Building in the Time of a Capital Crunch

Sanctor Capital
8 min readApr 18


The authors or their affiliates have ownership or other economic interests or intend to have interests in Metaprints, Sec3, SOL, ETH, BTC, and may have ownership or other economic interests or intend to have interests in other organizations and/or crypto assets discussed as well as other crypto assets not referenced.

Last week was a busy one for web3 gaming. There is a lot to unpack between NFT NYC, the Shapella upgrade, and the release of Solana’s Saga phone. There is no shortage of headwinds in the industry, but builders continue to build, willing the space forward. So, without much further ado, let’s dive in.

Conference Fatigue Sets in

Another NFT NYC is in the books, but this one felt muted compared to the previous year, and the preceding ETH Denver and GDC. Crowds were smaller, events were quieter. Still, there was no cloud of desperation hanging over the conference. A good chunk of the industry was pulled away to the web3 festival in HK and/or ETH Tokyo. Some, undoubtedly, were resting before the upcoming Consensus. All in all, people just looked tired.


The highlight of the week for gaming was Animoca’s Portfolio Day. Animoca continues to be one of the key players in web3 metaverse and gaming space, exhibiting a bold vision through vertical and horizontal integration in its ecosystem. The event was full of panels, portfolio highlights and closed with an actual dance off. Harry Liu, from one of our portfolio companies, Metaprints, put together a great summary of the day.

Games Search for Capital in a Tough Market

The frustration around ongoing fundraising for many games may have added to the exhaustion. Developing and publishing games is extremely expensive, but after a series of black swan events the space has been facing a capital crunch. According to the National Venture Capital Association and Pitchbook, Q12023 marked the fourth down quarter in a row in terms of US VC deal count.


Web3 gaming has felt the pain particularly badly, with an 80% YoY drop in funding. Studios that raised in the previous cycle, are having a tough time putting together a new round. Many teams have revised down their valuations hoping to attract investors. VCs, on the other hand, appear wary of value traps. Thus, capital is concentrating around big name teams, enabling them to raise big rounds, while everyone else is left reeling.

The silver lining was provided by Razer, which is launching its zVentures Web3 Incubator. While it is unclear how much money will be deployed, it is encouraging to see a major traditional brand step in on the early stage side.

The Gaming Space’s Power is Growing

Fandom released the results of its gamer survey, which revealed that 45% of gamers increased their gaming time. The report also showed that only ~20% of gamers play games based on franchise loyalty. This is encouraging for web3 studios as they look to create original IP.

The report also dove into generational differences among gamers. It looks like for Tweens and Teens, influencers and hype weigh heaviest when it comes to spending money on games, while Gen Z and Millennials focus on storyline and character development.


Web3 games have gravitated towards the hype path, and have started engaging content creators in a more concerted way. However, lore has been painfully overlooked or put on the backburner by many studios. This may lead to an audience motivation mismatch, particularly for midcore and hardcore games.

Ethereum’s Shapella Marks Another Milestone for the L1 Leader

After the Shanghai upgrade was successfully deployed, validators began withdrawing staked ETH and rewards. Withdrawals have surpassed new staking in the beginning, but a lot of the withdrawals have been attributed to Kraken. This is not unexpected, given Kraken’s $30M settlement with the SEC over its US staking-as-a-service platform.


Ethereum remains the biggest ecosystem in web3, especially when you consider the L2 offshoots. The continued shipment of upgrades is an encouraging sign in a challenging market. In its recent 2023 State of Crypto Report, A16z identified alternative L1s as one of the key trends to watch this year. So, you can expect challengers, particularly those like Avalanche who are focused on gaming to come for the crown. However, the Ethereum community just keeps on building.


Developers Maintain Strong Interest in the Metaverse

The finalists for ETH Global Tokyo have been revealed, with at least 4 projects having potential use-cases in the metaverse and gaming space: AokiApp NFT (image compression), Octoplorer (blockchain explorer with “human-readable answers”), (advertising protocol), SuperPlay (onboarding platform for gamers).


Hackathons remain an integral part of the web3 space, as they show developer interest, as well as uncover challenges and opportunities. They have been critical in attracting developers to many L1/L2 ecosystems. However, running one well remains a challenge, which makes the ETH Global circuit particularly special.

We, at Sanctor Capital, remain active around the hackathon scene and are excited to review the exciting projects that come out of these building sessions.

Solana’s Saga Phone is Out

No matter what you think of Solana, you have to give the team credit for thinking big and continuing to ship. The $1000 Android device has been anticipated for some time and now the first reviews are out.


As far as an ordinary mobile device, Saga, appears to be serviceable, but the web3 implementations seem underwhelming. The phone dapp store offered the possibility of another distribution channel, particularly for web3 games. However, the current store line up is limited and interactions come with quite a few frictions.

The team behind Solana has a bold vision, but given the well documented network issues, one has to ask if it’s simply trying to do too much.

Reddit Gen3 Finds Demand and Technical Challenges

Few traditional brands have had as much success as Reddit in onboarding traditional users into web3. You may have noticed that Reddit strategically avoids the term NFT, which may be a deterrent for average users. In fact, the recent $500K sale of CS:GO gun skin and knife shows that there is willingness to spend on digital goods in the absence of NFT tech underpinning ownership.


Now the social media platform has already attracted over 7.5M unique collectible avatar holders, and with 1.7B monthly visits, Reddit offers tremendous potential as far as education and user acquisition.

However, with growing popularity come its own set of challenges. The Gen3 release featured 100+ artists, and some of the most common NFT drop challenges known to the space: traffic management and bots. At one point the shop pages actually went down, and the suspected bot activity was quite high.

The web3 space can learn a lot from Reddit, but maybe the social platform has a few things it can pick up on as well.

Social media giants have been flirting with NFT integrations for some time now, but most have little to show for it. Meta was the most recent to disappoint, choosing to shutter its Instagram minting efforts.

“There Were Mistakes Made in a Wallet That I Controlled”

The above quote from Nicole Benham in relation to controversy around Blocky Doge 3 became an instant meme across crypto twitter. Her conduct earned her a redaction from NFT Now’s NFT100 list, which opened up a whole other can of worms.


The community was quick to point out that other members of the list have had questionable conduct in the past, and that removing Nicole in this fashion showed double-standards as opposed to integrity on the part of the publisher.


Celebrities have also been known to get into the web3 influencer game, but they may be harder to make to answer for their misdeeds. Last week, The Block’s Stephanie Murray called attention to the story of Shaquille O’Neal, who lawyers have been unsuccessfully trying to serve as part of a class action stemming from the fallout of the collapse of FTX.

The outspoken Franklin brought some nostalgia by announcing his retirement. He has been known for questionable trading actions and his taking a step back prompted a walk down memory lane.

AI May Force the Identity and Reputation Issue

The space has been circling around the importance of reputation and identity and builders have been tinkering with a variety of protocols. However, bots may make this an immediate and pressing issue for games.

With many games focusing their economies on skills based criteria, and esports tournaments effectively depending on them, bots threaten the existence of the entire ecosystem. Debates rage on twitter regarding the long-term viability of anti-cheat/bot software. Now as AIs are improving, KYCs are starting to look more and more like an inevitable necessity.


However, given how this may clash with the web3 ethos, this may be the area where privacy preserving identity and KYC protocols first show their utility.

This wraps it up for this entry. As always, if you are working on something exciting in the web3 gaming space, or are a traditional gaming team looking to explore the possibilities, don’t hesitate to reach out to any of us at Sanctor Capital. Have a great rest of your week!

Ilya Abugov (@AbugovIlya)

Disclaimer: This commentary is not investment advice. It does not purport to include any recommendation as to any particular investment, transaction or investment strategy, or any recommendation to buy or sell any investment. It does not reflect any attempt to effect any transactions or render any investment advice.

This post is solely for informational and entertainment purposes. It is inherently limited and does not purport to be a complete discussion of the issues presented or the risks involved. Readers should seek their own independent legal, tax, accounting, and investment advice from professional advisors. The views reflected in this commentary are subject to change at any time without notice.



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