The Drop in VC Investments Fuels Growth of Community-Driven Fundraising in Web3

As the crypto winter drags on, many Web3 startups are caught in the throes of a financing slump. For context, between 2021 and 2022, funding levels dropped significantly, dwindled by 26% culminating in a staggering 74% decline by the year's end.

Now moving into the second quarter of this year, the downturn in VC funding for Web3 startups is even more stark, with a 76% drop compared to the same quarter of the previous year, as highlighted in a report. Crunchbase report . 

With investors increasingly pivoting towards AI-centric companies during this time of fervor, Web3 startups have unfortunately seen the most substantial impacts.

According to data from Crunchbase, in the second quarter of this year, Web3 companies raised just over $1.8 billion through 322 deals. This represents a dramatic fall of more than 75% compared to the same quarter last year when these companies raked in a hefty $7.5 billion. This trend is further supported by a notable 51% decrease in the number of deals being made.

When we take a closer look at the overall situation, the decline is glaringly obvious. In the first half of 2022, Web3 startups collectively secured close to $16 billion in funding. In sharp contrast, this number fell to a mere $3.6 billion during the first six months of this year—a drastic 78% drop.

In light of the dwindling VC funding, a novel approach to fundraising has emerged: Community governance.

For example, within the Internet Computer ecosystem, projects like OpenChat, Kinic, and Hot or Not have pooled together $15 million using the blockchain’s Service Nervous System (SNS) governance model.

“Consider these as an upgraded version of a DAO, capable of running any Web3 application in a fully decentralized manner, entirely on-chain. The community members invest through governance tokens, giving them stakes in the future of the dApp,” explained Lomesh Dutta, VP of Growth. DFINITY told Metaverse Post.

What is the SNS framework?

The Service Nervous System (SNS) model leverages the principles of decentralization, enabling communities to actively partake in the governance processes of projects. This marks a profound shift away from the typical VC model, emphasizing decisions made with the user in mind.

“While traditional DAOs limit themselves to managing smart contract logic, the SNS structure facilitates comprehensive project management. All holders of governance tokens can put forth proposals and vote on any modifications to the dApp, including fundamental code changes,” Dutta shared with Metaverse Post.

In contrast to conventional DAOs, SNS operates entirely on-chain, overseeing all facets of project management, such as code updates. When the community approves a proposal, it gets executed automatically, free from central control.

Dutta noted that this particular aspect has attracted several services like OpenChat, Kinic, and Hot or Not to the Internet Computer blockchain.

The Choice Between VC and SNS

For many years, venture capital has been the primary avenue for funding startups. Its allure stems from the ability to provide large sums of capital, along with essential industry networks and insights.

Beyond mere financial backing, VCs offer a treasure trove of experience that can aid startups in navigating the intricate challenges of rapid growth. However, this support typically comes at the expense of giving up significant equity and some managerial control.

“This has always been the norm. Not all startups have fully embraced community-driven funding, and in some cases, this raises memories of Kickstarter campaigns that fell short,” expressed Dutta from DFINITY.

He posited that traditional VC funding remains an area where Web3 fundraising may struggle to compete. The reason lies primarily in the fact that the 'community's will,' while equitable, may not necessarily have the expertise or connections needed.

“The SNS DAOs provide a platform to tailor and integrate governance models, fostering complex roles for community members, which allows skills and knowledge to flow where they’re needed,” he further elaborated.

Transparency and Decision-Making Within Community Governance

According to Dutta, “SNSs are algorithmic DAOs that enable developers to transfer control of their dApps to decentralized, token-based governance systems managed by the community.” This creates alignment with the project’s goals, transforming users into stakeholders with a vested interest in its triumph.

Dispelling common misconceptions, community governance structures can indeed accumulate substantial capital through token sales or decentralized autonomous organizations (DAOs), as Dutta states. This strategy offers founders an alternative means of securing funding while retaining greater control over their projects' pathways.

Dutta explained, “Traditional DAOs are confined to controlling smart contract logic, while the SNS model allows for comprehensive project management.” Unlike VCs that may seek to dominate the project, such models facilitate open communication and consensus-building within the community.

Token-based governance frameworks, a distinct characteristic of community governance, promote engagement among community members.

Dutta remarked, “The community itself invests via governance tokens, which bestows upon them ownership and influence over the future of the dApp.” This empowers token holders to take part in project-related decisions, fostering a sense of belonging and accountability that encourages long-term investment.

Tangible Gains of the SNS Model

The success stories of Web3 initiatives utilizing the SNS framework are quite compelling.

OpenChat, a decentralized chat application governed by its community within the Internet Computer ecosystem, successfully raised $5.5 million (1 million ICP) in just six hours during its fundraising round. This model not only secures funds for ongoing development but also guarantees governance that is democratic and resistant to censorship.

Dutta discussed OpenChat's fundraising approach, explaining, “The raise was executed through a decentralized exchange of CHAT governance tokens, all within the ICP network. It attracted a total of 2,375 participants who collectively contributed 1 million ICP tokens. Now, this system is governed by these CHAT holders, and the newly acquired funds will be managed within OpenChat’s treasury, enabling CHAT holders to determine the best use for them.”

In a similar vein, Kinic, a search engine rooted in Web3, raised over $2 million (500,000 ICP) to present a decentralized alternative that emphasizes user data confidentiality and transparency.

Hot or Not, another initiative within the Internet Computer ecosystem, garnered $4.5 million (1 million ICP) via its SNS rollout. This platform uniquely blends short video content with prediction markets, empowering its community to engage directly in decision-making and revenue strategies.

Encouraging Web3 Developers to Decrease Dependency on VC Funding

As Web3 founders navigate the evolving financial landscape, the choice between community governance and traditional VC funding has become more critical than ever. While VC funding can provide access to capital and invaluable industry knowledge, community governance models emphasize alignment, decentralization, and active participation from members.

“Under the SNS framework, developers don’t have to wait for the deep pockets of major investors to launch their projects. Instead, they can present their initiatives to the community and allow them to decide whether they want to support this venture,”

Dutta advocates for the community governance approach.

“Projects that boast solid teams and compelling use cases can secure ample funding not solely from a single or a handful of centralized backers, but collectively from the community of users they aim to serve,” he stated. “This boosts loyalty, endows real power to the community through governance, and eliminates the need to satisfy a small clique of investors who might not share the same vision for the project.”