Funding to VC-backed Web3 startups fell by about a fourth, from a record high of $29.2 billion in 2021 to about $21.4 billion in 2022.
The largest rounds of the year (per Crunchbase data)
– ConsenSys raising $450 million at a valuation of over $7 billion
– Polygon Technology closing a $450 million round
– Yuga Labs (best known for its Bored Ape Yacht Club NFT collection) closing a $450 million “seed” round
– Circle Internet Financial raising a $400 million private equity round
– FTX and FTX US raising $400 million rounds
Q4 2022 Total number of funding rounds >$100m: 4
Q4 2022 Total number of funding deals: 327
Web3 technologies were a major focus for investors in 2021 and early 2022, however, the end of the year showed a significant cooling of investor interest in the still young space. This is not entirely surprising, as we have witnessed a significant venture capital spending pullback globally and investors are likely turning to more mature, proven industries. In the last quarter of 2022, only Amber Group, Matter Labs, Uniswap, and Mineplex announced rounds above $100 million whereas Q4 2021 had 20 such rounds. There were no rounds near $1 billion in 2022 unlike the previous year when FTX, NYDIG and Robinhood raised rounds of that size or greater.
The softening of the Web3 market is also influenced by the crypto winter and the shakiness of the digital asset market. This is further exacerbated by the dramatic collapse of FTX, one of the leading crypto exchanges. According to Crunchbase data, the fourth quarter of 2022 was the most brutal for Web3 startups as funding fell a staggering 74% from the same quarter in 2021, dropping from $9.3 billion to just $2.4 billion. This makes it the lowest quarterly total since just about $1 billion went to startups in Q4 2020.
The decline in investment in the Web3 space was not limited to just the fourth quarter, as dealmaking dropped every quarter of 2022. The deal flow also declined quarter by quarter, with only 327 funding deals being announced in the last quarter of 2022, compared to a staggering 677 in the first quarter of the year.
It is easy to look at the total numbers, and especially the current downward trend, in Web3 funding and conclude the “Web3 fad” is over. However, it is important to consider that many investors are not as used to the Web3 space as they are to other industries such as SaaS, enterprise software, or traditional fintech. In uncertain times like now, many are likely to shy away instead of jump in with both feet.
The crypto winter and the rockiness in that market also has undoubtedly played a role. When VCs were pouring money into the sector, bitcoin was hitting highs at nearly $70,000. Now, crypto headlines are dominated by one of the greatest debacles in startup history.
Overall, while the numbers may seem grim for Web3 startups, it is important to note that the Web3 space is still relatively new, and many investors are still trying to understand and navigate the space. With more and more companies entering the Web3 space, we can expect to see a rebound in funding in the future, as more investors become comfortable with the technology and its potential.