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As markets face turbulence, investor perceptions of Web3 investments are often lukewarm, with most becoming skeptical of their ability to weather the crisis. In the case of Bitcoin, for example, some thought it was doing well as it hit an all-time high, while the crypto market in general shrank from $3 trillion by November 2021 to $1 trillion as we begin the second half of 2022.
However, Bitcoin eventually joined the unfortunate downward market move. Bitcoin price decreased by more than 70%. It didn’t help that UST/Luna crashed, Three Arrow Capital (3AC) went bankrupt and Celsius froze the footage.
Still, not everyone is abandoning Web3 investments. Blockchain is considered the biggest winner amid all the meltdowns as it continues to show transparency. This on-chain transparency provides valuable information to the market, something that traditional financing will never deliver. With this in mind, anyone interested in Web3 assets should carefully evaluate their options.
Since 2016 I founded Increase Enterprises and invested in more than 50 Web3 investments. This first-hand knowledge has taught me what to look for and where to look for opportunities.
Related: Meaning of the Noise in Web3
Sometimes there is excessive optimism during bull markets and unfounded fears and doubts during bear markets. Below are five elements to review before investing in a Web3 startup.
1. The team
It’s easy to start a Web3 business idea, but running, maintaining, and growing it is a whole different ball game. There is no point in investing in a company that lacks competent leadership and a coherent membership.
Check out at least the three most important co-founders of a Web3 company: the chief executive officer (CEO), chief technology officer (CTO), and chief marketing officer (CMO). All three play a critical role in the company’s success, with the CEO overseeing the planning and execution of plans, the CTO providing the technical expertise, and the CMO in charge of promotions. There must be reasonable evidence that they are enthusiastically working with each other and not trying to compete unhealthy.
It also helps to have a credible advisory board. This body can provide helpful guidance when it comes to planning and implementing growth tactics, recruiting and retaining employees, building a corporate culture, and finding investors and growth strategies.
It’s reassuring to know that everyone in an organization is aligned with the business model and plans. Rumors or news of management disagreements or even labor issues should be enough to make you rethink investing in a company. Rarely does anything good come out of an organization run by individuals in conflict.
2. The market and opportunities
The market is another crucial factor. Even during recessions, a business continues to function normally or even thrive, especially if the market is significantly large and the demand for a product or service is considered essential.
However, it is difficult to find such a company in the Web3 realm. Among the hundreds or thousands of companies seeking financing, it is difficult to find one that stands out by serving a market that is unlikely to fail. The niches served by companies in the decentralized web are still mostly narrow, especially considering the internet penetration rate in regions outside the ‘developed world’.
Even in the developed world, the knowledge and understanding of modern technologies underlying Web3 companies’ product offerings still leaves much to be desired. Even now, many do not really understand or mock crypto, NFTs and other blockchain products.
It is important to choose an investment with high potential to defy not only prevailing market conditions, but also the prejudices and prejudices of consumers, users, regulators and the media.
3. The product or technology
As with traditional investing, it is advisable to find companies engaged in services that are considered important to day-to-day operations. FinTech companies that specialize in innovative payments and other financial services are a good starting point.
There are instances where companies offer products or services that are not considered essential. Yet they can introduce a groundbreaking or highly innovative solution with the potential to change conventions or create new market segments or serve institutional clients.
It is advisable to choose a company that can protect its product or technology. It should have the patents to make sure others can’t just copy what they offer. They cannot be profitable if their business model can be taken over by copycats or even outsmarted legally and technically by industrial giants.
In addition, companies that do not yet have a technical founder or CTO may need to consider a CTO when a company’s technical requirements are critical, a large-scale technology upgrade is needed, and the company needs decisive and experienced technical leadership, such as in the case of tech purchase decisions and interaction with tech-savvy customers and business partners. Do not invest in a company that cannot demonstrate adequate technical expertise and leadership, especially when it comes to Web3.
Related: Why should we invest in startups?
4. The customer or users
A viable investment is an investment that is profitable and can only be profitable if there are existing customers that can lead to further growth. Never invest in a web3 company that has yet to test its business model or product ideas. By identifying and studying existing customers, you will know if a business model is working and has growth potential.
There are no market sentiments to measure if a company isn’t serving real customers yet. There are very few cases where it pays to bet on a new product concept or business idea. If you have the guts to handle the risks, you need to carefully study everything about the market and the potential customer response.
Take the case of oversized cell phones. In the past, the media mocked the use of phones that were almost as big as their users’ faces. Now phones with screens larger than six inches are already the norm. The same can happen with product ideas from Web3 companies in the context of customer reception. You just need to study the trends carefully.
5. The connections and strategic partnerships
In addition, it is important to look at the strategic partnerships or connections of a Web3 company. Investigate the organizations or trade associations, business partners, authorities and established business players with which the company is associated. Investigate whether these connections actually contribute to the success of the company. Also, make sure it’s a sensible long-term strategic partnership and not just an overhead connection or temporary partnership.
A product becomes more acceptable when it is supported or promoted by a strategic investor and partner with the potential to convince customers to use a product or service.
However, beware of false influence. An influential billionaire businessman who randomly responds positively to a cryptocurrency, dramatically increasing its value, isn’t necessarily the kind of strategic connection you’re looking for. It doesn’t become strategic until that billionaire actually makes it a policy to accept the cryptocurrency when selling their products or paying for transactions within their company.
Related: Web3 is about more than technology, thanks to its inclusiveness
Making the right call
Assessing each component requires careful due diligence, intuition and in-depth analysis to determine the score for each criterion.
There are certainly many criteria that can form a basis for making Web3 investment decisions. A good investment option should not just be a good business idea. It must also be supported by a formidable team, in line with market conditions and prevailing opportunities, clearly acceptable to a significant number of clients and has strategic links with key players or authorities in the sector.
Always think about how you can contribute to the project. If the project resonates with your curiosity, knowledge or passion. Start getting involved in the community, ask questions and find ways to support. It’s a great way to get to know the team and the community involved.
