Original Title: 2022 Seed Stage Retrospective

Original Source: Lattice Fund

Original Compilation: Deep Tide TechFlow

Introduction

Last year, we published the 2021 Seed Stage Retrospective to provide a clear view of the trends in the seed stage that year. How many companies have shipped to the mainnet? How many have found product market fit? Who launched a token?

With the 2024 report, we now turn our focus to 2022 to better understand the progress and trends in the seed stage of cryptocurrencies. The report analyzes more than 1,200 public cryptocurrency pre-seed and seed rounds since 2022, providing insights into industry-wide, sector-specific, and ecosystem-level trends. As with our previous reports, we are open sourcing our database to allow for further exploration and analysis. We invite feedback and welcome any corrections; feel free to contact us at hi@lattice.fund.

Executive Summary

Projects in the Class of 2022 received funding during one of the most prosperous periods in crypto history. Teams announcing raises this year likely benefited from the bull run in 2021 and early 2022. Given the frothiness of the market, we expected these metrics to be negative compared to teams that raised money during the bear market. Our analysis confirms these expectations, but with some positive takeaways.

Nearly 1,200 companies received $5 billion in investments so far in 2022, a 2.5x increase from the previous year. Here are the main highlights:

2022 Breakouts

· Any year brings a few big success stories, and 2022 is no exception.

· On the infrastructure side, we saw re-collateralization protocol Eigenlayer, wallet-as-a-service provider Privy, and parallel EVM Sei all raise seed rounds. Notably, each of these teams helped kick-start a broader narrative.

· In the DeFi space, the breakout stories of 2022 were perp Dex like Vertex and Apex, and specialist NFT exchange Blur.

· Gaming was the leading consumer segment with nearly $700M invested. Despite the significant investment, the two largest success stories raised relatively little. Pixels and PlayEmber each raised less than $3M in their seed rounds.

Launching in a Challenging Market

· Nearly three-quarters of projects have successfully launched products on mainnet despite the bear market. Product-market fit (PMF) and follow-on funding have become more challenging compared to 2021, with both down significantly year-over-year.

· 18% of groups have shut down or ceased development, up from 13% in 2021.

· Only 12% of teams have received follow-on venture funding, down significantly from 50% in 2021.

· Only 15% of projects have launched a token, down from 50% in 2021.

Refocus on Infrastructure and CeFi

· After a detour in 2021, investors returned to more proven and consistent areas such as infrastructure and CeFi, investing nearly $2 billion and nearly $450 million in these areas, respectively, 3x and 2x more than the 2021 figures, respectively.

· 80% of CeFi projects and 78% of infrastructure projects have launched on the mainnet, reflecting strong investor confidence in these areas.

· Results at the application layer are more mixed, with 66% of consumer Web3 products and 68% of DeFi teams delivering products to the mainnet.

· Consumer teams were more likely to cease operations, with nearly twice as many shutting down as infrastructure teams.

· Payments (86%) and wallet (90%) projects were most likely to launch on mainnet.

Ethereum Leads, Bitcoin Continues

· Ethereum remains the dominant layer-one ecosystem in terms of fundraising, while Bitcoin projects continue to show resilience.

· $1.4 billion was invested in Ethereum-based projects, followed by nearly $350 million in Solana-based projects.

· Fundraising in the Polkadot ecosystem declined significantly, down 40% year-over-year.

· Teams building on Solana and Ethereum were equally likely to receive follow-on funding.

· In contrast, no teams in the NEAR ecosystem were able to raise follow-on funding.

· Projects in the Binance ecosystem were least likely to remain active, with a third of teams ceasing operations. Solana’s failure rate also doubled from 2021 to 26%.

· Bitcoin projects persist, with 100% of teams still active two years later.

Methodology

This report is based on a combination of first-party data, supplemented by insights from Messari, Root Data, Crunchbase, and other sources. To assess the progress of the seed-stage market, we categorized each company by stage, including “active but not delivering” and “no longer active,” with additional breakdowns by ecosystem and industry. While we have made every effort to ensure data accuracy, we acknowledge that errors may occur due to reliance on third-party data. Within ecosystems, we only included in the charts those with more than 15 teams that were able to raise a first round of funding.

One of the most challenging aspects of this analysis is determining whether a project has achieved product-market fit (PMF). Unlike the objective milestone of "product delivery", PMF is often subjective and can be fleeting, especially in the rapidly changing crypto market. We combine on-chain data from analytics providers such as Dune Analytics and DeFiLlama with information from company websites and blogs to make these determinations.

(Note: Lattice's illustration divides the analyzed products into several stages from left to right, including active but not delivered, product delivered, with PMF, with tokens, no longer active, acquired and shut down)

Seed round project status

Our seed stage review began with an internal analysis to identify projects that are gaining attention but have not yet raised follow-up funds, which may become targets of Lattice. However, it turns out that this data is enough to share with the wider industry.

This research is valuable because it reveals the health of various sectors, ecosystems, and the broader early-stage market over time. Given that most seed-stage teams raise funds to maintain operations for about two years, we decided to use that time frame to review the seed year.

In 2022, over 1,200 crypto companies raised over $5 billion in seed and pre-seed funding. Looking back at this group, 72% of companies have launched on mainnet or equivalent networks, up from 66% last year. Meanwhile, 18% of projects either failed to deliver or have shut down, which is consistent with last year's data. However, the most notable drop was in teams looking for PMFs, which fell to nearly 1.5%. It's worth pointing out again that it's difficult to assess how much traction projects running off-chain actually have, so we may be missing some teams with early PMFs.

During the bear market, it became increasingly difficult to attract users as retail interest waned. Hot sectors in 2022, such as NFTs, the metaverse, and gaming, are not attracting users now as they did two years ago. In contrast, infrastructure projects that primarily serve other crypto companies have proven to be more resilient. The best example is Eigenlayer, which announced a seed round in January 2022 and has successfully expanded its AVS go-to-market strategy, with middleware projects eager to collaborate.

This is a good reminder that today's hot industries don't always appear with investor interest. For example, the Metaverse space has 75 teams raising nearly $280 million, but none of them have found a PMF, more than 21% of the teams have closed, and you rarely hear anyone talking about the Metaverse. Compare that to DePIN or Ai, which barely registered in 2022 but are two of the hottest topics today.

(Data chart shows that 72% of seed-round financing projects in 2022 already have a mainnet)

VCs hold their wallets tight

The teams in 2022 raised funds during one of the most prosperous periods in the history of cryptocurrency. The teams that announced raises in 2022 were likely to have done so before the collapse of Terra and FTX, which caused the market to fall into a deep freeze. Although overall financing increased by 92% over 2021, the subsequent market tells a different story. Only 12% of the teams in 2022 were able to raise more funds in the past two years. This is in stark contrast to the teams in 2021, when nearly a third of the teams received follow-on funding.

Interestingly, token issuance has also declined year-over-year, with only 15% of teams in the 2022 cohort launching a token, compared to 50% in 2021. This significant decline can be attributed to two main factors: 1) The 2022 cohort likely missed the bull run window, with many teams scrambling to launch products in the first half of 2024 before launches dried up over the summer. 2) As Decentralized Exchange (DEX) launches have fallen out of favor due to declining DeFi liquidity, token issuance has shifted to Centralized Exchanges (CEXs). CEXs now charge high listing fees, often in the seven figures, and demand a large percentage of the token supply. The saturation of the token market, combined with the selectivity of CEXs and the diminishing appeal of launching on DEXs, makes it more challenging to bring tokens to market.

Flying to Infrastructure

Infrastructure investments tripled compared to 2021, reflecting a clear shift in investor focus. While interest in infrastructure appears to wane by the end of 2024, it is the most favored sector throughout 2022 and 2023. In contrast, DeFi was the only sector to see a year-over-year decline in investment, likely due to the fallout from the DeFi surge in quick money schemes and Ponzi economics in the summer of 2020.

Investors were rewarded for following the infrastructure trend, with these teams most likely to raise follow-on funding and launch on mainnet. Conversely, DeFi and consumer teams were more likely to launch tokens, but also more likely to shut down. The application layer felt the pinch — without additional funding, teams were forced to either launch tokens or shut themselves down.

(The pie chart shows that more than 70% of seed-round financing projects in each track have delivered to the mainnet (black part); but most of them have not found PMF)

Not all ecosystems are equal

Development across ecosystems reveals significant differences in project success rates. Nearly 80% of Ethereum-based projects have delivered products, outperforming Solana, where only 61% have delivered products, down from 75% in 2021. Although Solana has clearly weathered the bear market well, the influx of capital at the end of 2021 may have led to excess funds.

The failure rate of seed-stage teams in 2022 is consistent with that of 2021 teams, but significant differences have emerged within each ecosystem. As observed last year, teams within the Binance ecosystem were most vulnerable to shutdown, and now teams in the Avalanche ecosystem have joined this group. Notably, the failure rate for projects based on Solana doubled, with over 25% of teams ceasing operations. This increase is likely due to the influx of speculative capital during the bull run, leading to overexpansion and subsequent attrition during a particularly challenging period for Solana post-FTX. However, it is clear that teams that made it through this difficult phase have been rewarded. Additionally, it is worth highlighting the resilience of teams in the Bitcoin ecosystem, who not only continue to deliver, but have demonstrated extraordinary persistence, reflecting the reliability of the Bitcoin network itself.

The 2022 follow-on funding landscape reveals significant declines across all major ecosystems. Only 13% of Ethereum-based projects were able to secure additional funding, down from 31% in 2021. Similarly, only 13% of Solana startups raised follow-on funding, a significant drop from 30% last year. Notably, ecosystems such as Flow, StarkNet, and NEAR struggled to attract additional investment, with none of their projects receiving follow-on funding, highlighting the challenges these platforms face in maintaining developer and investor interest. This is particularly interesting given the amount of funding that entered the base layer of each ecosystem in late 2021 and 2022, with Dapper Labs raising nearly $600 million in 2021, NEAR raising $500 million in 2022, and Starkware raising nearly $200 million in 2021 and 2022.

What’s Next

The 2022 vintage is in a more challenging position than 2021. Finding PMFs in a sideways market without significant new retail net participation remains a challenge. Some teams have pivoted to sectors that are hot today with retail participation (e.g. gambling-related apps). Additionally, the significant reduction in teams receiving follow-on funding will limit the time these teams have to pivot to something new. Finally, the significant increase in seed-stage startups and tightening token issuance markets means more teams are trying to navigate a narrower range of token issuance opportunities.

Complicating all of this is the fact that investors have pivoted to sectors (e.g. DePIN and Ai) and ecosystems (e.g. Base and Monad) that are hotter today. This highlights that returns come not from chasing what’s hot today, but from chasing what’s hot 1-2 years from now.

We have no doubt that the seed-stage market in crypto will remain healthy, with active participation from nearly every fund, including a16z’s newly launched Crypto Startup School. The robustness of the late-stage market remains a question for this group of teams looking to raise Series A and beyond. Even within our own portfolio, we’re seeing a shift in narrative that impacts founders’ ability to raise capital.

Industries and Trends to Watch

Privacy-Enabling Applications

Investments in privacy-enhancing technologies have increased recently, with two privacy infrastructure trends emerging over the past year: Zero-Knowledge Transport Layer Security (ZK TLS) and Fully Homomorphic Encryption (FHE). ZK TLS adds a privacy-enhancing layer to secure communications on the current internet. ZK TLS projects like Opacity are working with companies like Lattice portfolio company NOSH to allow Nosh to tap into the existing web2 delivery market. In this example, the driver logs in with Doordash credentials in the nosh driver app, which the protocol treats as proof of identity. When the demand side of the network matures, drivers can make deliveries for Doordash in the nosh driver app and earn tokens if the order comes from the protocol network (not Doordash). We expect many more use cases to emerge for this new privacy primitive.

Similar to ZK TLS, advances in FHE infrastructure could enable a new class of crypto applications, from private DeFi to DePINfied data collection. An early practical example of this technology is sharing sensitive health information with AI companies. Lattice protfolio company Pulse is using the DePIN flywheel to collect health data that can be monetized by allowing researchers to analyze encrypted genetic data to identify patterns or biomarkers without access to the original genetic information, thus maintaining confidentiality. As privacy infrastructure advances and converges with broader trends — namely AI agents and decentralized physical infrastructure networks (DePIN) for data collection — it could unlock a new wave of consumer and enterprise-focused applications.

Augmented Reality Applications and Infrastructure

Broader technology trends are heavily influencing the direction of cryptocurrency founders’ efforts and where investor funds flow. We’ve seen this firsthand with the surge in AI-related startups in 2023-2024 following OpenAi’s massive AI improvements. With Apple, Meta, and Snap all launching major strategies in the AR space, we expect to see more and more crypto startups in the space as AR-related technologies finally reach the masses. One example from the Lattice portfolio is Meshmap, which is building a decentralized 3D map of the world. As the installed base of AR devices is set to explode in the coming years, 3D maps for app developers to build experiences will become critical. Excitement about metaverses may be premature in 2021, but the lesson from last year and this year’s report is that what people are not focusing on is where alpha can be generated.

Blockchain-backed collectibles market

Collectibles trading is mostly associated with digital asset trading (particularly NFTs), but blockchain-backed collectibles markets are emerging, from spirits marketplaces like BAXUS to watches on platforms like watch.io and Kettle. Collectibles trading is already a large off-chain market, but it suffers from issues such as lack of instant settlement, physical custody, and reliable authentication.

We believe these challenges present an opportunity for the “Blockchain Collectibles Market” (BECM), which is purpose-built to meet the needs of collectibles traders. BECM enables instant transactions through cash settlement, drastically reduces settlement time from weeks to seconds through the use of stablecoins, and employs NFTs to represent physical assets held by trusted custodians. This model unifies fragmented markets, enhances liquidity, removes individual storage burdens, and builds trust through identity verification. BECM also supports financial innovations, such as borrowing against collectibles, making the act of collecting more financially dynamic. With these improved efficiencies, BECM has the potential to significantly expand the total addressable market for collectibles by bringing in more traders, liquidity, and inventory.

Ecosystem Rotation

Our tables and charts only include ecosystems with more than 15 projects raising venture financing, the smallest number is close to 15 projects so has just been excluded. Perhaps unsurprisingly, we expect significant ecosystem shifts, given the trends we’ve seen, with Polkadot, NEAR, and Avalanche being replaced by L2 ecosystems and emerging L1 and 2 ecosystems like Monad, Berachain, and MegaETH.

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