Ask Georges: Where is web3 funding moving?

By Andy Kangpan on October 13, 2022

2022 has been dominated by unprecedented web3 market volatility. Using data analyzed through Georges Doribot (our AI team member and proprietary research tool that helps our team find new, innovative startups to back), we set out to quantify how the venture funding market for the crypto sector has fared over the course of the year, and to draw implications as we look to the future. We take a closer look at what the data says.

2021 saw an unprecedented volume of venture funding entering the market in search of the next wave of innovation in the crypto space after witnessing the decentralized finance (DeFi) boom in the summer of 2020. This wave peaked in the first quarter of 2022, reaching roughly $1.75 billion in venture funding (measured by venture dollars invested into crypto/blockchain companies as reported by Crunchbase).

However, our analysis of the data clearly shows that the market dropped precipitously since the end of 2021, against the backdrop of declines across financial markets broadly coupled with a number of recent negative crypto market events.

Diving deeper into our analysis of the data, we see that over the course of 2022, investor sentiment has significantly shifted across a number of sectors. To date, the second half of 2022 has been approximating funding rates last seen at the end of 2020.

In our analysis, we look at funding levels for specified web3 sectors in the second and third quarters of 2022 relative to funding levels for the sector in the first quarter. We find that investors have clearly soured on DAOs, DeFi and media companies relative to other web3 categories. For example, in the third quarter of 2022, startups self-classified as focused on building technology for DAOs raised less than 25% of the volume they managed to raise six months earlier.

By contrast, certain sectors like gaming are so far showing more resilience. Relative to the broader crypto market, gaming has continued to see high-profile deals amid the market downturn, including large investments in gaming studios such as Playful Studios as well as asset marketplaces such as Fractal. Many industry participants see gaming as the next big onramp for users into the web3 space.

At Two Sigma Ventures, we continue to be excited about the future of the crypto market. We believe that the industry can bring greater transparency, new economic models, and new forms of ownership to a variety of industries. We have seen this narrative begin to take hold in financial markets, and are excited for it to permeate all sectors of the digital economy.

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