Web3 Funding Plummets As AI Steals The Show

Editor’s note: For more Web3 coverage, visit Crunchbase’s Web3 Tracker, where we track startups, investors and funding news in the Web3, cryptocurrency and blockchain space, powered by Crunchbase’s live, comprehensive data.

Venture funding to Web3 startups in the second quarter plummeted 76% from last year, as big funding deals slowed to a crawl, Crunchbase data shows.

While seemingly all sectors are seeing a slowdown in venture capital, Web3 — defined here as cryptocurrency and blockchain startups — has been hit hardest as investors retreat to both AI and more traditional sectors.

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In the second quarter this year, Web3 startups raised just over $1.8 billion in 322 deals, according to Crunchbase data.

Those numbers reflect a more than three-quarter decline in funding from Q2 last year, which saw startups in the sector raise more than $7.5 billion. They also represent a 51% drop in deal flow.

Web3 dollars dip

The numbers look a little worse when just examining the first halves of the year. In H1 last year, Web3 startups raised nearly $16 billion. In H1 this year, it was just $3.6 billion — a massive 78% drop.

In fact, deal flow hit its slowest pace since the final quarter of 2020, when only 291 deals were announced for a total of $1.1 billion.

Large rounds definitely played a role in the dramatic year-to-year drop Web3 funding witnessed.

In Q2 last year, startups raised 15 rounds of more than $100 million. The just-completed quarter saw only three rounds:

Last month, Switzerland-based Islamic Coin, a Shariah-compliant crypto asset, raised $200 million from ABO Digital.
In April, Vancouver-based messaging protocol LayerZero Labs closed a $120 million Series B funding round from 33 investors, including a16z crypto and Sequoia Capital, valuing the company at $3 billion.
In May, Worldcoin developer Tools For Humanity — co-founded by OpenAI’s Sam Altman — raised a $115 million Series C led by Blockchain Capital. The funding also included a16z crypto, Bain Capital Crypto and Distributed Global.

Bottoming out?

If VCs and startups are looking for any silver linings, it may be that after several quarters of significant decline, funding to Web3 startups actually remained relatively steady quarter to quarter, with Q1 of this year seeing startups raise slightly less than $1.8 billion.

Perhaps we’ve found the bottom of the market for investor interest in Web3?

However, the number of deals fell 23% from the first quarter when more than 400 deals were announced.

It is also interesting to note that while VC investing has crashed in the market, crypto prices have spiked. Bitcoin, the largest crypto currency, is up more than 80% this calendar year. The second largest, Ether, is up more than 50%.

Each saw nice spikes last month after both Fidelity Investments and BlackRock filed with the U.S. Securities and Exchange Commission to offer the first U.S. exchange-traded fund investing directly in Bitcoin.

It was reminiscent of late 2020 and early 2021 when other large, traditional financial institutions started showing interest in the space and Coinbase went public — events that seemed to validate the space and helped spark the first rush of funding into the sector.

What’s next for Web3?

Will that happen again?

That’s anyone’s guess, but this market is very different from 2021, when seemingly everyone in the startup world was flush with cash.

Now investors seem very wary of putting money into anything — except, of course, AI — and have retreated to more mature sectors — again, except for AI.

Investors are still putting small amounts of money into more of the picks-and-shovels startups to build out Web3 — like Santa Clara, California-based Auradine and New York-based Axoni — which could be a harbinger to better funding days for the space if it is built out properly.

However, there is no denying the massive collapses of large crypto exchanges — we all know the names — and recent regulatory actions in the U.S. likely have shaken some investors from looking into the digital asset space.

Will those investors come back, or will current investors invite more?

The numbers certainly aren’t trending that way.