Web3 funding continues to crater – down 82% year-on-year

Editor’s Note: For more Web3 coverage, please visit Crunchbase’s Web3 Tracker, a site to watch startups, investors, and funding news regarding all aspects of Web3, cryptocurrencies, and blockchain. Powered by Crunchbase’s extensive data, this page will be continually updated as the next iteration of the internet grows. We hope this data and our analysis serve as resources for readers to track and understand the Web3 landscape and all that it encompasses.

In the first quarter of the year, funding for VC-backed Web3 startups hit its lowest point since the very early days of the space, as deal flow continues to slow.

Venture funding fell 82% year over year, falling from $9.1 billion in the first quarter of 2022 to just $1.7 billion, per Crunchbase data.

The funding figure is also down 30% from the last quarter of last year, and the lowest total since the fourth quarter of 2020 — which brought in just $1.1 billion — when many people had never heard of Web3.

Deal flow also continued its marked decline, as only 333 deals were completed in the first quarter – down from 369 in the previous quarter and a sharp drop from the more than 500 announced in the first quarter of 2022.

The total number of deals is the lowest since Q4 2020.

Great deals below

Perhaps nothing illustrates the differences between the first quarter of last year and the first quarter of this year in funding for Web3 startups more than the dramatic drop in large rounds.

In Q1 2022, VC-backed startups raised 29 rounds of more than $100 million. That included massive raises of $400 million or more from ConsenSys and Polygon Technology, as well as – of course – FTX and its American affiliate FTX US.

The most recently completed quarter saw only two rounds hit nine figures, as VCs have hit the brakes on spending big on the space.

The biggest rounds of the quarter include:

• Vancouver-based Blockstream, which provides blockchain technology solutions for the financial markets, raised $125 million in a convertible note and secured debt financing.
• France-based crypto hardware maker Ledger added another $108 million to its previously announced $380 million Series C at the same $1.4 billion valuation.
• Israel-based Chain Reaction, a semiconductor startup focused on blockchain and privacy technologies, raised $70 million in Series C.

Everything is down

For our purposes here, we define Web3 as startups in either (or both) the crypto or blockchain sectors. In the previous quarter, both of these sectors separately experienced their lowest decline in several years.

VC-backed startups saw just more than $800 million invested – the lowest amount since more than $600 million was invested in Q1 2020.

The story is similar for blockchain startups, which raised around $1.2 billion in Q1 – the lowest sum since such startups saw $820 million in Q4 2020.

Get out now?

Of course, the simple conclusion is that Web3 is over and it’s time to cash out crypto.

But, as pointed out earlier, risk financing is down in almost all sectors. Web3 has arguably been more affected by the downturn since investors in uncertain times seek out industries they know best — like cybersecurity or SaaS, not the promise of the next iteration of the Internet.

There also appear to be small sub-sectors that are seeing renewed interest in the space. Instead of pouring big money into the next exchange or lender, VCs seem to be concentrating on blockchain infrastructure players to help build the foundation for Web3. Companies like Chain Reaction, Miami-based QuickNode, Seattle-based EigenLayer and others have all raised significant rounds in the past quarter.

Despite difficult economic times, both bitcoin and ether showed impressive resilience last quarter – up over 80% and 70% respectively in price since the beginning of the year.

Undoubtedly, the industry is still reeling from the dramatic collapse of FTX, as well as several other crypto-lenders, and even some of the banking problems that rocked the economy in general. However, there are some positive signs.

Whether that’s enough to bring more venture dollars back into the space – only time will tell.

Methodology

For Web3 funding numbers, we analyze investments made in VC-backed startups in both cryptocurrency and blockchain.

Further reading:

Funding for Web3 startups drops 74% in Q4

Illustration: Dom Guzman