A new report from multinational professional services firm PricewaterhouseCoopers (PwC) released on Monday, April 6th, found that the rise of Bitcoin throughout Q2 and Q3 of 2019 didn’t prevent funding from dropping off; therefore, the report said that the crypto industry should be prepared that funding deals will likely be affected even more negatively throughout 2020 as the economic fallout from the coronavirus crisis continues.
“The global headwinds caused by the coronavirus and other related events are having an impact on many industries globally, including the crypto industry,” the report said. “We believe that the crypto industry is not immune to these conditions and the number and value of fundraising and M&A deals may be impacted as a consequence in 2020.”
Funding is increasingly going to later-stage rounds, infrastructure projects, and firms in Asia
Indeed, the total amount of funding fell 40 percent from $3.72 billion to $2.24 billion from 2018 to 2019, and the number of deals fell 18 percent from 662 to 540. Equity fundraising fell by 18 percent.
The report also found several noteworthy trends in the movement of capital that is still flowing into the space.
For one thing, an 8 percent increase of funding into post-seed rounds in terms of overall fundraising deals seems to indicate that the industry is maturing: more companies are in the later stages of their growth. Arslanian also said that this re-allocation of capital into later-stage funding rounds is “something we should expect to see as well as the industry matures.”
According to Arslanian, this should bring wins for VCs who are funding the industry: “there will be enough deal flow, and there will be enough exits as well to allow many of the crypto VCs to be successful,” he said.
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There was also a shift in the type of companies receiving investment. In 2018, most VC funding went to blockchain infrastructure projects, while in 2019, crypto compliance and regulatory companies were more popular.
Many VCs are also moving away from companies in Europe and looking more toward the Asian market. “We’ve definitely seen a number of the large players from the U.S. and from Europe really look at Asia,” said Henri Arslanian, PwC’s Global Crypto Lead, in an interview with CoinDesk. “Not only from an expansion perspective but also as a point of fundraising from strategic investors.”
Arslanian said that in particular, companies in search of new institutional clients have their sights set on Hong Kong, while firms keen on expanding their retail client base are heading to Singapore, which recently introduced a new regulatory framework,
”Unicorns are becoming more like octopuses”
The report also showed a major decline in the number of merger and acquisition (M&A) deals, as well as the flow of funding for these deals in the industry.
Indeed, the total number of the report found that acquirers native to the cryptocurrency industry were responsible for 56 percent of the deal flow in 2019, up from 42 percent the prior year. However, the total number of M&A deals that were identified in the report fell from 189 in 2018 to 114 in 2019 (a 39 percent decline); over the same time period, the value of these M&A deals fell 76 percent, from $1.9 billion to $451 million.
However, the report also found that in spite of this decline, cryptocurrency firms persisted in buying one another throughout 2019: the M&A deals that did happen throughout the year seem to be mostly instances of larger companies absorbing smaller companies that provided supporting services.
Arslanian said that this trend is likely to continue: “I think we should expect some of the big players to get bigger, but not by buying direct competitors,” Arslanian explained. “Not by becoming vertically bigger, but by becoming horizontally bigger. Unicorns are becoming more like octopuses where they have their hands in various areas of the crypto ecosystem.”