1. It is all about Labs
In terms of investment amounts in H1 2022, R&D startups were leading by a significant margin (34.9%), those were mainly design studios creating content. The same growth (only in terms of emergence, not investments) we can see in the segment of the earliest startups. Everyone wants to be the next Lavra / Yuga/ Dapper / LayerZero Labs. The investor interest in content creators is not surprising – the marketplace market is well-stocked, but further sales growth requires fresh ideas and high-quality assets. While the number of young startups sticking the word ‘Labs’ to their name, but at the same time consisting of a designer and a marketing manager, leaves much to be desired.
2. The Best and the Rest
The funding situation for Art+Tech & NFT startups is similar to the art market in general: there are ‘blue chips’ and others. There is a growing gap between them. The total amount of investments received by 8 companies at the level exceeding $100 million in H1 2022 was $1.921 billion, or 74% of the total. The remaining $679 million (24%) are distributed among 115 startups – an average of $5.9 million per company. And, although five million is also a formidable amount, which early rounds Art+Tech startups could not even dream about 5 years ago, the difference is still impressive. We may only hope that unicorns to be will master this funding with due diligence, without looking back at more successful colleagues.
3. Crypto vs. Ratio
Despite the obvious advantage of Digital & NFT startups over representatives of 'Physical' Art+Tech (111 vs. 12 in number or 96.2% vs. 3.8% in financial terms), the main investors in H1 2022 were traditional players - classic VCs (33.6%) and individuals (22.5%). According to our calculations, 8 out of 10 individual investors made investments in fiat currency. In other words, the vast majority of crypto startups were funded in traditional currency. This can be explained by two factors. First, traditional VCs did not want to miss the ‘hot digital market’ by paying with the assets they had at the time of the transaction. Second, crypto-investors decided to hold their funds, expecting for the capitalization of the main crypto currencies to grow. But we can state that the NFT ecosystem has been more interesting to the traditional market over the past 6 months, both in quantitative and monetary terms.
4. Investors are testing water
At the same time, investors were in no hurry to plunge headlong into the digital economy - 86.6% of 640 companies / personalities in H1 2022 made only one investment into infrastructure startups. This could be assessed positively if the market is supported by the global economy – i.e., when these investments would lead startups to quickly and successfully start working with their users. However, there are few chances for startups to quickly occupy their niche (and show the result of disbursing funds at the level of cash flow / company valuation growth) in the face of a decline in key indicators of the traditional market, as well as a recession at the crypto market. This could have a negative impact on the trial investment experience for more than 600 investors. Are they ready to wait for the new growth of the digital economy and the inevitable expansion of Web3?
5. Investment Portraits: Preplanned, Last Minute, Postponed
What is the record H1 2022 investment of $2.600 billion? This is a combination of several factors. It must be understood that most of the later rounds (Series A+) are planned many months in advance, including prior arrangements with participating investors. Consequently, the startups in our ecosystem received about $2.2 billion regardless of the economic crisis, the bear market of crypto assets, and hostilities in Ukraine. About $400 million more investments were dictated by the desire of investors to be in time to place money in a rather risky, but promising area before the crisis began. But one can only guess how much the Art+Tech & NFT industry lost in H1 2022. After all, as we remember, specialized funds have reserved more than $22.7 billion for the entire Web3, of which only $1.5 billion have been disbursed. The rest of the funds are waiting for a state of certainty: either the market will grow and investments will continue, or its further recession and mass M&A procedures with a discount favorable for investors.
After all, not only you and me, but investors also understand that digital assets have come into our lives forever. The only point is the most profitable (forecasted) investment cycles. And certainly the outcomes.
6. Investment Relations is Key Point
“Relations” is the key word in the phrase ‘Investment Relations’. And they are built up over a long period of time. A startup must understand that this can take years, while an investor studies your psychological profile as founders, reactions to success and failure, stress resistance, etc. This is no less important than determining the ability of a startup to work with money (traction) and find a market fit. It is good that most Art+Tech startups have realized by mid-2022 that it is extremely difficult to conquer an investor with a bare idea, even the most progressive and unique one. Those who jump into the last car of the train leaving for success are the first to jump off. And a real investor is your mentor for many years, in fact, another co-founder.
7. Blockchain Wars
Considering that the capitalization of any blockchain (and the crypto currency of the same name associated with it) depends on the number and amount of transactions carried out within its ecosystem, back in early 2022 we predicted ‘Blockchain Wars’ – competition in this market area. This was partly confirmed - the largest blockchains became more active in terms of grants for startups using their technologies, as well as targeted funding at the level of investment funds. At the same time, other market participants who need new users, in particular, crypto exchanges, are also drawn into such competitive wars. The number of ‘multiverse’ startups nurtured by strategists is on the rise. Today Animoca Brands (GameFi) and Galaxy Labs (R&D / VC), and Christie's (classic art market) join them.
8. BlackRock has not impacted the market… Yet?
The positive effect ( predicted by many people) from the epoch-making deal between the largest fund of our time BlackRock Capital (more than $13 trillion under management) and the top crypto exchange Copinbase is in no hurry to become influential. The capitalization of the leading crypto currencies slightly (11%) recovered after that message in August, 2022, but then again returned to the low levels of the previous summer. Elon Musk has managed the digital market more efficiently with his tweets. Either the main holders of crypto currencies do not know what BlackRock is (which is hard to believe), or it is no longer possible to reset the sagging market with such news. And, perhaps, the whole thing is in August - the traditional month of vacations and preparation for the autumn spurt?
9. More utilities, please!
We observe a certain fatigue in the crypto community as the main audience for Digital & NFT startups. So, unexpectedly for many people, the giant of the gaming world Minecraft abandoned the idea to introduce NFT for its users. It followed by bringing the issue of digitizing traditional audiences to the attention of some GameFi strategists at the NFT.NYC summit last June. And this is a very alarming call, since the game industry has been considered the main channel for the supply of adherents of crypto-assets. The main reason for such a division into NFT supporters and opponents among gamers was the understanding by a part of the audience that, apart from additional costs, crypto assets in games do not have actual, tangible benefits. And here we come to a term that has been lost in white papers and smart contracts since 2018 – utilities. It is the actual benefit of owning NFTs that, in our opinion, will determine the success of startups in the sphere. We have to admit: the new generation is fed up with the ephemeral benefits of the crypto world, which can be retold by the national motto of France - ‘Liberté, égalité, fraternité’ (Liberty, equality, fraternity).
‘Utilité, utilité, utilité’ is the new slogan for the next 6 months, and, most likely, for the next decade.
10. Physical Market on Parade?
83% of strategists who consider it inevitable to switch attention over to physical market assets amid the crisis - is an extremely high figure to ignore. We are not saying that CoinTelegraph or Decrypt will start writing about the sales of Basquiat and Rauschenberg. The main thing (if it happens) is to keep the weight taken, i.e., to provide users of ‘physical’ Art+Tech services with a quality product. And here, given the poor ecosystem of startups working with classical art, questions arise. The online offices of auction houses and large galleries (those who will have crowds of clients) will seize the initiative at best, and we will return to the time of the pandemic. In the worst case scenario, fractional ownership platforms may not be ready to provide users with the expected benefits, e.g., liquidity at the secondary market. It is no coincidence that the appearance at the market of a specialized exchange of the NASDAQ type for shares of art has long been actively discussed behind the scenes. However, first of all, it is necessary to unite the existing market players for this. But who is ready to become a new leader?
So, H2 2022 is ahead. With what thoughts are we going to enter it?
We would be happy to be wrong, but there will have been less high-profile investments in the Art+Tech & NFT area by the end of 2022. Everything planned before the start of the crypto winter has already happened, and the rest of the funds will follow the market. However, the crisis is a time of opportunities for Fuelarts. We must not forget that today's unicorns were founded just during the previous crisis periods - the bearish trend of 2018-2020 and the pandemic. A crisis is the best time to gather, inspire, and retain the community, test the team, and show investors your resilience. Then, success awaits you at the end.
Remember that your startup glass is half full, not half empty.