How to Participate in Web3 Startup Project Investment: Advantages, Paths, and New Exploration

06/03/2023·1years ago

With the thriving development of the Web3 industry, more and more startup projects are emerging. Participating in the early development of these projects often leads to excess returns. However, how to select projects and find the right investment path is of paramount importance for investors.

I. Web3 Startup Project Investment and Excess Returns

1.1 Understanding Web3 Startup Project Investment

The "Web3 startup project investment" in this article refers to investors seeking outstanding, high-growth, and untapped web3 founding projects, investing in the projects to obtain corresponding tokens, mainly for equity investment, helping and promoting the continuous development of the project, and expecting the market value of the project's tokens to continuously increase. From the perspective of the project, Web3 startup project investment brings reputation, resources, experience, and strong capital to the project, providing value-added services in the Web 3.0 ecosystem. From the perspective of investors, successful Web3 startup project investment can bring huge returns, and the astonishing investment return rate has attracted a considerable number of investors.

In a broad sense, Web3 startup project investment covers equity investments in various stages of Web3 projects before the public market trading of tokens (including CEX and DEX), including investments in projects at the seed stage, startup stage, development stage, expansion stage, and mature stage. Investment strategies can be divided into venture capital strategies, development investment strategies, acquisition investment strategies, mezzanine investment strategies, and revitalization investment strategies according to the investment stage.

Figure 1. Stages of Web3 Startup Project Investment

Source: https://medium.com/swlh/raising-seed-capital-heres-your-2018-guide-on-how-to-do-it-successfully-c73c42530598

1.2 Unique Attractiveness of Web3 Startup Project Investment

  1. Investment in Web3 industry startup projects is expected to generate better returns compared to other asset categories. This is closely related to the characteristics of investment in Web3 industry startup projects. Compared to secondary market trading of tokens, the low liquidity of tokens in startup projects implies a very high liquidity premium. In addition, the risks in terms of scale, leverage, and valuation are very different from those of mature and secondary market projects, which also increase the other risk premiums associated with these assets. The different durations, scales, and risks determine that high-quality investment in Web3 industry startup projects is expected to bring higher returns. The future development of Web3 industry startup projects does face great uncertainty, and the earlier the project, the greater the risk. Investing in Web3 startup projects involves holding tokens with large fluctuations and a longer investment horizon, so Web3 startup project investment is generally considered to be high-risk, high-return investment.

Investing in Web3 startup projects can involve investing in multiple projects at the same time. While the success rate of individual projects may be low, the odds of success after investment are very high. Therefore, evaluating and participating in a large number of projects is necessary to balance the odds and win rates to ensure long-term overall returns. From this perspective, although investing in startup projects involves high individual project risks, the risks of Web3 startup project investment can be managed, making it possible to achieve low-risk, high-return investment.

  1. Investment in Web3 industry startup projects can expand investment targets and provide opportunities for investors to invest in projects that have not issued tokens and obtain excess returns. The extensive growth of many projects brings broad development space, and by carefully selecting and assisting these Web3 projects to grow, more attractive alpha returns can be expected.

  2. Risk diversification. Investment in Web3 industry startup projects has relatively unique risk-return characteristics, with weak correlations with other assets and less susceptibility to daily market fluctuations, making it a high-quality choice for diversified investment. For large cryptocurrency investment institutions or high-net-worth clients, due to the large amount of managed funds, a highly diversified investment is particularly necessary. Web3 industry startup project investment has become an important part of the portfolio as the most popular alternative investment, providing investors with more choices in long-term investment, strategic allocation, and diversified investment. Web3 startup project investment plays an increasingly significant role in asset allocation and is expected to accelerate its development in the future.

1.3 Rapid Growth of Web3 Startup Project Investment

Web3 as the next generation of the internet has become a consensus. After decades of development, the embryonic form of the Web3 ecosystem has emerged, forming a development pattern with Bitcoin as the value consensus, Ethereum as the main underlying infrastructure, and multiple chains coexisting with comprehensive application deployment. According to the World Economic Forum, the Web3 system will leverage $82.7 trillion in value in the global economy. Currently, over 200 million people own Bitcoin and other digital assets, and it is estimated that this number may reach 400 million by 2025, with Web3 users reaching one billion by 2031. Large cryptocurrency investment institutions are particularly enthusiastic about investing in Web3 industry startup projects, and the rise of investment in Web3 industry startup projects has brought far greater returns than other asset categories. In recent years, VCs (venture capitalists) have been actively entering the Web3 field, with emerging institutions and traditional giants rushing in. The influx into Web3 can even be described as crazy. In addition to native crypto venture capital firms such as a16z, Paradigm, Dragonfly Capital, and Coinbase Ventures, Sequoia Capital, Goldman Sachs, IDG, Hillhouse, and Lightspeed are also racing to stake their claims.

Despite multiple collapses and the ensuing FUD (fear, uncertainty, and doubt) tsunami in 2022, VC firms' enthusiasm for investing in Web3 and crypto startups has not diminished at all. According to Galaxy Research, in 2022, the investment amount in Web3 and crypto startups by VC firms was slightly higher than $30 billion in 2900 transactions, a figure very close to the $31 billion in 2021.

Figure 3. Increase in Scale and Number of Web3 Startup Project Investments

Source: Galaxy Research

The rapid growth in the number and scale of investments in Web3 startup companies is due to the performance expectations of investments in Web3 and crypto startups. According to data from Cambridge Associates, as of the end of 2021, the average investment return of funds raised by VCs in 2018 was about 1.7 times. A16z, a top Web3 investment firm, established in 2018 with a fund size of $300 million, realized some returns during the 2021 crypto bull market and has already returned three times the original size of the fund to LPs. According to authoritative estimates, the return on this fund could be as high as 10 times.

Figure 4. a16z's Investment in Crypto Sector Enterprises

Source: "China Entrepreneur"

II. Professional Threshold of Web3 Startup Project Investment

While Web3 startup project investment has enormous advantages, it also presents some unique investment difficulties. The first is the complexity of investment professionalism and strategy execution; the second is the immaturity of data and information availability compared to mature projects; and the third is the need to adjust investment models and frameworks according to the characteristics of Web3 startup project investment when adding it to the asset allocation portfolio, which many investors lack the ability to do.

Therefore, Web3 startup project investment is not suitable for all investors. To achieve excellent returns from Web3 startup project investment, not only do investors need to consider risk tolerance and liquidity needs, but they also need professional investment capabilities. The following briefly introduces the Web3 startup project investment process.

2.1 Web3 Startup Project Investment Process

Web3 startup project investment consists of four stages: 1) project search and evaluation; 2) investment decision; 3) investment management; 4) investment exit. Each stage involves many operational practices, such as the first stage of project search and evaluation, which includes specific aspects such as project sources, initial project screening, due diligence, and valuation. Each project in this process can be further elaborated, which will be continuously expanded in later articles.

2.2 Risks of Web3 Startup Project Investment

Figure 5. Main Risks Faced by Web3 Startup Project Investment

2.3 Valuation of Web3 Startup Projects

When investing in Web3 startup projects, it is necessary to determine information such as the proportion of tokens after investment, the number of tokens, and the value of each token. Web3 startup projects are a new type of company and require new valuation methods. Valuing the value of crypto startups is more of an art than a science, and valuing crypto startups is currently absolutely imprecise. Valuation of Web3 startup projects relies on speculation and estimation, meaning that investors do not have a single, universally accepted analysis method. We recommend referring to several traditional venture capital valuation methods to understand the value of Web3 startup projects.

The use of valuation methods depends on the stage of the project and the corresponding data points of the market or the Web3 industry. Common methods include: 1) cost replication method; 2) scorecard valuation method; 3) Dave Berkus's valuation method; 4) venture capital valuation method; 5) discounted cash flow method (DCF); 6) valuation multiples.

2.4 Investment Methods for Web3 Startup Projects

According to the current development status of Web3 startup project investment, it can be divided into direct investment and indirect investment. Direct investment involves participating in the private sale of projects to raise funds, which can be considered by high-net-worth individuals and institutions. Indirect investment mainly includes participating in public auctions of projects for investment, or raising funds through VC DAOs and CEFI VC institutions. Public auction fundraising is conducted through public sales, targeting the general public, and is characterized by openness, small amounts, and mass appeal. Web3 public auction fundraising forms include IDO, INO, IGO, and others.

Reference: "Web3 Risk Investment and DAO Community Prosperity Model"

Note: Decentralized protocols for token public auctions mostly use auction methods to issue tokens. The auction methods mainly include fixed exchange rate auctions, Dutch auctions, batch auctions, and others.

From the perspective of investment methods, apart from a few experienced crypto investors choosing direct investment projects, most investors will choose to invest in Web3 startup projects through VC DAOs or platforms such as IDO and INO. The core reason is that investment in Web3 startup projects requires a large amount of professional active management, so finding high-level investment managers is crucial. Statistics have found that managers with outstanding abilities and better past performance are indeed more likely to increase the value of Web3 projects they invest in, bringing significant and sustainable performance to investors. This is why investors always strive to invest in VC DAOs or platforms such as IDO and INO with good past performance. The threshold requirements for VC DAOs and CEFI VC institutions are relatively high, and their organizational form is similar to traditional private equity investment funds, not fully leveraging the advantages of decentralization. Therefore, we recommend that investors participate in Web3 startup project investment through decentralized public auctions. We recommend a decentralized platform for indirect investment in Web3 startup projects: veDAO.

III. veDAO: A New Paradigm for Web3 Investment and Financing

veDAO: Using DAO to bring human intelligence and decision-making capabilities as a new productivity to the world of blockchain, incentivizing the collective intelligence of the human community to continue making the right decisions. veDAO is a community created by a group of Web3 startup project investment experts to screen and manage opportunities for yield farming through a decentralized autonomous organization (DAO), with the vision of providing a one-stop Web3 startup project investment service. By using game theory, veDAO has built a market that benefits Web3 startup projects, DAO communities, and investors, with the community screening the best Web3 startup projects for investors, solving the problem of information asymmetry in the Web3 venture capital field. The community provides the best Web3 venture capital strategy, solving the core issue of productivity in investment and DAO.

Transparent and efficient operation mechanism: veDAO fully combines the collective wisdom of the masses and the insights of elite individuals through segmented DAO autonomous methods, making the capabilities of elite investors an integral part of the DAO to build a truly collective intelligence brain. It ensures the impartiality, objectivity, and professionalism of project judgment, creating a truly new paradigm for Web3 investment and financing.

Figure 6. veDAO Operation Mechanism

veDAO provides different types of rewards for users in different roles: in addition to meeting the needs of fundraisers and investors, Pledging users can receive mining income, Voters can receive voting income, Referees can receive referral income and a 1% share of the fundraising amount, and Business managers can receive a 1% share of the fundraising amount, and more.

veDAO ensures the effective operation of voting governance through a system of rewards and penalties, allowing elite individuals to stand out and receive better governance income. The voting weight of voters is determined by the amount of veDAO and the voting weight, and the voting weight is bound to the voter's wallet address and cannot be transferred. Each voter's initial voting weight is the same, and each correct vote increases the voting weight, while each incorrect vote decreases the voting weight. As more elite individuals emerge, veDAO will allow voters to delegate their voting rights to agents in the future. The voter's voting rights are delegated to agents, and only Damoclesers can accept voter delegations.

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