If time is a flat circle, one strategy for seeing into the future is to look to the past - what lessons can we learn?
We’ve analyzed all 780 publicly available crypto pre-seed & seed rounds from 2021 to determine the impact of the $2.6B invested. We built a database to understand and visualize industry-wide, sector-specific, and ecosystem-level trends across the board. We’re excited to publicly share it.
Below we consolidate our findings. We welcome your feedback and are open to corrections - if you wish to submit a correction, please email us at firstname.lastname@example.org.
2021 was an explosive year for the crypto industry and crypto VC returned with a vengeance after reaching a bottom in Q2 2020. $2.6B was invested in nearly 800 companies in the 2021 vintage. Let's dive in and see what has happened to the projects since.
1. After two years of development, crypto projects are still chugging along toward finding Product to Market Fit with roughly 5% reaching that level. The rest of the teams…
- 70% of projects have at least shipped a product to mainnet or mainnet equivalent.
- 20% of the vintage has shut down or stopped development.
- ⅓ have raised a follow-on round of venture funding
- Nearly 50% have launched a token
2. Investor interest didn’t necessarily correlate with successful companies. Investors were overweight the application layer but CeFi & Infra teams have demonstrated more traction and raised more follow on rounds.
- Nearly 90% of infrastructure projects shipped to mainnet
- Less than 75% of DeFi projects delivered a product to mainnet
- DeFi, Consumer/web3, and especially gaming have struggled to find PMF
- DeFi projects also struggled to raise follow-on rounds with less than 30% raising additional funds
- A lack of real games did not stop gaming projects from launching tokens with 70% of them choosing to launch a token
3. Ethereum remains king amongst layer-one ecosystems. BNB teams are most at risk.
- 75% of Solana teams delivered a product to mainet, at the low end was Polkadot at 62%.
- 4% of Ethereum-based projects have found PMF followed by Solana at 3%
- Over 50% of multi-chain teams were successful in raising follow-on rounds followed by Ethereum and Solana.
- BNB projects were the most likely to shut down with teams building there having a 30% fail rate.
To compile this report we leveraged a combination of first-party data, Messari (formerly Dove Metrics), Crunchbase, and more.
To evaluate the progress of the seed stage market we categorized each company by stage as seen below.
*Active No Product Shipped: project is active on social channels and providing updates but no product is available for use.
**No Longer Active: project has not updated social channels in > 3 months
Note: projects can be included in two categories (e.g. Token Launched & PMF)
Projects have been further segmented by ecosystem and sector. We have made our best effort to ensure the accuracy of the data but acknowledge there may be errors given some data is pulled from 3rd parties.
Finally, we’d like to call out the PMF designation which is probably the most controversial. Classifying a project as having found PMF is challenging. Whereas “product shipped” is objective, PMF is subjective and often fleeting, especially in crypto. A once-hot project with seeming PMF could suddenly lose it due to a shifting market environment. Building in crypto can feel a lot like building a house on quicksand, what felt like PMF can rapidly change as the market shifts. Compounding the challenge is the lack of public data for certain types of companies. Where possible, we used onchain data from analytics providers including Dune Analytics, Defi Llama, and others. Beyond onchain data, we relied on companies' data via their websites and blogs.
Planting the Seed
We started with the 2021 vintage for a simple reason, we wanted to determine what projects were finding traction but hadn’t raised a subsequent round and might be a target for Lattice. Once we started the analysis we realized the data was interesting enough to share with the broader industry - to better understand how crypto startups were progressing and the early ROI on investment.
The seed and pre-seed fundraising market exceeded $2.6B in 2021 across nearly 800 reported companies. At Lattice one of the first things we look at is a team's ability to ship product. In the 1-2 years since receiving funding, over 70% of companies have at least deployed to mainnet or equivalent while ~20% had yet to ship anything or have already shut down. While 20% of companies might seem high, it actually beats the benchmark for startup industry standards. Even more important than just shipping is the ability to find PMF, by our analysis, we found ~5% of crypto startups to have reached PMF within the first 2 years, or about $65M invested per PMF startup.
Running out of Runway
If we estimate the average crypto startup to have raised ~2 years of runway, H2 2023 is going to start to get very interesting. Roughly a ⅓ of the 2021 vintage has raised a follow-on round so provided they are able to manage burn well, most of those projects should be good until 2024 and beyond. Within the other ⅔ of startups, over 40% of the team's rounds were raised in H1 2021. It is likely that many of those teams are running on less than 12 months of runway. Given how challenging the early-stage fundraising market is today and how far valuations have fallen since 2021, we’d expect the shutdown percentage to begin increasing very rapidly. The same rule will soon apply for teams that raised in H2 2021 - the private markets are icy cold and barring some significant market changes, we do not expect improvements over the next 6-12 months. One silver lining is that nearly 50% of these teams have already launched a token so it is possible that some of these teams have already liquidated some of the treasury to continue operations. If they haven’t diversified the treasury yet, we’d expect pain for these token prices, a tepid retail market and thin liquidity for long-tail altcoins is a dangerous combination.
Each crypto cycle brings new use cases with founders building applications and enabling infrastructure, and the VC dollars eventually follow. For the purposes of this report, we’ve broken the market into 4 categories; CeFi, DeFi, Infrastructure, and Consumer/web3 - the database contains the dozens of sub-sectors that sit underneath.
There was a significant amount of investment in infrastructure during the 2018-2020 bear market - flat circle, right? It wasn’t until the summer of 2020 that sectors began to emerge starting with DeFi. In 2021, Consumer/Web3 and DeFi received far and away the most funding. We can unpack why this happened a bit further. The first is that given how much money had been invested in infra during the bear market, specifically alt-L1s, investors were looking to invest up the stack within the respective ecosystems. Secondly, investors piled into areas already seeing traction like DeFi. The wrinkle though is that by 2021 it might have been too late. If we take the current top 10 DeFi tokens by market cap all of them were seeded in 2019 or earlier. A similar trend can be seen within gaming, 90% of gaming rounds got done in H2 2021 - once Axie had already started its parabolic ascent. Skymavis, the makers of Axie Infinity had raised their seed round in 2019! Important lesson: be careful about chasing the hottest new trend.
More money did not always translate into more PMF. While VC dollars flowed aggressively into DeFi and Consumer/web3, PMF proved more elusive for each of the two sectors. In comparison, projects within the more tried & true CeFi and Infra sectors were able to find PMF at much higher rates.
A lack of clear PMF did not hold projects back from launching tokens. DeFi projects released governance tokens at an aggressive clip with 66% of projects opting to launch one. Gaming was particularly egregious with 70% of teams launching a token despite very few having real PMF or even a game.
It is undoubtedly possible to bounce back after launching a token without PMF (Aave famously did it as ETHLend) but finding PMF while also managing a token through a bear market is a challenge. Teams face the herculean challenge of iterating towards clear PMF while fighting downward pressure on the token, managing a disgruntled token holder community, and shoehorning a token model on a strategy that is probably changing. An important lesson for founders: If you don’t ship a product with PMF - your token is the only product.
During 20-21 we saw the launch of a whole new set of ecosystems starting with Solana in March 2020. While there were many new chains launched, Ethereum remained king with 32% of the industry’s total funding, the next closest chain was Solana with 7%.
The N/A category includes projects that are chain agnostic and not built directly on chain (e.g. CEX) and Multichain is defined as projects that are built directly on multiple chains (e.g. a Multichain lending protocol)
More interesting than raw funding data is the progress made within each ecosystem. Amongst ecosystems with at least 25 projects receiving funding, ~60% was the benchmark in terms of the percentage of teams shipping a product with Solana teams leading.
Where things start to diverge more clearly is related to stages reached further downstream.
Ethereum-based projects led the way for finding PMF followed by Solana. It is worthwhile to note that these two ecosystems are two of the largest from a user base perspective. A good lesson is that it is much easier to find PMF in an ecosystem that already has a robust user base versus trying to build one.
Another indicator of progress within an ecosystem is the ability of teams to raise follow-on fundraising rounds. Teams taking a multi-chain approach were most successful in raising subsequent rounds of funding followed by Ethereum & Solana. While this might encourage founders to start with a multichain strategy, it’s more likely these teams were already seeing success in one ecosystem and used the funding to expand.
We operate in a world where failure is the most likely outcome when an investment is made. The standout (for the wrong reasons) is the Binance Smart Chain ecosystem. The failure of 30% significantly exceeds the average for the crypto category. On the flip side, despite the epically challenging year faced by the Solana ecosystem, teams continue to ship with only 11% having shut down.
*Discontinued” includes projects that have not been active for > 3 months on social channels or officially announced a shutdown
What Comes Next
Unlike 2020 and 2022, 2021 was a proper 12-month bull market and the amount of money flowing into the space during the period reflected that. While projects have shipped products at a rate that is in line with startup industry averages, crypto PMF remains elusive. Will teams have enough runway to find it?
The depressed VC market will make it challenging for the 2021 vintage to raise follow-on rounds if they haven’t done so already. Series A funds are looking to see more clear PMF as a prerequisite for a Series A. Not only that, there seem to be fewer Series A capable funds in the market at the moment. Either those funds are going to LPs trying to raise their next fund and running into their own challenges or for the cross-over VCs, they’ve moved on to the next shiny thing.
Some teams will cut burn enough to hopefully get to better market conditions. We also expect more teams to be going to market with bridge rounds in H2 2023, this phenomenon is already playing out. The biggest challenge for these teams is that the valuations were set when Jimmy Fallon and Paris Hilton were still rocking Bored Apes, times have changed and so have seed round valuations. A VC is now comparing these pitches to a fresh pre-seed or seed-stage company with a valuation 50% lower, so unless the traction looks really good, it will be a tough sell. The remaining ⅓ of teams that have funding to last another 12-36 months are in a much better position to survive. Lesson number one is pretty simple - survive.
Many of the last bull market winners were seeded during the 2018-2020 bear and before a narrative had taken hold. Chasing the hot narrative or ecosystem once in a bull (e.g. DeF) has so far proven unkind. Looking at the VC landscape today, it’s clear that certain narratives are hot and we continue to exercise caution based on how we’ve seen this play out in the past. The more interesting question to ask is what are fewer people talking about in this bear market that will outperform in a better environment. Looking towards the 2022 vintage the sectors and ecosystems will adjust with new faces like modular infra popping up and others fading into the background.
We plan to publish this report annually - we welcome feedback on the format and data.
Disclaimer: Lattice has invested in a number of companies included in this database
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