The open metaverse remains the preferred platform as we head into 2023
By Kelly Choo, Founding Partner of the True Global Ventures (TGV) 4 Plus Fund and the TGV4+ Follow On Fund
Key Insights
- Investors continued to choose the economic potential of the open metaverse over that of the closed metaverse.
- After unprecedented open metaverse investment in 2021, support industries became the most popular investment in 2022.
- Investors have shown a preference to invest in late-stage ecosystem leaders like Animoca Brands, then let that company invest in early-stage startups.
- Consumer demand for all-encompassing closed metaverse platforms like Horizon Worlds has remained elusive.
After a banner year in 2021 that saw the rise of platforms like The Sandbox and Decentraland, billions in primary and secondary land sales and soaring NFT prices, investor interest in the metaverse came back to earth somewhat. Ironically, this tempering coincided with corporate and private-equity money flooding into the space. McKinsey & Company reported in June that $120+ billion had already been pumped into the metaverse, more than double what was seen in the entirety of 2021.
This year’s corporate metaverse activity bears that out. Brands from Nike and Gucci to Snoop Dogg and TIME Magazine poured money into metaverse initiatives as a way of revolutionizing experiential brand engagement, while Meta doubled down on its Horizon Worlds experiment.
What we have learned, however, is that in consumer-centric sectors like metaverses and NFTs, venture investment from Web3-focused funds precedes that of mainstream VCs, corporations and private equity. We saw that with OpenSea, Decentraland, Axie Infinity, Star Atlas and The Sandbox.
With that in mind, we took a look at the 2022 venture investment landscape to understand what might be in store for 2023. What we found was that, according to our methodology, 216 metaverse funding deals were done totalling almost US$2 billion.
“It became clear to us early on in 2022 that it would be the ‘picks and shovels’ startups that would get the most attention from investors. An apt analogy given the ‘gold rush’ mentality of many established consumer brands.”
Who Got Funded
With all the corporate money flowing into the metaverse, three things happened. First, demand for support services skyrocketed. Digital architects, game designers, AI developers, content creators and custom metaverse services were suddenly needed to build metaverse experiences, whether on open platforms or closed worlds.
The second thing that happened was fragmentation. The success of the big metaverse platforms has paved the way for purpose-built and themed platforms. Sports, art, and consumer brands have been the three most popular themes, while remote work collaboration and education emerged as viable candidates for a purpose-built world.
The third thing was the refocusing of attention on Web3 gaming. Given the fraught history of Web3 games and with many of the brand initiatives on metaverse platforms centered around gamification, there was a clear need for a new economic model and gameplay innovation. This year’s breed of Web3 gaming startups have sought to do just that.
Venture investors were quick to pick up on these trends. Metaverse support startups were the primary beneficiaries. Gaming startups weren’t that far behind, particularly those in the extended reality (XR) space. But it was Web3 giant Animoca Brands that received the most funding. This follows a pattern in recent years where investors fund late-stage ecosystems, then let those ecosystems fund early-stage startups. We’ve seen it with all of the major blockchain ecosystems, now we’re seeing it with ecosystem-agnostic Animoca Brands.
Who Invested
There was a marked decline in funding deals from Q1 of this year to Q4. This coincides with the onset of the current crypto winter. What we’ve also seen is that investors have turned away from the hype-driven, more speculative investments that characterized Q4 2021 and Q1 2022. The goal now is to focus on the builders who are providing real value to customers. One such area is the startups making it easier for brands and enterprises to establish a metaverse presence.
Another thing we saw this year was that metaverse investments have represented only a relatively small portion of total blockchain investments. Shima Capital, for example, has done 102 deals so far in 2022, 52 of which were in the blockchain space. Yet, only 17% of those deals could be described as metaverse investments. Outlier Ventures and LD Capital had a higher proportion, coming in at 50% and 30% respectively. This is a sign that the entire industry is primed for growth. And given the inherent interoperability of Web3 tech, investment that benefits one sector indirectly benefits the others as well.
Animoca Brands has done the most metaverse deals so far in 2022. This is in line with the company’s mission of contributing to the building of the open metaverse. Deals were spread across open metaverse platforms, support companies and Web3 game developers. Polygon Studios, another ecosystem builder, was also active in bringing more metaverse companies to the Polygon blockchain. Interestingly, prior to its collapse, Alameda Research had shown clear interest in the metaverse.
Looking ahead to 2023
If this year’s metaverse investment activity has taught us anything, it’s that the future of the open metaverse concept is bright. While the crypto winter drags on, the builders will continue to build and the innovators will continue to innovate. Now is the time to search out investment opportunities, to find the startups doing the work now that will help grow the industry tomorrow.
Meta’s Horizon Worlds adventure, in stark contrast, hit quite a speed bump in 2022. After starting out with high ambitions, the company has had to revise monthly active user targets by almost 50%, not to mention having to lay off thousands of employees. On the surface, Meta’s troubles are an indictment of the closed metaverse. Expensive VR equipment is needed to access it and the actual utility remains unclear. What is clear, however, is that Horizon Worlds’ success should not be seen as a barometer for the metaverse concept as a whole.
With that, here are some trends in 2023 to look out for:
Support services like architecture, AI and avatar firms will continue to see a lion’s share of investment
The metaverse isn’t going away. Both open and closed platforms will continue to pop up, companies will find new ways to leverage the technology, and our lives will shift a little bit more to the virtual world. We’ll start seeing innovations like avatar expression AI, virtual robot training and a new wave of enjoyable Web3 games built on a stable economic model.
Open metaverse platforms will invest heavily in expanding their own ecosystems
This has already been happening to some extent, but we expect to see a lot more of it in 2023, especially as metaverse platforms launched this year seek additional funding next year. If we do emerge from the crypto winter in the first half of 2023, we should also see established metaverse platforms close funding rounds that were planned for this year.
Web3 gaming, after a tough economic year, will emerge stronger as improved economic models and usability come to fruition
Web3 game developers were perhaps the most affected by the current crypto winter. As token prices plummeted, so too did the number of users playing their games. This sent a clear message that GameFi economic models needed to be more robust and gameplay needed to get better. To that end, in 2023 and beyond we may see more games that combine the “free to play” model with new “play and earn” models.
A new set of industries will drive more traffic to the open metaverse
Music concerts and other live events are prime examples. Established brands and celebrities have only scratched the surface of blending physical and digital experiences. We expect to see a lot more innovation on this front, particularly as XR technology improves and becomes more widespread.
Methodology
We wanted to look specifically at companies either building metaverse platforms or building the tools and services that support metaverse platforms. Using Crunchbase data, we set the Description Keywords as “metaverse” and “virtual world” in the search filter. We then classified each company according to its description as either “Ecosystem Builder”, “Open World”, “Closed World”, “Gaming”, “NFTs”, or “Support”. For the “NFTs” category, we only considered companies that demonstrated a clear link between their NFT work and the metaverse.
Other reports and articles around funding tend to include online gaming, virtual reality, and augmented reality. We view this as a blanket approach that vastly overstates the amount of funding going to the growth of the metaverse. Simply put, not all online games and extended reality experiences should be counted as being related to the metaverse concept.
The data is current as of December 7th, 2022. Note that of the 309 funding deals returned in our search, only 215 had a specified amount. It should therefore be noted that the stated total funding and deal estimates are less than what was actually invested.
About the author:
Kelly Choo is the Founding Partner of the True Global Ventures (TGV) 4 Plus Fund and the TGV4+ Follow On Fund, which invest in global serial entrepreneurs that can disrupt industries with blockchain. The base fund now has two Unicorns, one IPO, and one in the process of going public including Animoca Brands and Sandbox.
He was previously co-founder and general manager of Brandtology, a leading social media intelligence company that was acquired and then went public, and CMO for a brain computing interface platform called Neeuro that helps individuals and companies to understand a user’s mental state. He is also a co-founder of ReferReach, a technology start-up that aims to revolutionize business networking by optimizing referral sharing with artificial intelligence.
LinkedIn: https://www.linkedin.com/in/kellychoo/
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.