Web3 funds: what are the perspectives?

Web3 funds: what are the perspectives?

Undoubtedly 2021 and early 2022 have seen the rise of Web3 – the third generation of the world wide web, open and decentralized – and funds dedicated to it, with investors putting around USD 94 billion worldwide into Web3 projects1, most of this since 2021. This was pushed by several factors.

First one being the democratization and use of the blockchain technology beyond the cryptocurrency world, as Web3 is based on a decentralized architecture. Second, Web3 being the successor of the Web 2.0, commonly used by millions, the appetite was enormous in the alternative investment world as everyone wanted to reiterate Web 1.0 and 2.0 success stories. 

In this context, venture capitalists and private equity firms were in strong competition to be the first to invest in these new projects, to not miss that train. In some cases, this race led to a lack of detailed reviews of the projects and to some extent overvaluation of businesses.

Later in 2022, the landscape changed dramatically from the almost unlimited funding period that started in 2021. The economic environment changed significantly in a context of inflation and rise in interest rates followed by the crypto winter and the collapse of FTX. By extension, this slowed down growth in the Web3 space.

A Crunchbase report2 has shown that funding into Web3 projects decreased by 78% in the first part of 2023 in comparison with 2021. According to the report, Web3 projects raised about USD 16 billion in the first part of the year 2022. However, in 2023 and over the same period, it was just USD 3.6 billion. Despite the challenging times, both Bitcoin and Ethereum showed impressive resilience; up by more than 80% and 70% in their prices respectively since the beginning of the year 2023. 

Generally speaking, fundraising objectives in the start-up world are harder to meet as money costs more and fund managers are looking closer at the business, looking for more mature investments than pure early-stage companies. However, it is to be noted that this is not specific to the Web 3 industry. Even in the field of artificial intelligence (AI), which is very popular these days, we start to notice a less exponential growth. The latter does not mean that these businesses are over but rather that they are entering the age of maturity.

How can the interest for Web3 bounce back – what are the key points?

Project maturity

As in many innovative disruptive fields creating a huge technological shift, the frenetic growth is followed by a more linear one. The Web3 ecosystem will become more mature over time; this is the normal course of things with a market cleaned of the weakest projects and with a concentration of players with strong proof of concept. 

In 2021 and 2022 there was a multitude of start-ups launching projects under the Web3 banner. Even though several venture capital funds investing in Web3 were backed by major institutions such as the European Investment Fund, showing the crypto and blockchain world is not a niche anymore, it does not mean that Web3 industry was mature enough. These days, for start-ups looking for financing, having “Web3” mentioned on the pitch deck is not sufficient anymore. We are in a more conservative environment and due diligences are conducted more thoroughly. The trend is to exercise restraint and rather look at the founders, the way they manage their business and value add of the projects, as everyone wants to avoid being the investor who invested in the black sheep. 

Usually financing of Web3 start-ups is a blend of equity and tokens. The latter are making the projects more attractive as they have potential increased liquidity and value on the market compared to pure unlisted equity. One does not see this mix of financial instruments disappear but again investors are more aware of the risks implied by the volatility of the token market as these can be separately listed and therefore detached from the real business as opposed to pure private equity investment.

After the first wave of Web3 projects and a necessary market cleaning, the future looks brighter in a less risky and more reasonable market with potentially lower entry costs for businesses. Bearing in mind the remaining regulatory challenges and regulators’ watch, now is clearly a very good time to find attractive opportunities for investors.

Translate Web3 solutions into the real economy and finance world

It is now a fact that Web3, with the attached concepts and technologies, is here for good. For investors, the question is now about the use of the technology rather than betting on all horses and assuming each Web3 project could be the new star of the internet. However, few indicators show that 2024 could be the year of a new take-off.

First and foremost, tokens are part of the equation in all Web3 projects. As noted above, financing rounds are always made of tokens, at least partially. When one sees finance giants in the process of launching crypto ETFs (exchange traded funds), highly exposed to blockchain, one also sees digital assets such as tokens become more and more mainstream. 

Second and in the same trend, tokenization of real asset is on the rise, using blockchain technology to create fractional digital shares of assets. For example, RealT, a US-based real estate company, offers fractional real estate investment in tokenized assets. Token-owners collect their revenue portion from the total income generated by the asset. In Luxembourg, BlocHome is offering the same, allowing investors to have a slice of real estate with a first ticket for investing as low as EUR 1,000. With the DLT Pilot Regime (Distributed Ledger Technology referring to the blockchain) that came into force in March 2023 in the European Union, financial institutions now have a legal framework to experiment with tokenization of shares, bonds, and units of investment funds. This development may help pave the way for the integration of Web3 technologies into the financial industry. This is also fully aligned with a survey published by Citi in March 20233, mentioning that the tokens market would be around USD 4,000 billion by 2030. Additionally, Larry Fink, BlackRock’s CEO, views tokens and tokenization as the next big thing in the financial markets4. 

Finally, one can also hope for a better economic environment, one that is less inflationary, and that helps start-ups find financing easier.

All in all, the question is therefore not to know if the Web3 ecosystem will impact us but what trajectory it will take. Its future path will mainly depend on how it navigates the current economic and regulatory challenges and how it will manage to attract renewed interest from the investment firms in a less frenzy and more reasonable context around its technology.

1 Global Private Equity Report 2023, Bain & Company (2023)

2 Crunchbase’s Web3 Tracker, Crunchbase (2023)

3 Money, Tokens, and Games: Blockchain’s Next Billion Users and Trillions in Value, Citi (2023)

4 Larry Fink Says Tokens Are “The Next Generation For Markets”, Forbes (2023)