“Chewed and spat out.” How startups survive venture winter

Many market participants are already bullish, but bears, as happens in the wild, attack the weakest and smallest. Despite the strengthening of Bitcoin’s position, in 2023 the volume of investment in the industry fell to record low levels. ForkLog figured out the situation together with the head of a venture fund and the founder of a young project.

Where did the money go

According to a report from Crunchbase, Web3 startups raised 76% less capital in the second quarter compared to the same period last year—only $1.8 billion.

The total number of transactions also fell by 51%, from 659 to 322. This is the lowest level since the end of 2020.

If we look at the entire first half of the year, the figures look even worse. During this period, Web3 projects attracted $3.6 billion – a decrease of 78%.

“The current situation is actually a complete ****** [гротеск]. Why? But because funding has decreased almost 10 times. There are many ideas on the market, but new companies are needed to implement them. But they don’t appear, or they appear and quickly die,” said Sergei Kovalev, founder of the Afford.Capital venture fund.

According to him, many highly valued projects are now trading at large discounts, and the number of startups themselves has decreased significantly.

In the first six months of 2022, analysts recorded 15 separate investment rounds worth more than $100 million. This year, their number has decreased to three:

• Swiss Islamic Coin project – $200 million led by ABO Digital;
• omnichain protocol LayerZero – $120 million led by Sequoia;
• Sam Altman’s startup Worldcoin – $115 million led by Blockchain Capital.

Crunchbase experts noted that many large investors have gone into the artificial intelligence sector, which attracted $25 billion in the first half of this year.

More recent data reviewed by WuBlockchain also suggests a continuing decline in the venture sector. The total volume of funds raised in September amounted to $510 million, which is 24% less than in August and 72% less than the same period last year.

According to the founder of the young cross-chain protocol CrossFi, Alexander Mamasidikov, the market for financing crypto startups has “matured” and is no longer throwing money away.

“I can’t say that investors have completely given up on cryptocurrencies or forgotten about Web3. On the contrary, interest is only growing. But he shifted from the “revolution” position to the “evolution” point of view. There is less maximalist talk about how the whole world will soon completely abandon fiat,” he emphasized.

Now there is more interest in projects that work at the intersection of TradFi and DeFi, Mamasidikov believes. Investors’ attention is also attracted to corporate blockchain solutions, especially those that do not require large-scale restructuring of the existing infrastructure.

The collapse of FTX dealt a strong blow to the reputation of crypto projects, added the head of CrossFi. The bankruptcy of the exchange brought with it many landing projects, which in turn hit the portfolios of venture investors. Alameda was also a major player, funding dozens of crypto projects.

“The macroeconomic situation also has a negative impact on the venture sector: high inflation, an increase in the key rate, and growing returns on low-risk assets. Of course, the crypto market does not exist in a vacuum and all these processes have an impact on it,” explained the head of the startup.

The founder of Afford.Capital noted that large venture funds are doing quite well, they continue to invest and raise money. However, smaller companies are faring much worse. Most small organizations had to suspend their activities altogether due to the market situation, Kovalev added.

Where to look for funding

Startups typically don’t have many avenues to raise funds, and almost all of them lead to venture capital firms.

One of them is grants from private or government organizations. For example, the United Nations Children’s Fund (UNICEF) provides non-equity contributions of up to $100,000 to technology startups that “advance human development.”

Large firms also often create their own investment funds. Web3-focused initiatives include the Polkadot Foundation, the NEAR Protocol Grant Program, and the Harmony Ecosystem Fund.

Sometimes startups resort to the services of accelerators and incubators, which provide access to investment, mentoring and a ready-made business plan. Typically, such organizations try to control the activities of the funded project as much as possible.

Fundraising, or Kickstarter, which has already become a household name, is also popular among crypto startups. Only in the Web3 space, the fundraising platform was replaced by a decentralized analogue called Juicebox.

“Some investors come up with projects on their own, for example, after meeting them at a conference or forum. Projects approach others on their own, schedule meetings, and make pitches. Basically, investors look at several components: the market, its problems and how the project they are interested in copes with them,” added Mamasidikov.

Speaking about the number of successful startups, the founder of Afford.Capital cited rather depressing numbers. Only 4-5% of companies reach the first seed rounds.

Responsibility for success depends both on the project team itself and on the state of the market. Kovalev believes that current crypto startups often do not seek to solve some global problem, but exist in a limited ecosystem, which is why they do not find founders.

Also, new companies employ many young and inexperienced employees, who sometimes occupy management positions. According to the head of the venture fund, they are not looking for a target product and are not developing a marketing strategy, which leads to disastrous results.

“Startups like this think that the market is buying it. But he just takes them, chews them and spits out the bones,” states Kovalev.

The head of CrossFi suggested a simple recipe for a successful product: correct positioning, finding your niche, working with the target audience, building a community and constantly improving technological aspects.

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