The Web3 space has seen a revival since the turn of the year, with many tokens recovering from the bearish winter of 2022. However, this has not done much to spur venture capitalists’ interest towards investing in the cryptocurrency industry.
according to a report From Crunchbase, venture funding fell from $9.1 billion in the first quarter of 2022 to $1.7 billion in the first quarter of 2023. This represents an 82% decline year-over-year and shows that investors are turning to investing in Web 3 projects.
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For context, the investment of $1.7 billion in the first quarter of 2023 is the lowest since the fourth quarter of 2020 ($1.1 billion) when Web3 was in its infancy. This decline is related to developments in the second half of 2022.
The decline in fundraising is related to Terra Luna and the collapse of FTX
To put this into context, the cryptocurrency market has been experiencing a surge of VC-led funding, which peaked in Q4 2021 and continued into Q1 2022. During Q1 2022, VC-backed startups raised more than 20 A round of more than 100 million dollars.
This included high-profile raises by ConsenSys, Polygon and FTX, which raised more than $400 million in venture capital funding. The second quarter of 2022 saw a similar trend, with more than $9 billion raised by crypto startups. However, Luna’s collapse at the end of the second quarter of 2022 immediately affected venture capital-led funding.
From the chart above, investments in the third quarter fell more than 50% to $4 billion, indicating that the crash prompted second thoughts from investors. The subsequent collapse of FTX in the fourth quarter seemed to confirm VCs’ concerns about investing in a volatile market. This may be why investment in the first quarter fell to $1.7 billion.
What does this mean for the future of Web3
In its study report, Crunchbase reports a decrease in the amount invested and a decrease in the number of funding rounds. On the context front, the first quarter of 2022 recorded more than 500 financing rounds compared to 333 rounds this year. In addition, the study revealed that only three financing rounds exceeded $100 million in the last quarter compared to 29 rounds a year ago, a decrease of nearly 90%.
However, these events should not be viewed as overly negative. The development in the past year has shown some risks within the crypto ecosystem. It has also helped expose some bad actors like the Luna Foundation and FTX, which collapsed despite receiving VC funding.
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It is well established that challenging periods usually provide an ecosystem where projects must build strong use cases to survive through a bull market. So the Web3 industry is expected to emerge stronger despite the current downturn in funding.
The cryptocurrency market responded positively in the first quarter, as the leading currency, Bitcoin, recovered and reached $30,000 during the period. At the time of writing, bitcoin is trading at around $27,590, down 9% in the past seven days.
Featured image from Pixabay and charts from Crunchbase and TradingView