The current crypto market downturn, which saw the prices of popular tokens such as Bitcoin and Ether sliding to just around a third of their respective all-time highs set last year, also cast some doubts on the long-term potential of Web3 investments. Investors are now understandably more cautious after witnessing the recent upheavals in the digital assets markets.
The marketwide decline of token prices caused the total capitalization of the crypto market to decline from $3 trillion in November 2021 to just around $1 trillion by mid-2022. Adding to the growing investor unease is the UST/Luna crash, the temporary suspension of withdrawal from the crypto lender Celsius, and the insolvency of the Singapore-based cryptocurrency hedge fund Three Arrow Capital (3AC).
Despite these concerning developments, many are still on board with Web3 investments. Amid the downturns in crypto, blockchain remains to be an attractive technology that creates many advantages for investing and finance. Its on-chain transparency, in particular, can’t be replicated by traditional finance. Investors, however, should exercise due diligence when planning and considering any investment in the Web3 space. Discussed below are fundamental factors to be taken into account when investigating and picking investment opportunities.
Product, service, or technology
Some may say that investing is just like gambling, wherein investors place their bets on companies. It does not have to be the case, though. In investing in Web3 companies, there are opportunities to objectively and meticulously examine and project the success of a company, mainly by scrutinizing its product, service, or technology.
Companies that focus on essential products and services are preferable. FinTech companies that offer innovative products and services, for example, are generally good options. Most people can’t do without banking services these days. They need their debit or credit cards when shopping for groceries. They need online banking for paying their bills and utilities.
Of course, not every Web3 startup offers products or services considered essential. This does not mean that investors should dismiss these companies outright as some could prove to be profitable enterprises in the long run. For instance, a company might offer a highly innovative product or solution that has the potential to change conventions or create a new market around its service.
Moreover, technology is a crucial factor for Web3 companies. Their innovative or trailblazing products have underlying technologies that must be developed further and protected. This is why, when looking for Web3 firms to invest in, it is important that a startup must have a technical founder or a Chief Technology Officer (CTO) responsible for the technology concerns of the company. When operating in a niche where technical requirements are crucial, a business needs a decisive and technically competent leader to help steer the company. A Web3 startup must demonstrate that it has the technical expertise and leadership to stay ahead of the competition.
Potential or existing customers
Investment risks are way fewer in Web3 startups that already have an existing customer base. Potential investors can study a company’s existing customers to gauge the popularity of its service or product and determine the growth potential of its business model.
Determining the potential customer satisfaction or sentiment is a lot harder if a startup does not have a product or service launched yet. Thus, it is always prudent not to invest in a Web3 firm that has yet to test its business model or product ideas unless one is willing to take on the serious risks involved. In some cases, betting on novel business ideas and product concepts can yield unexpectedly high returns. However, investors need to thoroughly and meticulously study everything about the market and the potential customer response.
Here’s an example of how changing customer needs and expectations can determine product success. In the early 2000s, what used to be regarded as ridiculously large mobile phones were not popular because the trend back then was for devices to be as small and thin as possible. However, devices with screens bigger than six inches have become the norm today, which proves that novel and previously unpopular concepts might still gain mainstream appeal in the future.
This could also happen with Web3 firms offering novel concepts and products. Of course, there are market acceptance risks–therefore, it is necessary for investors to study the trends carefully before betting big on these business models.
The startup’s core team
As discussed above, a Web3 startup needs a technically competent executive such as a CTO to handle the technology-related issues for the firm. However, running, growing, and sustaining the new company will require the concerted efforts of all members of the core team of the business, namely the chief executive officer (CEO), chief technology officer (CTO), and chief marketing officer (CMO). Potential investors should consider investigating the dynamics among the top leaders of a business to get a feel of how well they work together as a team.
These three executives play crucial roles in ensuring that the company is moving toward its goal. They need to cooperate with each other instead of engaging in needless competition and power struggle. The CEO is responsible for strategic planning and execution, while the CMO takes care of promoting the company’s products, and the CTO will provide product and tech expertise to the company.
While personal issues are unavoidable, these key executives need to be on the same page when it comes to the company’s goals and business model. Rumors about a management disagreement or labor issues must be taken into account and investigated when planning to invest in a company. Moreover, the presence of a credible advisory board is a plus factor for any technology startup. The board’s main responsibility is to guide the organization in terms of planning growth strategies and their implementation, manpower acquisition and retention, and fostering positive company culture.
Market or niche that offers growth opportunities
Another crucial factor is the market segment or niche. This can determine success even during adverse economic conditions like recessions. For example, the pandemic might have forced a lot of businesses to downsize or even shut down, but it proved to be advantageous for game developers and console manufacturers as demand for games and gaming hardware grew.
The surge in demand for online retail and delivery service businesses also emerged during the pandemic. Delivery companies’ profits rose as delivery service fees increased because of higher demand. Companies learned to specialize and become more innovative to stand out. There are those that deployed robot delivery units to safely and efficiently deliver products during the pandemic lockdowns. Some developed devices to monitor the condition and location of products sent out for delivery.
The COVID-19 pandemic proved that market changes are not that abrupt, so there are opportunities to anticipate changes in customer demands in different countries. It took time for the United States to implement lockdowns and other countries did not suffer the adversities of the pandemic at the same time. Most Web3 companies operate beyond national borders, so it is possible to find companies that are likely to get the windfall of market changes happening in other countries (which are likely to affect other countries).
Finding the right Web3 investments
Web3 investing is not an impossible puzzle to decode. By examining products, services, technology, core team, potential and existing customers, and market niche and growth opportunities, investors can find viable opportunities and promising companies worth investing in.
It is important, however, to remember that Web3 companies are challenged by crucial conditions such as internet penetration, consumer familiarity weaknesses, and reputation issues. These should also be considered along with the factors described above.