We’re nearly through the first month of Q3, which means we can finally start taking note of the trends that will define the rest of the year. Unfortunately for crypto enthusiasts, one long-running trend shows no signs of reversing: funding to web3 startups continues to decline and will likely do so for the foreseeable future.
Funding Decline: A Seventh Consecutive Quarter
According to the Crunchbase Web3 Tracker, funding to crypto startups around the world is on pace to decline for the seventh straight quarter. Investments in Q3 are expected to land below the $1.9 billion raised by crypto companies in Q2. In fact, Q2 was a relatively stable period, with crypto startups raising only slightly less than the $2 billion they did in Q1.
The Current Quarter: A Shakier Outlook
VC investments in web3 so far have totaled $412.7 million, and if things don’t improve, that will add up to about $1.2 billion or so by the end of September. While we’re not seeing investors behaving like they were during 2021, there are some positive signs: the ad market is recovering, startup valuations are getting slightly better, and we’re even seeing early signals that the IPO market is not completely dead.
A Break? Not Yet
Since peaking at $10.6 billion in Q4 2021, venture investment in crypto has trended downward for six consecutive quarters. Surely it’s time for a break? Perhaps not. There are several compounding factors to consider when projecting the crypto market’s future.
Regulatory Uncertainty: A Major Hurdle
First and foremost, regulatory uncertainty is making it harder for web3 companies to operate in as many countries as they would like. This limits their applicable Total Addressable Market (TAM) and thus their potential viability as venture-backed entities.
Consumer Demand: A Key Challenge
Secondly, consumer demand for crypto assets isn’t very strong. NFT activity isn’t improving, and crypto trading is down compared to historical levels and may be slowing further. It’s certainly a crypto winter, but not only because the external climate is chilly – consumers also don’t seem as engaged as they’d need to be for investors to be excited about crypto projects.
The Venture Side: A Changing Landscape
There’s a natural corollary to web3 being less appealing to customers and investors alike: crypto funds are smaller today. And existing capital pools appear to be shrinking, too. Let’s take a closer look at the changing landscape of venture investment in crypto.
Crypto Funds on the Decline
Smaller Funds: Crypto funds are getting smaller, with some notable examples including:
- BlockTower Capital: down from $300 million to $150 million
- Paradigm: down from $1.2 billion to $750 million
- Andreessen Horowitz (a16z): down from $3 billion to $2.5 billion
Shrinking Pools: Existing capital pools are shrinking, with some notable examples including:
- Andreessen Horowitz’s (a16z) crypto fund: down from $1.5 billion to $1.2 billion
- Founders Fund’s crypto fund: down from $600 million to $400 million
A Changing Landscape
The venture investment landscape is changing, with a shift towards smaller, more focused funds and a greater emphasis on operational efficiency.
A Bright Spot?
While the overall trend for venture investment in crypto may be declining, there are some bright spots worth noting. For example:
- Growing interest in DeFi: Decentralized finance (DeFi) is gaining traction, with more investors exploring this space.
- Increasing adoption of blockchain technology: Blockchain tech is being adopted by industries beyond just fintech, such as gaming and supply chain management.
While these bright spots are encouraging, they don’t change the overall trend. Funding to web3 startups continues to decline, and it’s unclear when or if this trend will reverse.
