VC’s Rapidly Growing Interest in Web3 – But Why?
Posted On: 04 Sep 2023
You know you’re investing in the right industry when you see world’s biggest players making substantial moves in it.
Numbers never lie and the amount of cash various venture capitalists are pouring into web 3 are over the roof. Reports show that venture capitalist firms had poured in around $33 billion in various blockchain and crypto startups in 2021.
Expert forecasts show that these investment figures are highly likely to have a 100% increase by the end of 2022.
Just the global VC funding in the NFT startups in 2021 crossed over a staggering $4.5 billion.
(Source: Statista)
That said, makes me curious about why these players are pouring too much into this new space. And, after substantial research, I’ve come to a conclusion that there are 5 reasons for the increasing interest of venture capitalists in the web3 space.
Massive ROIs
Data shows that investing in web3 space has proven to be more lucrative for investors. In 2021, the market cap was seen to have increased as much as 200%.
Bitcoin was offering a staggering return of 400%, whereas ETH stayed close to 60% returns. Various crypto currencies have been observed to be offering mind blowing returns such as Solana, that went up to around 11000%.
NFTs also share the same explosive growth as the crypto space. With a massive year on year growth of 21000% in 2021 made the market go up to an estimated $40 Billion. Experts are now valuing the NFT market and traditional art market at the same level.
Early movers in certain successful NFT projects, such as Bored Ape Yacht Club, CryptoPunks, Azuki and Doodles, have even enjoyed returns more than 10 times of their initial mint prices within a year.
Exploring other sectors other than crypto currencies and NFTs, the DeFi sector has also shown exponential growth over the past two years. Admittedly, as of right now, the market cap is around $44 Billion however, back in 2020 this market was at around $20 Billion.
Within this two-year time frame, the market has been observed to go as high as $160 Billion (in 2021). Experts say that this sector, which is currently quite a low percentage as compared to the traditional finance market, may even grow as much as 100 times by the end of 2027.
One should keep in mind that there are always many in this space (similarly to new spaces that came before web 3), who’ve lost a substantial amount of their hard-earned money as well. However, when talking about venture capitalists, they tend to spread their investments in various projects, hedge their investments to minimize their losses and expect no more than a 30% return in a year. So, technically this is quite an opportunity for venture capitalists today to enjoy exponential growth, provided they play their cards right.
Easy Liquidity
Normally in traditional financing, when a VC firm invests in a company, their investments are not likely to be easily liquidated. Venture Capitalists, after investing heavily in a business, will have to wait till the initial public offering (IPO), where they can offer their shares to the general public for sale.
Now, the process of a private company switching to a public company is a challenging one, not to mention quite time consuming as well. Therefore, in most cases, the venture capitalists need to have a certain level of holding power. Needless to say, traditional financing is not likely to be easily liquidated.
However, when you invest in web3 startups such as NFT projects, they can easily enter or exit the market without having to go through complex procedures and at a moment’s notice.
Moreover, investing in web3 means more transparency because all the data is stored on the blockchain, which can be accessed by the public at anytime from anywhere.
Passive Income Generation
With investment in web3 not only there is a high likelihood of capital gains but in fact, an increasing trend of investing in web3 by venture capitalists is also due to this space’s capability of becoming an amazing source of passive income.
Now, there are a number of ways through which venture capitalists can generate a sizeable stream of passive income from the web3 space.
One of the most well-known ways of generating passive income in this space is by staking your NFTs, which allows you to gain rewards in the form of tokens, that can be later exchanged for fiat currency.
Another way to generate passive income is through yield farming. The way it works is that you first stake your NFTs on the blockchain network. Against these stakes, you are rewarded with tokens, which can be both traded in return for fiat currency as well as re-staked for earning further rewards.
Moreover, you can also create a pool, where you can merge your tokens with fiat currency, which results in rewards as well.
Confusing right?
Well, to put it simply, by creating a pool, you are offering an exchange service (exchanging tokens for fiat currencies) to everyone else on the blockchain network.
Now, the rewards, in most cases, are quite tempting.
Firstly, the rewards are distributed on a daily basis rather than annually (in case of receiving dividends). And secondly, the rewards can range from a 2% return to even 1000% return, depending on the level of risk of the project you’re investing in.
Thus, venture capitalists have the opportunity to generate highly lucrative streams of passive income before they liquidate their investments. This motivates them to keep holding their tokens or commit to the project until it’s successful.
Highly Capital Efficient
Innovations in technology have helped companies gain higher revenues/profits with minimum investments. We have examples for this happening in every era. Whenever a revolutionizing technology comes forward, the businesses investing in the new space tend to get higher returns against their capital or the resources spent.
One of the best ways to understand this is to look at Netflix. Here we have a company, that achieves way more with only a couple of thousand employees and is valued at over $100 billion in 2022. Whereas, if you look at its counterpart Blockbuster, a company that followed a brick-and-mortar business model, is only achieving a fraction of what Netflix is achieving. Even though Blockbuster employs more than 50000 employees but the best valuation it got was $5 billion.
Same is the case when you compare businesses operating in web2 against companies or entrepreneurs operating in web3. You can see a massive decline in customer acquisition costs and marketing expenses in web3.
The difference here is about the people in the space. People operating in web3 are passionate and genuinely love what they do. Moreover, someone who loves what they do and is blended tightly in a community is highly likely to influence others with word of mouth.
Whereas most businesses in web2 are spending millions in marketing and sales just to acquire customers. With such expenses, a company operating in web2 requires larger amounts of seed money. Whereas, an entrepreneur operating in web3 can easily bootstrap through the rewards and passive income they are generating from their tokens. However, it’s only possible if the entrepreneur is playing his cards right, in the sense that it is only possible if the community is standing behind the project.
That said, investing in web3 carries great risk too however, the rewards are likely to be much higher than as compared to what you can receive in web2, resulting in venture capitalists rising interests in pouring money into the new space.
Lowest Point on the S-Curve
Web3 is a new and unexplored territory. Undoubtedly, these are exciting times however, this is also a time where one has to be cautious.
Experts view web3 to have exponential year on year growth over the next decade to make this space a trillion-dollar industry.
Even with all the criticism and skepticism web3 is facing, giants like JPMorgan and a few others are known to invest in research divisions to learn more about web3. Needless to say, these big players understand that this space is still in its early days and want to capitalize as much as they can on this opportunity.
Being early movers in this rapidly growing industry can prove to be an opportunity that simply cannot be missed, as the industry is still in its infancy.
Wrapping up
I’ve been rambling on and on for quite some time now and I’m sure you want this to end. So, I’ll end this on this note: If you’re planning to get in on the web3 action (which is the right thing to do, considering that fortune always favors the bold) then you must tread carefully because you’re walking in an unexplored territory. Do your research, stay up-to-date and work on blending in the web3 community and things just might work in your favor.
