"Why Web3 Matters: The Future of the Internet and Venture Capital"

"Why Web3 Matters: The Future of the Internet and Venture Capital"

We are currently witnessing the dawn of the web3 era, a powerful combination of the decentralized, community-governed ethos of web1 and the advanced functionality of web2. Web3 represents a paradigm shift in how we interact with the internet, as it is now owned and orchestrated by the builders and users themselves, facilitated by tokens.

In the traditional web2 model, as companies reach the peak of their growth, their relationships with network participants often turn from positive-sum to zero-sum. This means that in order to continue growing, these companies must extract data from users and compete with their former partners. This centralized approach leads to the accumulation of value by a single company, which ultimately results in conflicts with users and partners.

Web3, on the other hand, aims to decentralize ownership and control. Users and builders can now own pieces of internet services through tokens, both non-fungible (NFTs) and fungible. These tokens grant users property rights, allowing them to own a share of the internet. Moreover, tokens align the interests of network participants, fostering collaboration towards the common goal of network growth and token appreciation. This solves the inherent problem of centralized networks, where one company accumulates all the value and ends up at odds with its own users and partners.

Interestingly, the role of venture capital in funding basic innovation is often misunderstood. In 1997, venture capitalists invested over $10 billion, but only 6% of that amount went to startups. The majority of venture capital funds were allocated towards follow-on funding for projects that had already been developed through government and corporate expenditures. This highlights the fact that venture capital mainly supports the infrastructure required for business growth, such as manufacturing, marketing, and sales.

Contrary to popular belief, venture capitalists do not primarily invest in good people and good ideas; they focus on investing in good industries. They seek out industries that are more forgiving in terms of competition, as it increases the chances of success. In fact, less than 10% of all U.S. economic activity is projected to occur in segments with more than 15% annual growth over the next five years. It is much easier to grow within high-growth segments than in low- or no-growth ones.

Timing is crucial in venture capital. Over 80% of venture capital funds are typically invested in the adolescent phase of a company's life cycle. The challenge for venture capitalists is to identify entrepreneurs who can advance a key technology to a certain stage, such as FDA approval, where the company can then go public or be acquired by a major corporation. Investment bankers play a significant role in this process, as they help facilitate the exit strategy through initial public offerings (IPOs).

Preferred provisions in venture capital investments offer downside protection, while the presence of multiple venture capital firms adds credibility. In fact, some argue that the smartest funds are often followers of top-tier firms. Venture capitalists expect a ten times return of capital over five years in exchange for financing one to two years of a company's startup phase. They also receive a management fee, typically 2% to 3% of the fund's total capital, regardless of the fund's performance. The remaining gains are distributed between the investors and the venture capitalists.

It is important to note that good plans, people, and businesses in the venture capital world succeed only one in ten times on average. Venture capitalists often build their reputations on one or two successful investments. Additionally, it is worth highlighting that most basic research funding and invention comes from corporate or government sources. The United States stands out for its willingness to embrace risk-taking and entrepreneurship, creating an environment conducive to innovation.

In conclusion, web3 represents the future of the internet, where ownership and control are decentralized, and users can own a piece of the digital landscape through tokens. This shift has significant implications for venture capital, as it changes the dynamics of funding and ownership. To navigate this new landscape, here are three actionable pieces of advice:

• 1. Embrace the decentralized nature of web3: As a user or builder, explore opportunities to own tokens and participate in decentralized networks. This not only gives you a stake in the growth of the network but also aligns your interests with other participants.

• 2. Understand the market dynamics: When seeking venture capital funding, focus on industries that have a competitive advantage and are poised for growth. Venture capitalists are more likely to invest in industries with higher growth potential.

• 3. Timing is key: Entrepreneurs should aim to reach key milestones, such as regulatory approvals or market validation, before seeking venture capital funding. This increases the chances of attracting investors and facilitates the exit strategy.

By embracing the potential of web3 and understanding the intricacies of venture capital, individuals and businesses can position themselves for success in this new era of the internet.