Venture Capital Benchmark
North America, Europe and Latin America.
Venture capital in Q4 2021 did not disappoint
The VC space has been on fire the past year, and Q4 2021 was no exception. Q4 set new records in capital invested, with some of the most exciting companies on the planet receiving massive capital allocations. We will break it all down in the report that follows.
Welcome to our quarterly benchmark, where we analyze all the notable VC activity over the past 3 months and stack it up against what we saw the previous quarters and years. We scan across the US, Europe, and LatAm to bring you the best insights, be it you are an investor, founder, or just fascinated by the startup investing space. Let’s dive right in.
Web3 and blockchain deals set new records as capital follows innovation
Decentralization continues to be the theme of conversation in the venture world. Despite Web3, crypto, and blockchain deals only accounting for 5.7% of all venture deals in Q4, founders across the globe are deliberating how to leverage this evolving technology to capitalize on an entirely new customer base (persona virtual likeness)
The space is still in its infancy
But the growth cannot be ignored
With an incredible 7.4x increase YoY (now sitting at $25B+). Clearly, this is a space that is seeing massive interest by the VC community due to its pervasive applications across industries and opportunities to disrupt traditional business models.
If you are a founder and have raised capital in the past year/actively raising now, chances are you have heard an investor inquire about your Web3 strategy, no matter if you are building natively in Web3 or not.
Investor interest is building in the space, and valuations and deal count from the past year reflect that interest. Speaking on behalf of TheVentureCity, Web3 is an important vertical (however far from the only one) we are focusing on for Q1 and all of 2022.
In this VC’s view it is crucial to build natively in Web3 or in Web2 with a clear Web3 bridge strategy, if relevant for the startup’s core value proposition. Web3 provides an important opportunity to capitalize on new revenue streams, especially in verticals where decentralization provides incremental value for end users.
Web3 is the hottest term in VC right now, but it’s not the end-all-be-all for every startup’s success. As a founder, it’s most critical to focus on what problem you want to solve, what your customer needs, and then if Web3 offers value for how you want to build product. If Web3 doesn’t offer value in this way, then it’s not the best fit (for now) for you.
In early-stage investor circles, it’s difficult to have a conversation where Web3/crypto doesn’t come up. Separating useful technology from pure hype remains a challenge, but the opportunity and potential broad-reaching impact cannot be ignored. On the flip side, it is important to put this movement in perspective.
Despite the massive growth over the past couple years, Web3 is still a nascent space: there are approximately 300M crypto users worldwide (3.9% adoption) and much access to the space is facilitated through Web2 platforms.
Combine that with a massive void of Web3 engineering and technical talent compared to demand and one can comfortably conclude that broad practical use cases for Web3, independent of Web2 inputs, are still a ways away.
Web3 provides tremendous opportunity, but with reward comes risk and many projects are prone to failure due to the lack of infrastructure supporting the space. Uncertainty concerning the default L1 and L2 protocols where developers will build makes placing bets even more difficult.
In this VC’s opinion, placing a few, concentrated bets in high fidelity projects remains a strong strategy, ensuring funds/investors have exposure, but are not overly exposed to the highs and lows of the space. Having some exposure to the space is critical to capitalize if Web3 scales quickly into the future of the exchange and digital ownership over the next decade.
Q4 in a nutshell
The VC landscape has drastically changed over the past few years – new entrants from all sides (PE funds, hedge funds, corporate investors, syndicates, angels) have increased competition, deal size, and deal activity.
What is most interesting is where this activity is concentrated – later stage VC has seen the most growth, and it’s not even close. To put it in perspective: in Q4 and all of 2021, smaller deal sizes saw decreases in deal count and capital invested QoQ and YoY.
Common conception is because building a company has become increasingly cheaper as time has gone on due to the increased resources available to founders. Mid-size deals saw relatively flat activity QoQ and YoY. However, larger deals saw massive increases in volume. To further put it in perspective, Q4 deal volume for deal sizes $25M+ was 89% of all 2020 deal volume. Clearly, VC is seeing a massive change where bigger deals are the new normal.
The show goes on
Q4 saw more funding and higher deal activity
Another quarter, another funding record. Driven by the continued influx of capital into the market, more entrants into the VC space (9,244 investors in Q4 2021, 8,634 in Q4 2020), and the explosion of companies popping up in all corners of the globe, Q4 was the largest year by deal volume on record. Across the US, Europe, and LatAm investors poured $125B+ into private startups. This amounted to a 6.2% QoQ volume increase. However, Q4 saw 5,443 total deals, a 12.5% decrease compared to Q3 (more contributing evidence to the growing size of late-stage VC deals).
The most active investors this past quarter come at no surprise
Tiger, a16z, and Alumni Ventures lead the pack. Tiger invested in 66 deals in Q4, over 2 every 3 days! Gopuff (consumer goods and food delivery) was the largest deal of the quarter by valuation, followed closely by FTX (crypto derivatives exchange), Grammarly (cloud-based writing assistant), Faire (digital wholesale retail marketplace), and Brex (financial services for startups).
TMT, fintech, AI & ML were hot
Q4 by industry – follow the leader
Of the $125B invested by VC funds in Q4, 63.5% of it was allocated to the top 3 leading industries. TMT led the way with $37.4B deal volume, followed by fintech ($23.21B), and AI & ML ($18.3B). TMT saw median deal valuations at $70M, fintech at $73.7M, and AI & ML was close behind at $52M. This story of these industries leading the way is consistent over previous quarters and sends a broader message to the larger market: 3 sectors are heavily favored by investors due to the value they produce and scalability of business models.
US sees growth, EU & LatAm falter
US sets new funding record for any quarter of $93B in Q4
The US VC market grew last quarter in deal volume, whereas Europe saw a small decline QoQ, and LatAm saw a greater decrease, due to lack of massive funding rounds which highlighted Q2 and Q3 LatAm deal flow. However, the quarterly figures do not encapsulate the whole narrative, as Europe and LatAm exploded with 140% and 1,117% YoY growth, respectively. Each region produced outsized winners and minted unicorns, highlighted by GoPuff out of Philadelphia, PA ($40B post-money valuation), N26 hailing from Berlin, Germany ($9B post-money valuation), and CloudWalk from São Paolo, Brazil (2.15B post-money valuation).
Let’s Look At The Numbers….
USA VC Landscape in Q4 ‘21
Massive growth in the US in Q4 and 2021
US VC dollars invested in Q4 reached $93.2B, a 14.8% increase QoQ. Despite investors looking increasingly to emerging markets to seek outsized returns, US startups still received the lion’s share of funding for Q4 (75%) and 2021 (70%) compared to Europe and LatAm. What is astonishing is the sheer number of dollars invested in the US in 2021 - $311B! This represents a 153% increase in volume, which accounts for nearly a $190B increase in just one year. Time will tell if this level of activity is sustainable, and growth will persist at the exponential rate we are seeing.
Europe VC Landscape in Q4 ‘21
European startup funding slides marginally from Q3
Continuing drop from Q2 2021 high. European startups received $25.5B in funding in Q4, down slightly (-4%) from Q3 and more significantly (-22%) from a Q2 all-time high. Despite this drop, 2021 remained a considerably strong year for Europe overall with total funding at $105B, a YoY increase of $61B (140%). Europe minted 27 unicorns from 1,881 deals in Q4 2021 alone, compared to 4 across 2,446 deals in Q4 2020. Despite less deals getting done in Q4 and smaller volume from earlier this year, in 2021 Europe saw unprecedented deal volume and produced more successful startups than ever before. Clearly increased competition in the VC space has excited investors pushing up valuations across Europe.
LatAm VC landscape in Q4 ‘21
Significant drop in funding due to void in landmark deals
LatAm saw $5B in funding in Q4, a 34% drop from an all time high posted in Q3. Even though Q4 saw less deals than Q3 (200 relative to 255), the reason for the significant decrease in volume was due to a void of large funding rounds compared to previous quarters. LatAm saw the largest volume ever in Q3; 5 startups reached valuations above $500M, 1 of which became a unicorn. In contrast, the largest deal executed in Q4 was at a $420M valuation. This is to say that LatAm saw a sharp decrease in funding in Q4, but the future looks bright for the region considering its YoY funding increase jumped to $17B (356%)!
Emerging hotbed for innovation
Brazil is getting the street cred it deserves
Brazil is becoming a gold mine for investors and founders. Brazil combines many attractive market features from an investment perspective. Brazil has a population of ~220M and growing and boasts 8 cities with over 1M people (São Paolo has 12.4M and Rio de Janeiro has 6.7M). Importantly, mobile phone and internet usage adoption is high (65% and 73%, respectively), however software deployment and investment levels nowhere near match the infrastructure deployed to leverage it. For these reasons and many others, Brazil saw a jump in VC investment from $547M to $2.6B from Q4 2020 to Q4 2021 (372% growth). YoY growth was a staggering 272%, climbing to $7.3B deployed into Brazilian startups in 2021.
Big players taking notice
Even just 2 years ago, Brazil was a faint whisper in the VC world
Q4 2019 produced just $273M in deal volume, and $1.5B for the year (the largest deal was $14M at $100M valuation). The top three most active investors from Q4 2019 were all Brazil-based funds, and 7 of the top 10 most active were Brazil-based. Compare that to the present day – Q4 2021 alone minted 11 Brazilian unicorns across 91 total venture deals (420 on the year). Consequently, last quarter the most active investor in Brazil was American, and 6 of the top 10 most active Brazil investors are based outside Brazil. Brazil’s startup community is exploding at a rapid pace, and the global investor community is taking notice and finding ways to participate in the action.
Brazil becomes the envy of VC world
Industries Driving the Brazilian Movement
Over the past year, Brazil has seen massive innovation across a broad range of sectors. However, a few stand out and have become the envy of many VCs around the world. As one would expect, as a country moves into the digital age industries like information services, media, and business software become more commonplace. However, the massive winners and lion’s share of funding has gone to fintech and financial services software, and it’s not even close. Of the $7.3B invested into Brazilian startups in 2021, $5B went to the financial tech sector. The most notable Brazilian company of 2021 (arguably) is NuBank, a Brazilian neobank that IPO’d in December 2021. The future is bright for Brazil and fintech is leading the way.
The success of Brazil and the rise of its startup ecosystem should be a welcome sign to founders the world over. Brazilian founders’ success is a microcosm of a broader trend in entrepreneurship - borderless innovation.
Due to the reduced costs necessary to build a startup, expanding options for funding, and access to talent in almost any geography due to the rise of remote work, startup success is becoming less predicated on location.
Building a startup has never been as inexpensive as it is today. Resources such as open source software (vs. paid developer tools), AWS (vs. own datacenter), per-click ads and growth hack methods (vs. expensive marketing campaigns), off-the-shelf SaaS tools (vs. building your own internal tools), and app stores (vs. building out distribution channels) alleviate some of the obstacles for founder success.
VCs are actively looking for impressive startup opportunities outside the US. If emerging countries have the infrastructure to allow startups to scale quickly over digital networks, startups building in uncrowded spaces have the opportunity to outperform and create immediate value. Brazil is just an example of this trend, another example of an exploding market is India.
Startups can now hire talent from any geography, typically as long as they have an internet connection. This greatly enables startups to hire the best talent at the most affordable cost, therefore increasing their chance of success by expediting speed of development while minimizing burn rate.
Brazil is quickly seeing notable startup activity and the global investor community is taking notice.
Due to contributing tailwinds that have enabled the massive Brazilian population to adopt new technology (primarily consumer-based), startups are able to capitalize and build rapidly scalable businesses.
For this reason and many others, startups in Brazil are growing quickly and capital is following.
The combination of Brazil’s startup scene growing rapidly with the US market becoming saturated with new investors and expensive valuations makes for a perfect opportunity for capital to seek opportunities outside traditional geographies.
If investors want to pursue opportunities in different geographies, it is critical to understand the market in detail and ideally have a local presence there.
TheVentureCity is proud to boast two investment team members living in Brazil. We feel this gives us a unique advantage to work with local founders and understand the challenges they face.
Florida on Fire
In line with other geographies, Florida realizes a funding record in Q4
Florida’s VC market was ablaze in Q4 and 2021. Q4 funding clocked in at $2.4B, a 117% increase QoQ. 2021 more than tripled 2020’s volume at $5.7B. Of the top 5 largest deals executed in Q4 in Florida, 4 of those companies hailed from Miami. Florida’s Q4 funding was highlighted by MoonPay’s (fiat to crypto payment network) massive $555M Series A round, Healthcare.com’s (insurance provider comparison site) $180M Series C round, and Papa’s (elderly care management platform) $150M Series D round.
It is no longer a secret
Miami at the epicenter of activity
Miami is becoming a startup and VC magnet. The combination of the excellent weather, favorable business climate, and nucleus of Web3 talent makes Miami one of the fastest growing startup hubs in the world, and the capital is quickly following. Major events being located in Miami like Miami Hack Week, Miami Tech Week, Art Basel, and Bitcoin 2022 are evidence that the startup community, particularly crypto/web3 community, is converging upon Miami. Look out for more funding records and exciting startups coming out of Miami.
Becoming a key startup hub
Madrid sees growth highlighted by Spain’s largest deal ever
Madrid is quietly becoming a key startup hub in Spain. Small emerging players like Katoo (food procurement tools for restaurants and suppliers), Cobee (employee management platform), and Payflow (salary on-demand service) are disrupting traditional business models and showing off the ingenuity of Madrid’s startup scene. However, the secret may be out after Jobandtalent, a Madrid-based startup building a temporary workforce marketplace, announced a $502M Series E round at a $2.3B valuation, both records for Spain for deal size and valuation. Jobandtalent now sits atop the most notable startup funding stories from Madrid after unseating Cabify’s $160M Series E in 2018, where TheVentureCity participated.
Spotlight: Women in VC
Q4 capped off a record-setting year
Funding levels remaining strong for female founders
Startups with one or more female founder raised $56B in 2021 across 1,202 deals, $33B more than 2020, amounting to a 143% YoY increase. Startups with only female founders raised $6.4B across 217 deals, an 84% increase YoY.
Q4 looks similar to Q3: matching funding levels at $14.8B. However, this figure was achieved over less deals, raising the average deal size from $16.2M to $18.3M QoQ. All indicators point to female founding teams continuing to blaze a strong path in the startup and VC ecosystems.
Much more work to be done
Parity amongst men and women is far from achieved
Despite funding levels in 2021 for female-founded companies rising, this does not hide the fact that parity amongst men and women is far from achieved. The swelling of VC in 2021 was likely the largest driver for increase in female-focused funding, not more exuberance from the space to support female founders. On a percentage basis, 2021 was disappointing for female founders as 15.6% of VC volume went to startups with at least one female founder (up from 12.3% in 2020) and more notably just 2.0% of all venture capital went to female-only founded startups, down from 2.2% in 2020.
These figures paint a clear picture
More representation is needed in VC and executive suites by women
To put these figures in further context: 18.8% and 6.5% of all deals in 2021 were represented by female and male and female-only startups, respectively. When comparing the deal count to deal volume figures, not only are female founders receiving drastically lower levels of funding compared to their male counterparts, but also at smaller average deal sizes. TheVentureCity proudly boasts two female GPs, and continues to monitor and support the growth of women in the early-stage space.
The world’s industries are changing, and so is VC
Access for all
VCs must adapt to evolving market conditions
Venture capital’s fund structure has stayed relatively the same over the past two decades. The standard playbook: raise a large fund from a small number of limited partners (typically personal relationships), charge management and performance fees to keep the lights on and realize huge gains upon successful exits, and restrict access to VC-profile companies to wealthy institutions and angels.
However, this successful model is being disrupted
And startups are seeking capital outside the traditional sources. Not shockingly this influx in supply is being met by strong retail demand. Crowdfunding platforms, syndicates, rolling funds, and angel groups are all disrupting the standard VC model and allowing access to non-accredited investors that have previously been excluded. Not only are the profile of VC investors changing, but so are the organizational structures.
Decentralization hits VC
VC is being disrupted by access, but also by organizational structure
The drive for the public to own their own access to capital is the driving force, and that vision is starting to take shape. Large VC crowdfunding platforms exist such as Republic and Microventures, but they still allow centralized organizations to take transaction fees and gate keep access to certain investments.
Investor DAOs have the potential to decentralize the VC investor space
In a DAO, investors gather to invest as a coalition without an intermediary intervening. A notable Investor DAO is The LAO, whose members contributed 14K in ETH each ($47.6M AUM) to invest in blockchain-based projects such as Flamingo, Fleek, Boardroom, and more. DAOs unlock massive opportunity in the VC space in terms of access and liquidity - features that have eluded the space for decades, which are now fully possible.
Alternative funding methods
Venture funding has traditionally been in the form of equity from investors seeking outsized risk-adjusted returns for investing in companies very early on. However, venture debt is quickly becoming a popular financing option for founders. An early leader in the space was Silicon Valley Bank, who famously, as a FDIC-registered bank, became one of the first of its breed to lend to startups. Other large players have entered the space, such as OnDeck. Going forward, fintech players that play in tangential verticals like Brex and Mercury (banking for startups) are entertaining the venture debt space.
All of the above mentioned driving forces: access for previously ignored investors, decentralization, and alternative funding methods all are welcome news to founders.
In an attempt to channel my inner Marc Andreessen and create a broad-scoped law of VC/startups that also plays off Newton’s law of conservation energy I present to you...
TheVentureCity’s Law of Power in Funding Relationships: power can neither be created, nor destroyed, only reallocated.
For decades VCs held power over founders to command attractive valuations and austere terms. The tide is quickly turning in the founder’s favor.
Retail investor appetite, decentralized forms of organization, and alternative funding methods like venture debt allow founders to access a variety of capital channels and ultimately allow more capital to chase relatively the same amount of founders.
This tips the scales in favor of the founders and allows them to command the terms and valuations most favorable for their business objectives.
Venture capital is quickly being disrupted and the traditional fund model is no longer the exclusive way to receive early stage startup exposure.
Institutional and retail investors now have a plethora of options to choose from, and founders have more access to capital than ever before.
These changes empower the founder, and challenge the traditional VC investor to pivot and create creative solutions to attract LP capital.
Large funds (Sequoia, a16z, etc.) are creating funding models to support longer investment horizons and LP liquidity preferences.
To convince founders and LPs to work with them, non-Tier 1 VCs have to create differentiated and original value propositions to win competitive deals and justify fee structures.
This shift in VC is top of mind for the leaders at TheVentureCity. We are exploring a variety of options to further empower the founders we work with, deliver a superior investment experience for LPs, all while optimizing for performance and returns.
Diving deeper into the stages tells us what’s happening at ground level...
Less is more
Seed deals were down QoQ in deal count to 1,279, a 15% decline. However, capital invested rose QoQ to $5.4B, a 10% increase. The metrics of seed funding portray the general trend in venture: round sizes are being upsized due to various factors: primarily an influx of capital injected into the space by large incumbents and many new entrants.
The seed stage is changing
Breaking seed down
The bulk of seed deals are getting done in the $1M - $5M (618) and $5M – $10M (236) ranges. In general US seed deals tend to be on the larger side, compared to Europe and LatAm. These round windows combine for 68% of the total Q4 2021 seed deal count. To put this in perspective, these windows represented 56% and 53% of the total seed deal count for 2020 and 2019, respectively. Looking out to 2022, the venture industry braces itself for more expensive valuations and solid companies at attractive valuations becoming more elusive.
As the earliest VC deals (first or second capital injections for companies) have gotten more expensive and competitive, founders often make funding decisions on intangibles in the deal that do not appear on a term sheet.
Factors like investor reputation with portfolio founders, accelerator/incubator components, and potential contributions to hiring and strategic introductions matter more and more to founders.
Seed investors are at an inflection point where they must adjust their value proposition to not solely rely on their track record and exits. Increased competition means greater need for creativity, and the seed investors poised to win long-term understand this concept and are incorporating key changes into their pitches and value propositions.
Despite deal count stagnating/declining, deal volume continues to quicken as leading companies command expensive valuations from many investors clamoring to get on cap tables.
Deal execution timeline is crucial at this stage, especially if investors prefer to take a lead position. Unless a lead investor has a prior relationship with a founder before they consider fundraising, investors must compress diligence timelines to weeks or even days to secure large allocations.
As large, brand-name, multi-stage funds continue to enter the seed space, smaller traditional seed funds must pivot and offer differentiated founder experiences to continue to thrive and win allocations.
Q4 and all of 2021 crush historical performance
Early-stage deals (Series A & B) went on a tear in Q4 and 2021 as valuations continue to expand across the industry. Q4 saw $35.4B deployed across 2,063 deals, a 5% decline in deal count but a 25% increase in volume. To put this whopping figure in perspective, Q4 and Q3 from 2020 produced $31B in capital deployed; Q4 2021 produced a higher volume by a significant margin in half the time.
The VC industry is shifting
Early-Stage is leading the pack
Today, “early-stage” companies are often raising their 3rd, 4th, or even 5th financing round and scaling quickly. For that reason, the names in the space have changed and the most active investors align with later stage VC. For perspective, Tiger, a16z, and Alumni Ventures were the most active early-stage investors in Q4 with 32, 26, and 20 investments respectively. In Q4 2017 Kima Ventures, Bpifrance, and Hemisphere Ventures led the pack with 14, 12, and 12 investments respectively. VC is quickly changing, and the names associated with it are as well.
In this VC’s view, “early-stage” is not a fitting title for the companies and activity seen at the stage in discussion. What traditionally was a space reserved for companies raising their 1st or 2nd rounds of funding and reaching product-market fit has quickly become a space highlighted by companies scaling quickly, hiring aggressively, and raising at nine or even ten figure valuations.
VCs who intend to play in this space should be prepared to compete with some of the best bank-rolled investors on the planet.
Has the early-stage VC space changed due to companies or investors (chicken or egg dilemma)? In this VC’s view it is because of the investor climate – the need to diversify away from public equities and late-stage investments to seek outsized returns has large entrants expanding early-stage valuations.
Due to the increased competition at this stage, investors are looking outside the US to seek better risk-adjusted returns. Emerging markets offer compelling companies with significant traction at reasonable prices.
The profile of early-stage companies is quickly changing. What just recently was often cloud-based software now often incorporates some form of decentralized framework. TheVentureCity is closely monitoring this trend at the seed and early stages.
3X in one year?!?
Q4 and all of 2021 venture capital expansion was primarily driven by late-stage financing. Of the entire Q4 and 2021 VC market in the US, Europe, and LatAm ($125B and $446B, respectively), $66B and $248B were poured into late-stage startups (Series C and later). To put this in further context, the entire late-stage market was $80B in all of 2020. That’s over a 3X increase in just one year, further testament that late-stage valuations and deals are getting increasingly competitive.
Deal sizes are soaring
Massive deals are making headlines
We wanted to bring you the most notable late-stage deals to monitor (that we haven’t mentioned already), as many of these companies you can expect to continue making headlines in the future. Notable companies like Lacework (cloud security platform), Thrasio (ecommerce brand roll-up strategy), N26 (German banking platform), Better (mortgage platform), and Airtable (collaboration platform) raised a combined $4.7B in just Q4 alone. These companies, along with many others, are at the cutting edge of their respective industries.
The rate at which late-stage deals are getting done, and the amount of capital being deployed is staggering. Growth rates that seem to be unsustainable continue to get topped and more and more capital floods the market.
We will closely monitor how potential macroeconomic headwinds (rising interest rates, less dollars entering the money supply, etc.), combined with tailwinds (funds raising fresh capital, more active investors than ever) affect funding levels for Q1 2022 and beyond.
The mountaintop of funds (Tiger, Coatue, Softbank, Insight, a16z) who execute the largest quantity and most prestigious deals currently seems impenetrable.
However, as we saw with early-stage funds just 5 years ago, markets are frothy and so is investor performance. It will be interesting to see how current dealmaking translates to performance and which funds will continue to outpace the pack in the next half decade.
As funds at earlier funding stages continue to look outside the US for attractive companies, the global economy will come into sharper focus as large, well-funded companies in previously underserved markets will start popping up around the world. It is critical for late-stage funds to develop an emerging markets strategy if they have not done so already to capitalize on these future unicorns.
Tech and Crypto Q1 2022 Market Correction
The 2021 VC market set several new records. Various factors contributed to all-time levels of funding, leaving many investors and stakeholders curious how long this extended bull run could last.
Since mid November highs...
A large correction has taken place in the public tech and crypto markets
From a November 8th high of $67.6K, Bitcoin sits on January 25th at $36.2K, over a 46% drop in just over 10 weeks. Following a similar trajectory, the Nasdaq Composite index reached an all-time high of $16K, only to fall more than 13% to $13.9K as of January 25th.
The performance in the public and crypto markets informs private market investors how the future will likely play out. Companies across the board are returning to more reasonable valuations and trading more closely to fundamentals.
Softening in the public markets will likely trickle down to the private markets, with valuations and multiples declining.
Still, there is still likely room for some optimism - VC are sitting on $222B in dry powder, $130B of which was raised in 2021.
High reserve levels should ensure private markets are adequately supported even in the event of a full-scale public market sell-off in the coming months
Still, that does likely mean one thing for founders: smaller average valuations in early 2022.
Web3 Crash Course
In our last benchmark report we covered VC funding in the digital asset space and a snapshot overview of the metaverse. This quarter we are taking you through a broader view of the core components of Web3.
The backbone of Web3
It all started with DeFi and cryptocurrencies
At the core of Web3 is the concept of decentralization: moving power and decision-making away from a few central organizations and redistributing it to the end users - the people. It’s hard to describe decentralization without mentioning the first popularized application: cryptocurrencies. What started with bitcoin has now evolved into hundreds of cryptocurrencies popping up with various use cases.
DeFi is an exciting concept
And not just because transactions can be executed instantly
Not even because they can be executed on a permissionless basis (elimination/reduction of fees and take rates) but rather because payments are at the core of building within Web3. As opposed to Web2, where payments needed to be integrated with the existing web infrastructure (Stripe, Plaid, etc.), decentralized applications are built upon the payment networks themselves (referred to as Layer 1 or L1 protocols).
The future building blocks of Web3
Decentralized applications (dApps) are how the public will interact with Web3
Web3 is certainly in its infancy and has few practical applications beyond payments. However, upon the core Layer 1 (L1) blockchain networks, developers can build decentralized applications (dApps) to provide value to users on desktop and mobile. DApps are computer applications whose code is written in a series of related smart contracts.
Smart contracts are computer programs continuously run on a blockchain network
The contracts are often referred to as “protocols”. DApps currently fall into a few verticals including exchanges (ex: Uniswap, Soldex), DeFi (ex: Solend, Curve), gaming (ex: Axie Infinity, DeFi Kingdoms), collectibles (ex: CryptoPunks, NFTX), and several others. DApps are interesting because as their use cases and sophistication expand, more people will receive value in onboarding onto Web3.
The new way to organize in Web3
Meet Decentralized Autonomous Organizations (DAOs)
DAOs match internal structure with external interactions. Web3 and blockchain are grounded in decentralization and removing localization of control. Therefore, it makes sense to instill the same principles in the organizations that operate in this space. For that reason, and other benefits, DAOs were formed to democratize the decision-making and voting process among groups of Web3 stakeholders. DAOs are crucial and significant for the development of Web3 because they are designed around the core pillars of transparency and inclusion. You can read more about TheVentureCity’s view on the opportunity in DAOs in our recent article.
Web3 empowers the solopreneur
The creator economy is on the rise
Creators like artists, musicians, game developers, and others have long struggled to monetize their product and likeness. Historically, very few creators make a living off their work and there is a long tail of creators who fail to build significant audiences. A large reason behind this is creators are independent, distributed, and often resigned to large Web2 companies taking large take rates on their revenue streams. Web3 empowers creators by allowing them to directly reach their audiences (thus eliminating the middlemen) and offering new revenue streams to capitalize upon. These revenue streams often come in the form of digital assets or gaming. However, the opportunities are endless as more creators and use cases enter Web3.
Notable events from 2021 that turned the tide in favor of Web3
No movement is created overnight but some moments are bigger than others.
Bitcoin crossing $1 trillion in market cap for the first time on February 19, 2021
Mike Winkelmann, the artist more commonly known as Beeple, sold his NFT piece “Everydays: The First 5000 Days” for $69M
Elon Musk continuously pumping up Dogecoin’s price over Twitter.
El Salvador adopting Bitcoin as legal tender in June 2021
Ethereum launched Ethereum Improvement Proposal (EIP) 1559 - preparing for the migration to ETH2 to reduce gas fees (transaction fees)
In October 2021 ProShares launched a futures-based Bitcoin ETF on the NYSE
Facebook changed its name to “Meta” to reflect organizational strategic shift to the metaverse
Microsoft announces on January 18, 2022 acquisition of Activision Blizzard for $69B in move to gain market share and users in the metaverse
To build or not to build
Web3 is not for every founder/startup as it stands today; early-stage founders have limited bandwidth and must focus all available energy on the most important tasks at hand to execute and ship product at speed. For this reason, building in Web3 doesn’t make practical sense for many founders if they won’t achieve meaningful scale/revenue by the next time they need to raise. However, for those founders that think a Web3 strategy would be helpful and contribute meaningful progress to their ventures, below are some resources for learning and building:
Becoming a developer: BetterProgramming
What to look for from Web3 going forward
Clearly there is a buzz and excitement around Web3. Founders, developers, creators, gamers, and investors are all flocking to the space, and valuations reflect that hype. Web3 and crypto bulls like a16z partner Chris Dixon and Not Boring Capital partner Packy McCormick are vocal members from the Web3 investor community who express their excitement and use cases for the space.
However, this exuberance has been met by healthy skepticism
Especially by notable players. Scott Galloway, professor at NYU and renowned thought leader, recently wrote a scathing thought piece on Web3, and Elizabeth Warren is leading the charge in the government to strike down on stablecoins. It is fair to say that there is limitless opportunity within Web3, and the bulls and the bears have plenty to hash out as we closely monitor its successes and pitfalls.