NFT startups are not so enticing to investors lately

NFT, or non-fungible token, is admittedly one of the hot venture sectors I never got. But I don’t write the checks or do the diligence. So when well-known VCs started funding large NFT-related rounds last year and early this year, it seemed like a space to watch.

So watch out we have. And after months of data tracking, here’s what we can conclude: The NFT space is no longer nearly as hot as it was earlier this year. Fewer deals are made, and much less money goes into them.

To get a sense of how far things have gone down, below we charted seed and venture investments into NFT-related startups for the past seven and a half quarters:

Hot times

As you can see, funding of all things NFT peaked in the first quarter of this year, when investors poured $2.1 billion into the space. Almost a quarter of that went to a single deal: $450 million for Yuga Labs, of Bored Ape Yacht Club fame. Two others – metaverse digital real estate player Animoca Brands and NFT marketplace OpenSea – raised $659 million between them.

The fourth quarter of 2021, a record period for global venture funding across all industries, was also a hot time for NFTs. Startups in the area raised over $1.5 billion, of which $725 million went to Forte, a blockchain gaming platform.

When the markets were up, large NFT rounds accumulated. Between Q3 2021 and Q2 2022, at least a dozen companies raised rounds of $100 million and above, per Crunchbase data.

Cold times

Those days are over. In the latter half of this year, NFT-related funding has slowed considerably, with the current quarter on track to show the sharpest contrast.

Example: Halfway through this fourth quarter, the three largest NFT-related deals with known backers are $10 million rounds. If Q4 funding continues at its current pace, the quarterly total will be down over 80% from the Q1 peak.

The cost of NFTs and related assets also appears on the decline. Total NFT sales volume and the total number of NFT sold fell in October, setting monthly lows for 2022, according to a Decrypt report.

Not all digital assets have fared equally, with some collapsing while others are holding up, albeit mostly below the peak. On the collapse side, a high-profile example was the NFT for the first ever tweet, which initially sold for $2.9 million, but drew bids of only a few hundred dollars when the owner attempted to resell.

Meanwhile, the price of the lowest-priced Bored Ape, perhaps the most iconic digital collectible, has also fallen, down over 60% since its peak in April. However, it still costs around $70,000, so this is far from a dump.

Believers, non-believers and markets

Forecasts about where NFT start-up investments will go from here vary widely depending on one’s affiliation with the space in the first place.

For boosters of blockchain, crypto, decentralized finance and the metaverse lifestyle, the conventional wisdom is that the rise of Web3 will only bring wider use for NFTs.

To non-believers, it seems puzzling that billions ever went into this asset class.

In the startup sphere, it’s quite common for non-believers to be proven wrong over time, as a technology that once seemed fringe or out there gains mainstream adoption. In the case of NFT startups, however, market dynamics offer some support for the non-believer cause, with funding sharply down.

Still, it’s not game over yet. The past couple of quarters of falling investment may be more of a lull than an exodus of NFT startup backers. And the enduring appeal of some collectibles – like the hipster monkeys – indicates a real staying power.

Illustration: Dom Guzman