Web3 Funding sees a big drop as a big drop in rounds

Investors are tightening their purse strings on everything right now — and that apparently even means the next iteration of the internet.

For the past two years, venture capitalists have been enamored with all things Web3—a hot buzzword that encompasses everything from crypto startups to blockchain developers to decentralized technology builders. However, after a record-breaking 2021, where more than $30 billion was invested in this growing space, investors seem to be taking a break.

Funding for VC-backed Web3 startups, as well as the number of deals, fell to the lowest since late 2020, with the sector which mirrors the venture market in general.

The recently completed quarter saw just a little more than $3.3 billion rolled into startups in the space—a nearly 50% drop from the previous quarter. That’s the lowest total since roughly $1 billion went into startups in Q4 2020, and far from the high of nearly $9.3 billion invested in Q4 last year.

Deal flow also slowed in the third quarter, with just 408 deals announced. There are more than 200 fewer agreements from both Q4 2021 and this year’s Q1. It also marks the lowest number since Q4 2020 when only 262 deals were announced.

So far this year in total, investors have poured $17.7 billion into Web3 – well on pace to top last year’s record of $30 billion.

Big deals are slow

One issue affecting Web3 funding is a story repeated by many VCs this year – big growth rounds at sky-high valuations aren’t happening now.

There were certainly big rounds in Q3, including:

• In September, Palo Alto, Calif.-based Mysten Labsthe developer of the Sui Layer 1 blockchain, closed a $300 million Series B at a more than $2 billion valuation led by FTX Ventures.
• That same month, Santa Monica, California-based sports metaverse company LootMogul secured a $200 million investment commitment from Save. The startup wants to build virtual sports cities based on real brands and professional athletes.
• In July, Palo Alto-based Aptos Labs locked up a $150 million in Series A led by FTX Ventures and Jump crypto to a value of over 2 billion dollars. The round came just four months after the company, which makes its own Layer 1 system blockchain, closed a $200 million investment that turned it into a unicorn.

However, these deals were the exceptions more than the norm in the third quarter. In fact, the third quarter saw only five rounds of $100 million or more. There are the fewest since the fourth quarter of 2020, who only saw two. It also benefits from the 26 such rounds announced in the first quarter of this year or the 21 seen in Q4 last year.

Big names remain silent

It is important to keep in mind that almost every technology sector has witnessed something similar, and the number of large rounds has fallen drastically. Large growth companies included Tiger Global and Dragons have retreated into the market, and so-called tourist investors – those who are not very familiar with a certain technology – have fled to focus more on their portfolios and the sectors they know better.

It has probably affected Web3 funding more than any other area, as much of the technology is relatively new and many investors are not nearly as used to it as they are to other industries.

Tiger appears to be a good example, as the huge crossover investor made 30 investments in Web3-related startups in the first two quarters of the year, but only four such deals in the third quarter.

Only this week, The Wall Street Journal writes Andreessen Horowitzits flagship cryptocurrency fund lost 40% in value in the first half of the year, according to people familiar with the matter. According to Crunchbase data, the firm — which has been one of crypto and Web3’s biggest backers — has slowed its investment cadence in crypto and blockchain in recent quarters. After making 53 deals in these sectors from Q4 2021 to Q2 this year, the firm made just nine deals in the third quarter.

There is also the added aspect that investors see limited exit options in a still maturing market such as Web3. In times of uncertainty, investors like to see a direct path to liquidity if needed, and M&A activity has been sparse in the industry, especially in the past couple of quarters with only about a dozen deals announced, according to Crunchbase data.

Maybe something positive

While all these numbers do not paint a very promising picture, there are some positive trends if you look closely.

September was actually the best month since June for Web3 funding, with VC-backed startups raising nearly $1.6 billion per Crunchbase data. Investors have been talking optimistically about a small comeback in the fourth quarter as valuations have fallen and a new reality has arrived.

Despite the decline in large growth rounds and funding in general, the Web3 sector still featured a handful of unicorns in the third quarter, including Mysten LabsSan Francisco-based continuous settlement protocol ZebecSwiss developer of crypto products 21.co and London-based blockchain network 5ire.

With so much dry powder out there these days, there is definitely money to be made. But in these uncertain economic times, investors seem wary of high valuations, so a big rebound seems unlikely for the fourth quarter.

Methodology

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

Illustration: Dom Guzman