A recent report from Crunchbase has revealed a dramatic decline in venture capital (VC) funding for web3 startups during the first six months of 2023. Compared to the same period last year, funding plunged by a significant 78%. While blockchain-related ventures, encompassing crypto, NFTs, and the metaverse, were once considered the next frontier in technology, recent analyses, including the Crunchbase report, indicate that the web3 space has encountered considerable difficulties.

Venture capital is a crucial form of financing provided by institutional investors to entrepreneurs and startup businesses, typically during their expansion phases. This investment often comes with an equity stake in the business, compensating venture capitalists for backing enterprises that may not yet have established revenues or positive cash flows. The primary objective of VC financing is to offer financial backing and strategic guidance to high-growth businesses and startups. In the cryptocurrency sector, VC functions similarly, specifically targeting startups and initiatives involved in cryptocurrencies, blockchain technology, Decentralized Finance (DeFi), and other advanced distributed ledger technology applications.

Crunchbase defines web3 startups as cryptocurrency and blockchain startups. The report highlights that in the first half of 2022, web3 startups collectively raised nearly $16 billion. However, funding in the first half of 2023 plummeted to just $3.6 billion, representing a stark 78% drop. The second quarter of 2023 alone saw a 76% decline compared to the previous year, with web3 startups raising slightly over $1.8 billion between April and June, a sharp contrast to the $7.5 billion secured during the same period in 2022. While overall VC funding across all sectors slowed by 18% in Q2 2023, crypto-related funding experienced a much steeper decline. Conversely, artificial intelligence (AI) startups emerged as the new favorites among investors, attracting $25 billion in funding during H1 2023. Despite the general downturn, some notable funding rounds did occur in the first half of 2023, including OpenAI CEO Sam Altman's crypto project Worldcoin raising $115 million in a Series C round led by Blockchain Capital, and crypto protocol LayerZero securing $120 million from investors like Andreessen Horowitz (a16z) and Christie’s.

Lexi Novitske, general partner at Norrsken22 and founder of Acuity Venture Partners, an investment firm focused on early-stage African companies, offers insights into the reasons behind this decline in Web3 funding. She argues that the downturn is not solely due to a decreased interest in crypto, as commonly believed. Instead, investors are now shifting their focus inward, scrutinizing existing portfolios and prioritizing startups that demonstrate proof of profitability and attractive economics. This trend disadvantages web3 startups, which are often built on future expectations of profitability. Furthermore, Novitske attributes the downturn to the broader global economic impact of inflation. She notes that people are becoming more conservative with their cash, likely influenced by decreases in their crypto investments and the overall high cost of living. Consequently, consumer-focused platforms offering 'nice to have' or 'interesting to have' products are losing favor compared to companies developing 'need to have' solutions.

Regarding the future of crypto, Novitske remains optimistic, believing it still holds a useful space within the tech ecosystem, albeit potentially in a less visible role. She suggests that many AI companies are now leveraging web3 and other deeper tech solutions in their backend to build more efficiently and tackle real-world problems. Therefore, Novitske believes that web3 is not fading but rather evolving to become a more integral, yet often hidden, aspect of modern technology.