The Role of Venture Capitalists in the Rise of Web3: Successes, Failures, and Lessons Learned
Introduction
Web3—the next phase of the internet built on decentralization, blockchain technology, and user ownership—has been one of the most groundbreaking and controversial tech movements in recent history. While developers and entrepreneurs spearheaded the vision, it was venture capitalists (VCs) who often provided the critical financial and strategic fuel to get these ideas off the ground.
Over the past decade, VCs have poured billions into the Web3 ecosystem, funding projects ranging from decentralized finance (DeFi) to non-fungible tokens (NFTs), Layer 1 blockchains, and decentralized autonomous organizations (DAOs). Their involvement has both accelerated innovation and sparked intense debate about the balance between decentralization and centralized funding.
This article explores the vital role VCs have played in Web3, showcasing both success stories and notable failures—offering insights into what it takes to build sustainable projects in an experimental and fast-moving space.
Understanding Venture Capital in the Web3 Era
What Makes Web3 VC Investing Unique?
Unlike traditional tech startups where VCs acquire equity in exchange for capital, Web3 companies often issue tokens that represent some form of ownership, utility, or governance rights. These tokens are frequently liquid (or semi-liquid), enabling early returns through token sales or secondary markets long before the company is profitable—or even fully operational.
This liquidity advantage creates both opportunities and risks:
- VCs can realize returns faster through token appreciation or public sales.
- Projects may face pressure to prioritize price speculation over long-term utility.
- "Pump-and-dump" concerns arise if investors exit early, leaving retail participants with devalued assets.
The Role VCs Played in Web3’s Growth
1. Capitalizing Infrastructure
Building a blockchain protocol or decentralized app (dApp) requires significant upfront investment. From funding node infrastructure to community development and developer grants, VCs have bankrolled key aspects of the Web3 ecosystem.
For instance, early support from funds like Andreessen Horowitz (a16z) and Union Square Ventures helped bootstrap Ethereum’s ecosystem and signaled mainstream interest.
2. Accelerating Adoption
VCs brought not only money but also go-to-market strategies, partnerships, and publicity. Backing from well-known firms created a halo effect that encouraged adoption by users, developers, and enterprise clients.
Projects like OpenSea and Dapper Labs (creator of NBA Top Shot) gained traction partly because of savvy VC backing and the media attention that followed.
3. Guiding Governance and Compliance
Many blockchain startups operate in regulatory grey areas. VC firms often help startups navigate compliance by hiring legal experts, shaping governance structures, and planning token distributions that meet global regulatory standards.
Some firms have also become active participants in DAOs, voting on governance proposals and helping shape the direction of protocols in which they are invested.
Successful VC-Backed Projects in Web3
1. Ethereum
While Ethereum's initial development was largely community-driven and funded through a presale, VC interest surged post-launch. Andreessen Horowitz and others later invested heavily in Ethereum-based projects and infrastructure, recognizing the network’s potential as a "world computer."
Ethereum's flourishing ecosystem—supporting thousands of dApps and billions in assets—continues to justify early VC enthusiasm.
2. Uniswap (Backed by Paradigm)
Uniswap, the most prominent decentralized exchange (DEX), disrupted centralized trading models with its automated market maker (AMM) system. Paradigm, a crypto-native VC fund, provided funding and deep technical support. Uniswap became a core building block of DeFi, facilitating billions in daily trading volume.
3. OpenSea (Backed by a16z, Coatue)
As the leading NFT marketplace, OpenSea raised over $100 million and achieved unicorn status rapidly. VCs provided growth capital, compliance support, and helped scale the platform during the 2021 NFT explosion.
4. Chainalysis
Unlike many speculative Web3 plays, Chainalysis offers blockchain analytics and forensics tools used by governments, banks, and crypto platforms. Backed by Benchmark and Accel, the company became a critical bridge between crypto and traditional finance/compliance systems.
5. Polygon (Previously Matic Network)
Polygon received early investment from Binance Labs and later institutional backing from firms like Sequoia India. It evolved into one of the most scalable Ethereum-compatible chains, attracting major partnerships including Meta, Reddit, and Starbucks.
High-Profile Failures and VC Missteps
1. Terra/Luna Collapse
Backed by Pantera Capital, Galaxy Digital, and others, the Terra ecosystem was built around an algorithmic stablecoin (UST) and its sister token (LUNA). In May 2022, the system collapsed, wiping out over $40 billion in value. Despite VC backing, the flawed design and overconfidence in algorithmic stability led to disaster.
This raised questions about how thoroughly VCs vet projects in crypto compared to traditional investments.
2. FTX and Alameda Research
Arguably the most damaging VC-backed failure in Web3, FTX received funding from elite firms like Sequoia Capital, a16z, and SoftBank, with a valuation that reached $32 billion. Its collapse in late 2022 revealed deep financial misconduct, triggering massive contagion across the industry.
VCs were criticized for not conducting adequate due diligence, reportedly relying more on founder charisma (Sam Bankman-Fried) than sound business practices.
3. Celsius and BlockFi
Both of these crypto lending platforms attracted significant VC interest during the DeFi boom. Offering yields of 10%+ on crypto deposits, they appeared unsustainable in hindsight. Both eventually filed for bankruptcy, reflecting the dangers of underregulated lending models.
Regional and Thematic Expansion
VC Activity in Asia, Africa, and Latin America
While much VC attention has centered on U.S.-based projects, emerging markets have seen growing interest:
- Asia: Firms like Hashed (Korea) and Animoca Brands (Hong Kong) have invested heavily in gaming, metaverse, and DeFi projects in the region.
- Africa: VC-backed platforms like Yellow Card and VALR aim to improve financial inclusion by offering fiat-to-crypto services in underserved markets.
- Latin America: Projects like Ripio and Bitso have attracted VC investment to bring crypto-based remittances and stablecoins to economies facing inflation and currency devaluation.
This global focus reflects the broader mission of Web3: decentralized, borderless financial and digital services.
The Changing Nature of Crypto VC
DAOs and Community Funding
One emerging trend is the decentralization of funding itself. Rather than relying solely on institutional VCs, many projects now use:
- DAO-based treasuries to fund internal and community-led projects
- Launchpads or Initial DEX Offerings (IDOs) to raise capital from users directly
- Retroactive public goods funding (like Gitcoin Grants) for open-source infrastructure
Still, many VCs are adapting by becoming more transparent, taking active roles in governance, and committing to longer vesting periods for token holdings.
Criticism of VC Influence in a "Decentralized" World
Despite their role in scaling innovation, some critics argue that VC dominance in Web3 is inherently at odds with its decentralized ethos. Concerns include:
- Whale governance: VCs with large token holdings may unduly influence protocol decisions.
- Short-termism: Token incentives may encourage fast exits rather than sustainable growth.
- Limited community inclusion: Early token allocations are often skewed in favor of insiders.
As a result, some projects now reserve larger token allocations for users and contributors, using mechanisms like airdrops or fair launches.
What Success Looks Like in Web3 VC
Projects that thrive tend to share several traits:
- Transparent and secure code (often audited and open-source)
- Robust, community-driven governance
- Clear utility beyond speculation
- Flexible tokenomics with user-aligned incentives
- Compliance awareness without compromising decentralization
VCs who align with these principles—and who actively contribute to building resilient ecosystems—are more likely to see long-term returns.
Conclusion
Venture capitalists have played a pivotal role in transforming Web3 from a fringe experiment into a global technological movement. Their funding has enabled breakthrough projects and accelerated the development of blockchain infrastructure, DeFi, NFTs, and more.
However, the path has not been smooth. The Web3 space is littered with overhyped failures and under-regulated ventures. The challenge now is for VCs and founders alike to learn from these experiences and build more sustainable, transparent, and community-aligned systems.
As Web3 matures, the most successful investors will be those who move beyond speculation—toward long-term value creation rooted in the core principles of decentralization, transparency, and inclusion.
References
PocaOfWeb3
Axel Tombereau
Fred Wilson
Serge Baloyan
Fred
AntonioBen
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