Despite a general downtrend over the past two years, web3 startups are showing signs of resilience, with funding stabilizing and even seeing a slight uptick in recent quarters. According to Crunchbase latest report, web3 startups secured $3.7 billion in the first half of 2024. This figure is down 18% from the first half of 2023 but up a significant 42% from the second half of last year.
On a quarterly basis, web3 startups secured over $2 billion in the second quarter of 2024, marking a modest increase from the $1.8 billion raised in the first quarter. While this represents an 18% decrease from the $2.2 billion raised in the same period last year, it is noteworthy as the second consecutive quarter of increased funding following eight quarters of decline.
Figure 1: Funding To VC-Backed Web3 Startups, In US$ Billion, Q1 2023 – Q2 2024
The funding data analyzed includes investments in VC-backed startups within both the cryptocurrency and blockchain sectors.
A Lack of Mega Rounds
Although the overall funding increased, large funding rounds were scarce. Only seven funding rounds surpassed the $50 million mark.
The sector’s numbers were bolstered by Monad Labs, a New York-based company, which raised $225 million in a round led by Paradigm. Monad Labs is a layer-1 blockchain compatible with the Ethereum Virtual Machine, known for its faster transaction processing capabilities. This round is reminiscent of the substantial investments seen in layer-1 protocols during the 2021-22 period.
Other notable funding rounds in the second quarter include:
- Farcaster: The Los Angeles-based decentralized social network built on Ethereum raised a $150 million Series A led by Paradigm, valuing the company at $1 billion.
- Berachain: An Ethereum-compatible blockchain for financial applications secured $100 million in a round led by BH Digital and Framework Ventures, valuing the company at $1.5 billion.
- Auradine: The Santa Clara-based provider of bitcoin mining and AI hardware raised $80 million from several investors, including Mayfield Fund, MVP Ventures, and Maverick Capital.
- Humanity Protocol: This blockchain unique-identity platform utilizing biometrics raised $30 million in seed funding led by Kingsway Capital, achieving unicorn status despite being less than a year old.
A Potential Inflection Point?
The question on everyone’s mind is whether we are witnessing an inflection point for Web3. The industry may have weathered the worst of the funding drought, with investments dropping to a low of $1.2 billion in Q4 of last year. The slight increase in funding over the past two quarters suggests renewed investor interest, particularly in the infrastructure needed to build a successful application layer within the Web3 ecosystem.
Cryptocurrency’s resilience also bodes well for the sector. Bitcoin has surged 69% in the past six months, while Ether has seen a nearly 49% increase. Bitcoin’s continued growth post-halving and the growing interest from financial institutions in U.S. exchange-traded funds that hold Bitcoin indicate sustained momentum in the market.
Web3 Funding Challenges and Outlook
Despite these positive signs, there are still challenges ahead. Deal flow dropped by about 25% in Q2, with only 292 funding rounds announced. This reduction could indicate that investors are becoming more selective or that fewer compelling startups are entering the market.
Hatu Sheikh, Founder of Ape Terminal and former CMO of DAO Maker, believes that a challenging funding market offers an opportunity for founders to differentiate themselves by keeping step with the changes, developing a strategic plan for achieving product market fit.
The coming quarters will be crucial in determining the future trajectory of Web3 funding. Whether this stabilization will translate into sustained growth or if the sector will face further headwinds remains to be seen.
Read Also: Navigating Web3 Funding Challenges in 2024