Event Recap: Investing in Web3

On November 17th, we hosted our second panel Investing in Web3 as part of our three-part Perspectives in Web3 Virtual Series. It is an especially timely discussion given the series of events which have unfolded over the last few weeks surrounding the collapse of FTX, formerly the second largest centralized crypto exchange platform. Joining our conversation were Nick Ducoff of G20 Ventures, Lauren Stephanian of Pantera Capital, and Brandon Hoffman of Sunset Ventures. 

Here are some highlights from the conversation: 

• As web3 technologies infiltrate multiple industries, investors were excited about the “newly possible, newly practical, and newly necessary", such as infrastructure, developer tooling, and innovative areas such as NFTs.
• The crash of FTX, Terra/Luna, and the domino effect across the ecosystem has led to a more conservative fundraising climate for web3 startups and many lessons for investors. However, these events could accelerate the development of clearer regulations, which could ultimately benefit the field and bring more clarity for builders in this space.
• While we may be in a bear market, it is still a good time to build. Founders who pair their domain expertise and web2 experiences, with their passion for web3, are likely to be set up for success.

Why work in web3 and what are promising areas for investment? 

Prior to becoming investors in web3, our panelists each had backgrounds in “web2” industries. What made them switch to web3 and what are they most excited about in the industry? 

Ducoff, who was previously trained as a securities lawyer and two-times exited founder before becoming a partner at G20 Ventures, saw the early potential of using tokens to enable new financialization of assets on the blockchain, especially new business models that could reflect both the technological and philosophical innovations of web3. He points out three ways to think about web3 innovations: 1) the newly possible: innovations such as NFTs which allow for secure trading of digital assets; 2) the newly practical: the use of stablecoins which enables lower-cost forex transfers such as international remittance transfers; and 3) the newly necessary: the need for robust key management and self-custody with increased adoption of digital wallets. 

Stephanian on the other hand, with a background in engineering for trading platforms and now focusing on investing in De-Fi at Pantera Capital, was attracted by the potential of blockchains and smart contracts to solve for the inefficiencies of intermediaries in traditional finance. Currently, her work focuses on supporting companies that build the web3 infrastructure, including developer tools, investor tools, and marketing tools that can be used by other web3 startups as the ecosystem continues to grow. 

Hoffman, who has built a career in gaming and fin-tech at Samsung Next before co-founding Sunset Ventures, sees the innovation of web3 technologies such as NFTs democratizing digital asset ownership in the creator economy. An early entrant to the NFT community, Hoffman’s interest lies in platforms which help transition the gaming industry from incumbent-led to creator-led economy through tokenization of digital assets. As the field attracts more users, another key area of development he sees is projects such as bug bounty platforms which address fraud and risks to ensure a secure and healthy digital ecosystem. 

Impacts of FTX, current and future challenges for web3 ventures

A question many are perhaps wondering is how the field will be affected by FTX’s collapse. Our panelists admit that the current fundraising environment is poor for founders due to both financial loss from recent events as well as the decline of confidence in the industry from generalist investors. Startups which have raised capital in the last twelve months with overly high valuations are especially in a tough position to fundraise in the coming months. Perceived risks of association with the web3 industry from traditional industries further suggest a potential slow-down of mass adoption of the technology in the near future. 

On the flip side, however, these events may in fact accelerate the development of regulations. Regulatory ambiguity has long been a challenge for web3 startups in the past, as echoed by builders from our Building in Web3 panel. The push for regulatory clarity and guidelines could help the field grow. For policymakers working in this area, our panelists suggest that the best way for them to learn about the technology is to immerse in it and to acquire hands-on experience themselves. Given the complexity of the technology stack, it is crucial for regulators to recognize and understand the distinctions and nuances of different types of web3 innovations (i.e. difference between a security and a token) in order to avoid proposing one-size-fits-all policy solutions that could stifle innovation and incite legal challenges. 

Lessons learned from FTX also alert investors to pay particular attention to conflicts of interest during their due diligence for future investments. FTX’s downfall is not caused by the failure of web3 technologies per se - if anything, blockchain and De-Fi are built to prevent such type of fraud from happening through decentralization and transparency - but rather by poor corporate governance akin to the case of Enron. Moving forward, our panelists suggest investors to become more proactive in the governance of web3 companies by having a lead investor take a board seat and to adopt protective measures such as definitive equity agreements to ensure safe conversion of fiat cash into cryptocurrency. 

Tips for founders and builders 

Many people come and go in a bear market, but investors argue now is as good of a time as any to start building. Founders who can combine their domain expertise or experiences from web2, with their genuine passion and understanding of web3, will be set up for success in this space. Resourcefulness was also called out as a key trait for founders to have – given that much of web3 development is open source and can be less capital intensive to get started – it is a powerful skill for founders to harness.

To illustrate how early this space is today, Ducoff made the analogy that in 1997 there were 30 million active AOL users and today there are 30 million active Metamask users – web3 is in the equivalent “1997” of the Internet and we have an exciting 10 - 20 years of development ahead of us.

Looking forward

Our panelists agreed that several advancements such as the public ledger, smart contracts, tokenization of assets, and ability to perform decentralized, trustless transactions have created unique technologies to build upon. While there is a lot of hype in the space, there are also real technical and economic empowerment advances that have been made, and many still yet to come.

When envisioning the future of web3, the investors were hopeful that blockchain could enable a more equitable and democratic future. Whether it be through an easily accessible global financial system without transaction fees, Internet users being granted control over their identity or data, or re-imaging the creator landscape and business model – there was clear consensus that there is a lot of opportunity to innovate in this nascent industry.