The 2023 Web3 Investment Outlook

According to Cryptomeria Capital’s co-founder and managing partner Alex Mukhin, “The current cycle phase is often called crypto winter in the community. And contrary to what the name suggests, it's actually the best time for investments. We have already seen during previous cycles that the best projects are founded during the most difficult times. This happens because in a bear market founders focus on long-term initiatives that are aimed at improving the tech and industry, rather than on quick hype schemes.”

“The last bull run, 2020-2021, brought us several different narratives that eventually grew into massive bubbles, may it be the Metaverse, GameFi or NFTs,” echoed the CEO of Moonrock Capital, Simon Dedic. “Bear markets are different; they are for building and usually the time periods when the greatest ideas are born and only the best founders are still around.”

Web3 investments thrived in 2022, but what about 2023?

Investors flocked to the Web3 landscape throughout 2022 despite the events that unfolded across the blockchain universe. To put this into perspective, Web3 accounted for nearly 63% of the total blockchain investment allocations during the third quarter, marking the third consecutive time Web3 dominated the blockchain fundraising environment this year.

Early-stage projects related to NFTs, Web3 gaming, privacy-preserving technologies, and other sectors attracted significant investor attention throughout this year. But questions remain as to whether 2023 will continue this trend or face a change in approach.

Regarding his company’s investment outlook for 2023, Press Start Capital Co-founder and General Partner Steven Chien explained, “Bull/bear market aside, we're looking for web3 gaming infrastructure/picks & shovels plays given how early the web3 gaming/entertainment space is. We're also interested in innovative new web3-native entertainment experiences, and we believe ’asset development’ on metaverse real estate will be an interesting way to add value to digital assets instead of simply aping and praying.”

Chien is one of many investors within the venture industry harboring this view. Moonrock Capital’s Simon Dedic shared a similar perspective, highlighting, “What we already did in 2022 and what we are going to continue in 2023: coming back to fundamentals again and investing into founders who aim for a sustainable evolution of Web3. Preferably decentralized infrastructure, trusted middleware as well as innovative DeFi solutions and dApps that have the ability to accelerate mass adoption (i.e., SocialFi).”

Others are focused on infrastructure and utility. “Looking ahead, our main priority is supporting the projects delivering expanded Web3 functionality,” according to HashKey Capital investment director Xiao Xiao. “These include privacy-oriented solutions, zero-knowledge (ZK) proofs we believe are key to ecosystem scaling, no code tools to attract Web2 interest, gaming, and enterprise NFT applications.”

Investors will take a cautionary approach in 2023

While the comments of key industry investors support a continuation of current Web3 funding trends, the long list of catastrophic events in 2022 – be it the Terra implosion, bankruptcies of Celsius, Voyager, 3AC, $4.1 billion worth of hacks, or the ongoing problems with FTX and BlockFi – has forced investors to rethink their approach.

As HashKey’s Xiao Xiao pointed out, “As an asset manager, we are keenly aware of our responsibility to our investors, so proper due diligence is at the heart of our institutional approach. Simply put, it means avoiding highly speculative prospects that ride bull-market hype waves and overpromise. When studying potential investment opportunities, we are filtering prospects based on whether they are value-additive to Web3 and whether the team can execute its vision.”

“Our ultimate concern is delivering outsized returns for our investors, and this begins with a careful examination of the team and their track record, feasibility assessments, and a proper study of tokenomics to ensure an initiative takes a holistically sustainable approach,” stressed Xiao. “Valuation also plays a role, and what we always do is to avoid the momentum chasing. Most importantly, our role doesn’t end when we cut a check. Our post-investment management approach is designed to ensure a project achieves the highest likelihood of a successful outcome.”

Cryptomeria Capital’s Alex Mukhin shared a similar attitude, underlining, “The main criterion for project selection is, of course, how well it is able to both solve a particular problem and improve user experience: simply put, this is the only way to achieve a product market fit. It's easy to be a successful founder and investor when the market is soaring. A market downturn serves as a vitality test both for the products and the people behind them. The teams that can survive and mature through this challenging time have a high chance of creating truly brilliant projects.”

A report aggregating Web3 funding trends for the fourth quarter is still at least a month away, making characterizing how FTX’s spectacular crash and the extended crypto winter have impacted blockchain funding speculation at this point. Yet, despite this rather gloomy backdrop, investors' outlook for Web3 for the coming year is unrepentantly bright, with most already confident about what projects they wish to pursue, how they aim to maximize their stakeholders’ capital, and their accompanying risk-assessment measures.

Reuben Jackson is a blockchain security consultant. Outside office hours, he has been reporting on the crypto space for a few years now. His writing has been published in Crunchbase News, Venture Beat, Nasdaq, TipRanks, Bitcoin Magazine and more.

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