Time flies, doesn’t it? We’re nearly through the first month of Q3, which means we can finally start taking note of the trends that will define the rest of the year, or whether long-lasting trends are set to continue.
One such long-running trend shows no signs of reversing: Unfortunately for crypto, a former darling of startup land, funding to web3 startups continues to decline and will likely do so for the foreseeable future.
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According to the Crunchbase Web3 Tracker, funding to crypto startups around the world is on pace to decline for the seventh straight quarter — with investments in Q3 on track to land quite a bit below the $1.9 billion crypto companies raised in Q2.
In fact, Q2 actually felt kind of stable, since crypto startups raised only slightly less than the $2 billion they did in Q1.
The current quarter is shaping up to be shakier. VC investments in web3 so far have totaled $412.7 million, and if things don’t improve, that will add up to about $1.2 billion or so by the end of September.
We’re certainly not going to see investors behaving as they were during 2021. But the ad market is recovering, startup valuations are getting slightly better, and we’re even seeing some early signals that the IPO market is not completely dead, so you might expect venture activity to sort of bounce back, too.
After all, since peaking at $10.6 billion in Q4 2021, venture investment in crypto has trended downward for six consecutive quarters. Surely it’s time for a break?
Perhaps not.
There are several compounding factors to consider when projecting the crypto market’s future. First, regulatory uncertainty is making it harder for web3 companies to operate in as many countries as they would like. This, in turn, limits these startups’ applicable TAM (total addressable market), and thus their potential viability as venture-backed entities.
Second, consumer demand for crypto assets isn’t very strong. NFT activity isn’t improving, and crypto trading is down when compared to historical levels and is perhaps slowing even further. It’s certainly a crypto winter, but not only because the external climate is chilly — consumers also don’t seem as engaged as they’d need to be for investors to be excited again about crypto projects.
The venture side
There’s a natural corollary to web3 being less appealing to customers and investors alike: Crypto funds are smaller today. And existing capital pools appear to be shrinking, too: Sequoia Capital reportedly has slashed the size of its cryptocurrency fund to $200 million, down from $585 million.
“We made these changes to sharpen our focus on seed-stage opportunities and to provide liquidity to our limited partners,” a Sequoia spokesperson told TechCrunch+ in an emailed statement. “The crypto fund will primarily focus on new company formation, with the opportunity to supplement these investments from our seed, venture, growth, and expansion funds as the companies mature.”
The fact that Sequoia still aims to invest in early-stage crypto startups shows that the firm sees a future in crypto. But this would also be a tactic that ensures it makes much smaller bets than its infamous $150 million investment in FTX, for which it reportedly apologized to its LPs after marking the investment down to zero.
Sequoia isn’t the only generalist firm that’s been partially turned off by crypto after getting burned. Even more specialized funds are slowing down. Coinbase Ventures makes for a good example: Described by the Block Pro as “one of the most active investors in crypto with an average of 30 deals per quarter, and more than 400 investments in 376 unique startups,” the fund has made only 27 investments this year, compared to 150 in 2022.
We do have Coinbase reporting its quarterly results next week, so that’s going to be illustrative. But for now, it appears that limited activity on the blockchain is also limiting capital flow into the space. Bitcoin maxis rejoice.