Unveiling Web3 VC：Journey & Investment Strategies （Part I）

2023-08-01, 03:18

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## What is Web3 Venture Capital?
Venture capital has been the business accelerator to start-up companies with high potential, by funding those companies at an early stage with low valuation and benefiting from portfolio companies' growth. In Web3 space, there are numerous start-up teams and a clear exiting path by token issuance, which are both perfect for VC business.

Besides the traditional VC / PE that covers all sectors and with partial coverage of Web3 projects like Sequoia, there are dedicated Web3 Venture Capital (Web3 VC) like a16z, Pantera, FBG Capital who actively fund early-stage startups that build tech on blockchain or business on blockchain based digital assets.

In 2022, there were 1,477 deals with a total investment of 34.33 billion USD in the first three quarters [2]. Although Luna and 3AC tragedies cooled down investors’ enthusiasm and pointed to a decrease in venture capital inflow in Q3 and FTX collapse may even deteriorate the situation in Q4, we will still see a long-term upward trend for the annual market data at the end of this year.

**2022 Q1-Q3 Web3 venture capital and acquisition deals**
![](https://gimg2.gateimg.com/image/16908609979356492408011.png)
**Source: ‘Venture Capital Research 2022 Q3 Overview’ by Cointelergaph and KeyChain Ventures**

Besides investments in the primary market, Web3 VC firms could also invest in liquid tokens and trade in the secondary market, hence the balance sheet is composed of omni-assets (e.g. equity, native tokens, liquid tokens, etc.), in various venues (e.g., different centralized exchanges, custodians, banks, blockchains and protocols, etc.).

1Token, as a crypto native tech firm and veteran from traditional financial market, will share insights on Web3 VC and challenges in its life cycle management.

## Types of Web3 VC firms
Players in Web3 VC can be categorized into 2 types: traditional ventures with partial coverage in Web3 space, and crypto-native ventures.
Traditional ventures bring the traditional fund (usually large) to Web3, and show the following tendency
&#9679; Concentrated deals (large ticket size, small number of portfolios)
&#9679; Long decision making process and careful due diligence

So their investment is usually interpreted as strong recognition to a team / project.
On the other hand, crypto-native players can be more complex. There are mainly 3 types: primary investment firm (e.g. a16z, Pantera, etc.), market maker (trading firms), the VC arm of exchange (e.g. Gate Venture, Coinbase Ventures, etc.). Each of them has its own edge.
![](https://gimg2.gateimg.com/image/169086099736111047208012.png)
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## Characteristics of Web3 VC Investments
Compared to classic VC deals, Web3 venture investments have their own characteristics.

&#9679; **Both primary market and secondary Market**

Web3 VC firms's participance in secondary market sets them apart from traditional VCs. Web3 VC firms typically maintain their own liquid funds, or a book of liquid tokens. This could be either to acquire undervalued tokens from the secondary market, further diversifying their investment portfolios, or in times when the primary market does not offer good targets, these Web3 VC firms can earn yield from the secondary market. So buy-and-hold and yield strategies are nowadays Web3 VC's standard allocations, where Web3 VCs is acting like a mixture of VCs and hedge funds in traditional market.

&#9679; **More diversified investment approaches**

Traditional ventures mainly invest in the company’s equity, while Web3 ventures are mainly targeting at tokens.
Web3 VC firms could invest in one of a mixture of Simple Agreement of Future Equity (SAFE), Simple Agreement of Future Tokens (SAFT), and liquid tokens. Among all investments, SAFT is the most popular for its convenience of cashing out.

&#9679; **Unique factors to be considered in investments???**

Apart from the projects' short-term profitability, long-term vision, team background, products, markets, ecosystem and so on, there are unique factors in token/ SAFT investment scenarios that need to be considered. ‘Tokenomics’ as an Example, is the economics of a token, which includes everything from the token supply, issuance and utility, etc. With the same investments, total distributed tokens and token value, different vesting schedules and token unlock arrangements listed in the 'Tokenomics' can lead to completely different IRRs.

Let's take an Example
&#9679; Same investment: A Web3 VC invested in both portfolio A and B with the same investments of 1 million USD.
&#9679; Same total distributed tokens: Portfolio A and B will distribute 1 million token A and B in total.
&#9679; Same token value: Token A and B will be of same price during the vesting period.
&#9679; Different vesting and unlock schedules: 50% of token A is liquid in Year 1, 30% in Year 2 and 20% in Year 3. While 40% of token B is liquid in Year 1, 30% in Year 2 and 30% in Year 3.
&#9679; Different IRR: IRR of portfolio A turns out to be 71% and IRR of portfolio B is only 47%.
![](https://gimg2.gateimg.com/image/169086099794854852208013.png)
&#9679; **Shorter cycle and faster exits**
In equity/ SAFE investment scenarios, the exit strategies are traditional, like Initial Public Offering (IPO), Merger and Acquisition (M&A), Management Buy-Outs (MBO)... Either of these exits takes a long process, since it needs to go through multiple reviews and even the regulators’ approval.

While in token/ SAFT investment scenario, the cycles between investments and exits are much shorter. Exit strategies in these cases can be Initial Exchange Offering (IEO), Initial Decentralized Exchange Offering (IDO), Security Token Offering (STO) and Over The Counter (OTC) trades with management / other players.

Unlike IPO, token listing of IEO and IDO are unregulated (STO is emerging but still minor). Tokens are immediately liquid once released (because there's DEX). To prevent investors exiting immediately, projects usually set tokenomics and vesting terms to keep the party on.

Take AXS private sales round investors as an Example [3]:
1.Investors invested $864,000 on May 1, 2020 with an average price of $0.08.
2.According to AXS tokenomics on its whitepaper [4], 20% of the private sale tokens will be unlocked during the AXS public sale. The rest of the private sale tokens will be unlocked quarterly over the next 2 years.
3.AXS IEO happened on November 4, 2020.

It means private sales investors will have 20% liquid token after 6 months (cliff), and the rest 80% will be released to liquid in the next 2.5 years.

&#9679; **Large deal quantity and small check size**
Web3 ventures invest 10x or more portfolios than classic ventures, and meanwhile project companies involve many more investors for each round.
Web3 startups are moving fast in development and fundraising, so VC cannot make perfect due diligence. For max. return and min. risk, Web3 VC have to cover more projects, rather than being cautious and missing potential star projects. Large ventures easily invest in hundreds of companies in their portfolio (e.g. Coinbase ventures, Pantera, etc.).

Startups also tend to work with more investors. As mentioned above, founders do care about funding, but they also expect to cooperate with investors to help build and scale their ecosystem.

**Reference：**
[1] ‘Venture Capital Research 2021 Overview’ by Cointelergaph and KeyChain Ventures:
https://research.cointelegraph.com/reports/detail/venture-capital-report-2021-overview
[2] ‘Venture Capital Research 2022 Q3 Overview’ by Cointelergaph and KeyChain Ventures:
https://research.cointelegraph.com/reports/detail/venture-capital-report-q3-2022
[3] A<area>xie Infinity (AX<area>S) Tokenomics from CoinGecko:
https://www.coingecko.com/en/coins/axie-infinity/tokenomics
[4] Official Axi<area>e In<area>finity Whitepaper:
https://whitepaper.axieinfinity.com/axs/allocations-and-unlock/private-sale

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<div>Author:**1token.**
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
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