Oct 12, 2023

A new report from advisory firm Architect Partners notes that crypto dealmakers must have taken the summer off, as mergers and acquisitions have fallen again in the third quarter.

Video transcript

And your report from advisory firm Architect partners notes that crypto deal maker must have taken the summer off as mergers and acquisitions have fallen again in the third quarter. Joining us now to discuss is the managing partner for architect partners, Elliott Chen. Welcome to the show. Elliot. Hey Jennifer Lawrence and Emily, great to be here. Big fan of the show. Oh, thank you. Great to have you here. We love talking to our fans on this show. So thanks for joining us. All right, let's talk, let's talk about this report. The year's slow pace for crypto E activity is dragging on you note that, you know, maybe they took the summer off break down some of the key takeaways. Yeah, just like you guys try to bring a state of the crypto from uh indices perspective and congrats on the coin desk indices, we try to contribute to our industry through bringing data driven insights for the M and A and private financing markets uh in this quarter. Uh It's no surprise that we are near our lows uh from an M and A perspective for both number of deals closed as well as consideration paid uh There's a few reasons for this. Uh Number one, we kind of have a evolving business model uh for many of the companies that have been building uh in our space 2021 and 22 had uh a different uh they'll say uh customer and revenue metrics uh that we all saw and moving into 23 a lot of companies and founders are forced to uh change their models, evolve, their models, they're also fight facing shorter runways. Uh Second point acquire urgency has uh decreased. Uh We have regulatory un clarity and quite frankly, you know, BT C and the broader uh crypto markets have been relatively flat, which I'd argue is a good thing. But from an M and a perspective, doesn't give much to the I'd better be buying now instead of waiting for later. Third part valuation spreads remain high. There were a lot of companies that had raised that relatively high valuations uh in the past three years. Uh And now we're in this moment where uh there is a, there is a significant spread between what acquires are willing to pay and what uh uh people with companies are looking to sell at. So, uh some of those companies, it seems to be a lot of activity in trading and infrastructure. Uh This has been kind of one of the slowest months or slowest times in crypto uh certainly, since I can remember, but I, you know, statistically 5 to 10 years in terms of, of transactions in terms of volumes. Uh What does this all mean, you know, trading is dying yet? That seems to be the the the the big um the big business if you will of M and A in this space, can you explain what's going on? Yeah, I actually think uh trading volumes on exchanges isn't the best indicator of, of the health of the market, right? I think that right now our industry is go is growing up, which is good investor discipline is higher, acquisition discipline is higher. And that means that operating discipline must get higher. So as we come through this next phase, the companies that are surviving, they're uh better run, they have more experience. Uh they understand some of the market cycles that they've, they've gone through and quite frankly, the metrics that they're able to measure against ie who is your customer? Why are they paying you? How much are they paying you for it? These are all great questions and I think the companies that are building, particularly in trading and infrastructure will have much better answers to that. Uh Going into Q four in the first half of 24. What are your, what are your expectations for Q four? So we really take a look at the global market participation, particularly from an uh a choir and a strategic perspective. Uh As we all know, there were a number of global events that occurred in, in the, in the past few months. Uh This is a global movement and the market participation is certainly that as well. The institutions are the ones that we are looking at. These are the ones that, you know, we anticipate 20 100% of the top 20 global financial institutions have some Blockchain or crypto asset related part product in the market in a customer's hands today. It is early, no doubt, but we can, we could not make that statement two years ago. So as we look at those that are going to be doing the acquiring all of those companies have initiatives, they have uh resources behind it, they have people that are out front. And we think that in Q four and then going into Q uh first half of next year, a lot of these companies are gonna be asking the question, build by partner or invest, all of them will be asking that. Uh And that's a good sign for all the builders that are in our industry. So uh when it comes to defy, you're seeing activity there and how does this look it in with the backdrop of stc regulation potentially coming? Uh it it to this, you know, to how is the with all the regulatory pressures happening, let's say in D five, potentially down the road, uh you're seeing activity in D five. So, so what's happening here? Yeah, de defi is tough. Uh You have one problem, which is defi we'll call it yield generation. Uh two years ago, was in a zero interest rate environment. Now, we're in a much higher interest rate environment. Are you gonna be striking a similar yield by taking risk participating in defi activities? Uh So that, that's kind of a macro return thing. The second part of D I that the industry needs to figure out is, is the who uh it is very difficult for institutions to participate when they do not know who a counter party is. Uh And some purists believe that they should not be able to know who they are, but when institutions come in and they are, they may not be as active from ad fi perspective. But you know, eventually D IC I this all becomes phi a key component is going to be the who and until the D FI industry can figure out a way to verify who is participating. Institutions are not going to participate. And that's a tough kind of pill for many of the purists and those that are, are the believers in in D I. So there's a lot of great activity. Uh but we need the institutions to participate and there's a big hurdle there that won't allow them to participate today. All right. And sticking on defi uh when looking at crypto private financing, development of daps decentralized applications is now the majority of investment focus. Uh Did you find this surprising? And I I want to just add a little bit more to the question there. So many of these daps are having such a hard time gaining users. But to see the investment focus there is kind of an interesting uh juxtaposition. So was this surprising to you? Um actually, it's not surprising Jennifer for a couple of reasons. One, a lot of the dap investing that we see today is for the much earlier stage uh companies, right? So pre seed seed and series a uh in a market environment like that, it, it makes sense that many of the uh private investors are investing earlier stages. And when you think about um indus uh sectors that have the most promise, uh DAS is certainly one of them for, for our industry. DAS and to your point, uh we are early, particularly from a user experience perspective, we need to get better at that. Uh We are getting better, the companies that are being funded today uh likely are in their 1st, 2nd or second or third iteration. And I think that's important because a lot of our industry may be afraid, afraid to fail. Uh It's good for our industry to fail at certain points and times it's good for these experiments that to not work and to evolve into its next iteration. And I think a lot of that capital that we're seeing coming in in this summer at Q two and Q three are going to those founders and leadership teams uh that have figured some things out. And now they are waiting for now, they have uh started to build products on this second layer of infrastructure that we're seeing. And in 24 and 25 you'll start to see them emerge as, as real companies. Elliott, thanks so much for joining us this morning and unpacking that report. Thank you for having me that was managing partner for architect partners, Elliot.

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