According to recent data from Crunchbase, venture capital (VC) funding for Web3 startups dropped significantly by 82% YoY in Q1 2023, declining from $9.1 billion to $1.7 billion. This significant decline in funding is attributed to investors adopting a risk-off approach over the past few months by seeking out opportunities in industries they know best, such as cybersecurity or SaaS. The number of deals between VCs and Web3 startups also saw a decline of roughly 33%. The report from Crunchbase News highlights that this $1.7 billion figure for Q1 2023 marks the lowest amount of Web3 start-up funding since Q4 2020, a time in which many people had never heard of Web3.
Web3 startups are defined as early-stage companies that are either working directly with crypto or blockchain tech (or both). The report also emphasized that the number of big Web3 start-up funding rounds hitting nine figures almost completely dried up over the past year. In Q1 2022, VC-backed startups raised 29 rounds of more than $100 million, including massive raises of $400 million or more by ConsenSys and Polygon Technology, as well as FTX and its U.S. affiliate FTX US. However, the most recently completed quarter saw only two rounds hit the nine-figure mark, as VCs have hit the brakes on spending big in the space.
Although the interest in Web3 start-ups has cooled off in recent times, the report from Crunchbase also acknowledges that venture funding is down in almost every sector. The decline in Web3 funding is attributed to investors opting for a risk-off approach over the past few months by seeking out opportunities in industries they know best, such as cybersecurity or SaaS.
The decline in Web3 startup funding is also attributed to the dramatic collapse of FTX and several other crypto lenders, as well as banking issues that rattled the economy in general. However, there are some positive signs as highlighted by the report, such as the significant price rallies of Bitcoin (BTC) and Ether (ETH) since the start of the year. Whether this is enough to bring more venture dollars back to the space, only time will tell.
In a different report published by Galaxy Research on April 11, the firm looked at the broader amount of VC investment into all crypto companies over the past 12 months. In a similar vein to the recent trend in Web3 funding, the report indicated that the $2.4 billion invested into all crypto firms in Q1 2023 marked an 80% decline from the $13 billion recorded in Q1 2022. Notably however, while capital investment plummeted significantly YoY, the report showed that the number of VC crypto deals had increased by around 20% in Q1 2023 compared to Q4 2022.
The head of firm-wide research at Galaxy, Alex Thorn, stated that historically, venture activity has tracked crypto asset prices pretty closely. Therefore, it will be interesting to see if crypto VC activity can rebound if prices remain resilient or constructive this year, despite the many macro and monetary headwinds.
In conclusion, the decline in Web3 startup funding is a significant concern for the industry. However, there are positive signs as highlighted by the report, such as the significant price rallies of Bitcoin (BTC) and Ether (ETH) since the start of the year. The rise in crypto asset prices could encourage more investment in Web3 startups in the future, especially if investors believe in the potential of these companies to disrupt traditional industries.
It’s worth noting that Web3 technology is still in its infancy, and many companies are still trying to figure out how to apply this technology to real-world use cases. As such, there is a certain level of risk involved in investing in Web3 startups, and many investors may be hesitant to take on that risk, especially given the current economic climate.
Furthermore, the decline in Web3 funding is not limited to this sector alone, as venture funding is down in almost every industry. The decline in VC investment is attributed to various factors such as inflation, supply chain disruptions, and global economic uncertainty. This has led many investors to be cautious with their investments, especially when it comes to early-stage companies.
Despite the challenges, there are still many reasons to be optimistic about the future of Web3 technology. The potential use cases for blockchain technology are vast and varied, ranging from supply chain management to digital identity verification, and many companies are working on innovative solutions to address these issues.
Moreover, the rise of decentralized finance (DeFi) has demonstrated the potential of blockchain technology to revolutionize the financial industry. As more people become aware of the benefits of DeFi and Web3 technology, it’s possible that we may see a resurgence in VC investment in this space in the coming years.
In conclusion, the decline in Web3 startup funding is undoubtedly a cause for concern, but it’s important to remember that this technology is still in its early stages. As the industry matures and more companies develop innovative solutions, we may see a renewed interest in Web3 startups from investors. Furthermore, the rise of DeFi and the increasing mainstream acceptance of cryptocurrencies could lead to a resurgence in VC investment in the Web3 space in the future.