The fear of missing out (FOMO) factor which led many entrepreneurs to start up in Web3 and venture capitalists to invest in these firms last year, is now almost over, as the sector is grappling to build decentralised solutions for real-life problems amid funding winter.
Web3, which means the products and services are built on blockchain, is touted to be the next version of the Internet wherein all these products are decentralised.
“Entrepreneurs who were starting up are now pivoting, delaying token launches and fundraises. Their team members have either left or have been asked to leave. These are now very common,” said an entrepreneur, who was also planning to launch a token for his Web3 venture but has delayed its launch, requesting anonymity.
Further, entrepreneurs and investors say that growth-stage deals have almost come to a halt while pre-seed and seed rounds are still being closed.
“In terms of deal flow, we are down by 30 percent compared to last year. But, there is a lot of competition for seed rounds. Growth-stage deals are much tougher now,” said Hemant Mohapatra, partner at Lightspeed India.
Last year, the burgeoning sector raised $0.5 billion, while in the first six months of this year, the sector raised over $1 billion.
During the funding frenzy last year, coupled with the crypto bull market, scores of startups raised funding on the basis of just starting up in the crypto, NFT or larger Web3 space.
Tough questions
But many of these startups are getting a reality check as now questions are being asked about the real use cases and monetisation of many of these ideas.
“When you try to really do something impactful for a larger set of audience then you need a real business plan, basic economics, logistics and compliance. That is where we are at,” said former CoinDCX executive Manhar Garegrat who is now starting up a Web3 venture of his own.
The magic phase where you could just do something because it is new and interesting is over, he added.
Santhosh Panda, the founder of Foundership, said, “This year has shown us that Web3 is not ready even with the basic tools for us to function. If a new crypto user has to use a service, he or she will struggle with the MetaMask wallet. It can be solved at some point but we need to take more bets on infrastructure and tools rather than tokens.”
Is the FOMO phase over?
While on one hand, the funding winter did not stop large venture firms from raising mega funds to invest in Web3, cheques are going out only after intense scrutiny.
Garegrat added, “The FOMO era is over. The massive rally that was happening that everyone wanted to be a part of, is over. A majority of those projects that picked up in the bull cycle have lost a lot of value. We are now seeing the decentralised and the centralised worlds coming together.”
The industry is now seeing the need to be more rooted in reality, the centralised world as well as more cognisant of compliance and regulatory needs.
“Brands, founders, investors who just wanted to make easy money last year are now out of Web3. This has improved the quality. If someone is starting up in Web3 now, you know it is not for the short term, which helps you make the distinction,” said Pareen Lathia, co-founder of Buidlers Tribe.
Things have significantly changed over the last few months due to multiple factors like the crypto market crash and funding crunch in the startup ecosystem, among others.
What changed?
The concerns from investors are now more on compliance and products that can solve real-life problems. In fact, this sector has drawn this criticism periodically.
Around 2017-2018, when crypto startups raised capital through initial coin offerings (ICOs), many of them could not build a product to solve a real issue. This has also been a fear in the industry which has raised more scepticism among the critics.
The experts say that infrastructure projects, DAO tools, NFTs for the creator economy have been some of the areas that investors are keen about. But Lathia adds, “Last year’s theme which was drawing investments was majorly NFTs and DAOs. People are yet to find out what’s the next theme in Web3.”
While some are optimistic that the market will start reviving within the next few months which will draw capital, some say that it will take 18-24 months, based on the previous downturns.
“Every technology goes through cycles. Crypto has gone through multiple cycles and many valuable companies were built during the bear market. Overall, this is the time to go deeper and make more investments. This is also the time when we find founders with more understanding of the market,” said Vaas Bhaskar, principal at early-stage fund Elevation Capital.
But..no dearth of talent
However, experts say that interest in crypto or Web3 is far from dead.
CoinDCX founders earlier told Moneycontrol that they have 25,000 applications in the pipeline and plan to hire 1,000 this year.
Former Coinswitch Kuber executive Sharan Nair who is now building Web3 venture PYOR Edge agrees.
He reasons, “There is a difference when you are working in Web3, suddenly you are part of a community, you're changing your DP with light in your eyes. You are speaking a different lingo on Twitter. You can see a change in personality when people move from Web2 to Web3. They even dress more casually and start sending memes to each other. The culture attracts a lot of young talent.”
Both Garegrat and Nair say that they have been flooded with resumes.
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