Web3 funding decreased by 78%, but it’s not due to a lack of interest in cryptocurrency -VC investor Lexi Novitske

A new report from Crunchbase has shown that funding from venture capital (VC) into web3 startups plunged 78% in the first six months of 2023 compared to last year.

Not long ago, startups in the blockchain space, ranging from crypto, NFT, metaverse and all other offerings, seemed like the next big thing in the tech space. However, for varied reasons, this Crunchbase report and other expository ones have revealed that the web3 space has endured a difficult time recently.

Venture capital (VC) is a form of financing that institutional investors provide to entrepreneurs and startup businesses, usually at the expansion stage of their businesses. By investing in businesses that might not yet have established revenues or positive cash flows, venture capitalists often receive an equity stake in the business as compensation for their investment.

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The main goal of venture capital financing is to give high-growth businesses and startups financial support and strategic direction. In the crypto space, venture capital financing is no different from typical VC, except the startups benefiting from financing operate in the cryptocurrency market. 

Venture capital businesses in the cryptocurrency sector concentrate their investments on startups and initiatives linked to cryptocurrencies, blockchain technology, DeFi and other cutting-edge distributed ledger technology applications. 

More on the Crunchbase report 

Crunchbase defines web3 startups as cryptocurrency and blockchain startups. According to the report, web3 startups raised almost $16 billion in the first half of 2022. However, the fundraises in the first half of this year totalled just $3.6 billion, which signals a 78% drop. 

Also, looking at the second quarter of 2023, there was a 76% decline compared to 2022. Web3 startups raised just over $1.8 billion between April to June, compared to $7.5 billion during the same period last year.

Another Crunchbase report earlier in the month says VC funding has slowed overall, with an 18% drop across all sectors in Q2 2023. However, crypto-related funding has had a much steeper decline while artificial intelligence (AI) startups have become the new favourite of investors, copping $25 billion in funding in H1 2023.

Nevertheless, there were significant funding rounds in the first half of 2023. Sam Altman, CEO of OpenAI’s crypto project Worldcoin, raised $115 million in a Series C round in May 2023 led by Blockchain Capital. 

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Also, crypto protocol LayerZero managed a 9-figure funding round by raising $120 million backed by Andreessen Horowitz (a16z), Christie’s and others.

What is the cause of this decline in Web3 VC funding

According to Lexi Novitske, general partner at Norrsken22 and founder of Acuity Venture Partners, an investment firm in early-stage companies across Africa, this decline in Web3 funding is not just related to a decline of interest in crypto, as cited in many quarters. 

According to her, investors are now looking more inwards into existing portfolios. They pay more attention to startups with proof of profitability and attractive economics, to the detriment of web3 startups which are typically based on a future expectation of profitability.

Also, she believes the downturn is an economic impact of inflation globally. 

“People are much more conservative with their cash; they’ve probably been affected by the decrease in their crypto investments. The overall high cost of living, all of those things have played a part.

A  lot of these consumer-focused platforms that were trying to build nice to have or interesting to have products are becoming out of favour relative to other companies that are building need to have products.”.

 

Lexi Novitske

What is next?

The venture investor still believes that crypto has useful space in the tech ecosystem. However, it might now take a background stage in contrast to visible roles. 

“A lot of AI companies are building solutions that tackle problems that we see in the analog setting by using backend technology leveraging web3,  AI, and other deeper tech solutions to build more efficiently.”

So in terms of web3 fading, Lexi Novitske says no. In her opinion, it is rather evolving to be much more of a hidden aspect of technology rather than something necessarily on the face.