Even by the standards of cryptocurrency’s notorious volatility, the past six months have been rough. Estimated total value of all cryptocurrencies crashed approximately $2 trillion from its November 2021 peak, while the price of Bitcoin itself has increased fell down from a peak of nearly $70,000 last November to $20,000 as of this writing. Meanwhile, according to countingsince 2011, a staggering 2,400 cryptocurrencies have disappeared or “died” in one way or another.
However, unlike previous market declines, the main reason for crypto’s current malaise is the broader economic downturn combined with wildfire inflation, which central banks are fighting by raising interest rates, pushing investors towards more stable assets. Additionally, the current crisis has revealed how the crypto market has created a financial infrastructure very similar to that underlying traditional banking in 2008, even though part of the rationale behind decentralized finance (DeFi) was that the abolition of central banks and governments would help prevent systemic collapse and contagion.
However, despitea, the core technology underlying Web3 – an umbrella term for the new decentralized internet based on blockchain, cryptocurrencies, non-fungible tokens (NFTs) and DeFi – is reliable, has an extremely wide range of uses, and will stand the test of time, creating many billion-dollar-plus businesses in the process.
With around 110 previous 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 more than 1,000 applications from Web3-focused founders, with more than 300 applications in 2021 alone; 2022 follows the same path. To date, our Web3 portfolio companies have raised nearly $1 billion in follow-on capital – and that number is only a small fraction of what’s to come, as we’ve raised roughly half of those 110 or more companies invested in the past two years. which means they are still in the very early stages.
The shadow of the dotcom bubble
The reason Web3 and blockchain in particular are so promising is that I think we’re at an inflection point right now that’s broadly similar to the dotcom bubble at the turn of the century, where there’s a frenzy of investing in Internet startups using the nascent technology promised to herald a more egalitarian future in which the balance of power would shift away from old businesses and the state toward the individual. Of course, that dial-up era crashed and burned when its early promises didn’t live up to the hype. But out of the carnage emerged revolutionary but clearly useful companies like Amazon, eBay and Google, and gradually a viable ecosystem of enterprises and startups.
The parallels with Web3 are obvious. The early years of the Wild West of cryptography—whose proponents promised to bypass traditional gatekeepers and central banks to create a new internet based on blockchain technology—were marked by constant hype and rampant speculation. Ponzi schemesand even outright fraud. Again, with the bursting of the crypto bubble 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 find real solutions to real-world problems for individuals and enterprises.
At Techstars, we are currently seeing three market trends. First, while the turmoil will undoubtedly cause a lot of space startups to fail if they leave the runway and can’t take off, there is an upside to the crypto crash: frankly, it washes away the froth, crypto clones, Wannabe Web3 and the more crafty end of the NFT digital art market.
Second, VCs, no longer driven by FOMO, have stopped investing in invisible and multiple bets in Web3-tagged companies. While there are still firms with recently closed, fully funded ready to deploy, the bar for scrutiny is higher, due diligence takes longer, and extending the runway for existing portfolio companies is often prioritized over new projects.
It is promising that some of the more traditional VCs are also entering the Web3 fray. For example, fintech VCs we’ve worked with in the past now have staff (and partners) covering DeFI, markets-focused VCs are looking at creator economy offerings in Web3, and sports and entertainment-focused VCs are embracing blockchain – games and e-sports under consideration – everything points to a crossover coming.
Third, we see strong and, more importantly, affordable offerings continue to receive funding, opening up opportunities for startups that leverage the unique properties of Web3’s core technology. One such company is TransCrypts—a blockchain-based platform for verifying company data—who attended the opening ceremony 2022 class of Filecoin Techstar Accelerator It’s the middle of June in Seattle. Just days later, the team closed a pre-seed round of $1.4 million, including from investors Mark Cuban and protocol laboratories. Today, TransCrypts already has more than 100 corporate users, including a number of big 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. For example, Buchi Okoro founded Quidaxcryptocurrency exchange, in 2018 at the age of 25 in Lagos, Nigeria.
Okoro wanted to make it much easier for young Africans, many 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,” Okora said. “Trying to send money from Nigeria to the US is irrelevant. Crypto makes international transactions much easier.” Now the company is out 400,000 customers in 72 countriesand launched my own token, QDX.
New technologies usually take two or even three waves to reach maturity. The first wave, as a rule, is driven by excitement, causes a frenzy of feeding and ends with a sharp crash. In the second wave, when the foam goes away, really useful uses come to the fore.
After the collapse of cryptography, some concluded that Web3 was a spent force; that is, to fundamentally misjudge the situation. It has become abundantly clear that blockchain technology has many applications, from carbon markets to privacy protection, cross-border payments and real estate transaction records (to name a few). The first wave of Web3 is over. The second wave is coming. This is where things start to get interesting.