The Decentralization, Transparency and Anonymity of Venture Capital in Web3

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By Jeff Davis, Founder of Cap3 Collective

By now, most readers have heard the term “Web3.” It was coined in 2014 and represents the third generation of web technology, one that is built using decentralized blockchains. This new technology has created new investment opportunities – and more notably, new investment methods – for established capital providers to consider.

Decentralization, transparency, and anonymity are core mantras in Web3. There is a belief that using hive-thinking produced from members of grassroots communities formed on Twitter and other corners of the web using their own financial resources will produce better investment selections than centralized investment committees using other peoples’ money.

Before we dive deeper into the current relationship between established capital providers and Web3, it’s important to understand how we got here.

Exponential growth in new user participation has taken the total crypto and non-fungible token (NFT) market to over a trillion dollar market capitalization, even in the current bear market. The allure of profit led to adoption catalysts like Robinhood and Coinbase, which made the process of acquiring crypto assets significantly easier and safer for the average investor. The combination of crypto accessibility, the invention and rise of NFTs, and a whole lot of time at home with a fresh stimulus check in early 2020 created the perfect storm for Web3’s new attention from both retail and institutional investors.

At its core, the blockchain is an immutable ledger that keeps a public record of all the transactions that it facilitates. Thinking about the application of this utility is where innovative ideas begin: what if individuals could pool their resources with the security of seeing exactly where the funds sit and how they are deployed? A community-driven approach to raising capital is not an entirely new concept, but blockchain technology has provided new tools for communities to pool their resources in a secure, transparent way to achieve a common goal.

This presents both an opportunity and a challenge for venture capital firms: innovative, blockchain-powered business models are here and ripe for investment, but the technology itself creates a competitive alternative to the traditional model of trading equity for capital with a centralized firm. For early innovators, the cold shoulder they received from venture capital firms that were skeptics of the potential of Web3 beyond cryptocurrencies has fostered a culture of seeking support from the Web3 community for ambitious projects. Traditional capital providers must demonstrate the value they can provide a promising startup to justify the tradeoff of equity and control when an alternative, community-driven option is on the table.

The ability to break away from centralized entities like banks and venture capital firms is baked into the ethos of Web3, but you don’t have to look very far to see capital providers pouring money into the space in certain areas, and there’s no shortage of upstart projects that are happy to be supported by traditional funding sources when community building feels like a time consuming, uphill battle that doesn’t guarantee results.

The Web3 world’s relationship with traditional capital providers is complex, to say the least. Anonymity and moving away from centralized infrastructure have been at the very core of blockchain’s culture since the beginning in the mid 2010’s. To some Web3 founders, working with traditional funding sources is diametrically opposed to why the space exists in the first place.

So, what does the future look like for the relationship between traditional capital providers and promising Web3 companies?

Funding an unknown founder is rare in traditional venture capital. In fact, VC funds are more likely to select projects based on their founder’s CV, rather than the project’s idea. Apple investor Author Rock is credited as saying, “I invest in people, not ideas…if you can find good people, if they are wrong about the product, they’ll make a switch, so what good is it to understand the product that they are making in the first place?” This statement is of course a gross generalization, but it helps to illustrate the focus of traditional VCs.

Now, in 2022, there are anonymous founders being seeded by Web3-specific funds with a greater focus on the product rather than the creator. The product-first approach in Web3 mirrors what Web2 underwent after the dot com bubble burst. Simply, it was a return to fundamentals where funding went to projects that had a path to profitability. Web3 is now experiencing a similar shift, where the providers of capital are less concerned about who the founder is than they are about the project’s path to profitability.

The downturn of the markets has surely driven this trend, especially in the less proven NFT and alternative crypto asset verticals. Opensea, the largest NFT marketplace and trading post founded in 2020, was the first true “Web3 unicorn” – a platform that exists to facilitate the buying and selling of non-currency, blockchain-based assets. They were rewarded for being early with a $13B valuation at the time of writing, but the current wave of Web3 projects are facing an uphill battle with a bear market and slue of competition. Investment offers are more scarce in these conditions, and those who receive them need to demonstrate strong fundamentals and a clear path to profitability.

As the Web3 community’s idyllic vision of total decentralization comes to terms with the reality of the limitations that bad actors and complete anonymity place on the march towards mass adoption, it seems likely the relationship between traditional capital providers and new, innovative funding methods will find a healthy balance. No matter the funding source, everyone participating in the Web3 movement must figure out how to navigate the radical transparency that comes with doing business on the blockchain.

Jeff Davis is the Founder of Cap3 Collective, the Original DAOFund™. Cap3 Collective is a DAO that selects, funds and profits with new Web3 projects – without taking equity. Membership into Cap3’s DAO is obtained by purchasing an NFT which will become available August 24, 2022.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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