Investing in Web3

Transcript

thanks for all for attending today I think we're going to have a very exciting conversation so here we have Daryl from co-founder of tangent um will CIO of 100 Acre Ventures and Jason founding partner of foolish Ventures um so just kick us off maybe you guys could just give a brief introduction to what you guys are doing and how you guys are thinking about investing in webtree yeah thanks for that so my name is Daryl I am one of the co-founders of tangent which is a angel fan specializing in really early stage precedo seed startups in web 3. uh previously I was a principal from Defiance capital and started tangent three months ago that means will founder of 100 Acre

Ventures uh we do a lot of investing in D5 D5 Primitives nft Primitives um and more recently a lot more in the kind of gaming and broader infrastructure space and I'm Jason I founded coleus uh last year in September we are a Apec founder and project Focus weft refund and uh a lot of times we spent on the application layer as well as the info and tooling SAS layer at the bottom awesome thank you for that um I think to kick us off we all have everyone here has very deep expertise in investing in web free I'd like to start with exploring the relationship between a investor and the Builder and web tree so in your opinion

um how do you think having the right investor on board is important to web3 startups and what do you think are the best ways investors can add value to their portfolio projects yeah I guess I go first all right um so I think it makes a wool of the difference right who do you have in your corner especially at the early stage is probably one of the most important decisions you can make um the right investor can make or really set you back um as a protocol founder so I I think one of the most common ways that writer investors can push you forward is really be you know in the trenches with you pushing you forward be it you know pushing BD relationships expanding the network uh

giving user feedback try and sort of fine-tuning pictures to other investors or you know fine-tuning the strategy and how you go to market I think that's super important and the right investors at the early stage can really make a big difference yeah I certainly Echo all that I mean for us it's I would say it's a philosophy but we've tended to only invest in things where we can add a lot of value ourselves as investors in the sense that we actually use the products or have some of their way of providing expertise so again we've invested in a lot of D5 Primitives but we also run a liquid hedge fund that in turn uses those same D5 Primitives so there's a crows like Loop in terms of the feedback we give because we're using those

products um and it's been pretty consistent across you know all the Investments that we've made I think likewise we have a pretty large team from an operational perspective and we've lent that to you know again the startups that we've invested in which is an area that they shouldn't be dedicating resources they don't think themselves early on and they can again Outsource that so either through our own again usage of the product and expertise or other operational resources is ways that we've tried to create synergies and add value which again it I think helps create kind of a circular Loop in terms of making them more successful and of course into making ourselves more successful so yeah I think um I think Will and Daryl are you know roll up their sleeves type of investors and I think we see that

with a lot of web refunds in the space um I think further to that if I were to add um a lot of the products in web3 are very financially oriented in the sense that future expectation on the assets that they are selling or creating um really dictate the evaluation of the premium of these products so when it comes to the earlier stages having the right or quote-unquote reputable investors on board uh could really help the trust and the premium of the financial product so I think that's that's often missed but quite important Point um the other two things I would highlight is that when you compare a web 3 fund versus a non-west related fund um when it comes to the native

connectivity with other folks within the ecosystem at the earliest level like hey do you know another weapery protocol or do you know this founder that's just building a project I've often found what created funds to be uh much faster and much more well connected when it comes to making that introduction uh that's part one uh and then I think part two for for a lot of sort of these sweat refunds um they have seen a lot of mistakes that other token native projects have committed so it's not necessarily showing what the projects can and cannot do it's more so hey I've seen an example like this before that really blew up in their face and here's the reason why and I think Founders oftentimes value those two type of things very fascinating um so we briefly touched on this as you

guys were introducing um how you think investors can interact with Builders um what are some sectors and areas within crypto and web tree that you think are generally being underfunded today and what areas are you guys excited about well I guess underfunded is a pretty rare thing to see in crypto I think most crypto verticals have plenty of capital to uh to be deployed as seen by you know the countless of billion dollar Venture funds that were raised in the last 18 months so underfunded is pretty challenging but I think one vertical I would say I'm pretty interested in is consumer facing super apps I think that is

um sort of a narrative that I think over time we will see grow simply because the two most important things for web3 protocols is number one smart contract security and number two uh sort of your sort of market chain like market dominance over time and so super apps basically in order for you to be a super app you usually have some sort of lindiness by producing an existing product already and over time as people get more trusted and trust your protocol more you can begin offering alternative solutions that complement your original your original product so for example I think a D5 super app makes a lot of

sense because number one you basically need to clear the regulatory hurdle once with you know the respective regulatory parties and number two once people start trusting your brand for example uh then you know you can start constelling them let's say borrow Land Services Dex trading or petrol trading all on the same platform because you know once people are comfortable with their brand they're okay trading um other products as opposed to right now how the market is and how fermented and fragmented it is where you have to go to a different site every time you want to use a different Financial product I think that causes quite a bit of friction opens up many different attack vectors uh and just in generally has resulted in you know D5 what is in

what we see today where there's just a lot of friction a lot of hesitation to use the products for fear of you know being exploited or you know some of them so we have a pretty broad mandate in terms of how early stage or late stage companies we invest in I'd say one thing that we've been focused on recently has been less on investing in you know the next decks the next primitive or we've seen you know hundreds of iterations of some of these things and more so on companies that are putting all that together in a more like you know tangible you know product um so again kind of two areas we focused recently one's a developer platform for game studios a kind of create man and secure your in-game economy apparently there's a ton of hype around on-chain

games there's a ton of hyper on nfts um the difference here is providing this technology to existing game studios such that they can kind of pull a few small things out of it that help enhance you know the game Loops the economics of the game and enhance existing video games as opposed to creating you know blockchain based game um likewise we've invested in um called infrastructure platform that makes it makes it easier for full stack developers to incorporate certain web 3 protocols so if you want to use you know Roe or file a coin for storage instead of an S3 bucket it gives the developer the tools to do that in a very simplistic way so kind of Bridging the Gap between web 2 and web 3 building products and tops of these Primitives versus just you know at the very like kind of most most nuanced base layer

um it's been a big area of focus for us because really that's kind of where we see again the next wave of capital coming in the next wave of adoption is business is being built on top of the things versus I think kind of the 100th iteration of elite hello I I code a 100x iteration part which is let's just you know Fork you know swap on the latest layer one um I I want to touch on Daryl's point a little more because I I he basically set what I have in mind which is um consumer type applications um I think by our account which is by no means comprehensive there are probably three to five million unique daily active users that are touching what

three apps on chain today um that is a probably tier two sort of web 2 app if you really think about it um I think the infrastructure in this space when it comes to layer one throughput storage um and sort of Fiat on off ramp and kycml have just gotten to a decent place where we can now start thinking about increasing that 35 million by 10 to 100x by extension I think the easiest thing to do that like Daryl said would be a consumer type application so that but we feel like there are a lot of people who are potentially sort of building shovels but there are not enough gold diggers so I personally am very eager to sort of back and find Founders who are creating like a fitness app like Steppin or

creating a sort of uh uh you know browse to earn type web browser or anything that is potentially already existing or doesn't exist in web 2 today that could just have you know another million Dau into the space and in extension to that I think the mobile experience in crypto today is still horrendous I think you know you should not be jumping around to another app called metamask to like validate your transaction um I think anything that smooth out the experience and potentially providing a second Factor authentication type service could be quite useful um I haven't seen many teams building that I think that's well for funding um and the last thing is potentially not on so much the application or their product side but at least in my mind

crypto itself is somewhat more politics and framework oriented it's aside from technology is incentive design it's aligning people's sort of you know profits in the right way um because everybody was sort of like really busy building a product they can't or they don't have time to think through things from a first you know principle perspective and just end up taking the design from other token projects why should we have a linear or exponential type inflation curve like Bitcoin it doesn't have to be why can't we incentivize users that used to be stakeholders but no longer are and why are we still paying them so I think sort of aligning incentive type of token designs is sort of a frontier that not but not not a lot of people really

tackled yet and I don't know how you fund that but you know if the teams exhibit those characteristics we're also happy to throw in a check as well yeah and just just to add on to to what what folios are saying um I think by and large if you're trying to reach the next 100 million daus in web 3 you probably need some form of third-party custodial solution for tokens I I don't believe that 99 of the population will be able to you know comprehensively self-custody their assets on chain I think that's that's a bridge too far for for for most people and even now like for a lot of web 3 users people are consistently being concerned about you know getting exploited getting hacked this is just a

user friction Point uh a friction user point that is way too painful right now in order to onboard the next you know 1000 million users so a third-party custodial application some form of wallet I think it's needed um we've seen some attempts at it so far nothing really pushing the boundaries yet so keeping eyes open yeah there are definitely a lot of things to be built up in order to enhance the user experience of people coming into web3 and interacting within webtree itself as you said Demand aggregators on the consumer side tooling for developers to easily plug into web3 and all these ux improvements that can be done um I'd like to move move on a bit on to

um from the perspective of a Founder who is looking to come into web3 the ecosystem that they choose to develop on the platform they choose to develop on tends to be very crucial to the path they take to success if they succeed how would you advise projects in terms of choosing this ecosystem choosing the initial Partners to work with well I think it's very nuanced a lot of it has to do with the Founder's background who they trust who they know how much they know about the respective ecosystems if you're looking at a normal web 2 founder looking to get into web 3 chances are you're not going to build on

some you know the 10th most popular L1 just to like sort of have it as a USP right you probably want to start on an eve on an evm based chain or ethereum for example and get going from there but however if you you know you are very deeply knowledgeable about you know certain Cosmo space applications maybe you know you've had a lot of dealings with solana-based developers so far you know your expertise comes in the form of you know being able to write in Rust then you know a different set of ecosystems open up to you so it's really nuanced um I'd say that in general I recommend most applications to build on evm so far that may change and as more evmp we just

open up that will open you up to different ecosystems as well yeah I'll take it I'll give a different take on the same question I mean I think if I was advising a Founder on that I'd I would advise them to be kind of as agnostic as possible I think you could very well start one place then end up on another game in the future based on your on your needs and I think starting with a chain that has small Network effects or is evm compatible I think that all makes sense I mean the two companies I mentioned previously interesting enough what part of their goal is actually to de-risk that for the the kind of end users they're more like B2B products let's just use this gaming developer platform for example right like the basic idea is okay I want to store in-game assets or an in-game

currency on you know a blockchain but I don't know which one that is and so actually what they're trying to solve for is game studios not having to make that decision it's like you give us the optionality to use a blockchain as a data store to have a Marketplace etc etc but I don't want to choose that now in part because we don't know who the winner is whether it's Solana or ethereum or the next other 12l ones that will come out over the next you know two years um so again we most of the things that we've invested recently are actually trying to remove that decision from the End customer which is again different from the original question but again I agree with much of your original suggestions on if it's if you had to pick a chain I again I would think about

it as being as agnostic as possible yeah I I try to agree I don't have that much more to add I think I mean if you know solidity and you don't know rust I mean it's probably pretty dumb to build on Solana I don't know um I guess one thing I would say is I wouldn't I would be cautious of if you have an investor in your cab table who's pushing you to build on a specific chain because they themselves have invested in that chain I would just be cognizant of the um alignment of interest if you will and try to take a kind of zoom out and think you know what is the best what's the best product or a chain to build on and why and be as subjective as you can and also definitely talk to us many Foundation as possible because I there

are certain ones are very well funded um they are uh sometimes getting their check means more connectivity means more support it means more connections and also there are just a little looser in terms of funding you know they would give you 200k 500k no problem you know when you're supporting the ecosystem and uh alongside with that I think I've seen many Founders um I I think when you're copying onto L1 there are uh VCS that are very closely associated with those L ones and oftentimes if you're building a support type project uh that helps the ecosystem uh I think getting funding from those specific VCS might also get easier um I guess fundraising is never not part of a discussion but you know it's kind

of worth bringing up I I would add as well that uh one thing to be wary of is hopping on to the next L1 that seems to be all the rage yeah at this point in time I think it's very very dangerous if let's say right now you know ecosystem a is you know the most popular because maybe they just launched their conference they've got a lot of hype going on it the token price is pumping for example and then you think okay then you know maybe it's a good idea to launch on this token because it's getting a lot of hype usually it doesn't last and you know when you're building something for you know a three to five year time Horizon you want to pick something with you know a bit more stability it is ecosystem a like intended the the a is that intended or

is that no no it's a pure example yeah don't read into it no okay okay yeah I think a very common theme throughout the this conversation has been um how path dependent um the the building in web 3 is like once you launch a token in a certain area um if you screw up the inflation too much in the initial days you put your token in the wrong hands it it might create um second order negative effects as to how your product develops um so I'm curious to hear all of your takes on I guess the way token elements should be conducted like just broad principles that you think Founders should adhere to or maybe some

pointed view as to what Founders are doing wrong when thinking about tokenomics I guess my first question is the product need a token because I think a lot of things you know we'll raise money through a token and you can kind of question whether a token is required so that would be my first question about token economics is a token or not um I'm probably the outlier within crypto Adventures of not wanting to see a token with every single investment that we make but because I think it's a very relevant question for a layer one and potentially some dapps but then again you start getting to a point whether I know this is not where you're taking the question but whether it's you know required or not oh I'll I'll jump in um I I agree that

not every project needs one I think um the cash flow that comes into a project you know well there's a security destination but if you exert through for the token probably can have value accrual um upon when a token is launched I think the team has to make a decision as to when the cash flow comes in does it go to equity or token and the decision to make a token part of it is also I think a lot of teams decided to do it is that oftentimes the risk premium that a token can capture in the public market comes way sooner and it comes at a much higher valuation than Equity would so you create a project you create a token five billion dollar valuation dump it make money you know and move on to the next

one um I think the one Pitfall I would if you were to go about with a token is um I think setting having a market price being set on your project on a token side uh drastically limits once maneuverability in terms of setting the valuation for your future fund raises uh OTC rounds uh when the company needs to sell treasury often happens at a sort of 30 to 70 discount to the then prevailing secondary market price so launch your token at a wrong time at the wrong price uh would basically mean potentially being shut out from the fundraising Market versus a project that's still private that's part one um the 200 points I can probably make is

that having a token as potentially incentive to the users when using your protocol uh could potentially drastically change the user profile um and I think there could be more designs that uh for example instead of earning a lot of money maybe capping it to just you know earning your money back for certain type of activities uh upon that kind of design I think the user profile becomes from moving from a pure user to something extremely rent seeking to maybe still a user but just kind of want a bit more money to be earned from using your product um and then the last thing and I think this is still a very much an experimentation is that you know you have to be really cognizant of um uh sort of forcing your your users

to come back and contribute to your projects after they have gotten a token if you sort of give them a bunch of tokens up front for what they've done and sort of allow them to just sit on the tokens and do nothing afterwards I don't think that's extremely healthy design so you just kind of be very cognizant of it when you're designing the inflation mechanism yeah and just to add um I think first and foremost the introduction of a token has to fundamentally improve the value proposition of the protocol if the token does nothing and sells it's just a speculative speculative vehicle for the protocol you know you probably shouldn't be launching at that time so number one it has to improve the user experience in some way it'd be it improving the security of the protocol for the decentralizing the protocol

improvising the user experience of the protocol for example uh the uh you know these are several examples of how it can be done the second thing is that I think a token if you do launch a token I have the view that the token should be the main vehicle where value approves and this is debatable because in a lot of exam real life examples today you have value accruing to both the token and the equity in you know perhaps not the fairest ways so I'm of the view that if you do launch a token 100 of the value should accrue to a token and your token holders should be able to receive Rewards or dividends as such right it should I think a token should be thought

of as a as an improvement to equity uh as sort of an ownership vehicle of whatever protocol that you're that your your uh you're building so these are the two things uh and lastly I think using tokens to bootstrap initial adoption of the protocol is very you have to be very measured with it because a lot of times you can fall for increased usage or increase activity for you of your protocol and perceive it as product Market fit whereas in reality it is just users farming your token and once that token incentive is gone your users are gone just like that so that's something

that has to be you know really thought of uh and this isn't to say that you shouldn't be using tokens to incentivize people but it should be done in a pretty pretty measured way and I think I think I think right now protocols have sort of understood this Playbook or this narrative to an extent and have been able to put out measures that consistently engage with the users and also give them you know a little carrot at the end of the line for them to continue engaging and just piggyback on your comment at Candy Raymore in terms of having a token that accrues value so if there's an option of this you know company this app Etc that value should accrue to the Token what's what's frustrating the space right now

is that there's this kind of like regulatory barrier that is always happening so like I think like open scene looks rare is a good example right where like looks rare as token actually I think it's a very clean token economics in the sense that you get your if you stake looks right you get your pro out of share revenue on the platform so it's actually a pure pass through of equity which to me is a very clean you know token design a lot of companies you know don't do it because then you're worried about looking like a security so they have an 8 on team they do it it's fine and then you have these other kind of like I won't say convoluted but these like workarounds like oh well the value of cruise to the treasury this is a governance token at some point in the

future we'll figure out how to get this governance away so there's these kind of like hurdles that people are navigating I think unfortunately because of Regulation that gets in the way of having a perfect alignment but I think where we all want this to go is exactly that you want that perfect alignment and there are cases of that out there and there's unfortunate cases where it's not aligned not because the team doesn't want to do that but just because of other you know hurdles in this case regulatory so awesome we talked we briefly talked about product Market fit um I think that area point was very uh was very crucial there um let's talk about founder product Market fit like in your opinion where do you see the most successful web tree Founders coming from where do you see

common themes between Founders you think uh will do better in the web 3 space I wouldn't say that they are noticeable common traits um specific to web3 I mean all successful Founders will have several you know common traits uh in in any startup right um but I think founder market fit is a pretty important aspect that we look at when investing um basically that question we're trying to answer is how does does this founder is he uniquely positioned to solve the problem that he's trying to solve right and and sort of we're hoping the answer is yes so that we can continue with the

investment uh but oftentimes you know you want to find people that are you have you know a particularly different history or track record with a particular problem or he has spent you know 10 15 years in you know web 2 trying to solve the same problem he's moving into work three right so are these guys you know experts in that particular field ready to solve that problem where no one else can I think that that is that is pretty important when you're trying to invest yeah I was gonna say I think people have experience in the industry that they're trying to disrupt or their web 2 Founders that have kind of ramped up their knowledge of web3 and have found a way to kind of apply that to solve any problem is is where we find the best finders I I remember going to this like

D5 Meetup in San Francisco 2017-ish it's talking about over collateralized loans everything's overcloud realized like what if we had underclaughterilized loans it's like you realize the entire Financial system works with under Cloud as lending so there's like these like novel ideas that this like group of again very like ambitious entrepreneurs were talking about and like you just realize how about if you just bring a couple people who have spent their if you pair that together people have spent their time in that industry whatever you're trying to disrupt I think it's a good combo and sometimes I see the overzealous entrepreneur who has no industry no experience an issue they're trying to disrupt which is also a there's some there's some benefit in that but I think pairing with someone who has that Legacy experience as well is not a bad thing to do and uh the best

teams that we've invested in if you'll have kind of a pairing of both I Echo that point a lot I think I I I'm I don't know I I usually go into meetings if I've looked at their pitch deck which you know sometimes happens um uh I I usually will have problem about that specific domain which is you know oh you must have thought about ABCD issues and the best type of Founders I've come across is usually when I raise the question uh and I I hope I myself have kind of an answer they just absolutely crush me they're like oh wait I've already thought about it and it might not have the solution but they're like oh wait I've already thought about it and I'm like three step ahead of you and by the way you have to find a question wrong and here's how I really

think about this um those to me tend to be the best founder staff from the grinding very hard and having them expertise this sort of that the ones I could improve on is like oh I actually haven't thought of that issue and I'm like well I'm not an expert like you should be the expert how come you haven't thought about this and you're like building this business shouldn't be the first thing that you ask um and I oftentimes found like the first the first group tend to be a bit more successful great uh you have anything to add well awesome um I'd like to just have one final question what is your number one fundraising tip for people looking to build a web tree you're supposed to cancel the questions

ahead of time oh it doesn't have to be fundraising it can be what is your number one tip raise enough but not too much um I think you need I think the the goal if you're trying to raise at least if your first round uh two to three years worth of Runway uh if you raise because it you're in the height of the bull market and you raise the maximum you can raise be simply because you can chances are after that incentives get a lot uh more muted um when you have a hundred million dollars in the bank for no reason all of a sudden you know we see Founders start doing things that they really shouldn't be doing so yeah yeah it's a fine line of staying hungry

versus having some Reserve if you're going to go into a market where it's going to be difficult to raise um this this probably goes without saying but I think you should have a clear explanation of why you're raising or like how much you're raising and why and it's fine if you have like a buffer because we're worried about being in two years but I've talked to a handful of teams where they basically pick a number because they saw two of their peers have a similar number and it's like an ego type thing or it's a this is where the market's at and to me that's just not a very good answer so again I think you can you can skin the cat all different ways but you should be pretty clear as to what you're raising how much you're raising and why and what's the

objections of that money um which again seems kind of self-explanatory but and I would say ask for a recommendation as your referrals to and pick your VCS carefully when you uh when you go to market fantastic those were great answers and uh we um thank you so much for attending this conversation and uh we hope to see you guys around thank you [Applause]