Web3 startups have been grappling with a significant drop in funding, with second-quarter figures in 2023 showing a staggering 76% decline compared to the previous year, according to Crunchbase. Despite raising a modest $4 billion in the first half of 2023, a sharp contrast to the nearly $16 billion raised in the same period in 2022, the overall trend pointed to a challenging fundraising landscape for these companies.
The downturn can be attributed to various factors, including a lack of investor confidence following market setbacks such as the FTX fiasco and the Three Arrows and Luna debacles. Regulatory actions against major players in the field have heightened concerns about regulatory risks. Additionally, a decline in active developers, users, and overall transaction volume on exchanges further contributed to the downturn.
However, beneath the surface of this market turbulence lies the untapped potential of decentralized databases within the Web3 framework. As governments worldwide implement new data regulatory regimes, the ability of Web3 to empower users to manage their own data becomes increasingly crucial.
Contrary to the boom-and-bust narrative, Web3's architecture offers a unique solution to the challenges posed by evolving data regulations. Instead of companies managing user data, Web3 allows users to control their data, providing software products access only with explicit permission.
Web3 startups face a crucial juncture in their evolution, necessitating a shift in their approach to marketing and selling. Unlike the seamless transition from Web 1.0 to Web 2.0 observed in the mid-2010s, Web3 startups must adapt to survive in a market where fewer than 60 companies generated over $5 million in revenues on chain in 2022.
To thrive, these startups need to expand their buyer base to untapped markets, particularly within the cloud software and infrastructure sector, which constitutes a significant portion of the $1.5 trillion global IT spend. A key aspect of this expansion involves adopting more recognizable language, simplifying terms such as "wallets, blockchains, and tokens" to "accounts, databases, and credits."
Promoting the value proposition and focusing on delivering greater revenue growth at lower costs will be essential for Web3 startups. Embracing the advantages of decentralization, such as improved performance, enhanced security, and compliance guarantees, can help bridge the gap between Web 2.0 and Web3 technologies.
For instance, blockchain technologies can address the growing complexities of data privacy laws by combining the benefits of personalization with crypto-based privacy. Encrypting preferences on the public blockchain allows users to manage their data, satisfying international regulations while enabling publishers to customize sites with user consent.
As the industry navigates this transformative period, startups must focus on practical applications that combine the strengths of Web 2.0 and Web3 to meet the growing demands for privacy and personalization. For investors like Theory, the convergence of Web 2.0 and Web3 software signals a promising future, as Web3 companies strategically embrace lessons from the past to shape their future endeavors.