VCs Discuss What Drives Investments in Web3 Startups The year 2023 and late 2022 are completely different from what the markets were in 2021. A lot of founders are now raising money at reasonable valuations. There is increased focus on profitability, on what final product or utility one is building for. And this holds true for Web3 startups as well.

The year 2021 was a record year for fundraising by startups. It saw crazy valuations. However, the year 2023 and late 2022 are completely different from what the markets were in 2021. A lot of founders are now raising money at reasonable valuations. There is increased focus on profitability, on what final product or utility one is building for. And this holds true for Web3 startups as well.

"It is only a different technology that powers different types of use cases. While people have realized it does power content creators and give them immense freedom, at the end of the day, there has to be utility to the end-users. If end-users are not coming in and enjoying being on a particular platform, it doesn't make sense. But that is settled now and most of the platforms that are now coming are utility focused or user focused," said Pearl Agarwal, Founder & Managing Director, Eximius Ventures at the Web3 summit held by Entrepreneur India.

Investors advise startups to do user research and then work backwards and see if they can add a blockchain or Web3 angle to it. However, at the core of investing in Web3 startups still lies innovation.

At a panel discussion on what VCs look in Web3 startups, Vatsal Kanaikya, Principal & CTO, 100X VC commented, "Investing in this space is equivalent to investing in deeptech startups. While investing or evaluating a Web3 startup, it has to be seen if it is really building something unique in the protocol itself. We have to deep dive into the product to see if it is really solving some problems. Is the yield curve better? We go very deep and understand how they are technically building it out."

Bypassing low adoption rate

Exciting it may be, but adoption rate in Web3 space remains absymally low. So how can adoption rate be worked upwards? According to investors, consumer apps need to be engrossing to the point people forget what tech they are using. "We have yet to get to that point. But we are still not ready from an infrastructure point of view. When you look at the UI or UX experience side of things, a lot of things are coming up where things are more about network and free speech. In the gaming space, we have not yet added the utility of finding what's that next thing that Web3 is going to offer to these games besides financial incentives," says Akshay Aggarwal, Venture Partner, Drapon Dragon Fund.

Also investors feel when it comes to the future of bitcoin and crypto, we are still evolving. "We meet a lot of people who want to build lending and borrowing protocols, but we need to understand adoption is not going to come by paying people money," says Vineet Budki, Managing Partner and CEO, Cypher Capital.

The investors also touched upon the area of Decentralised Finance (DeFi), within Web3 world, which according to them is pretty native. Said Harsh Agarwal, VC, Kyber Ventures, "In DeFi, there is-money, players and even developers, but we need good bridges. Integration of finance with tech is very much needed. It needs focus."

Token vs equity offerings-what do investors consider?

Startups willing to raise funds have been issuing tokens for sometime now. But what do investors preference remains when it comes to choosing between initial coin offerings (ICO) and equities offered by them? "As an early stage investor, we would like to invest where we get both tokens and equities. This is because down the line part of the value that protocol generates will go to equity holders as well as to the token holders," says Rohit Jain, MD, CoinDCX Ventures.

Apart from discussing funding issues, investors also dwelt on the technical side and said that middleware provides significant potential to create cross industry utilities that will integrate with blockchain adoption.

"At the end of the day what Web3 does is it enables creators to own, have better ownership and get rewarded for it. But it doesn't change the fact that whatever you do, you still need to segment the market. There are some areas of middleware that are ripe for innovation, including decentralized identity management and data access privacy and analytics. Whatever you create you need to have a way of handling. These are some areas that we think we can focus on to solve real world problems. And it will generate a lot of revenues," says Ravi Sundararajan, CEO, VirAstral, an early stage studio focused on Web3, Generative AI, and SaaS companies.