Bears abound, but none in sight at Denver’s crypto fest

It was hard to tell at first from EthDenver — the biggest Ethereum developer conference in the world — that we’re in a bear market. The conference earlier this month attracted some 20,000 attendees to Denver, where hundreds of side events and impromptu meetups crowded trendy bars and restaurants day and night.

The sector has certainly slowed down: In 2022, the crypto market lost as much as $2 trillion. But if you stopped to talk to any investor or founder, it became clear that many entrepreneurs and investors believe the market downturn is constructive to the long-term health of the web3 space. Projects are settling down into real value and foundation building rather than pump-and-dump schemes and hyped-up NFT sales.

My conversations with EthDenver attendees took place just before Bitcoin’s value surged to its highest since last June. Even with the cryptocurrency at over $28,000, the price is still way below its all-time high of $64,000.

Developers and founders I talked to celebrated the toned-down parties as a good thing because it meant that most of the speculators were gone. Even local Uber drivers noticed. Last year, they were shuttling people between much more extravagant parties. “You could just smell money in the air,” one of them told me. “And this year it felt more serious.”

Applying the brakes

The downsizing of events and parties went in tandem with shrinking investments for startups, which now face a harrowing time to attract financing. The amount of venture capital for web3 companies saw a sharp decline in Q4 2022, totaling $2.4 billion compared to $9.3 billion a year ago, according to Crunchbase. The number of web3 startups funded halved to 327 during the quarter.

Pantera Capital, one of the biggest web3 investors, has slowed to four deals in Q4 compared to 25 investments in Q1 2022 alone, according to Crunchbase’s record. A typical web3 crypto VC firm is now making half the deals than it was at its peak, said GSR Ventures’ David Yin, who invests in web3 and fintech companies.

As funding cools, startups find themselves chasing after investors instead of the other way around, which was the case during the bull run. Marco Mirabella, co-founder and CEO of decentralized insurance startup Ensuro, said he talked to over 200 investors before getting seven of them to commit to his company’s seed round.

“It was very difficult to find a lead investor, and I started to understand why,” said Mirabella, who previously co-founded dApp developer solution Cartesi. “Everyone relies on the investment memo of the lead investor and all the due diligence that they do. This process takes a very, very long time. And because of the situation with FTX, investors start to run criminal record checks and background checks on every person in the management team.” 

Founders aren’t the only ones running into roadblocks. A frequent remark by web3 investors is that they love the bear market because company valuations are down and deals have gotten cheaper. On the flip side, the number of startups — and high-quality startups — raising money has also gone down, so investors have become more selective about sourcing and are spending more time with the stronger founders.

As Yin observed: “If you’re a very, very good project, and you raised a lot of money before, you probably don’t want to raise now, right? Because you don’t want to do a flat or down round in a bear market.”

Becoming traditional

During the bull market, investors were much less prudent with their bets because they could quickly liquidate the cash invested into a company’s private token sale. Even at the beginning of the bear market, financiers were still voracious. Vivian Law, co-founder and CEO of token management and liquid vesting startup VTVL, recalled that from late 2021 to early 2022, her company would get LinkedIn inbounds “every week, if not every day.”

Long queue at EthDenver 2023 to pick up attendee badges. Image Credits: TechCrunch

“I don’t know how they found out about us and when I asked them, they said our company came up in their recommendation feed or someone was talking about us,” said Law, whose company raised $1.5 million in Q2 last year.

VTVL, which has gone live, is in the process of raising a new round. Its product, in turn, serves other startups that are seeking capital, which has allowed it to spot a new trend.

Many investors were heavy-handed in their bids back in 2021 and we’re seeing creative methods for fundraising from our users, where projects are buying out early advisors or angels to raise subsequent rounds,” observed Law, formerly an investor at SOSV.

“For founders, it means less dilution and more bargaining power, for investors, it means getting in on a deal that they missed last year at a more reasonable valuation with a project that has more proven metrics.”

As hype in the industry dies down, companies are facing plunging valuations. Seed-stage companies raising a $2 million equity round are now typically valued at around $10 million, while those seeking a token round are raising 10% of their valuation, said Sean Yu, an investor at London-based Backed VC. During the bull market in 2021, companies could be easily valued at over $20 million in their seed round. Some could even raise $100 million pre-product.

That’s no longer the case as web3 venture capitalists become more risk-averse and start asking for metrics that are more typical to the Web 2.0 world, including a company’s product-market fit and even revenues. It’s not just the fund managers who heightened scrutiny, either. Their limited partners are also increasingly worried about the prospect of the crypto industry, even though these funds raised large sums when the market was in its highs, and there’s still much dry powder, or uncommitted capital, lying around, Yin noted.

The event attracted over 20,000 attendees this year. Image Credits: TechCrunch

Though focusing on revenues might help sustain a company through the winter, it could also compromise a company’s long-term vision. Law, for instance, said her team was briefly “distracted” by advice to pursue a pure SaaS as a business model, which she later realized wasn’t a suitable path.

I think VCs focusing too much on revenue making now is not necessarily a good thing because it’s pressuring everyone to think about short-term ways to make money,” the founder said.

Looking forward

The crypto space today feels much saner than when Bitcoin’s all-time high of over $65,000 in November 2021 ushered in a torrent of NFT scammers and opportunists who would raise money with just a white paper and disappear after a few months. Those who stay in the industry are now zeroed in on making the user experience smoother for non-crypto natives — hence the vibrant infrastructure building — as well as pinpointing real-world use cases, for instance, with efforts around stablecoins and offline payments via crypto for unbanked populations.

“I think if you look back during the last bear market, a lot of the best innovations are happening during that time,” Yin said. “The real builders are the ones who actually think about, ‘What can I use crypto or blockchain to solve?’ ‘How do I have somewhat of a business model?’ ‘What am I building, not for the hype, but for the long run?’ I think many of those founders only started building less than a year ago.”

Some argue that the industry has already bottomed and fundraising has started to slowly rebound, but uncertainty still looms. During a meetup at EthDenver, conversations went quickly from an optimistic projection of web3’s future to sudden panic when news arrived that the stablecoin issuer Circle was severing ties with Silvergate, the now-defunct bank that was seen as the go-to institution for crypto startups. But looking across at the Web 2.0 realm, the collapse of Silicon Valley Bank is similarly sending shockwaves across the more established startup world.