Investing in Web3 Companies: What Investors Should Consider

Dusan Kovacic, CIO at Rockaway Blockchain Fund, talks about new Web3 use cases and which ones may see the most VC and investor engagement, as well as how investors should evaluate Web3 companies during the current market environment.

What are the implications of the current market environment on Web3 companies?

Despite the market downturn, the data shows that the number of blockchain users has increased significantly. Sometimes, these market downturns can be a hugely positive opportunity for investments, with more realistic valuations coming to the forefront, and in seeing what the next wave of builders is creating. The following Unicorn start-ups were all created in a bear market: WhatsApp, Netflix, Slack, Mailchimp, Instagram, Uber and more.

The long-term value proposition of Web3 technology continues to hold strong despite the current market activity. At Rockaway Blockchain Fund (RBF), we expect dealmaking to continue at a more sustainable pace in line with the macroeconomic environment. Many factors, such as regulation and the migration of talent, are progressing to make this a more encouraging area for investors to partake in. We are likely to see the colossal blockchain investment figures of 2021—over $33 billion invested by VCs in crypto and blockchain startups—increase again in the future.

Beyond capital, how are Web3 projects looking for support from VCs and partners?

Increasingly, Web3 projects are looking for support from VCs and partners beyond the provision of capital in areas including talent acquisition, community expansion and engineering. Depending on the market, the value added by VCs fluctuates and shifts. For example, in a bull market, there is more of a focus on services and the brand. In a bear market, the value add is capital.

RBF has a comprehensive product offering, built on the pillars of Venture, Engineering and Liquidity. Our firm goes strategically beyond capital inflow to solidify the success of portfolio start-ups within a competitive blockchain industry. In addition to capital, VCs should be able to help investees with research, engineering, hiring, etc. As well as this, these projects must also be educated on brand signaling, as when a branded VC invests, it brings credibility for dealmaking, hiring and more.

How should investors view Web3 companies during this time? What should they keep in mind?

As the industry grows, VCs have an opportunity to connect with founders who have niche project experience and are applying that skill set in an effort to progress the ecosystem. In doing so, these founders provide an opportunity for investors to learn more about a specific facet of Web3, such as algorithmic valuations of NFTs or long-term financing mechanisms.

When looking at new projects, investors should keep in mind that this is an educational opportunity that helps to refine their own offering. These VCs should examine the professional track record of the team of builders to establish what expertise they bring from another field, making them unique in the space.

What are some new Web3 use cases? Which ones do you think will see the most VC engagement and which ones are most primed for enterprise and institutional adoption in 2023?

Global adoption of blockchain technology is well underway and in tandem with that emerges a host of exciting and new Web3 use cases. NFTs in particular have witnessed a great deal of hype and exposure, but the real long-term and sustainable valuation methods are yet to be solidified.

Another concept relatively in its infancy that we are looking to support is insurance within the decentralized applications (dApps) space. The assessment of risk is difficult in this regard meaning that traditional insurance companies are hesitant to cover unconventional technical issues i.e. smart contract hacks or protocol malfunctions.

In decentralized finance (DeFi) specifically, RBF is looking at the area of derivatives. While there are different options for automated market makers (AMMs)—an underlying protocol that powers the exchange of crypto assets without intermediaries—they have not gained much traction as they are not capital-efficient. Therefore, RBF is interested in projects that are solving this.

Regarding infrastructure, we anticipate more interest in zero-knowledge proof (ZKP) in verifiable computation in the context of Layer 2s and other protocol designs. We believe that these developments, as well as many others, are primed for greater investment and future enterprise adoption.

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