Investing in Web3 - Leaders and Losers

No technology develops without funds, and we all know that venture capital funds provide the major flows of funding to startups. And, of course, nobody gives money without counting on a profit.

So, those sectors of Web3 that are the most attractive to investors are most likely to develop faster and deliver more impressive returns compared to those sectors that do not receive a lot of funding.

So, which sectors are those that are worth your attention?

Let’s have a look at how it all develops.

How Was It Until Now?

Since 2016, investors have provided approx. $94 bln into Web3 companies; most of this sum has been invested since 2021.

Source: https://www.bain.com/insights/web3-remains-highly-relevant-global-private-equity-report-2023/ 

While the investment volumes decreased by over 77% in 2022, now, when the market rebounds, the interest in this sector rises again. So, in January 2023, Web3 projects already raised $517 mln, which marks a 36% growth from the sums raised in December 2022.

Source: https://www.galaxy.com/research/insights/crypto-venture-capital-q1-2023/ 

As you can see, the investment level has grown in Q1 2023 (and the Bitcoin price reacted accordingly). 

It means that as soon as unfavorable circumstances are away, the sector continues to attract money and grow. However, Web3 is not only about cryptocurrency; it is also about infrastructure, gaming, metaverse, etc. Which of them attracts more attention from investors?

Have a look here.

As you can see, NFT, Metaverse, and Gaming are the hottest trends. Even though some specialists believe that the interest in the metaverse is fading and, instead, AI is rising, data doesn’t lie: about 30% of the funds provided by VCs go to the metaverse and gaming. 

The second place is taken by financial services: trading, exchanges, investment solutions, and lending. 

If you compare at which stage the businesses in the leading sectors receive financing, you will also notice an interesting trend.

Source: https://www.galaxy.com/research/insights/crypto-venture-capital-q1-2023/ 

The trading, exchanges, lending, and investing sectors mostly get the most funding deals during the seed and later stages, which is typical for businesses that have a working product and a base of clients. In other words, most of these businesses receive the majority of VC deals for further development rather than for the very launch of a business. This category of companies is more mature, and their potential can be forecasted in the long term.

The newer category of startups, such as metaverse, NFTs, DAO, and gaming, is new. Their foundation is laid by completely new technology. So, the number of investment deals at a pre-seed stage is higher compared to the trading category, most likely because there are not so many established companies in this sector. 

We also know that one deal for several billion may be worth many deals for smaller sums. In this regard, the situation looks even more interesting.

Source: https://www.galaxy.com/research/insights/crypto-venture-capital-q1-2023/ 

Two of our leaders - metaverse/NFT/DAO/Gaming and Trading/exchanges/lending/investing receive very little funds at a pre-seed stage. Why? I believe that when it comes to trading solutions, investors prefer to provide funding for already existing products to boost their development. Yep, the environment is very competitive, and only the best ones can receive VC funding in this niche. 

When it comes to Metaverse, DAO, etc., there are plenty of teams working on these solutions, and thus, only those that have to offer something impressive indeed can count on a significant fund influx. 

But the situation changes later at a seed, early stage, and later stage development. The Trading/Exchanges/Investing/Lending category gets the more funds, the more developed a company is, while the Metaverse/NFTs/DAO/Gaming category gets the major share of funds at a seed and an early-stage development. There are almost no funds invested at a later development stage (maybe because there are not so many mature companies in this niche).

Why These Two Niches?

I believe that each niche has its unique benefits. The metaverse/NFT/DAO/Gaming niche is new, it is developing rapidly, and the perspectives are breathtaking. Have a look at how much the tokens of the leading metaverses or the major P2E games have grown since they were introduced to the market. All that growth is stuffing the pockets of early investors. That’s why it is understandable that investors are looking for more opportunities to benefit from the growth of promising startups.

But with the current growth rate of the number of metaverses, they prefer to be more careful and give funds to those who can prove that the product is viable and the potential to benefit is high.

Trading/Exchanges/Investing/Lending is another niche that gets the most funding. Here, I can explain everything with this meme.

We are all here for the tech, but we all know that without money, even the most disruptive tech doesn’t have a chance. And when people, especially if they are VC investors, give money, they expect returns. Trading, exchanges, lending, and investing are the fields where one can earn, and thus, they get the most attention. 

What to Expect?

Forecasts for the future? I believe that the trading niche will stay there for quite a while. It is already mature and known to deliver profit. Metaverse? Time will show because, for now, this industry is still too young. The only thing that is clear is that in this highly competitive area, only the strongest will survive.