Even by the standards of cryptocurrency’s notorious volatility, the past six months have been a sweaty ride. The total value of all cryptocurrencies is estimated crashed by about $2 trillion from its November 2021 peak, while the price of Bitcoin itself has done so fell from a peak of almost $70,000 last November to below $20,000 as of this writing. Meanwhile acc a countsince 2011, a staggering 2,400 cryptocurrencies have disappeared or “died” in one way or another.
Unlike previous market slumps, however, the main reason behind crypto’s current malaise is the broader economic downturn, coupled with wildfire inflation — which central banks are combating by raising interest rates — prompting investors to flock to more stable assets. Additionally, the current crisis has exposed how the crypto marketplace has built a very similar financial infrastructure to that underpinning traditional banking in 2008, although part of the rationale for decentralized finance (DeFi) was that the abolition of Central banks and governments would help prevent systemic collapse and contagion.
However, despite all the turbulence currently engulfing the space, I remain convinced that the underlying technology of Web3 — the umbrella term for the new blockchain-based, decentralized internet, cryptocurrencies, non-fungible tokens (NFTs), and DeFi includes – this is robust, has an extremely wide range of use cases, and will stand the test of time, creating numerous $1B+ businesses in the process.
With around 110 pre-seed investments in Web3/crypto and blockchain related startups, Techstars is one of the most committed and active early-stage investors in this space. Over the past five years, our accelerators have received well over 1,000 applications from Web3-focused founders, with over 300 applications in 2021 alone; 2022 is on a similar path. To date, our Web3 portfolio companies have raised nearly $1 billion in follow-on capital – and that number is just a small taste of what’s to come, as we’ve raised about half of that 110 in the last two years or more companies have invested. which means they are still at a very early stage.
Shadow of the dot-com bubble
The reason why Web3 and blockchain in particular are so promising is that I think we are currently at a tipping point that is broadly similar to the dot-com bubble of the turn of the century when a frenzy of investing in internet-enabled startups, leveraging a nascent technology that promised to herald a more egalitarian future in which the balance of power would shift away from old businesses and the state and toward the individual. Of course, that dial-up era crumbled and burned when its early promise didn’t live up to the hype. But out of the carnage emerged revolutionary but decidedly useful companies like Amazon, eBay and Google, and gradually a viable venture and startup ecosystem.
The parallels to Web3 are clear. The early years of crypto’s Wild West — which proponents vowed to bypass traditional gatekeepers and central banks to create a new internet based on blockchain technology — were marked by incessant hype and rampant speculation. Ponzi schemesand even outright fraud. Yet again, in the wake of the crypto bubble bursting and market volatility, there are clear signs that we are about to enter a new era where there are opportunities for builders to create a human-centric Web3, where businesses can finding real solutions to worldly problems for individuals and businesses.
At Techstars we currently see three market trends. First, while the turmoil will no doubt cause a large number of space startups to fail as they leave the runway and are unable to take off, there is also a positive side to the crypto crash: frankly, he flushing out the froth, the crypto clones, the Web3 wannabes and the more gimmicky end of the NFT digital art market.
Second, VCs that are no longer driven by FOMO have stopped investing unseen and multiple betting on companies with Web3 tags. While there are still firms with recently closed, brimming funds ready to be deployed, the bar for check-cutting is higher, due diligence is taking longer, and lengthening the runway for existing portfolio companies is often prioritized over new projects .
Promisingly, some of the more traditional VCs are also entering the Web3 fray. For example, fintech VCs we used to work with now have staff (and partners) covering DeFI, marketplaces-focused VCs review creator economy offerings in Web3, and sports and entertainment-focused VCs pull blockchain -Games and Esports under consideration – all indicating a crossover is underway.
Third, we see strong and more importantly accessible proposals continue to receive funding, opening up opportunities for startups that leverage the unique properties of Web3’s underlying technology. One such company is TransCrypts—a blockchain-based platform for verifying company data—who attended the opening ceremony 2022 Filecoin Techstar Accelerator class Mid-June in Seattle. Just days later, the team closed a $1.4 million pre-seed round from investors including Mark Cuban and protocol labs. Today, TransCrypts already has over 100 enterprise users, including a number of well-known names in technology, retail, and aviation.
Similarly, we are seeing a trend towards use cases targeting developing countries where cryptocurrencies can serve a more practical purpose. Founded Buchi Okoro, for example Quidaxa cryptocurrency exchange, in 2018 as a 25-year-old in Lagos, Nigeria.
Okoro wanted to make it significantly easier for young Africans, a large proportion of whom are unbanked, to connect financially with the rest of the world. “Trying to send a payment from point A to point B, even in Africa, is a nightmare,” Okoro said. “Trying to send money from Nigeria to the US doesn’t matter. Crypto makes it a lot easier to make international transactions.” The company is now out 400,000 customers in 72 countriesand started its own token, QDX.
New technologies usually take two or even three waves to reach maturity. The first wave is usually hype-driven, attracts a feeding frenzy, and ends in a crucial crash. In the second wave, when the foam recedes, the really useful uses come to the fore.
Since the crypto crash, some have concluded that Web3 is a spent force; that is, fundamentally misjudging the situation. It has become abundantly clear that blockchain technology has myriad applications, from carbon marketplaces to personal identity protection, cross-border payments and real estate transaction records (to name a few). The first wave of Web3 is over. Wave two is underway. This is where things start to get interesting.