7 investors discuss web3’s present and peer into its future

Most people have experienced the internet only through Web 2.0: online applications, the social web and software as a service form the fabric of our lives.

But even as other technology rapidly evolves, basic web infrastructure has remained largely unchanged since the turn of the millennium. Lately, many have championed web3 as the internet’s next phase, but the term encompasses so much territory, conversations can be rather diffuse.

We’re still years away from web3 capturing major market share, and there are valid concerns that its complexity will daunt consumers and regulators. However, our research indicated that the investment landscape is growing increasingly competitive as venture capitalists become more educated and less skeptical.

To get a clearer sense of where the market is, we reached out to several active investors to find out where web3 stands and what the future holds:

• Lior Messika, founder and managing partner, Eden Block
• Atul Ajoy, partner, Horseshoe Capital
• David Chreng-Messembourg, founding partner, LeadBlock Partners
• Randy Glein, founder/partner, and Sam Shapiro, principal, DFJ Growth
• Mercedes Bent, partner, Lightspeed Venture Partners
• Jai Das, co-founder, president and partner, Sapphire Ventures

To make things as clear as possible, we asked each respondent to share their elevator pitch: How would they describe the technology if they were trying to convince a skeptic to invest?

Starting with the potential consumer appeal of cartoon apes, we tried to find out what specifically attracted them to invest in the semantic web and where they’re currently seeing demand. “I initially got into web3 through verifiable credentials and data provenance in the enterprise market,” said Atul Ajoy, a partner at Horseshoe Capital. Several others said they started exploring the space after developing an interest in crypto.

In addition to discussing potential applications in advertising, fintech and enterprise apps, respondents shared their advice for web3 founders who are hunting for funding, along with their concerns about factors that could stall its development. Finally, we asked each respondent: What are skeptical web3 investors missing?

“I never met a skeptical investor who actually understood what was going on. If you get it, you’re probably strapped in and ready to go,” said Lior Messika, founder and managing partner, Eden Block.

“At this point, web3 has proven itself as more than a phenomenon — it is the foundational layer of the metaverse.”

Lior Messika, founder and managing partner, Eden Block

Please give us your web3 elevator pitch: What is it, and what role does it play in today’s internet framework? 

In two sentences: Web3 is the key to the real metaverse. Web3 will house our financial institutions, social interactions, personal identities and much, much more in the not-so-distant future.

Expanding: When I look at web3, I see an amalgam of decentralized infrastructure capable of powering a new world. The two most distinct properties of web3 are composability and decentralization. Firstly, crypto networks are swallowing up value and creating environments where every possible form of on-chain value interlinks and interacts with the other. Web3 has the unique ability to create tangible value systems out of value systems that remained intangible for millennia. It unlocks a world where our social capital, reputations, and historical interactions are given indelible and truthful assets — which often get priced into a market powered by decentralized protocols.

Web3 is where all decentralized systems will learn to interact with each other, building on the security and value (thus network effects) of a broader ecosystem. It will be multilayered and multifaceted, supported by completely new infrastructure. Our applications will need to relay data reliably, transfer data completely privately, store data and maintain high levels of availability — all on decentralized rails. In web3’s short history, we’ve already seen how centralized infrastructure can be a dangerous tradeoff.

What made you decide to get into the space? Cartoon apes and blockchain games don’t yet have broad consumer appeal: Where are you seeing demand for web3 products today? 

Web3 symbolizes a massive societal shift, infused with innovation and supercharged with values. I dove headfirst into the space when I understood that we’re in the midst of a cultural revolution enabled by technology — not the other way around. Crypto and web3 is our technological answer to a societal problem that has plagued us for millenia, so I think that it’s natural for us to treat this movement with respect and passion.

On products: Some of the most powerful web3 products that we’re seeing these days are intensely focused on ownership, creation and other contextual features that ultimately amount to our digital identities. Funnily enough, we’re already starting to see how crypto products are taking hold of our culture and of our shared attention. In the metaverse, your “pfp” is not only a skin of sorts but the key to another dimension. The individualism this basic feature enables over time explains the frenzied NFT market, which will undoubtedly remain a large part of web3 and the metaverse. The technological basis for NFTs will unlock disruptive value systems across gaming, fashion, social and creator economies.

On a less obvious note, coordination in large, decentralized groups (DAOs) will require streamlined frameworks and transparent value systems. As communities grow and scale into multibillion-dollar networks, decentralized governance becomes very difficult. Colony and Coordinape will enable the next generation of DAOs through specialized tooling and automated frameworks for governance and incentives.

What kinds of applications can we expect to reach the market in the near future? Where are you placing your bets, and can you name a few companies to watch?

Within the broader context of web3, we see tremendous growth across two distinct layers in the stack — infrastructure and applications. Unlike TCP/IP (a core piece of internet infrastructure that cannot be monetized) at the dawn of the internet, decentralized protocols and baked-in incentive systems make running decentralized infrastructure extremely valuable. Technologies like the Pocket Network manifest this in full force, with billions of relays per week. The Pocket Network provides decentralized infrastructure to an entire ecosystem — and compensates its node runners handsomely for the work. At the current state of relays, the forecasted annualized revenue of the network is in the hundreds of millions.

Another core piece of infrastructure for web3 is Biconomy. The Biconomy team is building transactional infrastructure for the decentralized web. Its platform abstracts away crypto transaction complexities for both developers and users. Biconomy has built a series of products that cater to developers building applications in web3 — as protocols continue to grow into mass producers of on-chain services, developers need tools to streamline their operations and integrations to allow for mass scale.

On the application layer, I believe that we’ve only begun to scratch the surface of interoperable value systems within the broader web3 space. Through decentralized finance, we will one day price, value and monetize every single form of capital that can be linked to us on-chain. Our favorite art pieces will pay off our mortgage on lending protocols, and our “likes” will become financial assets. In simple terms, decentralized finance will kick-start the great monetization of everything. Protocols like Vega Protocol aim to enable decentralized derivatives at scale through fair and efficient markets.

Another trillion-dollar opportunity in DeFi relates to a massive elephant in the room — since markets need stability to remain competitive and efficient, DeFi has largely sacrificed decentralization for stability, opting for the USD as the main underlying collateral for a huge portion of the market. Protocols like Float offer an alternative, by creating a low-volatility asset that can remain completely decentralized. Without a truly decentralized collateral in DeFi, web3 is at risk.

Can you share a few of your top concerns? What are some of the pitfalls that could prevent web3 from realizing its potential? 

Firstly, it must be understood that decentralization has to be the basis for all true innovation in what we refer to as web3. It is the common thread between every truly disruptive application in today’s cryptosphere: Uniswap and its many clones, money markets like Compound, Cryptopunks and Bored Apes, and storage solutions like Filecoin and IPFS — all enabled by one underlying property. Future developments across crypto networks will continue to leverage decentralization as a core enabler and build additional utility around it.

In the absence of decentralization, disruption is stifled. For this reason, I believe that the biggest risk for us as we venture deeper into web3 is going back to how things were. Making easy tradeoffs that take us away from the very core premise of web3 — maximal decentralization, often at the cost of performance or scalability.

What are some of the use cases and monetizable opportunities that will encourage major websites to switch over to web3? Will the prospect of increased internet regulation be a factor?

Internet regulation is one extreme, but the more likely case is that web3 will swallow up enough value as it continues to grow for major websites to deem it necessary to switch over to web3. Web3 is akin to an economy, and most players will want to participate.

Over the next decade, what are some of the major leaps you anticipate? Which aspects of web3 are overhyped?

One major leap we will make as a society is to embrace true ownership. Financial freedom is deeply embedded in financial responsibility, and web3 is an interface to the most direct form of responsibility (and freedom) possible.

On the topic of overhyped aspects of web3: I believe the radical openness and permissionless access across web3 open the door to a lot of experimentation and speculation. For this reason, most of the overhyped areas of web3 will actually be found at the bottom of the most valuable markets in the space. For example, looking at anything but the top 15-20 NFT projects and their associated communities is excruciating. In the long term, overhyped segments of the market will continue to act as a signal of where much of the innovation and broader focus currently stirs.

How competitive is the web3 investment market today? What needs to be done to grow interest?

The web3 investment market has never been more competitive. Investors are rallying behind developer teams with an idea and a bank account. I believe that while the capital continues to flow into the space so freely, the fundamentals remain the same yet the stakes (both in risk and upside) have never been higher. The amount of potential value in strong decentralized use cases is almost unimaginable, and teams are scouring the world for talent. To grow even more interest, the funding will have to eventually match talent and human capital, which currently seems extremely difficult to find.

What advice would you give web3 founders who are trying to get their first check? 

Web3 needs new leaders and will designate them organically as this ecosystem evolves. Nowadays, web3 founders take on the roles of communicators and community builders. In a world where development is open source and contributions are largely permissionless (more often the case in applications built on Ethereum), rallying an entire ecosystem to your cause becomes an extremely unique challenge.

The core drivers for web3 are values-based and financially driven — thus, iterating on web3 will be a cultural and capitalistic mission. It will be incentivized by numbers, algorithms and code, and it will also be supercharged by brand, community and people. Web3 founders should internalize this and leverage that intimacy between developer and community to their advantage. Founders who clearly communicate the values and core missions of their project right from the outset will enable communities to form around that shared goal and propel the project into existence — and mass distribution.

Without market intelligence, are they at a disadvantage when it comes to pitching?

Without a certain amount of market intelligence, founders are severely disadvantaged. Web3 iterates so quickly and so sharply that even a few months of downtime can create fundamental knowledge gaps. In our investing practice, we see the stark difference between founders who are web3-native and those who haven’t taken the plunge yet. By now, it’s become clear that to build a successful product in web3, teams require a certain level of nativity to correctly identify gaps in the market, desires and needs of its user base, and much more.

Do you know any skeptical investors? What do you think they’re missing?

I never met a skeptical investor who actually understood what was going on. If you get it, you’re probably strapped in and ready to go. At this point, web3 has proven itself as more than a phenomenon — it is the foundational layer of the metaverse. Skeptical investors are probably missing the true meaning of Meta’s recent play, Zuck’s rather funny conversation with Gary Vee about NFTs and the general direction of digital life.

Atul Ajoy, partner, Horseshoe Capital

Please give us your web3 elevator pitch: What is it, and what role does it play in today’s internet framework? 

Web3 is a new decentralized form of the internet where users become owners. Today’s internet, Web 2.0, is largely controlled by centralized players who capture much of the monetary value created on the internet. Web3 replaces these centralized players with decentralized networks that distribute the value to developers, creators and users. This allows these network participants to design new incentive mechanisms in on-chain for organizations like DAOs.

What made you decide to get into the space? Cartoon apes and blockchain games don’t yet have broad consumer appeal: Where are you seeing demand for web3 products today?