Venture investments in web3 down significantly from bull highs

The venture capital landscape in web3 has fallen from its highs over the past two years, marking a significant shift in outlook for promising blockchain and crypto-based start-ups. This is according to analysis from Agile Dynamics.

“The venture capital journey has been rollercoaster ride since the outset of the 2020 bull market,” said Paul Lalovich, partner at Agile Dynamics and a leading expert in Web3 dynamics.

Providing context to Lalovich’s claim: between the last quarter of 2020 and the second quarter of 2021, funding in web3 boomed exponentially from $1 billion to $9 billion, only to plummet by 82% year on year to $1.7 billion as of the same period this year.

Web3 start-ups of all shapes and sizes have felt the brunt. In the first quarter of 2022, several venture backed startups witnessed substantial investment rounds exceeding $100 million, with enterprises like ConsenSys, Polygon, and FTX securing more than $400 million. Fast forward to the first quarter of 2023, and only two rounds touched the $100 million mark.

“This tidal shift in investor sentiment is attributed to various factors, with risk appetite a notable one. Numerous venture capitalists were eager to invest substantially in the booming market. However, with money becoming tighter and web3 valuations and outlook on the decline, fewer are willing to take the risks now,” Lalovich said.

A growing maturity in due diligence on web3 businesses is another factor that has tightened spending. “During the bull market, venture funds were penning checks with minimal due diligence. Now that the reserves have dwindled and valuations have undergone significant corrections, many early-stage investors are hesitant to channel capital into what they now feel is a risky, nascent sector.”

Copycat investing

Similar to trends seen among institutional investors and private equity funds, venture capitalists are now increasingly watching the moves of their peers (or rivals). “We’re seeing a clear pattern in the markets where smaller venture capitalists are only looking to deploy follow on capital to tier-1 players, instead of taking the risk and leading their own rounds” said Hunter Riedel, Principal at Agile Dynamics.

This means that rather than scouting the sector and making their cherry picks based on their own outlook, venture funds are aligning their investment decisions with the moves of name-brand peers. “This is a stark contrast from the past where venture capitalists were open to taking risks on fresh and innovative ideas; now they lean on the brand recognition of major players like a16z, Sequoia, Pantera and so on, and their extensive due diligence capabilities.”

“From the funds’ perspective, this strategy makes sense,” added Lalovich. “Riding the wave of their moves and following suit with capital injections could be a fruitful strategy.”

The drawback however is for the sector as a whole. “It basically favors the larger and more established players in the scene, and dwindles down fresh start-ups and more risky – but promising – challenges,” Lalovich said. “If the situation persists for too long, it will be unhealthy for the web3 ecosystem and bodes ill for innovation in the space.”