Web3 Funding Sees Huge Drop As Big Rounds Dip

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

For the last 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 tech builders. However, after a record-breaking 2021 which saw more than $30 billion invested in this burgeoning space, investors seem to be taking a pause.

Funding to VC-backed Web3 startups, as well as the number of deals, dropped to its lowest since the end of 2020, with the sector mirroring the venture market in general. 

The recently completed quarter only saw slightly more than $3.3 billion roll into startups in the space — nearly a 50% decrease from the previous quarter. That’s the lowest total since just about $1 billion went to startups in Q4 2020, and a far cry from the high of nearly $9.3 billion invested in Q4 last year.

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

Thus far this year in total, investors have poured $17.7 billion into Web3 — well off pace to reach last year’s record $30 billion.

Big deals slow

One issue affecting Web3 funding is a story that has been repeated by many VCs this year — large growth rounds at sky-high valuations are not happening now.

There certainly were big rounds in Q3, including:

• In September, Palo Alto, California-based Mysten Labs, the 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 Gem. The startup is looking to build virtual sports cities based on real-world brands and professional athletes.
• In July, Palo Alto-based Aptos Labs locked up a $150 million Series A led by FTX Ventures and Jump Crypto at a $2 billion-plus valuation. The round came just four months after the company, which is creating its own Layer 1 system blockchain, closed a $200 million investment that minted it a unicorn. 

However, those deals were the exceptions more than the norm in the third quarter. In fact, the third quarter only saw five rounds of $100 million or more. That is the fewest since the fourth quarter of 2020, which saw only two. It is also well off the 26 such rounds announced in the first quarter of this year or the 21 witnessed in Q4 last year.

Big names go quiet

It is important to remember nearly all tech sectors have witnessed something similar with the number of big rounds falling drastically. Large growth firms including Tiger Global and Dragoneer have pulled back in the market, and so called tourist investors — those not extremely familiar with a certain technology — have fled to focus more on their portfolios and the sectors they know better.

That likely has affected Web3 funding more than some other areas, as much of the technology is relatively new and many investors are not nearly as acclimated to it as they are to other industries. 

Tiger appears to be a good case in point, 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.

Just this week, The Wall Street Journal reported Andreessen Horowitz’s 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’s and Web3’s biggest supporters — has slowed its investment cadence in crypto and blockchain in recent quarters. After making 53 deals in those sectors from Q4 2021 to Q2 of this year, the firm made only nine deals in the third quarter.

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

Maybe some positives

While all those numbers do not paint a very promising picture, there are some positive trends if one looks closely.

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

Also, despite the slowdown in large growth rounds and funding in general, the Web3 sector still minted a handful of unicorns in the third quarter, including Mysten Labs, San Francisco-based continuous settlement protocol Zebec, Switzerland’s crypto products developer 21.co and London-based blockchain network 5ire.

With so much dry powder out there currently, there is definitely money to make more. However, during these uncertain economic times, investors seem wary of high valuations, so a big rebound seems unlikely for the fourth quarter.

Methodology

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

Illustration: Dom Guzman

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