A&T Talk: Why Classical VCs Changed the Way, Talking about Web3 with Web2 VCs
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Highlights of this issue:
When did everyone start to believe in Web3?
What is the most anticipated thing about Web3?
What is the biggest obstacle on the road to realizing Web3?
What do Web2 companies need to change if they want to transform into Web3?
How to look at the monopoly problem existing in Web2 from the perspective of Web3?
How does Crypto VC view anonymous projects?
What do you think of the current phenomenon of first- and second-level inversions?
In this year's investment in the primary market, what are the areas that you are optimistic about?
How do you view Web2's user-owned concept and Web2's capital-driven concept?
How to evaluate Token investment and equity investment?
How to look at the periodic problems of the investment track?
How to value the project?
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The following is the transcript of recent in-depth exchanges between A&T partners and two peers in the same industry. We invited two senior investors from traditional institutions who have transformed Web3 investment, hereinafter referred to as Peter and David (both pseudonyms), to chat with them as Investors with rich experience in traditional investment, their logic and thinking in transforming into Web3 investment.
Legal Disclaimer:
The above content only represents the personal academic opinions of the guests, for industry learning and exchange, and does not represent the positions and opinions of the institution and the institutions where the guests work.
Peter：
Q: When did you start to believe in web3?
Todd:
It started when I participated in a Hackson in 2016. During that time, Ethereum had just encountered the well-known DAO hack, but what I saw was that although ETH experienced a very big impact, at that time many developers just focused on building interesting things, and did not care much about ETH. Prices go up and down.
Peter:
I started to believe in Web3 from January 2021. Although I have joined the Crypto world since 2018, I don't think of Crypto as Web3, it's just more about blockchain, a new technology. It wasn't until I saw Mirror.xyz that it really brought something different and value to the industry. Compared with Zhihu or Medium of the web2 platform, Mirror provides an option for content creators that can help them raise the funds they need during the creative process. And this is difficult to achieve in Web2.
Liam:
From a user experience standpoint, I do agree with you about Mirror. To me, DeFi is also Web3, although they are not applications of Web3. Before Uniswap, there was a well-known DEX called DDEX. I was an active user of that application, because they did not monopolize your data rights, and I could fully control the movement of my assets between different applications.
I started to believe in Web3 because I was in the cryptocurrency market. To me, Web3 means less licensing, ownership, transferable economic value, etc. In March 2020, I was still at Deutsche Bank, and it was the first time I knew about Bitcoin as another asset. I believe Web3 will be a paradigm shift for the financial system, starting with money.
Peter：
Q: What are you looking forward to most about web3? It could be a pattern, a product or a mindset.
Todd：
From a user experience perspective, Ownership is the most critical. Ownership is something we cannot have in the Web2 Internet world. That's why I'm so excited when the NFT bull run arrives. Starting with NFTs, we can have a Metaverse where people spend more time and get entertained. In the long run, when everything is digitized, when there are more and more data, we can have more different things in the digital world.
David：
Totally agree with the idea of Ownership, but there are still many hurdles to make it happen. The only things we can really have right now are NFTs and FTs, but we may not be able to own data. This part will be discussed later.
An open financial market is what I look forward to most. Because many friends came to ask, if they do not have overseas bank accounts, how to buy and sell Chinese stocks in the US market? The synthetic asset platform can indeed become an option for them to achieve the same goal, and the world on the chain will synthesize stock price fluctuations.
Peter：
Q: What is the biggest hurdle on the road to implementing web3?
The first is the threshold of use. If you want to enter the real Web3 world, you need to have a wallet to manage your private key. This is a very high threshold for many people. I know that there are many projects that are trying to lower the barrier of wallets, but they still don't do it well enough.
The second is about privacy. The current data on the chain is very transparent, so basically every transaction of yours is under the nose of everyone. So we can see a lot of different types of applications coming into this public space trying to grab this data and give users a product that tells them what other people on the chain are doing right now. This does offer a lot of functionality, but we don't have any privacy in a place like this. I have seen many projects trying to solve this problem, such as Tornado Cash. These ideas allow users to manage their privacy. If you want to expose some transactions, you can open them to the public. If you want to have some privacy, you can still achieve it, so we will soon find a breakthrough in this area.
Todd：
The last part is about decentralized storage. Right now, most things in the crypto world are still stored in centralized cloud storage. When it comes to ownership, we don’t really own it. Decentralized storage is what truly enables anyone to own data ownership.
Peter：
Low threshold and competitive application scenarios, which one is more important for the expansion of Web3? Because you mentioned that there are many projects that are trying to modify the user experience.
The first scenario will discuss serving those users who are proficient in Crypto, or Crypto native users, and the second scenario will discuss how to bring the public into the Crypto world. From an investor's perspective, there are several ways to succeed. One is to serve those core users and use these core users to build the initial community, instead of expanding vigorously from the beginning, I think this will be a more practical approach.
David：
However, I do see some other projects, they are creative enough, give them a thumbs up, I think they are brave enough, for example, in terms of public chains, Flow is doing a lot of work to adapt to non-encrypted users. There is also a project, Stepn, which is very interesting, move to earn, they created a very simple user experience for non-crypto users from the beginning.
Liam:
I totally agree with what you discussed. And for me, it would be Crypto education. Most Web2 Internet users don't know Web3 at all, they don't know how to use wallets, how to buy cryptocurrencies, or how to participate in the community. Therefore, there needs to be some simple and intuitive way to get these people on board more quickly.
Many people are not interested in DeFi, but if they want to participate in Web3, the first obstacle may be learning how to use Metamask. But I think they can start with hardware wallets, which are more secure and better suited to the Web2 user experience.
Peter：
Q: If web2 companies want to transition to web3, can they succeed?
David：
Web2 companies need to change the way they think. Like needing to try to be open and collaborative instead of thinking everyone is my future competitor. They also need to try to use token incentives to attract users instead of buying users directly.
This is hard for most Web2 companies. Because we are entering a new era, what is built is no longer a company or an enterprise, but more like a digital country. They do the work of open source protocols, so the whole mentality of Web2 and Web3 builds is changing.
From the perspective of the community, to build a Web3 or Crypto project, you must have the mentality of building a community, and you need to build a consensus among users. This has some similarities with the process of building some great companies in the past, but the whole mentality is quite different.
David：
Q: How to look at the monopoly problem in Web2 from the perspective of Web3?
Peter：
For Web3 companies, starting a business still needs to find some new application scenarios. If you want to compare Lending and Borrowing with AAVE and Compound, it is actually very difficult to have a new opportunity. It is very difficult.
Todd：
In fact, we often encounter some problems, such as what to do with Tencent and Ali. In fact, AAVE and Compound can also do these ToB things, and they are more persuasive to some B-side users.
There are many things that giants can do, but each team is limited in what they are good at. The other is that many teams do not actually have a deep recognition of a new direction, but in fact not every team has an innovation. There is such a deep understanding of the point.
In fact, some new teams can have some innovations on some crowded tracks. For example, we voted for a Staking Reward last year. Our investment logic at the time was that it was CoinmarketCap of the Staking track, but in fact CoinmarketCap did not do it. This matter, and Stakingreward has been deeply involved in this track for a long time, and has accumulated a lot of deep users.
Peter：
In fact, I think AAVE has contributed a lot of innovative points to this market this year, so I think it is very reasonable for it to turn to other tracks. It needs to jump out of a certain circle to get some new things.
Liam：
In fact, it is not yet the time for special involution, such as Opensea and Uniswap, they do not do it on every chain, in fact, they give you a lot of opportunities, there are too many directions to do, and there are too many opportunities, such as Uniswap, In terms of Dex, it must be the largest traffic on Ethereum, but Metamask did not make a swap because of its large number of users, but connected to Uniswap as an aggregate, but Metamask’s swap charges a high fee, so its Revenue is also high, so there are many marketplaces and aggregators on NFT, so there are many things that can be done at the project level.
In fact, there is no institutional monopoly in Web3, and users vote with their feet. If you think carefully about the top project, is it perfect? In fact, it is far from enough. In addition to UniV2 and V3, there are many other forms. For example, some forms of Orderbook, so the first mover has the first mover advantage, but still need to make some innovations to attract users.
Peter：
Q: How do VCs view anonymous projects?
VC is the same as a company. VC itself is a product of history. It is not static and will be changed. From the perspective of investment, VC invests a sum of money at a very early stage of the project and gets some equity or Token at a very low price. , this point is not essentially different from traditional VC. The difference lies in the form of financing and the judgment of valuation. For example, the Token percentage in the early stage of the investment agreement does not actually have further dilution, right? But if you invest in equity, After rounds of financing, your equity only accounts for 1% or a few tenths of a percent, but tokens have no dilution, so you will see that the cost of some VCs is very, very low.
The other is the back-checking of the project. In traditional projects, you need to do financial back-up and legal back-up. However, under the current digital background, you don’t actually need to visit this company. You and the founder may have a remote chat. Let’s talk, Cryto actually brings a lot of good things. If the project is launched, many things can be clearly seen.
Peter：
For anonymous projects, no matter what method is used to build trust, his name and where are not really important. In fact, I personally participated in some Fair launch projects. In fact, it is a good idea not to take money from institutions. In this way, if it is more application-oriented, it is completely possible, but if it is an ecological public chain, it still requires an early large investment from the organization, and it is relatively difficult to do a full Fair launch.
Todd：
If we are investing in a fund, we may be investing in the aesthetics of the fund, but for a fair launch, it is more to cater to the aesthetics of the entire market. But catering to the aesthetics of the market will cause great fluctuations, but if a Fund can be more open and transparent, for example, in the form of a DAO, and the investment trajectory is disclosed, then I would prefer this form.
David：
Some Funds in the Crypto field are aware of a problem that the form of VC will change. For example, the Founder of Polychain tweeted that VC in our industry will be subverted soon, and most VC organizations will be subverted. form.
Compared with fair launch VC, there are still many advantages. The connection between projects, investors and investment institutions is still very useful. Institutions can provide some traditional post-investment services, including helping to recruit people and doing PR to connect some resources. VCs including KOLs and exchanges can help to make connections.
Todd：
Q: What do you think of the current phenomenon of the first and second level inversions? In this year's investment in the primary market, what are the areas that you are optimistic about?
Internally, we have always been looking forward to the coming of the bear market. In our understanding, the best time to sell funds is in the bear market, because in the bull market, the competition and valuations that Fund faces will not be so friendly. Compared with individuals, institutions are actually more likely to Doing more research is actually the money that a person realizes. Institutions are suitable for selling in a bear market, and counting money in a bull market is fine.
David：
Many traditional Runds have been selling more frequently recently, and they will not be so afraid of projects with high valuations. In fact, we will maintain a shooting frequency in a bear market. Back to your question, every small partner in our Fund has My own track, for myself, I will be more optimistic about the completion of some Web3 middleware, because in fact, several major pieces of Web3 have been seen, but some things are needed to complete this middleware.
We prefer overseas companies. We will divide web3 into 4 layers, application layer, tooling, middleware and infrastructure. The last layer is Protocol such as L1. Our focus is still on middleware and tooling such as DAO tools and data The analysis platform and NFT analysis platform are called Tooling layer, and the other one is middleware and infrastructure, such as DID, middleware of data, and then nodes and storage. These things are called Meddleware or because we are very familiar with this part in Web2 In some fields, the risk is more controllable, but the application layer, like Gaming and NFT investment, the risk is not so managable compared with us, and it takes less energy.
The last is the Protocol layer. We have seen less about L1 and Scaling solution, because there are relatively few good projects that we have contacted so far. In addition, cross-chain is also one of our key points.
Peter：
Back to the issue of the bull market and the bear market, it is true that many traditional Web2 funds are very fomo investing in Web3 investment. We are still very calm internally and look at a high valuation more rationally.
For us, we will vote for an L1 or L2 Scaling or Privacy Protocol because I think the richness of the Protocol layer is relatively strong, and there will be a lot of ecological economic activities. We look at the application layer less and focus on middleware. We have also invested a lot in Tooling and will continue to pay attention. From the perspective of valuation, everyone may prefer a bear market rather than bubbles with high valuations. When competition is fierce, many people will raise the valuation very high, and the end result is that everyone’s returns will be lower. . This is also a game. Everyone votes with their feet on the valuation. If everyone thinks the price is unreasonable or can get a more flexible price from the second level, then they will use their own methods to price the project, so everyone has their own valuation logic.Q: How do you view the Web3 user-owned concept and the Web2 capital-driven concept?
Peter：
How to evaluate Token investment and equity investment?
The first is the concept. Compared with the traditional equity market, the individual and community components of the Web3 market must be higher, so there will be some Fair launch practices. From another perspective, everyone's ideal is complete democratization, complete openness and transparency, but many people still rely on the judgment of institutions and KOLs, so for a long time, institutions will still have a great influence.
David：
Regarding the valuation issue, from a broad perspective, we will judge which mechanism the project will use to exit, such as the listing of Coinbase, such as the acquisition of Coinmarketcap by Binance, these are more traditional methods. We are more flexible about the exit mechanism.
This mainly depends on whether the value of the project is in Token or equity.
Peter：
Q: How to look at the periodic problems of the investment track?
Todd：
The most ideal situation must be that you can predict the cycle and direction very well. For example, some previous funds can invest in NFT in the early stage or invest in some large DeFi in the last wave. This must be a very ideal situation . If it is a less than ideal situation, there are some things that people don't know what is going to rise or what will rise. But we need to think about whether this thing is a wave or a long-term thing. If your perspective is the latter, from the perspective of an institution, then it is good for you to keep pace with the market. If you know that this thing has bubbles in the short term, but the long-term 10-5 years is a long-term growth thing, then believe this A little bit of sustainable investment. If you think this thing is a wave, then you may not be chasing hot spots. If you continue to be optimistic, you will continue to make arrangements.
David：
I would like to add that if the project exists for a relatively short period of time, it may be possible to pursue such a short-term return as a secondary fund. We will have some considerations whether this project can really solve some problems in the market. It may face some troughs, but in the long run, the fund will also gain some value.
This industry basically has some consensus, that is, the entire Crypto industry will continue to alternate between bull and bear, but when we invest in a project, we all hope that this project can survive the next wave of bull market and exit in the next bull market. If it is NFT or Gaming at the application layer, it will get a big return in a short time, but it will only be popular for a short time.
Todd：
Q: How to evaluate the project?
Every specific track will have its valuation method. The simplest valuation method is that this project has similar things, and you can look at the standards of its comparable companies. The other is that there are some projects that we think will have a place in the long run, and relatively speaking, they will have a better valuation. For example, Staking as a service, if you think crypto will become mainstream, it may become similar to AWS and Alibaba Cloud in the later stage. For the giant companies, now we look at traditional equity companies. Their valuation in the market can also give us some reference. For example, if you invest in a project, it may become such a large company in five years.
David：
The valuation of this round of defi is because the hot spot of the market is not in this place at present, so the funds will go to places with higher returns, so the valuation of the second level will drop, but you can count some blue-chip projects of defi His income, so in fact, compared with the traditional financial industry, the PE of 20 times and 30 times is actually relatively reasonable. Therefore, for the valuation of some defi projects, as long as it is still the core player in a track for a long time, its price is also a fluctuation in the secondary market.
Peter：
Opensea’s benchmarking in traditional Web2, in fact, the logic of this model is a bit like Taobao, and because one of its products is different from the other, its logic is more like Xianyu, let me add this question.
Regarding the time perspective, the method of finding Comparable as Todd said may be the best way to use it. Find where the project is similar to the project. Of course, it also depends on the characteristics of the product. If it is a public chain project, use traditional valuation. It is not particularly accurate, but it is more reasonable for Defi projects to use traditional valuations. In addition, it is very common for projects to subsidize users at present, so there will be a situation of brushing the volume, so to sum up, if you really want to count Valuation still needs to believe that the long-term industry will return to a rational and average level. The industry is still very early, so there is actually no very formulaic valuation method.
David：
Q: Compared with Web2 finding founders among executives of traditional big factories, how does Web3 efficiently find project founders?
Peter：
Let me briefly talk about it. In fact, most of the time, I rely on friends in the circle to communicate and recommend new projects, but there are also a few cases where some good projects can be found on Discord on Twitter.
Todd：
I won’t talk much about friends’ recommendations. It’s actually quite useful to find some projects from Twitter or Discord. Friends from large domestic manufacturers will have a lot of regulatory considerations, so there will still be a process of changing their minds. In the long run, if they have a sense of identity with the industry after changing their minds, they will still turn to this matter later. This is A thing that takes time.
I would like to add that we will often do two things. The first thing is that we will vote for some portfolios. We will vote for them because of our recognition of this track. Then I will chat with these founders to understand The new development direction of these tracks, the latest good teams, source some good projects from this channel.
In addition, everyone will have a bot to crawl some new projects. These are all our own practices. For example, when you go to crawl, you will have your own parameters.
David：
Q: How do you view the Web3 open source project to maintain its competitiveness?
When I first came into contact with the Crypto market, I also thought about this question, because everyone’s code is open source, so how to maintain this competitiveness? Then after I came into contact with Web3, I felt that a team still needs a strong marketing ability and operation ability. In addition, they need some of these fields and new relationship networks, such as some exchanges, public chains, KOLs, and the support of powerful investors. .
Todd：
In addition, because the Web3 project is international, it is also important to operate an international team, international management ability and project execution ability. Another point is that someone in the team can have a strong understanding of the design of Tokenomics. Make some innovations, maybe there is not much new innovation in DeFi Tokenomics, but gamefi and socialfi can have some innovative designs for the token of the project is also a plus.
Peter：
Examples of Uniswap, Sushi, and Pancake. Uniswap still carries the largest amount of funds and the largest attention in the market. The other is the innovation of the team. For example, Uniswap can make V2 V3, but Sushi and Pancake cannot do it. Plagiarize the code but cannot gain cognition and innovation. In addition, Pancake has also received strong support from Binance, and the other is the ecological support of BSC, so strong enough resources are very important, and the other is Sushi. Their team's community operation ability is relatively strong, so the team's ability in operation and community. So these three points basically cover our investment thinking.
Todd：
In the primary market, people are indeed very important, that is, whether the team can continue to innovate. In addition, the matter of open source does not make the track more involuntary. The competition is all-round. UniV3 actually modified an open source license. At the beginning, the time was set and it could not be fully open source. , Slowly open source later, so open source is not a black and white thing.
END
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