Global Web3 VC Funding Set to Decline for 7th Quarter in a Row and May Not Turn Around Until SEC’s Warpath Is Over

Web3 companies have found it hard to attract VC funding, a new Crunchbase data shows. According to the report, the nascent industry saw its funding pipeline slip by 78% in the first half of 2023.

However, this does not represent disinterest in the industry. Instead, it could be a growing wariness from investors following regulatory pressure.

78% Massive Drop From H1 Of 2022

In the past few months, businesses across various industries have faced challenging times, and the Web3 space has been no exception.

According to a Crunchbase report, the decentralized finance (DeFi) space experienced a substantial decline in venture capital (VC) funding.

The report revealed an overall decline of 78% in the first half of this year. This follows an inflow of only $3.6 billion in H1 of 2023 compared to the $16 billion it attracted from eager VC firms in the same period in 2022.

Web3 VC funding slipped by 76% in Q2 of 2023, pulling in only $1.8 billion. This amount came from only 322 deals done between April to June.

The decline is put into better context when it is placed side-by-side with $7.5 billion raised in the second quarter of 2022. The 322 figure is the second-lowest amount of deals since the last quarter of 2020, which pulled in $1.1 billion from 291 deals.

In the second quarter of 2022, Web3 startups raised 15 rounds of funds, with all of them pushing above the $100 million mark. The second quarter of 2023 has not been so robust, with only three crypto startups managing to hit the pre-seed figure.

These include Shariah-compliant Web3 startup Islamic Coin which raised $200 million from ABO Digital. Vancouver-based LayerZero Labs raised $120 million from 33 investors, and Worldcoin raised $115 million in Series C funding from Blockchain Capital, a16z, Bain Capital Crypto, and Distributed Global.

Has it been any better for the first quarter of 2023? Crunchbase seems to believe otherwise. Only 418 deals were completed in Q1, 2023, which is 23% higher than the Q2, 2023 results.

Where Is All the Money Now Going?

Crunchbase does not believe that VC interest has ebbed or that the Web3 space is no longer attractive. Instead, it states that VC firms are turning their sight to artificial intelligence (AI) and more traditional tech sectors.

AI has become the hottest topic in the tech space following the launch of OpenAI’s ChatGPT in November 2022. The human-like intelligence software sector has served as a catalyst for many companies now diving headfirst to tap into the AI gold rush.

Another Crunchbase report noted that global venture capital funding slipped by 18% quarter-over-quarter (QoQ) to $65 billion, but AI seems to be the outlier.

The nascent industry pulled in $25 billion in the first half of this year, representing 18% of the global funding.

While this is lower than the $29 billion raised in the same period last year, it is still a huge step-up compared to the global funding decline. OpenAI attracted the most amount, with Microsoft pumping $10 billion into its partner’s purse.

The popular software company led by Sam Altman is also the brainchild behind the newly launched Worldcoin project.

Regulatory Action Scaring VC Firms From Web3 Space

One of the Web3 space’s greatest hurdles at the moment is regulatory uncertainty, likely at least partially driving the decline in venture funding.

In the last six months, regulatory pressure has grown from several world governments. Countries like Singapore, Hong Kong, the United Kingdom, and several European nations have become laser-focused on the Web3 space.

However, none have matched the zeal of their United States counterparts. Leading the frontline has been the US Securities and Exchange Commission (SEC), which has been on a tear in the last couple of months.

Beginning with the Ripple blockchain case kickstarted in December 2020, the SEC has continued to drag crypto firms into legal battles to protect investors.

Recent examples include the Coinbase and Binance legal lawsuits and Chair Gary Gensler labeling several altcoins as securities.

This has seen many US-based crypto firms seeking greener pastures in foreign lands. A typical example is the Winklevoss Brothers’ owned Gemini exchange opening its business in Singapore.

https://twitter.com/WhaleCoinTalk/status/1671195941372583936?s=20

Coinbase is also angling towards this step, but CEO Brian Armstrong is still committed to the US market despite the top regulator frowning at its lending services.

The company shares seem to have benefited from the attention and have risen 50% in value between July 6 to July 10, 2023.

Despite facing a lawsuit from the SEC, Coinbase's shares have seen a significant increase of 50% in value.

The #SEC had threatened to sue #Coinbase over its lending product, which they argue involves a security.

Yet, even amidst such regulatory challenges, Coinbase's stock… pic.twitter.com/lGdedxXqwk

— Velvet.Capital (@Velvet_Capital) July 29, 2023

However, not all crypto firms have shown such resilience, and VC investors are becoming wary due to the lack of regulatory clarity in the space.

The recent data from Crunchbase seems to indicate that the third quarter of 2023 will go the same way unless the SEC ceases its current warpath against the nascent industry.

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