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Despite Bitcoin up around 160%, 2023 has been a challenging year for Venture Capital in general and for Web3 in particular. Going into 2024, the global economic outlook remains uncertain. Geopolitical uncertainty remains. The Antiglobalist climate is still very much alive. Many leading indicators point to weaker US growth (but not a sharp recession). At the same time, markets already appear to have priced in a soft landing, and 2024 is forecasted as a year of single-digit earning growth and single-digit returns on the median S&P 500 stock¹. The answer to many of the challenges of today, however, is a continued focus on innovation - for corporates, governments, and investors - and we believe that there are tremendous mid-term opportunities ahead for blockchain as “a catalyst technology” to drive growth - and positive social impact - for decades to come.

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Global (European) Venture Deals² are just in for the calendar year 2023. The total funds raised are around USD 344bn (USD 63bn), down 35% (46%) from 2022 and down 54% (48%) from 2021’s record highs. The total number of deals has equally dropped, compared to the previous year. Equally, fundraising has been challenging for the Venture Capital Industry, with total capital raised of USD 161bn (USD 17bn), down 48% (43%) from 2022 and down 58% (51%) from 2021 record highs. The fund count is down 49% (52%) compared to the previous year. Exit activity, which was low in 2022, has remained subdued. All major regions (NA, Europe, Asia, RoW) have seen similar dynamics in terms of deal value and deal count, capital raised and fund count, and exits. And finally, when looking at deal values and valuations, on a European level median deal values have remained relatively stable, while valuations have also remained broadly in line with prior years, except for the later stage venture growth segment, which experienced a drop of around 24%.

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In terms of the technology segments that have experienced the most growth in 2023³, Generative AI, Electric Mobility, and EV battery were the top-3, followed by Circular Economy and Cybersecurity. More generally, “Physical Tech” is en vogue: whereas investments into manufacturing startups lagged behind E-Commerce five years ago, these investments now make up more than 3x E-Commerce. As such, it seems that this next round of tech is coming of age, with entrepreneurial innovation increasingly directed at tackling the world’s biggest problems, which often require hardware solutions: Novel Energy, Computing, Biotech/Health, and Spacetec. 

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This tallies well with our investment theme at CV VC. The history of computing has seen various paradigms, each introducing something qualitatively different. Blockchains represent the latest paradigm shift, allowing developers to write programs that make strong commitments about their future behavior, running without interference from any central authority. Thus, we consider blockchains as computing with special properties rather than simply being decentralized ledgers. 

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One of the powerful aspects of blockchains lies in their ability to create trust in applications. While blockchains may have criticisms, such as being slow and expensive to run, they possess unique features that traditional computers lack (e.g., programs can make commitments about their own behavior in the future or programs that run without interference from anyone). They invert the power relationship between software and hardware, giving software control over the hardware in a decentralized network. Therefore, we recognize blockchains as powerful computers that can transform various industries by providing new levels of trust and decentralization. 

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The investment theme at CV VC revolves around three key areas:

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1. Target applications that are developed on blockchains

2. Seeking out tech companies that utilize blockchain technology as a catalyst for technological and social megatrends

3. Considering opportunities in service providers catering to the blockchain industry.

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1. Applications without platform risk 

In the Web 2.0 era, startups that relied on other companies’ APIs faced significant risk because the centralized company controlling those APIs could change the rules at any time. This led to various startups suffering and, in some cases, failing altogether when the central company altered their terms to the startups’ detriment. 

However, the advent of blockchain technology and decentralized platforms, like Ethereum, has mitigated platform risk. With blockchain-based smart contracts, developers can create programs with APIs that are immutable and committed to not changing. This neutralizes the risk associated with centralized control, allowing startups to build on top of these platforms without the fear of smart contract rules being changed and, therefore, disrupting their businesses.

Applications built on blockchains can include financial primitives like decentralized exchanges, lending platforms, stablecoins, and various DeFi applications. However, the potential of blockchains extends beyond finance. For instance, they enable the creation of decentralized social networks that are not controlled by monopolistic tech giants, offering users more control over their identities, followers, and content curation. 

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2. Catalyst Technology 

At CV VC, we believe that blockchain is the catalyst for tech and social megatrends reshaping the future. Blockchains come with many attributes, such as data immutability, decentralization, transparency & provenance, consensus mechanisms, security, privacy or censorship resistance. 

Therefore, blockchain serves as a catalyst for tech megatrends such as Artificial Intelligence, Internet of Things, Cleantech, or Personalized Health & Longevity. 

Furthermore, the use of blockchain technology has the potential to raise trust and legitimacy concerning the functioning of public, economic, and social institutions, most of which are suffering an unprecedented erosion of trust. Therefore, we believe that blockchain is also a catalyst for social megatrends such as ESG, data ownership, governance, and social gaps. 

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3. Service Providers

To help grow this ecosystem, we invest in service providers who are building the infrastructure for the digital asset world, such as custody services, market makers, and KYC providers. 

Considering our investment themes, we envision blockchain technology as a transformative force with the potential to revolutionize various industries. In the near future, we anticipate the highest levels of adoption in sectors such as Banking and Finance, Media and Entertainment, Energy, Supply Chain Management, Cybersecurity, Telecommunication, and Health/ Science. These industries are likely to be at the forefront of blockchain integration, presenting significant opportunities for growth and innovation.

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Looking at the year ahead, we believe that for our broader sector, 2024 will bring: 

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Crypto: BTC medium-long-term strength despite last year’s run-up. Bitcoin tends to lead recoveries, but we remain cautious on DeFi short to medium term given regulatory headwinds and continued lack of mainstream UI. NFT activity is lackluster at best and may require new and differentiated inspiring use cases to re-ignite. ETH has completed some of the most impressive tech upgrades of all time in 2022 and 2023. However, the question remains whether it can outperform either the digital money/gold (BTC) or its up-and coming higher beta peers. Having said that, with SOL up 6x and BTC 160%, we have been overdue for some mean reversion for ETH. 

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Builders Build: Despite the past crypto recession, developer activity has held up well. Smart contracts deployed, active addresses, and mobile wallet activity have seen continued momentum, and as for our focus areas, we have seen continued innovation at the application layer. 

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AI & Crypto/Blockchain: To us, this one is very straightforward in a number of ways. Firstly, in a world of generative AI, you will require a technology (blockchain) to provide reliable, global, and mathematically guaranteed provenance. And we will need machine money (crypto), whether that is Bitcoin or something else. And then you will need service providers for such a functional digital asset ecosystem. 

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Non-Financial Application: There are plenty more, but three areas with blockbuster potential in terms of innovation are worth mentioning here: In Social Media, the incumbent players dominate the market while a marginal number of creators make sufficient money to make content creation worthwhile on a broader basis, providing an opportunity for breakout Decentralised Social (“DeSoc”) apps as a new way to create an audience and new and more direct reward models. Physical Infrastructure Networks ought to challenge cloud infrastructure services over time and, even if they take just a small “de-platforming risk” share of the market, ought to become an area that disproportionately accelerates. Science (across sectors) as an industry has trust challenges, bureaucratic inefficiencies, and poor incentive schemes. Blockchain and Crypto are the tools to challenge and solve this whilst there is ample long-term megatrend potential in a lot of fields of science (such as personalized health/longevity, rare diseases, space tech, and energy) to drive deployment. 

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¹ JPMorgan “Eye on the Markets” Outlook 2024 

² All Data based on PitchBook 

³ Dealroom