What Investors Should Know Before Pumping Money In Web3 Startups

Web3, DeFi, Metaverse—these terms have proliferated our daily lives. Facebook, Inc. even changed its name to Meta Platforms, Inc. But what does Web3 mean? Is it a paradigm-shifting new technology? Maybe. Is it the Answer to the Ultimate Question of Life, the Universe, and Everything? No, that’s 42.

As venture capitalists, we are in the business of investing capital in early-stage businesses. Fortunately, or unfortunately, almost every pitch deck that our team has evaluated over the last few months has included the word “Web3".

But what does the term mean? A good starting point to understand Web3 is to understand what came before. Web 1.0 refers to the very first version of the internet, which made its debut in the 1990s. It comprised a collection of links and pages that could be consumed, with little interaction with or input from the users.

What followed was Web 2.0, which not only enabled users to consume content but also interact and create their own. The largest technology companies of today, Meta, Amazon, Netflix, Google, and many more, have built formidable businesses on the back of Web 2.0, primarily leveraging user data for monetization.

This brings us to Web3, which can summarily be described by three critical elements: decentralization, blockchain, and ownership. Web3 platforms do not rely on centralized servers but rather a peer-to-peer network where multiple copies of data are stored. This data is then arranged via protocols to ensure persistent availability. The second element, blockchain, ensures that content is immutable, verifiable, and distributed. Lastly, unlike Web 2.0, Web3 ensures that users, and not intermediary platforms, own and control their data.

We must remember that Web3 is still nascent, having been around for approximately two years, while Web 2.0 has had 15-20 years to proliferate our lives. Nevertheless, these challenges are not isolated to the Indian Startup Ecosystem, but rather faced by the world at large. India has seldom been at the forefront of innovation. Web3, for the first time, has brought everyone to a level-playing field.

As investors, this phase does draw a parallel to the 90s and the dot-com era. The internet was just about to take off and investors across Silicon Valley were investing in any company that had a ‘.com’ in front of its name. Did everyone understand what they were investing in? Probably not. But had they not backed visionaries like Jeff Bezos, who wanted to sell books through the internet, we would not have e-commerce and the democratised distribution that has enabled D2C brands to flourish.

Startups would not have been able to scale their products and services without AWS and would have had to undertake high capital expenditure, building server farms as they grew. A lot of things had to go right, and they did, for Amazon to become what it is today. Jeff Bezos was the right entrepreneur, in the right place, at the right time.

The Indian startup ecosystem is at a similar juncture with Web3. We have visionary entrepreneurs, with access to arguably the largest technological talent pool in the world, and investors waiting to get on the rocket.

So, what’s the catch? Well, very much like the dot-com era, there will be winners and losers. Almost all internet businesses were wiped out by October 2002, the trough where the NASDAQ Composite index had lost 78% of its value from its peak. VC funding dried up, valuations got saner, and investors began focusing on cash flows once again.

We believe Web3 will undergo a similar phase. The key for entrepreneurs, we believe, is to stay vigilant and focus on the right business model. Like the dot-com era, we will see a multitude of companies spring up and pitch their vision revolving around Web3. Some will flourish, some will survive, and others will, unfortunately, fail.

So, if you are an investor looking to participate in this growth story, you may want to base your strategy on two basic tenets of investing. The first is to choose the right jockey and back your winners to the top. The second is to build the right team. Business models can pivot, market sizes can be impacted by a litany of external variables, but if the jockey is right, they can navigate any situation.