VC Funding Model Flops for Web3 Projects: A Twain-esque Take

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Venture capital funding, the most sought-after form of backing amongst founders looking for capital to bootstrap their operations, is a bit like a shiny bauble that everyone wants to get their hands on. But, alas, it’s also a bit like a siren’s song, luring in unsuspecting founders with promises of riches, only to dash their hopes against the rocks of reality.

The problem is, despite a few exceptions of funds like Sigma Capital, web3 VC funding is the most difficult to obtain at the early stages of the founder journey. In spite of a slight increase in funding in Q1 of 2024, VC backing for web3 startups continues to decline, dropping by 82% year to year.

This exclusivity of opportunity continues to sideline many potential contributors and limits the diversity of ideas that receive funding. It’s a long-standing issue in the startup ecosystem that has persisted in the web3 space, despite blockchain’s promise of decentralization.

Why the traditional VC model fails web3

Web3 projects often struggle within the constraints of traditional VC funding because of the fundamental mismatch of incentives. VCs tend to prioritize profit and short-term growth, which doesn’t often align with the experimentation and collaboration-driven nature of web3 projects aiming to create public good and build for social impact. Public good projects also lack the incentive of lucrative exits associated with for-profit businesses.

Another factor that goes against the principles guiding web3 founders is decision-making. The most popular VC funds centralize their decision-making process when it comes to funding decisions, leaving the destiny of web3 start-ups in the hands of a select few. This structure is in direct opposition to the ethos of decentralization and community-led decision-making encouraged in the web3 ecosystem.

Moreover, VC funding flows mostly to organizations that launch a token, which infrastructure tools and L2s are more likely to do in comparison to apps. That means apps are much less likely to receive funding, even though they are just as, if not more important, to gaining user adoption.

The real question the ecosystem players should be asking themselves is, can startups survive with the current decline of funding? And what role can we play in shifting this trajectory?

Blockchain-powered funding models

Blockchain technology introduces a new realm of opportunities for funding in the web3 space, particularly for those building ambitious public goods projects, such as open-source software.

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Meg Lister is an experienced web3 product leader who currently serves as the GM of Gitcoin’s Grants Labs. Prior to joining Gitcoin, Meg led product at Flipside Crypto, launching their first product through to a Series B fundraising and over 30K users. She has a deep background in web3, DAOs, blockchain data, and B2B SaaS and adtech. As a team-builder and hands-on practitioner, she thrives in impact-driven organizations and high-growth environments.

💡 Want to learn more about funding models for web3 projects? Check out this insightful article by Meg Lister! 🌐

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2025-02-03 15:35