Venture capital data thus far in the third quarter indicates that investment into blockchain-focused startups is on pace to contract dramatically compared to recent quarters and the heady 2021 period.
Data from Crunchbase and PitchBook indicate that after totaling around $10 billion in some recent quarters, the total dollar value of web3 investments could more than halve — with some datasets implying an even sharper fall when we compare Q3 2022 with earlier quarters of the same year.
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It’s canon in the blockchain world that rapid business cycles are part of the game, with periods of hype and spending followed by periods of lower consumer activity. A common perspective is that boom periods bring in new users for web3 products and related services while ensuing busts allow for quieter, building-focused work. Here’s how Coinbase described the pattern in its most recent earnings deck:
Regardless of how much stock you put into the perspective, it appears that during this building-focused moment, less capital is on offer. It is not a shock that any particular venture capital investment area is seeing lower capital flows in the present quarter; after all, startups and venture investors alike are digesting something akin to a hangover from last year’s party.
Therefore, lower investment into, say, fintech startups or enterprise software upstarts is not a surprise.
Why pay special attention to the web3/blockchain world in the context of a slowing venture capital market more generally? We care because the companies building decentralized applications and infrastructure managed to hang onto the good times longer than other sectors and may be in for a sharper contraction. Let’s talk about it.
A data background
Startup fundraising is slowing on a global basis, but as TechCrunch has explored, not catastrophically.
Inside of the aggregates, we are seeing some impressive declines, however. For example, per CB Insights, fintech funding fell from 1,362 deals worth $38.4 billion in Q4 2021 to 1,225 deals worth just $20.4 billion in Q2 2022. The same dataset indicates that retail tech, which peaked in Q2 2021 with 946 deals worth $29.9 billion, continued a multiquarter decline to land at just 710 deals worth $13.2 billion in the second quarter of this year.
Given that backdrop, declining venture capital totals for web3 companies should not surprise. And yet, per a new Crunchbase dashboard, the following data points through Q2 2022 concerning web3 fundraising, as counted by the data service (and my former employer):
- Q1 2021: $9.5 billion
- Q2 2021: $6.4 billion
- Q3 2021: $7.1 billion
- Q4 2021: $9.8 billion
- Q1 2022: $8.6 billion
- Q2 2022: $6.6 billion
Frankly, I had not anticipated any data service collating a year-over-year gain in venture capital fundraising for web3 companies when we compared the second quarter of this year with Q2 2021. And yet.
More shocking, however, is that the same Crunchbase dataset indicates that just $719 million and change has been raised by web3 companies in the third quarter of this year, a period of time that’s now more than two-thirds done with.
Venture capital data is squishy, so we wanted to compare the Crunchbase chart to another source for the sake of confidence. So we ran a query of all venture capital rounds and growth-focused private equity deals on PitchBook that are denoted as “web3” and found some similar data.
But while PitchBook confirms the Crunchbase point that Q2 2022 was more active in dollar terms for web3 companies than Q2 2021 — mind blowing, that — it counts about $2.4 billion in total funding for companies in the blockchain cohort for the third quarter. Still, compared to the $10.4 billion that PitchBook tallies in the Q1 2022 column, it’s minute starchy carbs.
Regardless of whether you prefer Crunchbase or PitchBook’s dataset, it’s clear that web3 fundraising is trending down. In a sense, this undercuts the building-during-the-downturn narrative, as less capital could mean less money for the people and tools needed to build crypto-native services. But there’s still some money flowing, and prior periods were rich, meaning that many web3 startups could remain well capitalized despite a slowdown in new capital access.
The above situation has me pondering that huge Andreessen Horowitz crypto fund that was recently compiled. Back in mid-2021, when the investment firm announced a $2.2 billion fund targeting web3, this column noted that the group was investing more, more quickly and tackling the regulatory climate at the same time. In short, it seemed that a16z was not only placing wagers on web3 companies but pushing hard to ensure that the overall crypto market succeeded.
That perspective was generally supported by the firm raising a new, larger fund with what appeared to be similar goals this year. This was how we wrote about it at the time:
What a16z is doing is something akin to quadrupling down on the web3 market with its largest fund to date, precisely as its competitors tighten up their purse strings. This is what it actually means to be greedy when others are fearful, and a16z knows it.
As the venture market slows — in particular, VC interest in near-term investments into crypto-related startups — a16z is starting to feel a bit less like the vanguard of an army of capital disbursers firing off new rounds into its chosen industry and more like a pioneer forging ahead far in advance of the rest of its traditional rivals.
Perhaps investing more when the market slows will pay off for the firm; after all, if a16z ends up being right, it will wind up with more money than God. But it is notable that the firm’s rivals are moving in the opposite direction.
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