Even though the Indian Web3 space has all the apparent and basic requirements for a vibrant startup ecosystem, the country has seen only 95 startups in the sector being founded in the last year, according to latest data available. 

This is a 63.6 per cent drop from 2021, which saw 261 startups being founded in the region, according to data sourced from startup data platform Tracxn. The declining trend still continues, as only 12 startups have been founded by halfway through 2023. 

To be sure, the Web3 startup industry is still nascent in India. According to Tracxn, the region has a total of 550 active startups currently. The Web3 startup industry, although was thriving in its infancy, now faces an uncertain regulatory environment, lack of ease of doing business, a slowdown in funding, and a looming bear market as possible deterrents to the birth of newer Web3 startups, as industry stakeholders note. 

Rohit Jain, MD of CoinDCX Ventures points out that globally as well Web3 startups have slowed down, much like in the broader startup ecosystem. “As it tends to be a cyclical industry, there are a lot many startups that get founded in a bull market given the high noise and easy availability of capital,” he said. 

Although the influx of startups was relatively higher previously, many startups have deadpooled too. Data from Tracxn shows that 13 startups - VeriScript, a decentralized platform for legal contracts management, Nexen, a P2P marketplace for crypto-backed loans, Toqqn, a blockchain-based social sharing platform, to name a few, have gone out of business in 2022.

The funding activity for Web3 startups in India too is on a declining trend. The total funding in 2022 stood at $717.5 million. In contrast, half way through 2023, the total funding YTD stands at a mere $104.5 million, according to Tracxn.

Parth Chaturvedi, Investments Lead, CoinSwitch Ventures said, “The funding which has exited the market was primarily ‘tourist money’ attracted by the price action. Traditional VCs entered the ecosystem out of FOMO without establishing a long-term investment thesis, making them quick to retreat when faced with challenges. Against this backdrop, the crypto and Web3 native funds continue to deploy capital, albeit with enhanced due diligence. Investment cycles have become longer and closing of rounds now takes longer.” 

He further said that the current bear market has undoubtedly made it more difficult for Web3 startups to raise funding, and founders should be prepared to reduce burn and increase runway. Albeit, it is also the best time to build sustainable products that can withstand the future cycles of the market he added.

In addition, the widely debated issue of the crypto brain drain is also a viable reason for the drop in new startups. Dilip Chenoy, Chairman of Bharat web3 association said that four critical pillars required for developing the ecosystem for Web3 - developers, entrepreneurs, investors, and users,- have been reportedly leaving the Indian market for much more competitive jurisdictions such as Singapore and Dubai. 

“This is due to the perception of regulatory uncertainty in India, and issues around Ease of doing business (EoDB). Hence, business operations are experiencing much more friction compared to their global counterparts,” he said.

Chenoy notes that the entire sector faces denied access to UPI rails. The Web3 ecosystem also has limited access to RBI’s legally permitted payment systems, such as credit cards and debit cards, which remain extremely popular as a mode of online payments in India and cannot avail benefits of Prepaid Payment Instruments such as Prepaid Wallets.

In contrast, countries worldwide - Hongkong, Japan, and Singapore for instance, are recognising the transformative potential of the web3 space and implementing numerous proactive measures to foster and support its growth within their respective jurisdictions.

However, not all is gloomy for the Indian Web3 space. Jain said that while the number of startups being founded might have reduced, the quality of startups being founded remains top-notch. “The quality of startups vis-a-vis the bull market has not gone down. We see some great infrastructure projects being built, and a lot of constructive work is happening in the industry. India still remains one of the largest developer pools in the world.”