The second quarter of 2023 has seen a significant drop in venture funding for Web3 startups, with a 76% decrease from the previous year. This decline is part of a broader slowdown in venture capital, with the cryptocurrency and blockchain sectors being the hardest hit.
The Web3 funding slump
Venture funding for Web3 startups, which include cryptocurrency and blockchain companies, has seen a sharp decline in the second quarter of this year. According to Crunchbase data, these startups raised just over $1.8 billion in 322 deals. This signifies a decrease in funding of over 75% compared to the second quarter of the previous year, during which startups in the industry secured over $7.5 billion. The data also shows a 51% drop in deal flow.
The first half of this year has been particularly challenging for Web3 startups. In the first half of the previous year, these startups raised nearly $16 billion. In contrast, 2023 first half of the year only saw them raise $3.6 billion, marking a massive 78% drop. The pace of deal flow has also slowed down to its lowest since the final quarter of 2020 when only 291 deals were announced for a total of $1.1 billion.
Large funding rounds played a significant role in the dramatic year-to-year drop in Web3 funding. In Q2 last year, startups raised 15 rounds of more than $100 million. This year, the same quarter saw only three such rounds.
Is the market bottoming out?
Despite the significant decline, there may be a silver lining. The financing for Web3 startups has been fairly consistent from one quarter to the next, with startups raising just under $1.8 billion in the first quarter of this year. This could indicate that we have reached the bottom of the market for investor interest in Web3.
However, the number of deals fell 23% compared to the first quarter, when more than 400 deals were announced. Interestingly, while VC investing has crashed in the market, crypto prices have spiked. Bitcoin, the largest cryptocurrency, is up more than 80% this calendar year. The second largest currency, Ethereum, is up more than 50%.
These spikes came 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. This was reminiscent of late 2020 and early 2021 when other large, traditional financial institutions started showing interest in the space as Coinbase went public.
The future of Web3 investment
The current market is very different from 2021 when seemingly everyone in the startup world was flush with cash. Now, investors seem wary of putting money into anything, except AI, and have retreated to more mature sectors.
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. This could be a harbinger of better funding days for the space if it is built out properly.
However, the massive collapses of large crypto exchanges and recent regulatory actions in the U.S. have likely shaken some investors from looking into the digital asset space. The question remains: will those investors come back, or will current investors invite more? The numbers certainly aren’t trending that way.
Indeed, the recent SEC filing against XRP has shed light on the need for clearer regulations in the cryptocurrency sector. This lawsuit, along with the current court proceedings involving prominent exchanges such as Binance and Coinbase, has highlighted the need for clear regulatory guidelines in the industry.
As these cases unfold over the next few months, they are likely to exert pressure on regulatory bodies to provide more explicit guidelines. This, in turn, could pave the way for increased institutional investment in the sector. As the dust settles, the crypto landscape may find itself on more solid ground, potentially attracting investors who were previously deterred by the uncertainty of the regulatory environment.