Early-stage investors still betting on Web3 solutions

Last week, CoinSwitch Kuber launched a $10-million Web3 Discovery Fund. It will cut checks between $25,000-$250,000 for services, products, and infrastructure startups in the sector, Ashish Singhal, cofounder and CEO of CoinSwitch Kuber, told ET.

The fund would also provide these startups access to marquee investors, including Tiger Global, Sequoia Capital, Ribbit Capital, and Coinbase Ventures.

“This time is very crucial to look at companies that are solving long-term problems,” Singhal said. “Even though the market has come down and FOMO (fear of missing out) has reduced, no longer it is about who is raising what amount; it has become about building for the users and solving actual problems.”

Early-stage investor Elevation Capital, a partner for the discovery fund, plans to expand the team evaluating this sector and continues to have a “high capital commitment” for Web3 startups, said Vaas Bhaskar, principal at the fund that has backed Polygon and announced six investments in the last 12 month.

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Proof of customer traction
As valuations correct and FOMO dies down in the market, venture capitalists are focusing on Web3 startups with some proof of customer traction. The sobering down of sentiments and funding has impacted the wider tech industry, as reported by ET in July.

But for Web3, at least half a dozen financing deals are in the works across infrastructure, analytics, and gaming that would see participation from crypto native and traditional funds.

Spheron Protocol, a startup that provides web hosting and other services to both web2 and web3 companies to utilise decentralised infrastructure, is in talks to raise $6-7 million, people aware of the matter said. Spheron Protocol did not respond to ET’s query seeking comment till press time Tuesday.

“A bear market is like a stress test on the entire ecosystem,” said Pranav Sharma, founding partner at Woodstock fund. “With every bear market, the whole industry goes to the next

. In 2017, it was white papers, and then after that, technical architecture became a lot more robust to attacks. Now it is more about looking at user traction and user experience.”

With customer experience and user traction taking centre stage, tooling and infrastructure startups have also attracted funding in recent months. DAOlens, a business-to-business (B2B) decentralised autonomous organisation (DAO), raised $5 million (about Rs 39 crore) led by Nexus Venture Partners. Samudai, another DAO platform for building and managing communities in the Web3, closed a $2.5-million funding round from FTX Ventures, Sino Global Capital and Coinbase Ventures.

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Trust deficit and market movement

The collapse of Terraform Lab’s UST stablecoin in May had a cascading effect on the market. ET reported on May 16, that the after-effects of Terra’s collapse Indian venture capital firms that had exposure to the Terra ecosystem have also taken a hit.

“There is a lot of learning about risks in this cycle which we didn’t think about very deeply, at least from some angles. The cycle that follows will lead to a lot of innovation; there will be a lot of learning from what went wrong and what we did not think through, and that will spur a new generation of companies and protocols,” said Bhaskar of Elevation Capital. “Second, I think we also learned that infrastructure, tooling and middleware was not ready. This cycle will push those innovations, and we are seeing a lot of deal flow with such companies,” he said.

The fall of crypto institutions like Three Arrows Capital and others in the last few months has led to massive losses for retail investors. Singhal said the trust deficit in the system might slow down adoption in the short term.

“There is definitely a bit of hesitance seeing the failure of these institutions. It reduces the adoption in a way,” said Singhal of CoinSwitch Kuber. “So, if you were forming a company, say, one year ago, you would have seen a huge adoption, but now the increase in the number of users adapting to the technology would slow down a bit, but that would not deter founders from creating solutions.”