Are VCs over Web3 or just taking a break from it?
A recent Crunchbase report revealed an 82 percent decline in funding for Web3 startups between Q1 2022 and Q1 2023, raising questions about whether the rise of generative AI is causing venture capitalists (VCs) to lose interest in Web3 or, at the very least, lose interest in it at the moment. The report noted that funding for early-stage Web3 startups focusing on blockchain or crypto technologies dropped from $9.1 billion to $1.7 billion between Q1 2022 and Q1 2023.
While still far above the $1.1 billion in VC funding for Web3 startups in the fourth quarter of 2020, the fact is that large-scale, nine-figure funding rounds have become increasingly scarce. In the first quarter of last year, nearly 29 VC-backed startups raised rounds of more than $100 million each, including over $400 million by Polygon Technology and ConsenSys, while only two such rounds took place in the first quarter of 2023.
While Crunchbase notes that some may jump to the conclusion that Web3 is over and it’s time to cash out of crypto, it points out that venture funding is down in almost every sector. Moreover, the Web3 sector has been disproportionately affected by the dip as investors gravitate towards familiar industries like cybersecurity or SaaS rather than betting on the promise of the next iteration of the internet.
The central place that generative AI is taking in the cultural conversation is one important factor, but not the only one influencing lessened VC interest in Web3. The Crunchbase report notes that several factors may have contributed to this trend, including December’s dramatic implosion of FTX and its subsequent ripple effect on multiple crypto entities, as well as the closure of crypto-friendly banks like Silicon Valley Bank earlier this year.
Despite a positive start to 2023, with Bitcoin hitting the $30,000 mark (though it is now hovering around $25,000) and Ethereum exceeding $2,100 after the Ethereum Shapella Upgrade, the future of the crypto and Web3 funding landscape remains murky. As far as VCs go, despite the aforementioned drop in interest in Web3 generally, there seems to be renewed interest in specific subsectors within the Web3 space.
For example, VCs appear to be pivoting towards blockchain infrastructure players to help build the foundation for Web3. In the past quarter, companies like Chain Reaction, Miami-based QuickNode, and Seattle-based EigenLayer all raised significant rounds.
Whether these encouraging developments are enough to attract more venture capital back to the Web3, crypto, and blockchain sectors remains to be seen. If the crypto industry could weather price drops (or “hit bottom“), it could potentially lure venture capitalists back to these sectors. But unlike the heady days of 2021 and 2022, it is now crucial for Web3 startups to clearly demonstrate their value proposition and showcase the potential of their technologies. Now, it is all about concrete use cases rather than celebrity or influencer-led hype.