DPAD’s YCombinator accelerator program hosts 11 projects and this blog is an abridged version of the 12 sessions with the project teams delivered by Agresh Singh — one of the top Executives at Coinstore who is vast at VCs networking for Web3 startups. According to Agresh, Venture capital (VC) funding in the Web3 space has been growing rapidly in recent years, fueled by the increasing interest and adoption of decentralized technologies and cryptocurrencies. Web3 refers to a new generation of internet technologies that are built on decentralized, blockchain-based systems, allowing for increased transparency, security, and control for users.
Some of the main areas of Web3 that have been attracting VC investment include:
- Decentralized finance (DeFi): DeFi refers to a range of financial applications and services that operate on blockchain-based systems, allowing for peer-to-peer transactions, lending, and other financial activities. DeFi has been a major focus of VC funding in the Web3 space, with billions of dollars invested in various projects and platforms.
- Non-fungible tokens (NFTs): NFTs are unique digital assets that are stored on a blockchain, allowing for ownership and provenance to be easily verified. NFTs have exploded in popularity in recent years, with VC funding pouring into projects and platforms that enable the creation, buying, and selling of these assets.
- Infrastructure and development tools: As the Web3 space continues to expand, there is a growing need for infrastructure and development tools to support new projects and applications. VC funding has been directed towards startups working on blockchain infrastructure, developer tools, and other foundational technologies that will help drive the growth of Web3.
VC Fund Landscape
According to Crunchbase, funding to VC-backed Web3 startups was highest in 2021, recording approximately $28 billion in total investment. The largest rounds of 2022 were;
- ConsenSys, a Brooklyn-based blockchain startup, that locked up a $450 million round at a valuation of over $7 billion in March led by ParaFi Capital, four months after its $200 million Series C. ConsenSys develops protocols software that runs on the Ethereum network and allows developers and enterprises to build on Web3.
- India-based Polygon Technology, a scaling platform for the Ethereum blockchain, closed $450 million round in February led by Sequoia Capital India at a reported $13 billion valuation.
- Yuga Labs, a Miami-based blockchain company, that closed a $450 million seed round led by a16z crypto in March at a valuation of $4 billion.
- Boston-based Internet finance firm Circle Internet Financial raised a $400 million private equity round from BlackRock, Fidelity Management and Research, and Marshall Wace and Fin Capital in April.
Other notable examples include; Solana, which raised $314 million and Alchemy, a blockchain infrastructure provider, which raised $250 million. This includes pre-seed, seed, and all venture funding. 2022 was the second year, recording nearly $20 billion in total investment. 2018, 2019, and 2020 followed suit with $18 billion, $15 billion, and $10 billion in total investment from VC funding.
Early-Stage Investment Process
The early-stage investment process in VC funding typically involves the following steps:
- Pre-screening (decision making framework): This includes checking the team, identifying market and potential investment opportunities, examining the product and business model, ROI potential, round structure, and traction.
- Management meeting investment team: Once potential investment opportunities have been identified, the next step is to screen them to determine whether they meet the investment criteria. This may involve evaluating factors such as the market size, the team’s experience and track record, the competitive landscape, and the company’s financials.
- Commercial, operational, and legal due diligence: If a potential investment opportunity passes the initial screening process, the next step is to conduct due diligence. This involves a more in-depth analysis of the company’s operations, financials, legal and regulatory compliance, and intellectual property. Due diligence is typically performed by the VC firm’s investment team, and may also involve input from external advisors and experts.
- Management, presentation investment committee: Management and presentation investment committee reviews and makes decisions on investment proposals. This committee have the knowledge and expertise to evaluate investment opportunities, the potential risks and rewards, and expected return on investment and make informed decisions about where to allocate resources.
- Investment: If due diligence is successful and the investment opportunity is deemed attractive, the next step is to negotiate a term sheet with the startup. A term sheet is a non-binding agreement that outlines the key terms of the investment, such as the investment amount, valuation, equity stake, and any special terms or conditions. Once the term sheet is agreed upon, the final step is to complete the investment and closing process. This involves signing the definitive investment documents, transferring funds, and completing any required legal and regulatory filings.
Major Checklist for VCs
Here are the major questions most VCs look for before committing to funding;
- Is there a great management team?
- Is the market opportunity big?
- What positive early traction has the company achieved?
- Are the founders passionate and determined?
- Do the founders understand the financials and key metrics of their business?
- What are the potential risks to the business?
- Why is the company’s product great?
- How will my investment capital be used and what progress will be made with that capital?
- Is the expected valuation for the company realistic?
- Does the company have differentiated technology?
- What’s the company’s intellectual property?
- Is your legal formation clean and in compliance with applicable laws?
VC funding in the Web3 space is expected to continue to grow as decentralized technologies and applications become more mainstream and widespread. To get VC funding for your project, you must go through the checklist explained above to ensure your business has what it takes to kick off.