Despite experiencing a notable drop in buzz in the venture capitalist space, the nascent Web3 segment experienced a slight increase in funding in Q1 2024 compared to the fourth quarter of the previous year. This marked the first time Web3 has seen an increase in venture capital funding since Q4 2021, giving the emerging industry a brief reprieve from several years of low funding.
However, despite the recent rise in Web3 investing, venture capitalist dollar inflows into the space have dropped year-to-year and are a long way from the highs registered in 2021 to 2022.
Web3 refers to the next generation of the internet and is powered by decentralized blockchain technology that grants users unprecedented levels of control over their data. Start-ups in the Web3 space attracted significant investor attention as blockchain technology and cryptocurrencies such as Bitcoin gained significant worldwide popularity, drawing in millions of dollars from investors who wanted a share of the next big thing.
However, the nascent space struggled to sustain investor interest and was further hampered by the FTX scandal that caused trust in Blockchain and cryptocurrencies to drop to an all-time low. According to data from Crunchbase, Web3-related start-ups involved in either Blockchain or cryptocurrencies raised less than $1.9 billion through 346 deals in the first quarter of 2021. This was roughly 58% more than the funds raised in Q4 2023, when Web3 start-ups raised close to $1.2 billion in 263 deals but 17% less than the funds raised in the first quarter of 2023, which totaled $2.3 billion raised in a whopping 670 deals.
The number of deals secured by start-ups in the Web3 space has also seen a 48% year-over-year drop, indicating that Web3 start-ups are having trouble securing the same number of deals they were several years ago. It’s rough going for a sector that just a few years ago was enjoying significant investor attention amid immense private-market interest in a decentralized internet and a flurry of newly minted unicorns.
Although several markets suffered a major investor pullback starting in 2022, the Web3 segment suffered a greater impact as investors congregated in more profitable and better-defined sectors. The result was a cryptocurrency winter that was compounded by the revelation that FTX founder Sam Bankman-Fried had embezzled billions of customer funds.
Most of the funding raised in Q1 2024 was raised via small rounds with the three largest funding rounds of the quarter totaling less than $300 million. UK company Exohood Labs raised $112 million, Seattle-based start-up EigenLabs raised $100 million and Hong Kong’s Freechat raised $80 million.
As companies such as Horizon Fintex continue to use different Web3 solutions in their operations, a strong case for further investment in Web3 start-ups is likely to arise, and inflows into the industries could accelerate in the coming years.
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