Investing in Web3

next up we have let's see we've got uh Danny and Maggie and uh let's see um uh we've got Ria and Lydia and Lindsay talking about investing in web3 brilliant or mad science uh this is an awesome group I know a bunch of them really excited for what they're gonna have to say uh I know that uh Danny and Maggie and I were at consensus uh all together in 2018 and it's just been wonderful to see how everyone's careers blossomed as VCS and I'm just really looking forward to hearing about more of the Mad Science thanks so much for introducing us Trace so this is a panel about crypto Trends in thesis for 2023 with four badass investors I'm going to be the moderator my name is Maggie love I'm co-founder and director of ecosystems and Partnerships for web3 cloud a crypto infrastructure company and the founder of shifai an educational initiative in the space and off to our lovely panelists hi everyone I'm Danny I'm a partner at Meadow web Ventures we are investing in early stage blockchain startups and I'm also the meta curator for East Denver hi everyone first of all I'm pretty sure Maggie has single-handedly moderated half of the panels at East Denver so can we just give it up for Maggie fun week my name is Lindsay I lead crypto at Bessemer Adventure Partners multi-stage generalist fund but we have dedicated about 10 of the main fund to crypto and focus on early stage seed in series a mostly focused on infrastructure developer platforms and some consumer applications these days I'm rehabitoria I am a general partner at Castle Island Ventures we focus exclusively on companies and protocols building on public blockchain networks historically our Focus has very much been around infrastructure trading custody data compliance a lot of the Rails that you need this ecosystem to operate smoothly and I'm Lydia I'm a partner at Bain Capital crypto band Capital crypto invests sort of across the stack in early stage blockchain projects but with a particular focus on protocol and defy infrastructure thanks so much for those intros so I feel like we can't talk about 2023 without reflecting a bit on 2022 so has the web 3 investing landscape changed since then were there some themes that were popular last year that are not as popular this year or would you say it's it's the same and if so like what is what's happening oh hey sure so I think this year has been definitely really interesting because we saw like a massive downturn which really takes us back to the basics so um in the previous years I think people had gotten a lot of fomo and were just sort of like investing in everything and anything just to kind of get on the ride and now I think it brings us back to a much more conscientious stage of investing where we're really focusing on um tangible applications like real value for us we really focus on supporting Builders so we're like a fund of builders that invests in Builders and I think that's what we're looking after this year um so um I've been in my Howard marks refresh uh which is aptly timed because he talks a lot about how Bubbles um at the beginning are always based in some nugget of truth right um the internet is going to change our lives or nfts confer digital ownership and people care about that um you can make money in the beginning of that and then as more and more people join the hype cycle the less and less price matters um you know being coming from a traditional Venture Fund price is still a massive uh indication of value and also your entry price often determines um a massive portion of your returns so the way that we've been thinking about it is finally as optimism has kind of been um taken out of prices today now is once again the right time in this kind of trough of disillusionment to continue looking at crypto and so we're still really excited about the opportunity and I think once um to your point a lot of the builders are still here and take us into the next Bull Run you'll see the same cycle occur um and I just think crypto is like a lot of other industry is in just maybe some of those swings are a little bit more massive than we see in more mature asset classes I think one thing that was unfortunate last year is that a lot of the companies and projects that came to rise compromised on a lot of the values that we hold true and originally brought us into the crypto space so they sacrificed those values in favor of really fast growth and I think that's ultimately what led to a lot of the crises and crumbling of Institutions and protocols that we saw last year I think now it's a really good reset and the founders that we're talking to the teams that are building in the space are building much more intentionally and the first priority is optimizing for those values around transparency accountability um you know giving power to users improving the non-custodial experience and really building intentionally with those values at the foundation and hopefully not sacrificing those irrespective of Market cycle going forward just to get really fast growth the only thing I'd add I think you guys really covered it well but um because uh there's such a massive correction evaluations particularly in the liquid Market I think there's a lot of as an investor really interesting things that are trading publicly that have really material usage um that have sort of have a much more attractive entry price now so I think that's an area that I've seen a bit shift from last year this year yeah I love everything said last year definitely had a couple bubbles a lot of it led by fomo or you know compromising on values and now we can go back to some of those initial values that made us all excited about the space to actually build systems differently so that's great to hear and so what use cases are you most excited about this year and that you're focusing on this year so we always look at infrastructure as one of the foundational pieces so I think part of it is because if you have a long-term belief in protocol or technology the infrastructure is almost like the lowest risk level because you're like okay if we invest in the tools for the builders and some of them are really successful then we're investing in like the right Pathways for it so so that's sort of like the covering your basis I actually really like investing in consumer applications that I think are going to be transformative to culture because when we jumped into this the idea was that we were going to change the world or go down in flames so I really look into projects that I think are maybe exploring decentralized social media that are thinking of Reinventing how certain pieces of [Music] um current consumer culture is working using smart contracts to implement legal agreements I think there's a lot of really cool Innovation kind of happening on that side and I'm actually really interested in Collective economics so yeah um so before the panel Maggie asked us if she should ask us about her hot takes and Ria said no they'll just come out so maybe this is a hot take but um I think the last cycle saw a lot of VCS saying oh I think this is a really interesting use case for crypto and then Founders being like okay like if I can build in this use case I can raise from these VCS with zero Market validation as to whether or not consumers or developers actually wanted those tools so I think for us the underlying thesis has always been is this a 10x better consumer and developer experience and you'll see that in the engagement in retention numbers early on even if it's a really small pool I think a good example of this is like what got me down the crypto Rabbit Hole to begin with is um we've been longtime investors in gaming we let the series be in twitch we're small investors in Discord and um the the largest semester in TSM which is a professionally sports team and um so rare was something that when we saw it we were like okay yes an existing game mechanic and fantasy the fact that you have ownership which is something these players care about is an augmented version of the consumer experience that already exists in fact like the first 15 20 users that we talked to back when they had 5000 users we're saying saying that they learn about ethereum to to play so rare and so that to me has been a really good indicator of consumer interest to your point and so we're still looking for that and it's more Bottoms Up and less so also you know I I'm more of a career investor and so I can't even pretend to know what is or is it interesting or hard to build and I think for us our job is really to be really really open-minded let Founders lead us to the water and then build a more granular thesis based on those data points that we see in the market there's a few things that I've been really excited about that I've been down the rabbit hole of over the last few weeks and months I think one thing is really and I alluded to this in my first answer but really improving the non-custodial experience so that the Reliance of end users on centralized platforms goes down and the gap between usability and security Narrows um you know there's a few technical developments on this front that have been very exciting ethereum Foundation announced account abstraction went live on ethereum with erc4337 earlier this week at wallet con which is really exciting because it will hopefully push wallets in the direction of doing away with seed phrases and making the login and uh you know onboarding experience more similar to web 2 where you have recourse you have recoverability you have the potential to abstract gas which is like a really foreign concept to people using applications in web3 versus web 2 so that's something I'm super excited about um on more of the application consumer side of things one thing that we've been really excited about as a fund is the concept of physically linked nfts so attaching a physical item to a digital object and facilitating more liquidity around it reduce or lowering the barrier to authenticating whether something is real or not and creating more interesting in-person and online experiences for holders of those products that's something we've been pretty excited about and then another Rabbit Hole I've been down recently is Mev and I think in conjunction with um is this kind of tangential to maybe the role that wallets will play and something that we've seen is more applications announcing their own kind of vertically integrated wallet I think uniswap announced a wallet earlier this week um xerion also announced something but specifically related to Mev sharing some of the value created by these transaction Originators the users with those end users through wallet or application interfaces that's something that's pretty exciting to me too yeah and I'm not a consumer investor so I'm going to go a little bit in a different direction here I would say the thing that gets me really excited not about a specific area in crypto but just about the space and just about what I do is the idea of a incredibly neutral global settlement layer um I think we are all aware that our the financial system is is broken in many ways and actually in a lot of cases you could fix those with a centralized system but but that could never be done globally through any system other than a blockchain and so I think that's a really interesting sort of inspirational you know very far off Vision but one that gets me really excited about the space and then more tactically I've been spending a lot of time looking into stable coins sort of as they relate to this global settlement thesis I really like that and that brings to mind the world regulation like Global sediment layers I think we're seeing this clear Challenge from the regulatory space in the US about that also stable coins so I'd love to know if how the regulatory landscape might be impacting some of your Investments if at all it's not every hour um and you know I'm not a lawyer so I in a lot of ways am not exactly the right person to answer this question but um you know there are a lot of regulators who are threatened by the idea of a global settlement layer um and it's sort of the biggest existential risk to this thesis is regulation in my mind and so I I just say yeah it's a big question and I don't have the answer either anybody else has the regulatory movement's been impacting the way you your fund's been looking at investing I think one thing that I've seen is their regulatory like like the concerted effort of different agencies in attacking crypto has been a real Challenge and I I have seen some startups over the last few weeks that were a lot more optimistic about launching a product and working with regulators and getting the appropriate licenses that they need deciding to kind of take a step back and reevaluate whether now is the right time or whether it makes sense to wait for a little bit more clarity and productive conversations before kind of embarking on that Journey so that's one impact that I've seen is like people are taking a step back and reevaluating whether now is the right time to build certain things the other thing I want to add is that although we in the U.S we're in a very stressful regulatory environment there are actually a lot of really great strides happening globally I think like Mika is really something that gives us a lot of excitement about the future um and so I think the it feels stormiest in the US but there's actually been a lot of really great strides that are going to Foster innovation in other countries yeah and I'm actually really excited about the idea of smart contracts and forcing social contracts I think that's really like one of the major innovations that we have and at the risk of dating myself I was like the first test group for Facebook and so they showed up and they're like hey guys this is so cool you're going to connect with your friends and we're never going to sell your data and we're not even going to let other people in and um and we were you know young and naive and we're like this is really cool and eventually you know you become the product and you have these like borderless global companies that have no regulatory pressure on them whatsoever because they're sort of like autonomous of governments and so people the users have no bargaining power even though you're the majority there's no like Union or Collective the only thing you can do is effectively like rage quit and be you know live in isolation and so I I'm really interested in seeing like what projects and products they're going to put forth uh platforms where the rules are laid out from the beginning which is like you if you if this is you know if it's this is a club then like you own your Club if this is your Collective then like that belongs to the people if you know you're we're collecting data like you're collecting your own data and maybe like we're using ZK technology to like read information and run algorithms against it and then the actual value accrual comes to the people and the platform is actually just like a small enabler of that and I think that inversion in the business models that can be achieved will be really really interesting I think that's a huge value proposition not just for the end users that now can own their data and take it across platforms and and have it be like more composable but also if you think about the regulation around data and decentralized platforms holding data and the potential liability associated with holding that data and it getting compromised and the fines that they might have to pay there is an incentive on their side too to reduce that liability uh and and the infrastructure that goes into you know maintaining and securing that data and protecting it from an increasing amount of attacks that they're facing I do think there are also interesting implications about Network effects if platforms are no longer incentivized around buy-in and consumer lock-in what ends up being the moat for a lot of these uh not only the moat for the businesses themselves but also the incentive to continue to running the platform it's like I just think we don't have the answers for what those business models might look like but um what I'm excited about is that uh you know we won't be able to predict what that looks like but once you see it you're gonna know okay hey this is actually something that's completely whatever the opposite of skeuomorphic is um completely new and different and and that's really like the the home runs that we're trying to aim for yeah and I actually think that's where in like the idea of collective economics comes in right because again historically you have these like very small number of corporations that are accruing like insane amounts of wealth you see something pretty similar happening with like validators in ethereum where like a small group of people are the ones who are actually like receiving this and that's why I'm so interested in like distributed validator technology to be able to sort of like take this back to the people and so I think that the business model is going to be like what if we like we've established that now there's a market for Consumer data that didn't exist before so these companies pioneered you know they were Pioneers in creating a market now that we know the market exists like why don't we take it back right and the companies that I think will be successful like right now you have companies that own a certain amount of market share and they take like all the money that's coming in there it's like what if they had a much larger part of the market share and took a very small amount of the money and the rest came into the people into social impact projects into ways that you could actually like have regenerative economics and um I you could you could basically create better business models that were still really profitable and I think that sort of um maybe it's a unicorn maybe it's a dream who knows but I'm really I'm really interested by like what that could look like I'm definitely interested in like what web3 business models may look like uh can you describe any other ones that you find interesting or you think might be leading the way I'm sure I'll be brief but basically I think that I really like um user-owned communities uh because it's sort of again an inversion of what we have today and I don't know what that looks like in the in the long run or what happens when like people own those communities and I also have thought about like the idea of of things that should be public goods and how do users own them so like if identity and privacy should be a public good then like maybe people have a lease on it and you never get to own it so I kind of try to explore like what the future looks like in a not so dystopian way yeah I would say um I think it's a fascinating question is what these business models are going to look like and I think we're going to see a lot of evolution um I think in the last year we saw many token models that don't have product Market fit although there's a trillion dollars of market cap that disagree with me so I think there's going to be still a lot of experimentation in this space particularly around when and who should have a token versus I think there's going to be a shift of a of a certain subset that goes back towards a more traditional Equity model I alluded to this earlier but one thing that I still haven't fully formed an opinion on this and and what where or who this benefits the most but I think one thing that I've been seeing more of is people getting creative around how to capture and leverage Mev as their business model and kind of abstract away the cost for the end user and and have that be the way that they generate a sustainable business model and sustainable levels of Revenue by kind of increasing their view of transactions on chain and and getting creative around how they capture value from those transactions yeah I think we're still in this experimental stage and you know we have trillions of dollars of market caps you're like how can we still be experimenting but we're definitely still not sure exactly how to appropriately leverage tokens for all types of situations okay we don't have too much time left I would love to know when I'm sure people in the audience would love to know like what do you look for in projects or Founders that you fund so I'm looking for projects that are building something that is somehow better with blockchain technology than without it so I guess it's short like something people actually want oh she didn't say that first now what are we gonna do um well I'll use this opportunity to do a quick plug for um steel Dow which is I see a couple members in the audience here um but it's it's uh this idea that like Bessemer obviously is a multi-stage generalist fund we don't have a 60-person team looking at just crypto how can we expand the types of Founders that we see and the types of projects that we fund especially since you know best Venture is a pretty like tight-knit Network in a bad way and we're trying to open that up and democratize access to private markets and so what we've done is kind of bootstrapped a vehicle for the community to help us deploy and to that end it's looking for really really early stage opportunities where like you know bessemer's bread and butter is kind of leading a series a versus steeldow is really in the precede stage and for that like we have a research division that recently published on zkps they're now doing a piece on AI and web3 they're also doing an Mev piece and then the last thing is around like um uh generative Ai and gaming and any any opportunity potentially for crypto to turn some of those monetization opportunities on its head so um those are the the main areas there and we try to make sure that it's collaborative with Bessemer obviously but it's its own entity so those are some of the areas that that group is focused on one thing that we really look for in Founders is just sussing out or gauging whether they're really aligned with the ethos of the space and are in the space for the right reasons and whether they are leveraging the properties that are uniquely enabled by blockchain rails in a creative way and implementing it as a part of their business protocol at the foundational layer so just going back to what I was saying in the beginning Founders that are really values aligned and are in it for the right reasons the only thing I would add is increasingly looking for investors who are not only obsessed with the technology but also obsessed with go to market that's all the time we have do you want to share where people can find you all on the on the internet so they can follow up I'm at Waverly maven I'm at Lindsay Lee underscore on Twitter IA on Twitter I'm at lid Hilton but you won't know how to spell that so okay well thank you so much um and thanks for having us eat thember