An overview of Web3’s venture capital activity in 2021

2021 has been a pivotal year for the Web3 industry, where it has grown from a fledgling community to a fledgling industry.

Over the past year, we’ve seen an incredible mix of talent and capital flow into the Web3 ecosystem. From there was born massive innovation in the underlying decentralized tech stack, along with consumer-facing applications that disrupt money, finance, and even the internet itself.

The opportunity

Web3 generally refers to the Internet which belongs to its builders, users and creators. By leveraging tokens and decentralized technology, it aims to disrupt centralized intermediaries. Cryptocurrencies, decentralized finance (DeFi) and non-fungible tokens (NFT) are the first applications that have found their fit with the commodity market and have been adopted by consumers.

However, the massive adoption of Web3 technology is only just beginning. Cryptocurrency is still owned by less than 10% of the world’s population. Decentralized financial systems currently hold around $ 100 billion in assets, but still represent a small drop from the traditional financial system. Web3 apps have reached tens of millions of users, but still pale in comparison to billions of Web2 app users.

Like Tascha from Soundwise recently Speak clearly, experiences from the previous two waves of exponential technology, the Internet and mobile, show that consumer applications start to gain popularity once the highlighted technology reaches 1 billion users. In contrast, there are currently only 180 million Ethereum addresses. Using this as a proxy for the adoption of Web3, at current growth rates, it will take another 5 years to reach 1 billion users.

We are probably at the start of what is potentially the greatest technological innovation since the advent of the Internet, giving VCs one of the most asymmetric upside opportunities in recent history.

Some very high-level metrics on the 2021 market:

  • VCs deployed $ 30B + in the world in 2021 in crypto startups
  • There are 65+ crypto unicorns, with over 40 of them created in 2021. There were nearly 50 crypto startups that raised over $ 100 million in 2021
  • Total market capitalization exceeded $ 3T

Landscape VC

VCs bet big on crypto startups in 2021, investing around $ 30 billion globally at the end of November in 1,278 deals (according to Pitchbook). The average day in 2021 saw blockchain-related startups raise $ 20 million, and the average seed-raising jumped from $ 1.5 million in 2020 to $ 3.3 million.

We are seeing significant crypto-focused venture capital funds being raised. a16z raised a $ 2.2 billion crypto fund in June. Paradigm raised a $ 2.5 billion crypto fund in October. Additionally, larger and more established funds like Tiger and Sequoia, which had historically moved away from crypto, are aggressively entering the market through late stage equity.

As more institutional capital flows into the Web3 ecosystem, expect valuations to rise and competition among venture capital funds to intensify. Differentiation between different verticals such as stage (early vs. late), geography (west vs. east), value added (tokenomics, governance, developer access, liquidity, etc.) will become key for funds as allocations are becoming more and more competitive.

Startup Landscape

The increasing frequency of subsequent steps has enabled at least 65 crypto / blockchain startups to reach valuations of over $ 1 billion, with more than 40 companies reaching unicorn status in 2021.

Nearly 50 crypto startups raised more than $ 100 million in 2021. Historically, crypto valuations and blockchain funding have been dominated by exchanges, fintechs, and institutional service platforms. This has remained the case this year, with FTX, Celsius, Gemini and Fireblocks being among the biggest increases.

However, we’re also seeing an increased focus on mainstream apps, as evidenced by the massive rounds that Sorare, Moonpay, Forte, and Dapper Labs have lifted. Each of them is focused on bringing the next billion users into the digital asset ecosystem.

Where do we go from here? The Web3 ecosystem is currently a melting pot of talent (developers & entrepreneurs) and capital (VCs & institutions). Combine that with some primitive new technology (blockchain / crypto) and you have all the ingredients for an explosion of innovation and value creation. As decentralized technologies and applications mature and favorable winds such as metaverse adoption kick in, consumer adoption of Web3 will become inevitable.

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