Why VCs Are Still Investing in Web3 Despite the Crypto Market Crash

• VC funding to Web3 startups hit a record early this year even as overall funding slowed.
• Investors told Insider that startups focused on Web3 infrastructure will withstand the crypto crash.
• VC firms, as a result, are growing their Web3 and crypto practices even in the market downturn.

Though individual cryptocurrency coins and nonfungible tokens may come and go, many investors believe that the future of crypto is still stable and ripe for opportunity. 

In the world of Web3 startups, investors have still been partying like it’s 1999, despite 30% tumbles in the prices of bitcoin and ethereum over the past month and the collapse of stablecoins TerraUSD and Luna. New startups in the space such as Highlight and Mara are still announcing outsized “mango” rounds.

Investors say there’s a good reason why the broader slowdown hasn’t hit Web3 nearly as hard. Of roughly a dozen VCs Insider contacted about their Web3 investments, nearly all of them pointed to their focus on the “picks and shovels,” or underlying technology supporting other applications.

The fundamental premise of Web3 — a more decentralized version of the internet fueled by crypto that allows users to maintain ownership over their digital assets — is here to stay, said Aaron Holiday, the cofounder and managing partner of 645 Ventures, an early-stage firm that has invested in the Web3 companies Solidus Labs and Cion Digital.

“That part, I believe, is isolated,” he added, referring to Web3’s “picks and shovels” in contrast to the broader market crash. “But there is going to be material capital that is going to be lost.”

Much of the venture capital funding is going to companies building tools for the crypto space at large, such as the security and compliance company, Chainalysis, which recently doubled its valuation to $8.6 billion following a $170 million Series F round. Solidus Labs, which offers crypto risk analysis for financial institutions, announced $45 million in Series B funding earlier this month. 

While the overall flow of venture capital into startups slowed in the first quarter of 2022, funding to Web3 companies hit a record high of $9.2 billion over that period, according to CB Insights.

The rise of newer, standalone VC firms devoted to crypto, such as Paradigm and Haun Ventures, which have raised billions of dollars in the past months, has helped keep capital flowing into Web3 startups. But other venture firms have also been moving to beef up their expertise in the area.

Some firms, such as Lux Capital, have in the past few months added investors to their team who are focused on the space, while others, such as Bain Capital Ventures, have launched entire crypto-focused arms. Newer VC firms are devoting significant portions of their portfolio to crypto, too, even if Web3 isn’t their sole or primary focus.

For instance, Day One Ventures, a seed-stage firm founded by the investor Masha Bucher, has backed crypto-focused companies such as SuperRare and Worldcoin, and it’s even invested a small portion of its funds in NFTs. (The firm’s collection includes the popular Bored Apes Yacht Club and CryptoPunks.)

Bucher told Insider that she’s seeing Web3 companies continuing to secure funding at robust valuations even now. “The best companies won’t have trouble raising,” she said — a phrase that’s become a mantra among investors over the last few months.

Some investors are less rattled by the current crypto crash because they’ve seen it play out before. Mike Duboe, a partner at Greylock, first started investing personally in bitcoin shortly before the infamous collapse of the cryptocurrency exchange Mt. Gox in 2014. He’s since backed Web3 companies such as Pinata and Magic Eden and has seen several other crypto slides since then. 

Yet, he said, the founders of standout Web3 startups have largely managed to withstand the changing market winds.

“A lot of these companies are built by founders who have lived through downturns,” Duboe told Insider. “Our conviction is as strong as it’s been historically.”

Not all investors are completely sanguine. Mo Koyfman, the founder of the VC firm Shine Capital, told Insider he believes that investor appetite for Web3 startups will eventually cool for a while.

Just like the plunge in tech stocks has led to slashed valuations, so too will the slide in cryptocurrencies, he said: “They’re all correlated.”

Even some crypto bulls have started to tighten their belts. Bucher told Insider she began to taper her personal purchases of NFTs earlier this year.

“We’ll be able to buy them at better prices in the next few months,” she said.