VCs Discuss What Drives Investments in Web3 Startups

2021 will be remembered as a record-breaking year in terms of startup fundraising. The valuations were insane. The markets in 2021 were completely different. However, 2023 and the late 2022 will be totally different. Many founders now raise money at fair valuations. The focus is now more on the final product, or utility that one builds. This is also true for Web3 startups.

"It's just a different type of technology that powers different use cases." Although people have realized that it gives content creators immense freedom and power, the end users must also benefit. It doesn't matter if end-users don't enjoy being on the platform. "But that's settled and most platforms are now utility-focused or user-focused," said Pearl Agarwal of Eximius Ventures, at the Web3 Summit held by Entrepreneur India.

Investors recommend that startups do research on users and then go backwards to see if there is a way to add a Web3 or blockchain angle. Innovation is still at the heart of Web3 startups.

Vatsal KANAIKYA, Principal & Chief Technology Officer, 100X VC, said at a panel on how VCs evaluate Web3 startups: "Investing in the space is like investing in deeptech startups." When investing in or evaluating Web3 startups, it's important to see if they are building something new and unique within the protocol. To determine if the product is solving a problem, we need to dig deep into it. Is there a better yield curve? "We go into great detail to understand the technical aspects of how they are building out their products."

Passing the low adoption rate

It may be exciting, but the adoption rate of Web3 is still absymally small. How can the adoption rate be increased? Investors believe consumer apps must be so engaging that users forget the technology they're using. "We are still a long way from that point. We are not yet ready in terms of infrastructure. You can see that a lot is happening on the UI/UX side, where it's more about free speech and network. We haven't yet included the ability to find out what Web3 will offer these games in the future, other than financial incentives, says Akshay Aggarwal. Venture Partner at Drapon Dragon Fund.

Investors also feel that bitcoin and crypto are still in the process of evolving. Vineet Budki is the CEO and Managing Partner of Cypher Capital. He says, "We have met a lot people who are interested in building lending and borrowing protocol, but it's important to realize that adoption won't come from paying people money."

Investors also discussed the topic of Decentralised Financing (DeFi) within Web3 World, which they consider to be pretty native. Harsh Agarwal of Kyber Ventures said, "In DeFi there are players, money, and even developers. But we need good connections." Finance and tech integration is very important. "It needs to be focused."

What do investors think about token vs equity offerings?

Since a while, startups that want to raise money have issued tokens. What is the preference of investors when choosing between initial coins offerings (ICOs) and equities provided by them? As early stage investors, we prefer to invest in a way that we can get both equity and tokens. It is because, down the road, a portion of the value generated by the protocol will be shared between equity and token holders.

Investors also discussed the technical aspects of blockchain, and how middleware can be used to develop cross-industry utilities.

"At the end, what Web3 achieves is that it allows creators to be better owners and receive rewards for it. It doesn't alter the fact that you will still have to segment the market, no matter what you do. Some middleware areas are prime for innovation. These include decentralized identity management, data access privacy and analytics. You need a way to handle whatever you create. We think that these are areas where we can concentrate to solve real-world problems. It will also generate a great deal of revenue," says Ravi Sundararajan. He is the CEO of VirAstral - an early stage studio that focuses on Web3, Generative AI and SaaS businesses.