When it comes to web3, investors say they’re in it for the long haul

In the heat of 2021’s record-setting venture market, you couldn’t avoid the growing noise from the burgeoning web3 sector. Trust me, I tried. But while some of that momentum carried into 2022 (Yuga Labs closed a $450 million seed round in March), the rest of the year was relatively quiet.

Yes, venture as a whole had a quieter year overall in 2022, but the lack of web3 deals stood out particularly because the sector entered the year with so much momentum. Maybe the dramatic meltdowns of token Luna and the second-largest crypto exchange FTX scared investors off web3 as a whole? Did the rapid decline of consumer interest in NFTs spur VCs to rethink the category? We decided to find out.

To get a better idea of how the people writing the checks are thinking about web3, TechCrunch surveyed more than 35 investors, and it turns out the majority are not only actively investing in the category, they also harbor hopes of a shining future for what they feel is a potentially transformative technology.

One VC, who asked to remain anonymous, said that because the technology is so nascent, we aren’t seeing the true potential use cases yet, which could explain the lack of continued excitement after 2021’s rally.

“Those who understand the space know there’s a lucrative future that’s still in its earliest days,” they said. “Those who don’t understand the space also know that but will be more hesitant to deploy without a fundamental grasp of the real-world applications. Almost none of the purported benefits of web3 (decentralization, pseudonymous identities, zero-knowledge proofs, etc.) have been realized in full yet. It’s like the era of the [early World Wide Web], when every web page was simple HTML with ridiculous graphics and archaic capabilities.”

Jambu Palaniappan, a managing partner at OMERS Ventures, agreed, though he admitted that there is a need for web3 to prove its value in critical applications. “Our belief in web3 is that we’ll see a wave of companies that take advantage of that gap but with a higher degree of scrutiny on the value they provide. We’ll also see a very clear push for regulation in the sector.”

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Several other investors echoed those sentiments, saying they remain bullish on the sector due to its future use cases and not necessarily based on what they were seeing in the market right now.

For some investors, like Lisa Lambert of National Grid Partners, the sector remains a core investment pillar, particularly given the potential of web3 companies to benefit the energy space. “As energy grids become more decentralized and more sources of clean energy come onto the grid — like solar arrays, wind farms and even home EV chargers — there’s a critical engineering challenge in making sure all these new resources are integrated into the transmission and distribution networks so clean energy gets from where it’s generated to where it’s needed most,” she said.

Bruce Hamilton, a general partner at Mech Ventures, is bullish on the technology because of its potential use cases as a tech layer that could be implemented into other startup tech across different sectors. “I personally think the future of web3 is integrating it into software without the front-end user realizing it’s web3.”

Many VCs also don’t mind that the sector isn’t at the peak of the VC hype cycle anymore. Several investors said the hype dying down helps weed out tourist investors and entrepreneurs, which leaves behind better deal flow and valuations. Melody Koh, a partner at NextView Ventures, said this also gives the entrepreneurs already building in the space more room to breathe.

Hyped or not, web3 companies seem like they’re here to stay, and investors seem more than willing to keep backing them.

“There are elements of web3 that are secular shifts and technological improvements that are wanted by consumers,” Chuckie Reddy, a partner at QED Investors, said. “Investments in the space will move toward real-world applicability and solutions that reduce friction. Some of the use cases around blockchain, in particular, have the potential to be transformative.”