We’ve seen a massive surge in attention and adoption for crypto recently. Both positive attention, and some bad (Celcius, FTX collaps, Luna crash).
In any case, this industry is growing. And with that, we’re also seeing more and more institutional capital pouring in. Not only directly into assets like Bitcoin and Ethereum, but they’re also backing early-stage web 3 startups.
This led to what I like to describe as the 2017 ICO boom on steroids. Not only did we have huge returns on IDO’s and IEO’s throughout 2021 – 2022, but early-stage funding also drastically increased. Let’s have a look at where most of this early-stage funding has been flowing towards in 2022.
A quick intro to (early-stage) funding
If you’re already familiair with VC investing and don’t need a quick intro, go ahead and skip to the next paragraph.
Venture capital firms are investment firms that invest in the early stages of startups and small companies, often tech-focussed. They’re not always startups though, as often times VC’s participate in follow-up funding for companies who need an extra cash injection to propel them to the next level.
Imagine you just came up with a great idea for a business, or in this case a crypto project. You’ll need to posses all the good qualities that founders have. But there is one more thing you need to actually turn this thing into a succes; capital.
Typically, you will self-fund the first stages of your company until you have an MVP (minimum viable product). Although some companies self-fund even further until they really need the capital to take that next step.
That next step is what requires more capital, typically for business expenses, marketing, R&D, legal, and salaries. And that, is where VC firms (or angel investors) come in.
By investing in the early stages of a project/company, VC’s take on a lot of risk in the hope of getting a sizable return on it in the future. Projects can go through multiple funding rounds, wherein they get to raise money at higher valuations than the previous rounds. The seed round is typically the earliest rounds you’ll see VC’s invest in. In the future, companies might raise more money through a Series A or series B.
The investments made during these funding rounds, is what we refer to as funding.
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where are vc’s placing their bets right now?
1) Layer 1 blockchains and blockchain infrastructure
There’s a good chance you’ve heard of Aptos and Sui, as they both had high profile funding rounds due to two reasons: the big names that participated in the rounds, as well as the amount of raised capital.
Aptos Labs raised a total of 350M USD from well-known firms like Binance Labs (VC arm of Binance), Jump crypto, Multicoin Capital, a16z, FTX ventures, and 20 other firms. Sui (Mysten Labs) raised a total of 336M USD from firms like a16z, Coinbase ventures, Binance labs, Circle ventures, FTX ventures, Jump crypto and more funds.
These are just two examples, but we’re definitely seeing a huge increase in the interest for layer 1 blockchains. It seems that layer 1 blockchains are what has been raking in the majority of the funding lately. Some sources indicating that there are close to a hundred layer 1 blockchains still waiting to enter the market.
This is rather interesting, as it begs the question; do we really need more of them? Ethereum, Solana, Elrond, and Fantom are some of the well-known existing layer 1 chains.
Since Ethereum currently owns about 60% of the market share in this category, there is a big battle to come in the future for the remainder of that market share. Personally, I don’t see Ethereum losing their leading position.
2) Layer 2 ecosystem
Funds are betting big on layer 2 projects, and projects building on top of them. We’re seeing tremendous growth in the TVL on L2 platforms such as Optimism and Arbitrum.
Some noteworthy L2’s that raised funding in 2022:
- Optimism raised a $150M Series B led by a16z and paradigm (march 2022). This brings their total funding up to $178.5M and values their company at $1.5B. These guys have been building since the start of 2020.
- Arbitrum had their latest round (a Series B) in august 2021. Nonetheless, I still think they’re worth mentioning as their ecosystem has been growing rapidly throughout 2022, as well as the TVL on their platform. Offchain Labs (company behind Arbitrum) has raised a total of $123M and their latest valuation tops out at $1.1B.
- Polygon is an L2 we all know, and probably have used in the past. Personally, I think they’re great and their tech is definitely strong. February 2022 they successfully closed another round of funding led by Sequoia Capital India for an impressive total of $450M. This round was joined by Kevin O’Leary and over 40 VC firms.
- StarkWare Industries, the company behind the StarkWare L2 scaling solution, raised a Series D which valued their company at a whopping $8B (up $6B compared to their latest funding round). The company raked in another $100M, bringing their total funding amount up to $273M.
- Matter Labs (zkSync) raised $200M in a Series C led by Blockchain Capital and Dragonfly. Matter Labs is the company behind zkSync, and their latest round bring their valuation up to an estimate of $800M—$1.2B (source: dealroom.co). Their total funding amount currently sits at $258M.
- Eclipse is a customizable rollup provider, enabling developers to deploy their own rollups using any chain or data storage. Eclipse co-founder Neel Somani described the company as a universal layer 2. Ecplise has raised a total of $15M, which is a modest amount, from Tribe Capital, Tabiya, Polychain Capital, Polygon Ventures, Soma Capital, CoinList, and other VC fims and angels.
- Boba Network raised $45M from a total of 28 investors. Boba network is another Layer 2 scaling solution, thought one of their main USP’s is that they allow devs to build Multichain Dapps through their Hybrid Compute technology.
- Immutable X announced a $500M fund for NFT and game developers in an attempt to attract more builders, developers, and users to their L2 platform. The fund is backed by Animoca Brands (which is an NFT/gaming focused VC), GameStop, Double Peak, and other firms.
3) Interoperability, Cross-chain communication, and connectivity between Blockchains.
While some people build new chains and Dapps, others focus their efforts on connecting the existing chains, as well as the Dapps that are scattered across them. This becomes even more important when you consider the numerous layer 1 blockchains still waiting to enter the market.
Polkadot is an example of a large project in this category, although they’ve been around for around 2 years already. Polkadot aims to allow communication among blockchains and to pool security, while still allowing each chain to run their own functions.
The interoperability/cross-chain niche is growing, and early-stage projects within this niche have locked in quite a bit of funding recently. One example is LayerZero who raised over 140M USD in funding. LayerZero is an interoperability protocol that unites the data and liquidity that is spread across various applications on the evergrowing list of blockchains.
4) GameFi and NFT’s
2021 and early 2022 were great for GameFi, amazing even. For a good while, it was ‘up only’ for this sector. Though, over time, the quality of the projects in this category declined. Cheap copy-paste projects entered the market. Often created by opportunistic founders who wanted to take advantage of the boom. Eventually, GameFi collapsed.
I personally see a small resurrection of this industry slowly starting to unravel. The quality of the projects is a lot better than what we saw in the late stages of the previous GameFi run.
NFT-related projects and NFT collections have surprisingly been gaining traction as well. Despite the fact that NFT trading volume has declined substantially. In january 2022, OpenSea raised a $300 million funding round at a $13 billion valuation. Despite some debates on whether this valuation was fair given the current trading volumes, I still consider as an impressive feat.
With many new chains/ecosystems entering the market, we’re also seeing NFT marketplaces being created for each one of them. Usually from founders hoping to capture that ‘first movers advantage’. Me personally, I don’t think we need any more marketplaces, but that’s a topic for another day.
A new development that we haven’t seen before, is companies behind successful NFT collections leveraging their NFT brand to raise capital. Some recent examples:
- Yuga Labs (company behind BAYC) raised $450M at a $4B valuation
- Chiru labs (company behind Azuki) raised $40M at $300-$400M valuation (est.)
- Doodles (NFT collection) raised $54M at a $704M valuation
NFT companies/collections typically used secondary drops as a means to rake in more capital, or relied solely on royalties. Leveraging your NFT brand to raise a funding round is definitely an interesting development, and I’m curious to see if this will become a regular occurence.
Why you should track vc investments
It’s helpful to keep an eye on what the big venture capital firms are investing in. Why? Because VC investments often lead to important innovations in their respective fields.
By keeping tabs on what the firms are funding, you see which companies are likely to make waves in their respective industries. You should also keep track of the funding amounts for each company. Doing that gives you a sense of how much capital VC’s pour into different areas of research and development.
Tracking which companies receive funding (and how much) helps you answer three questions:
- How should I allocate my own funds?
- Should I make any adjustments to my portfolio?
- Which categories will likely become hot in the future?
The main goal of tracking capital allocation, is to be ahead of the trends. There is quite some time between the moment a project raises funds, and their actual listing on the market. This window differs for each project, but ranges from anywhere between a couple months and even a few years.
Tracking early-stage funding helps you form a thesis on what trends might play out in the future. And that, my friends, is how you stay ahead of the curve.
