Author: Momir amidzic, investment associate this article is only for Industry learning and exchange, and does not constitute any investment suggestions
Original title: the survival of VC in Web3
In 2021, Web 3.0 will enter the public view and become a popular word. At the same time, NFT will also allow millions of new users to enter the world of decentralized applications. In terms of financing, many crypto native funds have raised a lot of new capital, and large venture capital and private equity companies, such as tiger or coatue, have also expanded their digital asset department and began to actively invest in a variety of Web 3.0 projects.
This has brought about two effects. First, if Web3 0 is "owned" by venture capital companies, so many top streams such as Jack Dorsey (twitter co-founder) will question the basic principles of Web 3.0. On the other hand, the intensification of competition among venture funds will force some funds to choose immoral investment strategies to squeeze into the current round to get investment shares, or to obtain short-term profits at the expense of reputation.
In our country, only research driven venture capital companies that provide real value for the project can have a positive impact on the current market life cycle. However, we have also heard some voices of doubt, that is, does the project side still need professional funds in the Web 3.0 ecosystem? In response, we should first analyze the role of venture capital and private equity companies in the Web 3.0 world and what value-added services these institutions provide for a decentralized economy.
Market signal - reputation
Market signaling - Reputation
Early projects usually rely on the endorsement of investment institutions. Industry leading vc basically has strict due diligence procedures. Their support for a project is usually understood as a positive signal by market participants. Participants here include not only users, but also individual investors, even agreements on exchanges and L1, because they also want to find valuable projects in an active and full investment encryption market.
However, it takes years of hard work and hard work to gain a reputation, establish a good track record and relationship with the local community. New portfolio projects can be supported by the good reputation of investment institutions. For venture capital institutions, obtaining a good reputation is the most time-consuming activity of venture funds. For example, a16z is considered to be one of the most famous investment companies in this field. Therefore, no matter a16z whether or not any activities are carried out after the investment, the investment behavior alone is considered to be very beneficial to the project, because most market participants will think that this is a signal that the project may be very excellent and deserve more attention.
VC is an industry that pays attention to accumulation. In most cases, the longer the VC survives in the market, the greater the competitive advantage. Establishing a resource network requires practice, including organizing hackers to support early developers, organizing summits and other meetings, contacting security audit companies / financial institutions / other VCs in different regions, and making a voice through the media. In general, this is a process of continuously enabling this resource network.
A new project usually needs some introductions from the same industry, so the project side pays great attention to the resources of excellent VC. Although introducing resources requires more time and energy than endorsing the project, it is still large-scale. Generally, VCs are more willing to actively introduce resources than simply meet the needs of the project side. For VC, the key to stand out in terms of resources lies in the weight of these resources. For example, you can introduce a security audit company, link to a well-known centralized exchange, help recruit talents, contact media channels, communicate with portfolio companies, etc.
Similarly, experience is proportional to time. For the founders of the project side, such experience is beneficial because it can be useful in the long-term direction of strategic decision-making and market orientation, especially in such a sleepless market. In such an emerging market as cryptocurrency, there seems to be no right or wrong choice. However, an experienced VC can definitely help the project party make a more reasonable plan, whether in the key decisions such as the time / mode of financing or the deployment of human resources.
Some agreements need a lot of liquidity to support and considerable funds to support long-term development. For them, strong capital is very important. In addition, VCs need to form an investment logic with more risk preference, so as to support these untested products and ideas for a long time. VCs with stronger risk tolerance are willing to take additional risks and lock their funds in smart contracts that have not been tested in practice.
Hands on practice
Finally, perhaps the most valuable but also the most difficult large-scale service for excellent VCs is the practice of doing it yourself. A practical scheme can be interpreted as the integration of investors and project parties, and often participate in the daily progress of the project. At the same time, in marketing, R & amp; D and token economic model.
Some examples of venture capital companies having a far-reaching impact on portfolio companies through personal participation include: paradigm's participation in the design of uniswap V3 and opyn squeeth options, or Delphi digital's participation in the design of token economics of axie infinity, etc. Of course, if you notice, we (iosg) have many similar practices and spend a lot of energy to help the post investment growth of the project.
Indeed, considering various constraints, such as time and labor costs, including a large number of investment projects, it is difficult for VCs to do every project by themselves. In any case, consensus and common goals are the basis for long-term and close cooperation.
Aligning the incentives
From a project perspective, it is necessary to determine the type of partner they want. Some projects may be very strong in a specific field (such as Market Research), but lack experience in other fields (such as marketing), so they are looking for complementary venture capital. Each project has its own unique preferences, however, they should plan financing according to these preferences.
For example, if the project is looking for venture capital companies that can contact for a long time, they should not let a large number of venture capital companies enter this round of financing, but ensure that they provide sufficient investment scale for the cooperative venture capital companies. Another option is that maximizing the use of capital during the start-up phase may require more investors, however, at the expense of some other value-added services.
In the view of VC, reputation may be lost due to several wrong actions, or it may gradually disappear because VC becomes complacent. Although it is acceptable to spread risks and support more projects, this is not the best strategy because it will affect the reputation of the fund and its ability to compete in the future. In addition, because each new investment disperses the company's resources, the increase of marginal value decreases with the increase of investment.
The evaluation and concentrated bet on the fund can show the degree of belief and theory driven of the fund. In our view, venture capital plays an important role in the Web 3.0 ecosystem. Finally, just like in any other field, the market dynamics will naturally screen out the VC that is really valuable in this field, and the value extractors will eventually be excluded from the primary market.