82% Year-over-Year Decline in VC Funding for Web3 Startups

• VC funding in Web3 projects declined 82% from Q1 2022 to Q1 2023. 
• Investments in Crypto firms also declined by 80% in a similar time frame. 

Venture Capitalists generally keep themselves from spending in a slower economy, as such scenarios are ambiguous toward the return on investment. Comparing Q1 2022 and 2023, Web3 startup funding declined by 82% from $9.1 Billion to $1.7 Billion. The data was revealed in a report on April 20, 2023; although this decline seems heavy, the funding was $1.1 Billion in Q4 2020. 

VCs Making Distance from Web3 Startups

The data here concerns Web3 startups which are early-stage companies that work directly with blockchain or crypto. Even the deals between Web3 startups and VCs have declined significantly. Q1 2023 saw 333 deals with a YoY decline of about 33%. There was a time when these startup funding rounds reached nine figures, but this scenario is out of the picture for now. 

In the first quarter of 2022, VC-backed startups raised nearly 29 rounds of more than $100 Million each. These included $400 Million or more by Polygon Technology and ConsenSys. One of the contenders among these rounds was FTX and FTX.us. The study reveals that during Q1 2023, only two rounds made the dream nine-figure mark; this could be because VCs are not keen to spend more money in the Web3 space. 

If the overall funding scenario is studied, “venture finding is down in almost every sector.”

With this declining approach, investors have taken a risk-free method for the past few months. They seek opportunities in the best-known areas, like cybersecurity or SaaS. For now, they are avoiding investing in the next iteration of the internet, Web3. 

It should be known that the industry is still recovering from the dramatic implosion of FTX and the contagion effect that took away multiple crypto entities. Also, the recent banking scenario created by the closure of crypto-friendly banks intensified the problem. 

2022 was a bad year for crypto, and 2023 has been great so far, with Bitcoin touching the $30,000 mark and Ethereum going over $2,100 following the Ethereum Shapella Upgrade. But can this momentum bring back the good days for crypto and the Web3 funding scenario cannot be said for sure. 

The April 11 report by Galaxy Research looks into the overall scenario of VC investments in crypto companies for the last 12 months. Investment in crypto firms in Q1 2023 declined 80% from $13 Billion in Q1 2022. Even if the VC funding declined, the deals increased by about 20% in Q1 2023 compared to Q4 2022. 

There is a positive momentum in the crypto industry, with prices mainly in the green. If the industry keeps this momentum going, a slight price drop should not affect the overall growth. Such a scenario could make Venture capitalists return to the Web3, crypto, and blockchain arena. 

When a Web3 or Crypto project receives massive funding, it suits the project and the whole sector as multiple startups try to innovate better to receive even better funding. This race creates the best products and services in the industry. 

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

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