How Venture Capitals Are Building Web3’s Future Beyond the Bull

Venture capital in Web3 is undergoing a transformation. The speculative era of the initial coin offering (ICO) boom in 2017 has given way to a more structured investment environment, where institutional capital plays a defining role. As the sector matures and competition heats up, venture capital firms are faced with the need to adjust their strategies in order to stay relevant.

The industry’s evolution into an emerging financial ecosystem has also placed increased importance on activities of venture capital firms such as Foresight Ventures, which serves as key indicators of market sentiment and insights into high potential growth sectors. 

Yet, as capital deployment strategies evolve, so too does the challenge of aligning incentives: balancing the interests of VCs with Web3 builders has created a complex environment for stakeholders. The entry of mainstream investment firms into the space has intensified competition, as each VC seeks to maximize productivity with each dollar committed.

Investing Landscape and Current Dynamics

Considering the rapid growth of Web3 over the past few years, there are now startups whose success rivals that of established firms. For instance, Polymarket, a highly successful prediction market on the Polygon network, gained significant attention during the past US elections.

With over $9 billion in traded volume, the platform underscored the potential for crypto-native applications to compete with Web2 alternatives.

Likewise, the success of AI Agents toward the end of 2024 has also sparked optimism that Web3 is on the rise. These autonomous multipurpose agents are now used in finance, predictions, music, and other key growth areas of Web3. 

The popularity of PayFi has seen the sector process over $1 trillion in transactions annually, irrespective of broader market sentiments. The ecosystem facilitates B2B cross-border payments, the market for compliant stablecoins, and enhances on-chain and off-chain credit systems.  PayFi also plays a crucial role in enabling people in emerging markets to on-ramp/off-ramp, promoting broader adoption of crypto for real-world commerce, especially in regions where access to traditional banking may be limited.

In terms of most active VCs, data from CryptoRank and insight4vc indicates in 2024 Animoca Brands led venture capital activity with over 100 funding rounds, followed by OKX Ventures with more than 80. Cogitent Ventures, Binance Labs (now known as YZi Labs), and Foresight Ventures each completed approximately 50-60 rounds, underscoring their significant influence on the crypto investment landscape.

As a leading active venture capitalist, navigating market inconsistencies is both a challenge and an opportunity. Market downturns are common, often fueled by broader macroeconomic trends and over the years, we have witnessed multiple downturns that have forced VCs to dial back their investment efforts.

Still, these testing periods can also present the most promising opportunities. This is because, like in Web2, innovations that emerge from the harshest of economic conditions tend to have a higher prospect of long-term success. For example, Coinbase was established when the world was recovering from the 2008 global economic meltdown. Today, it is the largest exchange in the United States, with a publicly traded capitalization of $56.85 billion.

Over time, VCs have had to implement a multifaceted operational approach to support their portfolio companies. While ready capital serves as an incentive, providing technical support, consultancy and industry networking opportunities for founders have consistently helped create the most resilient companies.

Areas of Focus for Future Innovation

When it comes to geography and opportunities, we focus on the U.S. and Asian markets. Asia presents significant potential, though it is a fragmented market with diverse cultures and regulations. The U.S., on the other hand, is making progress with improving regulations, and its positive approach to crypto could help reattract talent. VCs with offices in both sides of the world have the unique ability to leverage various resources in both eastern and western markets, providing a strong competitive edge to their portfolio companies. 

In the earlier years of Bitcoin (BTC), retail investors played a crucial role in sustaining the industry. However, the ecosystem is now populated with institutional investors, like Strategy (formerly MicroStrategy) and Rumble, who have considerable influence on the market and have altered the dynamics of capital allocation.

Beyond Bitcoin, innovations and developments in stablecoins and decentralised finance (DeFi) remains a focal point for investors. AI-driven blockchain applications, meanwhile, are reshaping expectations for Web3’s utility. While many protocols seek to capitalise on this shift, only a few have demonstrated the infrastructure required to support large-scale adoption.

One such ecosystem is the BNB Chain, which has attracted significant investment. Foresight Ventures recently pledged $25 million to fund startups participating in the Most Valuable Builder (MVB) programme, an initiative co-launched with YZi Labs. The aim is straightforward: to identify and nurture exciting projects with the potential to change the world and drive broader crypto adoption.

The crypto market is currently undergoing a significant correction, with valuations sharply declining across the board. While short-term sentiment remains bleak, experienced venture capitalists understand that downturns create opportunities. The industry is evolving, and trends will likely shift in the coming months. With pro-crypto regulations emerging across the globe, it remains to be seen which venture capital firms will be able to seize the many opportunities that will be presented in the industry.

Established VCs understand this trend, and many strategically choose projects and ecosystems with the best odds of fulfilling their goals. The industry is evolving, and trends will likely shift in the coming months. With pro-crypto regulations emerging across the globe, it remains to be seen which venture capital firms will seize the many opportunities in the industry.