The Rollercoaster Ride of VC Funding in the Web3 Landscape

The landscape of Venture Capital (VC) in web3 has witnessed a significant decline compared to its flourishing state in 2021. This shift is primarily attributed to various factors, with risk tolerance being a notable one. Numerous venture capitalists were eager to invest substantially in the booming market. However, with money becoming tighter, fewer are willing to take the risks now.

The Venture Capital (VC) journey has been rollercoaster ride since the outset of the 2020 Bull market. Funding in web3 quickly escalated from $1 billion in Q4 2020 to $9 billion in Q1 2021, only to plummet by 82% YoY to $1.7 billion as of Q1 2023. In the first quarter of 2022, several VC-backed startups witnessed substantial investment rounds exceeding $100 million, with enterprises like ConsenSys, Polygon, and FTX securing more than $400 million. Fast forward to the current landscape of Venture Capital (VC) funding in the web3 space, there has been a noticeable shift from the exuberance of the past Bull market to a more cautious and discerning approach among investors. This transformation is primarily driven by several factors, including a decrease in risk tolerance, tighter capital availability, and a reassessment of investment strategies.

During the Bull market, VC funding in web3 experienced exponential growth, with billions of dollars flowing into blockchain, cryptocurrency, and decentralized finance (DeFi) projects. However, as the market matured and underwent significant corrections, investors became more wary of the risks associated with nascent technologies and speculative investments. This newfound caution has led to a decline in overall VC funding in the web3 space.

In February 2024, a record 114 Web3 and blockchain projects raised a total of $642.1 million in funding. The focus of the funds was mainly in the DeFi and blockchain infrastructure development sectors.
In February 2024, a record 114 Web3 and blockchain projects raised a total of $642.1 million in funding. The focus of the funds was mainly in the DeFi and blockchain infrastructure development sectors.

Amid the Bull market, companies and funds were penning checks with minimal due diligence. Now that the reserves have dwindled and valuations have undergone significant corrections, many VCs are hesitant to channel capital into this risky, nascent sector. A phrase resonating among some web3 turned AI now back to web3 VCs is, “we only follow on with tier 1s”. Suggesting that since their investment strategies lack a profound understanding of the market dynamics, instead, they will only follow investment patterns of top-tier VCs. Rather than maintaining a clear focus on specific segments like infrastructure or decentralized finance (DeFi), their tactic is to pursue any project led by a name-brand VC. This is a stark contrast from the past where VCs were open to taking risks on fresh and innovative ideas; now they lean on the extensive due diligence teams and brand recognition of major firms like a16z, Sequoia, Pantera, etc., to prosper in a market they scarcely understand.

From the funds’ perspective, this strategy makes sense—why not ride the coattails of large funds and inject capital into any round they are spearheading that will welcome you? However, does this strategy favor the companies and the overarching web3 ecosystem?

Companies seek VC funding not only for financial backing but also for the invaluable guidance and strategic partnerships that ensue. If a company secures a top-tier fund to lead their round, filling it with other strategic players becomes a simpler endeavor, and often, the lead will assist in attracting additional investors. Allowing these tag-along funds to join the cap table could potentially become a liability rather than an asset unless they share the vision and offer value beyond the financial facet. Regarding the broader web3 ecosystem, I believe that this “follow the tier 1” strategy hampers innovation. Not every concept will resonate with the biggest and best names in Venture Capital, and consequently, many exceptional companies may fall through the cracks if these funds are absent to catch them and take the risk.

The VC funding scenario in the web3 domain has undergone a radical transformation since the days of Bull market optimism. The risk appetite has considerably dwindled, and presently, even some of the finest projects are struggling to secure funding. The emerging trend of trailing the lead of prominent VCs is unhealthy for the venture capital ecosystem and bodes ill for innovation in the web3 space.


Paul Lalovich
Paul Lalovich
Organizational Effectiveness and Strategy Execution Practice