Many market participants have already adopted a bullish stance, yet bears, as in the wild, are attacking the weakest and smallest. Despite Bitcoin’s strengthening position, in 2023 investment volume in the industry fell to record lows. ForkLog examined the situation with the head of a venture fund and the founder of a young project.
Where did the money go
According to a Crunchbase report, in the second quarter Web3-startups attracted 76% less capital than in the corresponding period last year — only $1.8 billion.
The total number of deals also fell by 51% — from 659 to 322. This is the lowest level since late 2020.
If you look at the first half of the year, the figures look even worse. In this period Web3 projects attracted $3.6 billion — a decline of 78%.
«The current situation, in fact, is a complete mess. Why? Because funding has fallen by nearly tenfold. There are many ideas in the market, but to realise them new companies are required. And they either do not appear, or appear and die quickly», — said the founder of Afford.Capital Sergey Kovalev.
According to him, many highly regarded projects are now trading at large discounts, and the number of startups themselves has fallen significantly.
In the first six months of 2022, analysts recorded 15 separate investment rounds of more than $100 million. This year their number has shrunk to three:
- Swiss project Islamic Coin — $200 million under ABO Digital;
- Omnichain protocol LayerZero — $120 million under Sequoia;
- Worldcoin — $115 million under Blockchain Capital.
Crunchbase experts noted that many large investors have shifted to the artificial intelligence sector, which attracted $25 billion in the first half of the year.
More recent data, checked by WuBlockchain, also indicate a continued decline in the venture sector. The total funds raised in September amounted to $510 million, 24% lower than in August and 72% lower than in the same period last year.
According to Alexander Mamasidikov, founder of the young cross-chain-protocol CrossFi, the market for crypto-startup funding has matured and no longer throws money around.
«I can’t say that investors have completely lost faith in cryptocurrencies or forgotten about Web3. On the contrary, interest is only growing. But it has shifted from a position of ‘revolution’ to a view of ‘evolution.’ There are fewer maximalist conversations about the world abandoning fiat entirely in the near future,» he stressed.
Now investors are more interested in projects operating at the intersection of TradFi and DeFi, says Mamasidikov. Investor attention is also drawn to corporate blockchain solutions, especially those that do not require a major overhaul of existing infrastructure.
The blow to the reputation of crypto projects was delivered by the FTX collapse, added the head of CrossFi. The exchange’s bankruptcy dragged along many lending projects, which in turn hit venture investors’ portfolios. Alameda was also a major player, financing dozens of crypto projects.
«The negative imprint on the venture direction is also shaped by the macroeconomic situation: high inflation, rate hikes, rising yields on low-risk assets. Of course, the crypto market does not exist in a vacuum and all these processes affect it,» explained the startup’s head.
The founder of Afford.Capital noted that large venture funds are faring quite well; they continue to invest and attract money. However smaller outfits are faring much worse. Most small organisations have had to pause activity due to market conditions, Kovalev added.
Where to seek financing
Startups typically have few avenues for raising funds, and almost all of them lead to venture firms.
One is grants from private or public organisations. For example, UNICEF’s venture fund provides non-equity grants of up to $100,000 to technology startups that ‘contribute to the advancement of humanity’.
Large firms also often create their own investment funds. Among Web3-oriented initiatives: Polkadot Foundation, grant programs for NEAR protocols and Harmony Ecosystem Fund.
Sometimes startups turn to accelerators and incubators, which provide access to investments, mentoring and a ready business plan. Such organisations usually seek to exert maximum control over the funded project.
Fundraising, or what has become a byword Kickstarter, is also popular among crypto startups. Only in the Web3 space has the crowdfunding platform been replaced by a decentralised analogue called Juicebox.
«Some investors themselves reach out to projects, for example after meeting at a conference or forum. Others approach projects themselves, set up meetings, make pitches. Investors mainly look at several components: the market, its problems and how the project in question tackles them», added Mamasidikov.
Speaking about the number of ‘hit’ startups, the founder of Afford.Capital cited rather disheartening figures. Only 4-5% of companies reach the first seed rounds.
Responsibility for success, however, depends on both the team and market conditions. Kovalev believes that today’s crypto startups often do not aim to solve a global problem, but exist in a constrained ecosystem, and therefore do not attract founders.
There are also many young and inexperienced workers in new companies, who sometimes occupy leadership roles. In the venture fund head’s view, they do not seek a target product or develop a marketing strategy, which leads to a bleak outcome.
«Such startups think the market will swallow them. But it simply takes them, chews them up and spits out the bones,» Kovalev concludes.
The head of CrossFi suggested a simple recipe for a successful product: proper positioning, finding a niche, engaging with the target audience, growing the community and continuously improving the technological aspects.