What investors need to know before investing money in a Web3 startup

As venture capitalists, we are in the business of investing capital in early stage businesses. Fortunately, or unfortunately, the word “Web3” is included in almost every pitch deck our team has evaluated over the past few months.

But what does the word mean? A good starting point for understanding Web3 is to understand what happened before. Web 1.0 refers to the first version of the Internet, which made its debut in the 1990s. It consisted of a collection of links and pages that could be consumed, with little interaction or input from users.

This was followed by Web 2.0, which not only enabled users to consume content but also interact and create their own. Today’s biggest technology companies, Meta, Amazon, Netflix, Google, and many others have built formidable businesses behind Web 2.0, primarily leveraging user data for monetization.

This brings us to Web3, which can be briefly described by three important elements: decentralization, blockchain and ownership. The Web3 platform does not rely on centralized servers but on a peer-to-peer network where multiple copies of data are stored. This data is then organized through protocols to ensure consistent availability. The second element, the blockchain, ensures that content is immutable, verifiable and distributed. Finally, unlike Web 2.0, Web3 ensures that users, not intermediary platforms, own and control their data.

We must remember that Web3 is still nascent, has been around for two years, whereas Web 2.0 has taken 15-20 years to advance our lives. Nevertheless, these challenges are not isolated to the Indian startup ecosystem, but face the world at large. India has rarely been at the forefront of innovation. Web3 has provided equal opportunity to all for the first time.

As for investors, this phase parallels the ’90s and the dot-com era. The Internet was just about to go and Silicon Valley investors were investing in any company that had ‘.com’ next to its name. Does everyone understand what they are investing in? Maybe not. But if they didn’t support visionaries like Jeff Bezos who wanted to sell books via the Internet, we wouldn’t have the e-commerce and democratic distribution that have enabled D2C brands to flourish.

Startups would not have been able to scale their products and services without AWS and would have had to incur higher capital expenditures, building server farms as they grew. A lot of things had to be done right, and they did, for Amazon to be what it is today. Jeff Bezos was the right entrepreneur at the right time, in the right place.

The Indian startup ecosystem is at a similar juncture with Web3. We have visionary entrepreneurs with access to arguably the world’s largest tech talent pool, and investors waiting to get on the rocket.

So, what’s the catch? Well, as in the dot-com era, there will be winners and losers. Almost all Internet businesses had been wiped out by October 2002, the trough where the NASDAQ Composite Index lost 78% of its value from its peak. VC funding dried up, valuations became wiser, and investors began to focus on cash flow once again.

We are confident that Web3 will also go through a similar phase. We believe that the key for entrepreneurs is to remain vigilant and focus on the right business model. As in the dot-com era, we will see many companies emerge and build their vision around Web3. Some will flourish, some will survive, and others will unfortunately fail.

So, if you are an investor looking to participate in this growth story, you can base your strategy on two basic principles of investing. The first is to choose the right jockeys and put your winners back on top. The second is to build the right team. Business models can pivot, market sizes can be influenced by a litany of external variables, but if the jockey is right, they can navigate any position.

Rajesh Sehgal is the Founder and Managing Partner of Equiminity Investments.