November 30, 2023

Even by the standards of cryptocurrencies’ notorious volatility, the last six months have been a white-knuckle ride. The total value of all cryptocurrencies is estimated to have plummeted by some $2 trillion from their November 2021 peak, while the price of bitcoin itself has plunged from a high of nearly $70,000 last November to under $20,000 as I write. Meanwhile, according to one tally, since 2011 a staggering 2,400 cryptocurrencies have one way or another disappeared or “died.” 

Unlike earlier market routs, however, the key reason behind crypto’s current malaise is the wider economic downturn, coupled with wildfire inflation—which central banks are combatting by raising interest rates—leading investors to flock to more stable assets. Furthermore, the current crisis has exposed how the crypto marketplace built very similar financial infrastructure to that which underpinned traditional banking in 2008, even though part of rationale behind decentralized finance (DeFi) was that stripping out central banks and governments would help prevent systemic meltdowns and contagion. 

Yet despite all of the turbulence currently engulfing the space, I remain convinced that the underlying technology to Web3—the umbrella term for the new blockchain-based, decentralized internet, which includes cryptocurrencies, non-fungible tokens (NFTs), and DeFi—is robust, has an extremely wide range of use cases, and will stand the test of time, creating scores of $1 billion-plus companies in the process. 

With around 110 pre-seed investments in Web3/crypto and blockchain-related startups, Techstars is one of the most highly engaged and active early stage investors in the space. Over the last five years, our accelerators have received well over 1,000 applications from Web3-focused founders, with over 300 applications in 2021 alone; 2022 is on a similar trajectory. To date, our Web3 portfolio companies have raised close to $1 billion in follow-on capital—and that number is just a glimpse of what’s to come, as we invested in around half of those 110 companies in the past two years or more recently, meaning that they are still at a very early stage. 

Shades of the dot-com bubble

The reason Web3 and blockchain in particular holds such promise is that I believe we are currently at an inflection point broadly similar to the turn-of-the-century dot-com bubble, when a frenzy of investment in internet-enabled startups, harnessing a still-nascent technology, promised to usher in a more egalitarian future in which the balance of power would tilt away from legacy business and the state towards individuals. Of course that dial-up era crashed and burned when its early promise failed to live up to the hype. Yet out of the carnage, revolutionary yet resolutely useful companies such as Amazon, eBay, and Google emerged, as well as, gradually, a viable venture and startup ecosystem. 

The parallels with Web3 are clear. The early, wild west years of crypto—which proponents promised would bypass the traditional gatekeepers and central banks to bring about a new internet built on blockchain technology—were marked by incessant hype and furious speculation, Ponzi schemes, and even outright fraud. However, once again, in the wake of crypto’s burst bubble and market volatility, there are clear indications that we are set to enter a new era where there are opportunities for builders to create a human-centric Web3, where companies are solving practical, real-world problems for individuals and enterprises. 

At Techstars we are seeing three market trends right now. First, though the turmoil will undoubtedly see large numbers of startups in the space fail, as they run out of runway and are unable to raise, the crypto crash has an upside too: bluntly, it is flushing out the froth, the crypto clones, the Web3 wannabes, and the more gimmicky end of the NFT digital art market. 

Second, no longer driven by FOMO, VCs have stopped investing sight-unseen and making multiple bets on Web3-tagged companies. While there are still firms with recently closed brimful funds ready to deploy, the bar for cutting checks is higher, due diligence takes longer, and extending the runway for existing portfolio companies is often prioritized over new projects. 

Promisingly, a number of the more traditional VCs are also entering the Web3 fray. For example, fintech VCs we’ve previously engaged with now have associates (and partners) covering DeFI, VCs focused on marketplaces are looking at creator economy propositions in Web3, and sports and entertainment-focused VCs are considering  blockchain gaming and esports—all of which indicates a crossover is underway.

Third, we are seeing strong and, crucially, accessible propositions continue to get funded, with opportunities opening up for startups that leverage the unique properties of Web3’s underlying tech. One such company is TransCrypts—a blockchain-powered corporate data verification platform—which graduated from the inaugural 2022 Filecoin Techstars Accelerator class in Seattle in mid-June. Just days later the team closed a pre-seed round of $1.4 million from investors that include Mark Cuban and Protocol Labs. Today TransCrypts already has over 100 enterprise users, including a number of household names in tech, retail, and aviation. 

Similarly, we are seeing a trend towards use cases targeting developing economies, where cryptocurrencies can serve a more practical purpose. Buchi Okoro, for example, founded Quidax, a cryptocurrency exchange, in 2018 as a 25-year-old in Lagos, Nigeria. 

Okoro wanted to make it significantly easier for young Africans, a large portion of whom are unbanked, to connect with the rest of the world financially. “Trying to send a payment from point A to B, even in Africa, is a nightmare,” Okoro said. “Never mind trying to send money from Nigeria to the U.S. Crypto makes it significantly simpler to transact internationally.” The company now has over 400,000 customers in 72 countries, and has launched its own token, QDX.  

New technologies tend to take two or even three waves to reach maturity. The first wave is usually hype driven, attracts a feeding frenzy, and ends with a decisive crash. In the second wave, as the froth recedes, the truly useful applications come to fore. 

Since the crypto crash, some have concluded that Web3 is a spent force; that’s to fundamentally misread the situation. It has become abundantly clear that blockchain technology has myriad applications, from carbon marketplaces to personal identity protection, cross-border payments and real estate transaction records (to name but a few). Web3’s first wave is over. Wave two is underway. This is where things start to get interesting.    

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