VC Interest in Web3 Security Endures After Crypto Winter

• Despite the crypto winter and a funding slowdown, several VCs remain interested in Web3 security.
• VC Richard Seewald told Insider the market is ripe, given recent crypto hacks.
• Seewald, founder of Evolution Equity Partners, has backed the startups Elliptic and Solidus Labs.

As crypto hype gives way to more vocal skepticism, several investors who have ventured into Web3 are now focused on two big areas: security and compliance.

Some of the biggest funding rounds for crypto-focused startups this year have been in those spaces, including a $200 million Series B for Aleo, which makes tools for building private Web3 applications, and a $170 million Series F for Chainalysis, which provides tools for governments and businesses to monitor crypto transactions and spot fraudulent or noncompliant activity.

Like in most other areas of the market, venture funding for cybersecurity has dropped this year. Funding in the third quarter totaled $2.6 billion — that’s significantly down from a peak of $8.3 billion in the fourth quarter of 2021, according to Crunchbase data.

But several VCs who have made investments in Web3, including Andy Kangpan of Two Sigma Ventures and Ethan Kurzweil of Bessemer Venture Partners, have told Insider they still see opportunities in the security space.

Richard Seewald, the founder of Evolution Equity Partners, a venture firm that invests in security-focused startups, said the recent woes within the crypto industry — such as the hack of the cryptocurrency exchange Binance — only illustrate a growing need for security and compliance tools.

According to an August report from Chainalysis, the value of assets plundered through crypto heists in 2022 had already surpassed last year’s total by 60%. Hackers stole nearly $2 billion in crypto assets between January and July.

Some crypto companies are still grappling with basic security around credentials such as private keys, which are used to access crypto wallets, and personal digital signatures, Seewald says. These are prime areas, in his view, for security startups to step in.

“It’s remarkable that we see those types of things in the market,” he said. “That type of hygiene is low-hanging fruit.”

Among the startups Seewald’s firm has backed are Elliptic, which makes security, analytics, and compliance tools for financial institutions and regulators, and Solidus Labs, which provides services for risk monitoring and surveillance to flag manipulation in crypto markets. In September, Solidus Labs made Insider’s list of the most promising crypto startups of 2022.

Crypto security, according to Seewald, is not so different from security for other tech applications. He likened today’s climate in Web3 to the internet 20 years ago. Many of the values that some Web3 proponents hold dear, including decentralization and anonymity, are “not dissimilar from how people spoke about the internet in the early days,” he said.