the middle. As such, I would be highly cautious of infra projects in the next 6-12 months. High raise amounts suggest higher valuations. High valuations suggest inflated token prices if and when they come to market. High token prices mean little ‘meat’ on the bone for buyers later on.

Meanwhile, and I can’t believe I am writing this as I have become skeptical of DeFi, but based on VC raises, DeFi may present a better R/R. There are a commensurate amount of DeFi projects to infra, but they have not been able to raise the same amount and, on average, raise less money. Lower raises suggest lower valuations and lower valuations suggest more upside if and when they come to market with a token. New DeFi projects may be the place if people are looking for deals.

Getting accurate data on VC funding is challenging. As such, take these numbers with a grain of salt. VC funding is pretty secretive; this is not an exhaustive list of what is happening. Secondary sales of locked tokens, backroom agreements, and more can affect the PA when these tokens come to market. Sometimes, public raises don’t reflect the most recent sale to VCs. Regardless, this data is a fascinating glimpse into the mindset of VCs and the market we will see in the next few months – one of lots of infra and potentially poorly funded DeFi projects.