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TLDR 💸: Web3 VC has to operate fundamentally differently than any other VC in the world.

Web3 VCs must:

• Be Apart Of The Community

• Understand The Web3 Landscape

• Build Your Community / On-Chain Credentials

Continue reading to learn more about this and what you should do to be a successful web3 investor.

What is Venture Capital?

Venture capital is a return on an investment-motivated effort where investors or limited partners provide financing to startups and small businesses that are believed to have hyper long-term growth potential. Companies that don’t capture a significant market are usually barred from receiving venture investment.

A limited partner or LP generally comes from well-off investors, investment banks, and other financial institutions. The money raised by the LPs is used to create a fund within a Venture Capital firm to invest in a particular industry set. The fund may be as specific or general as the venture capital firm proposes.

A venture capitalist or VC is a unique and exclusive career path that rewards those who can “see in the future.” A VC is a person who distributes the money the venture fund raised through limited partners.

The goal of the VC is to receive a return on their investments; the higher the number, the better a VC you are. To this, VCs must invest in a business with the potential to grow exponentially, solve a problem people are willing to pay for, and have a low valuation. Start-ups are precisely what it says it is. It is a business that has recently started up. These businesses come with a lot of risks.

Companies with VC backing include;

• Uber

• DoorDash

• Meta

• Amazon

• Google

“More than two-thirds of them never deliver a positive return to investors.” — Harvard Business Review

It is generally understood almost 90% of start-ups fail. The risk to the investor decreases as the start-up moves up its lifecycle. On the contrary, the higher the lifecycle a start-up moves, the higher the valuation and the lower return on investment an investor receives.

Let’s break it down by business lifecycles/venture stages

Pre-Seed

• A business with an idea they believe solves an actual problem but has not been proven yet.

Seed

• A business with a promising idea and a prototype solves an actual problem but only has limited research to prove it.

Series A

• A business with a promising idea that proves to solve a problem through generating revenue

Series B and Above

• To a reasonable extent, a business has proven that they have solved a problem that people are willing to pay for, and the company can scale.

Generally speaking, the higher the risk, the higher the return on the investment.

A business usually has no real business at an earlier stage. As a VC, you ideally find a company in the pre-seed or seed area that succeeds and thus yields a more significant return on investment.

Investors can’t always rely on the idea to find these golden companies. Knowing that over 60% of startups fail, investors, rely on the following to make investments:

Who are the founders?

• What’s their experience? Are they fit to succeed?

Who is on the team?

• If their idea were to fail, could the team find a way to still succeed?

What market are they operating in?

• Is the market prime for innovation, new competition, and has a positive future outlook?

Many VCs are focused on a particular industry which gives them insight into what may or may not work. I believe that VCs operating in the Web3 industry must change their business.

What is Web3?

Web3 is an emerging industry that expands on the current phase of the internet. Due to its emerging nature, most businesses are start-ups with very few exceptions.

These companies are fundamentally different due for three reasons

Internet-Native

• Building on the internet, the historical context of web3 / crypto all started on the internet. There aren’t any stores or physical employees rather than services to help facilitate a digitally based society.

Community-Native

• Instead of extracting value from their users, these startups aim to create and nurture a relationship with their communities. In return, they have the ability to capture significant market share.

Global

• These start-ups do not function for a particular subset of the population, rather than anyone who has access to the internet.

VC in Web3

The role of a venture capitalist has always been about the same. Find experiences and knowledge founders with promising ideas in promising industries. The part of these VCs has been primarily based on the capital they provide the start-ups. Web3 flips this upside down.

Founders in Web3 companies want to see investors be a part of their community. Venture capitalists have found a negative connotation within various web3 startups. The nature of VC is usually getting in first before a community has been built, and thus profit from this industry.

A web3 business values its community highly. Usually, the web3 startup grows side to side with its community. Their communities provide value and expect value in return. The token model has been introduced because of this unique relationship. Tokens represent voting representation within web3 startup communities.

VCs investing in web3 companies may receive tokens as a part of their investment. VCs have enormously been known for capturing tokens and either holding them to capture a prominent governance voice or dumping the tokens to receive their liquid capital back.

As a web3 start-up, receiving investment from your community or venture can be tricky. Understanding that your business is high risk can influence your decision on where to raise capital, thus influencing who receives the reward if you are successful.

The dynamic can be problematic for web3 founders that don’t wish to place the risk on their community (who usually still provide their community with a considerable amount of free ownership). Web3 VC must operate in a different landscape that they have never had before.

How To Become A Successful VC in Web3 Today?

There are three things I think all VCs must have to be a success in the current web3 landscape. These may change as the industry begins to evolve and mature. If you are a VC in web3 or a VC looking to join web3, DM me to join our web3 link community of start-ups and investors. These three points are all things we emphasize, teach and preach. More of this to come later!

1. Be Part Of The Products Community

• As a VC, a web3 founder would like to see you as part of their startup community. This will help you provide value to their community through constant interaction and, more importantly, provide feedback. Being a part of the community will also help you understand the product’s users, allowing you to make more sound investment opportunities. This can be hard due to the volume of start-ups. Choosing your top 10 and sticking with them will provide you with valuable information.

2. Understand The Web3 Landscape

• As a VC, you want to understand the general direction the industry is going. Understanding the overall market and where it is going will give you a successful perspective on what to invest in and provide valuable and timely feedback/questions for your team or portfolio companies. The web3 market changes every hour, and being up to date helps you in the profession overall.

3. Build Your Community / On-Chain Credentials

• As a VC, you have the power to shine a light on your portfolio companies and bring your community into theirs. Having your community or personal brand will allow web3 founders to understand your own experience while understanding what community value you carry. In addition, make sure to participate in on-chain communities that prove your engagement with said community. These may include joining an investment DAO or buying a project NFT.

The current web3 environment allows VCs to have a unique opportunity to be financiers, users, and community members. This comes with a lot more responsibility and expectations. The top deals in the web3 venture scene are kept at the top. Breaking is challenging, but it is possible!

Thank you for reading. I am taking this journey myself and believe it will be challenging. Those who plan the seeds I have written about today will reap the fruits of their labor tomorrow. Okay, maybe not tomorrow but one day. Web3 is unknown and exciting. The long-term bets are all better than the short-term ones. Have a great day!

🇲🇽 About Me

Juan is a first-generation, low-income Latino web3 advocate. His goal is to onboard 1 million underrepresented generation z into web3. He works as a Partner at the Web3 Link and the BDR at a stealth start-up.

📲 Contact Information

📧 Email address: juanriveraperez00@gmail.com

🐦 Twitter: https://twitter.com/0xjrp

🔗 LinkedIn: https://www.linkedin.com/in/juanriveraperez/