Web3 startup VC financing drops 82% year-over-year

According to data from Crunchbase, venture capital (VC) funding for Web3 startups plummeted 82% from Q1 2022 to Q1 2023, falling from $9.1 billion to $1.7 billion.

Crunchbase News highlighted the data in a report published on April 20, noting that the $1.7 billion figure for Q1 2023 represents the lowest quantity of Web3 start-up funding since Q4 2020, when $1.1 billion was reported—a time when “many people had never heard of Web3.”

Web3 startups are defined in this context as early-stage enterprises dealing directly with crypto or blockchain technology (or both).

Deal flow, or the number of total transactions between VCs and Web3 startups, also declined significantly, with the 333 deals recorded in the first quarter of 2023 representing a roughly 33% year-over-year decline.

In addition, the report notes that the number of nine-figure funding rounds for Web3 startups has nearly vanished over the past year.

“During the first quarter of 2022, venture-backed firms raised more than $100 million in 29 funding rounds.” This included massive raises of $400 million or more by ConsenSys and Polygon Technology, as well as, of course, FTX and its U.S. affiliate, FTX US, according to the report. Adding that:

“The most recently completed quarter saw only two rounds hit the nine-figure mark, as VCs have hit the brakes on spending big in the space.”

While the business information platform acknowledged that recent interest in Web3 start-ups has waned, it also emphasized that “venture funding is down in almost every sector.”

Crunchbase ascribed a significant portion of the decline in Web3 funding to investors pursuing opportunities in “industries they know best—such as cybersecurity or SaaS—and not the promise of the next iteration of the internet [Web3].”

“Undoubtedly the industry is still reeling from the dramatic collapse of FTX, as well as several other crypto lenders, and even some of the banking issues that rattled the economy in general.”

“However, there are some encouraging signs,” the report continued, noting the significant price increases of Bitcoin and Ether since the beginning of the year.

The report concludes, “Only time will tell if this is sufficient to bring more venture capital back into the space.”

In a separate report published on April 11 by Galaxy Research, the firm examined the total quantity of venture capital investment in crypto enterprises over the past year.

Similar to the recent trend in Web3 financing, the report indicated that the $2.4 billion invested in all crypto firms during the first quarter of 2023 represented an 80% decrease from the $13 billion documented in the first quarter of 2022.

Interestingly, while capital investment fell considerably year-over-year, the number of VC crypto transactions increased by roughly 20% in Q1 2023 compared to Q4 2022, according to the report.

“Historically, venture activity has closely tracked the prices of crypto assets.” It will be fascinating to see if crypto venture capital activity can rebound if prices remain resilient or positive this year.

There are numerous macro and monetary headwinds, however,” wrote Galaxy’s chief of firm-wide research, Alex Thorn.