What have vc's been investing in during 2022?
analyzing which sectors institutional investors are betting on
WHAT have VC'S been INVESTING IN DURING 2022?
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’s and don’t need a quick intro, go ahead and skip to the next paragraph.
Venture capital firms are investment firms that typically 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.
VC’s invest in the early stages of your project/company. With being early, they are taking 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.
where are the 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 are building new chains and Dapps, others are focusing their efforts on connecting the existing chains, as well as the Dapps that are scattered across them. This will become even more important, seeing that there are numerous layer 1 blockchains still waiting to enter the market.
Polkadot is one example of a large project in this category, although they have 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.
This category is growing and an a solid amount of early-stage projects with similar goals have locked in funding recently. One example being LayerZero, who raised over 140M USD. LayerZero is an interoperability protocol created for uniting the data and liquidity that is spread across various applications on the evergrowing list of blockchains.
We’re seeing an increase in projects in this category that have raised funding. Perhaps the most well-known project in this category is a project called LayerZero that raised over 140M USD. It’s an interoperability protocol which aims to unite the data and liquidity that is scattered among different applications on various chains.
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. To be fair, the quality of projects declined over time, as more cheap copy projects entered the market. Usually from opportunistic founders who wanted to take advantage of the boom. Eventually, GameFi collapsed.
We’re currently seeing a small resurrection of this industry however. But the quality of the projects is a lot better than what we saw in the late stages of the first GameFi run.
And despite the fact that NFT trading volume has declined substantially, NFT-related projects, as well as some NFT collections, are still gaining traction. Recently, we saw OpenSea raise a $300 million funding round at a $13 billion valuation. While there was some debate on whether this valuation was fair given the current trading volumes, this was still 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 raising capital leveraging their NFT brand. 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
Previously, NFT companies/collections 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 thing.
Why it's important to track vc investments
It’s helpful to keep an eye on what the big venture capital firms are investing in, because these investments often lead to important innovations in their respective fields.
By keeping tabs on what the firms are funding, we can see which companies will likely be making waves in their respective industries. It’s also useful to know the amounts invested in each company; this helps us get a sense of how much capital is being poured into different areas of research and development.
All of this information can help us decide how we want our own funds allocated, or if we should make any adjustments to our portfolios.
Another reason to keep an eye on where capital is pouring into, is to be ahead of the trends. Typically, there is quite some time between the moment a project raises funds, and their actual listing on the market. Tracking early-stage funding helps you form a thesis on what trends might play out in the future.
Which projects have you been following? Which ones are you most excited about? Any that I missed that are worth mentioning? Let me know👇
Nillion is a highly ambitious infrastructure project which, if it succeeds, can have a huge impact on web3, as well as outside of web3
MetaFi is building a financial metaverse like you’ve never seen before, and aiming to change the current web 3 trading experience.
Kaspa is a PoW layer 1 that aims to address some of the security difficulties from Bitcoin’s Nakamoto Consensus, using the Ghostdag protocol.
MoHash, a project aiming to bring stable yields to DeFi, recently raised a $6M seed round, despite a slowdown in overall investments in VC-backed web3 startups.