More than ten Web3 unicorns have seen their off-market valuations drop by 50%, and the primary market in the bear market is also weak

Written by: Julian, Web3 World

"If I had invested in this Web3 company two months later, the valuation would have been half as cheap; the team is all complaining that I acted too quickly." Mark, who returned from the Polkadot ecosystem conference in Hangzhou, said with a somewhat awkward smile.

In April this year, the Web3 fund he manages completed an investment in a GameFi project with a valuation of $45 million. By May, the project proactively lowered its valuation to $35 million to continue fundraising, and now the project's external fundraising valuation has dropped to $25 million.

In the context of a bear market, most projects cannot escape the decline in primary market valuations. Data compiled by Messari founder Ryan Selkis shows that many Web3 unicorn projects are facing significant reductions in their off-market trading prices compared to their previous financing valuations, including star unicorns like OpenSea, FTX, and ConsenSys. More than 10 Web3 unicorns have seen their valuations shrink by about 50%, with some even reaching 90%.

One extreme example is BlockFi. In March 2021, BlockFi raised $350 million at a valuation of $3 billion, and later that year raised funds at a valuation exceeding $5 billion; in June this year, The Block reported that BlockFi was raising funds at a valuation of $1 billion. Just over a year later, there are reports that FTX is looking to acquire BlockFi at a variable price of up to $240 million.

This is also a true reflection of the Web3 primary market in a bear market: some project valuations are declining, institutions are generally cautious and waiting, and large platforms are accelerating industry mergers and acquisitions.

In the cold environment of the bear market, G3 spoke with more than a dozen Web3 investment institutions and entrepreneurs to explore thoughts and opportunities for investment and entrepreneurship in the bear market.

Primary Market Begins to Cool Down

"We have been looking at projects for the past three months, but we haven't made a single investment." KiWi, who works in investment at a leading exchange, said that by the end of 2021, they had sensed signals of increasing risks in the global capital markets. While tracking the performance of newly listed projects on all exchanges, they found that many were experiencing a disconnect between primary and secondary market valuations, leading them to judge that the bear market would soon transmit from the secondary market to the primary market, decisively hitting the investment pause button.

Since the end of last year, the market has been talking about the Federal Reserve raising interest rates and the wolf of inflation coming. However, many professional institutions, due to inertia, have failed to extricate themselves from such an obviously cyclical bear market.

The profit-making effect in a bull market is significant; whether retail investors or institutions, once they FOMO (fear of missing out), they rarely base their valuations of crypto startups on long-term cash flows. Instead, they rely more on comparable company analysis and public peer comparisons. Many project valuations have thus risen dramatically.

For example, the X-to-Earn trend that was popular in the first half of the year led many institutions to invest in GameFi projects. According to crypto media Odaily, there were a total of 82 financing rounds for GameFi concepts in Q2 this year, accounting for 16% of the total financing rounds in the market; the financing amount reached $2.996 billion, accounting for 23.5% of the total market financing. The number and amount of GameFi financing rounds far outpaced the industry.

Now, with the Federal Reserve raising interest rates and the decline of major risk assets, the collapse of X-to-Earn projects in the bear market means that many crypto startups with such concepts are likely to see their valuations decline.

GameFi sector's decline over the past year. Data source: Messari

For example, regarding the leader in X-to-Earn, StepN, most of the hundreds of analyses have avoided a core factor: Binance. StepN's key to success lies in Binance's full incubation and operation, combined with its clever Ponzi economic model, ultimately achieving a market value of over $10 billion and a hot X-to-Earn track.

If a project that relies on timing and location is taken as a typical case and then used as a reference for valuing other similar projects in the public market, it is naturally easy to chase high valuations, leading to a disconnect between the valuations of invested projects in the primary and secondary markets.

0xTodd, a partner at Nothing Research, believes that the valuation disconnect between primary and secondary markets is particularly evident in the Web3 space. "The entire Web3 sector is still in the stage of concept validation. The characteristic is that cash flow is relatively low, and user data mainly relies on subsidies. In this case, it is very dependent on the narrative of the bull market—selling dreams. Once entering a bear market, everyone's data immediately shrinks by an order of magnitude, making it difficult for the secondary market to perform well."

Entrepreneurs Face Increased Financing Difficulties

"The collapse of Terra (LUNA and UST) was a very obvious turning point that caused many mainstream investors to lose interest in investing and slowed down venture capital in the Web3 field." A representative from a DeFi project stated that several traditional VC firms were previously in contact with them for investment, including top dollar funds. However, after the Terra collapse, most paused investment negotiations.

Since the transmission effect from the secondary market does not happen quickly, there is often a certain lag before it affects the primary market. The collapse of Terra and the subsequent series of liquidations undoubtedly accelerated the spread of panic throughout the market, undermining everyone's confidence.

According to comprehensive statistics from Odaily, there were 184 financing rounds in April 2022, with a financing amount of approximately $7.05 billion; in May, there were 165 financing rounds totaling about $3.54 billion; and in June, there were 162 financing rounds with a financing amount of approximately $2.12 billion. It can be seen that in May and June, the crypto market was affected by the Luna collapse and negative news from various institutions, leading to a sustained low market sentiment, significant losses of funds in the market, and a rapid decline in both the number and amount of financing.

Data source: Odaily

The cooling of the primary market directly affects many startups that are currently fundraising. The aforementioned DeFi project representative stated that in addition to traditional VC firms pausing investment negotiations, many institutions specifically investing in Web3 have reduced the amount of single investments or required projects to proactively lower their valuations.

Compared to projects that have completed or partially completed their financing, other earlier-stage Web3 entrepreneurs are facing obstacles in fundraising. G3 found that when helping many entrepreneurs transitioning from Web2 to Web3 connect with investment institutions, if they lack sufficient Web3 native background experience and relevant resources, even with certain product and technical capabilities, it is currently very difficult to secure funding.

A project representative in the G3 community focused on DID stated that after about six months of product refinement, the project began fundraising after completing internal testing in June. After talking to more than a dozen VC firms, the results were not ideal, and they had to stop market activities, concentrating their main cost expenditures on product and R&D.

Some entrepreneurs have also begun to turn their attention to various industry vertical conferences, hackathons, startup camps, incubators, and other activities, hoping to gain better exposure opportunities, endorsements from Web3 native resources, and grant support.

A representative from a Web3 storage protocol project stated that they participated in the Polkadot Decoded conference held in June, which was their first public appearance at a large offline conference, allowing the team to have the opportunity to directly connect with industry institutions during the bear market.

Exchanges Expand Through Acquisitions in a Bear Market

Retail investors do not know whether institutions hold cash or cryptocurrencies (assets); if they hold cryptocurrencies, retail investors still do not know whether institutions hold mainstream coins or altcoins.

Therefore, in a bull market, many institutions can leverage their professional technology, information asymmetry advantages, and primary cost advantages, using leverage to form a capital scale advantage, switching back and forth between cash, mainstream coins, various hot altcoins, and even NFTs, creating significant trading volume and volatility to achieve profits.

However, in a bear market, as retail activity and trading volume gradually decline, it leads to a stock game among institutional investors. At this point, institutions that over-leveraged during the bull market and held large positions in altcoins, especially those that exchanged cash for cryptocurrencies and sacrificed liquidity for staking, are at risk of facing explosions or cash flow difficulties if they cannot extricate themselves in time.

On the other hand, platforms that exchanged cryptocurrencies for large amounts of cash during the bull market can begin investing at this time, acquiring distressed institutions and projects that have fallen sharply to expand their market presence.

On July 1, Binance CEO CZ stated that they currently hold a large cash reserve and are actively seeking to support distressed crypto companies, hoping to help most companies facing some liquidity constraints through this cycle, and are currently negotiating acquisitions with over 50 crypto companies.

"The biggest financial backers in this market are still large exchanges, which are the main buyers in the bear market acquisition market. Large exchanges accumulated a lot of principal during the bull market, and their good cash flow makes it difficult for them to get themselves into trouble with reckless operations. Although they sometimes pay tuition for blind expansion or security issues, they are still relatively safer compared to institutions that have heavily leveraged," 0xTodd stated.

It is worth noting that some financial backers in the acquisition market also include DEX (DeFi), such as the recent acquisition of the NFT aggregation market Genie by Uniswap Labs.

Another major player expanding aggressively in a bear market is SBF from FTX. In April of this year, FTX announced the completion of its acquisition of the Japanese cryptocurrency exchange Liquid; recently, FTX is also looking to acquire BlockFi at a variable price of up to $240 million. Additionally, there are reports that FTX is open to acquiring the cryptocurrency mining industry, which is about to be hit hard, and is still seeking opportunities to acquire U.S. brokerage firms to provide stock trading services to U.S. customers.

Many foreign institutions have fallen into difficulties due to risk control and other reasons, which objectively creates "bargain" expansion opportunities for leading exchanges like Binance and FTX. Cobo Ventures investment VP Alex Zuo believes that "many U.S. (foreign) institutions are not as strong as we imagine; they are trying to retrace our steps with laws and regulations, which is not feasible, such as mining machine lending and interbank borrowing; they are focusing most of their energy on compliance applications, participating in Wall Street meetings, etc., but have not worked hard to improve profitability and technical risk control levels, and some even mismanaged client funds, so some recent crises are inevitable."

In Conclusion, When to Bottom Fish

Regarding when institutions will bottom fish in a bear market and how entrepreneurs can survive and raise funds during the bear market, some institutions have provided their own suggestions.

As an investor who has experienced multiple bull and bear cycles, Web3Vision founder Yang Linyuan optimistically believes that the bear market is the best window period for investing in the primary market. Truly outstanding entrepreneurs need to go through the baptism of the market, and good assets will also have more reasonable valuations in a bear market. In the last bear market bottom, many early quality projects faced little competition from institutions, making it easier for them to secure investments.

"There are some promising projects that we missed in the seed and early rounds. These projects may loosen their valuations in the later stages of the bear market due to cash flow issues, and I believe this is also a good time for investment," said Iren, head of investment at Crypto Geek. For projects they previously favored, if valuations drop in the bear market, they will also consider following up or increasing their investments.

Iren also advises projects with limited cash to endure this bear market at all costs; it would be a pity if they fall just before dawn (historically, this ratio is not low). If they can lower their valuations and secure funding to survive, that is also a good choice.

0xTodd also believes that many potential projects are actually nurtured at the bottom of the bear market. Historically, about 90% of projects will fail in a bear market. For investors, they tend to invest in streamlined teams during a bear market, using a "power-saving mode" to solidly develop and implement with the funds raised, which is the way to successfully navigate the bear market. For project teams, even if you just persist and achieve the simple task of surviving, you have already outperformed 90% of your peers.

"Investing is an anti-instinctive process, so we generally do not try to guess the bottom; usually, when no one is paying attention, that is the bottom. The best left-side indicators for bottom fishing are hard to predict; I tend to think we need to wait until the market shows clear right-side indicators before we can welcome the next best opportunity to bottom fish," 0xTodd stated.