How to Invest in Web3

How to Invest in Web 3.0

We see the phrase ‘Web3’ used a lot lately and it is a confusing and vast concept to break down. There’s a confluence of a lot of things going on with Web3, and as investors, we sense that something big is going on here and we want to find signal through all the noise. What makes up Web3, what’s real and what’s hype, and how is it really different than Web1 and Web2? And what does Web1 and Web2 even mean? On September 22, we sat down with trailblazing Venture Capitalists, Kandice Cota and Sara Ledterman, to learn about how they view the shifting world of Web3 and how they spot future unicorns to invest in.

Irene Ramsay kicked things off by asking Sara and Kandice to define Web 3.0 and tell us how the Web has evolved to where we are today. Thankfully, Sara and Kandice both have great metaphors to contextualize and simplify this complex world for us. For Sara, you can learn and understand more about Web 3.0 by watching the evolution of music festivals. For Kandice, it’s looking at investments into Web 3.0 the way you would consider owning gum balls vs the gum ball machine.

Sara breaks down the evolution of the web like this: Web1 was the first iteration of the public internet and it was a read-only information platform. Today’s Web2 is a read and write platform, where you can not only read the content but also create and publish content. In Web2, data is stored in locations called databases, and these databases are controlled by big tech companies who decide how to structure all of that information and they decide what information gets to you.

The idea of Web3 is that the data lives in decentralized databases spread across machines all over the world, in a peer-to-peer vs centralized manner.  In this application of distributed information, the database is free of that middle, meddling layer, which means that your searches scour multiple sources. Blockchain technology can validate sources and truth in data and it is a ‘trustless’ technology, which means no single entity has the authority to decide for you.

Sara shares the music festival analogy by having us look at Woodstock. Essentially four guys managed to get half a million people to show up for a three-day music festival at a time before cell phones or the internet – and it snowballed into a historic event. If we look at NFT projects today, they’re spread throughout a decentralized network and we’re seeing so many disparate creators all coming together to create art, platforms, and collaborations. They all managed to get to one place without a central command post. By contrast, Google search acts like a central command post.

You can also see how the web follows the trajectory of another festival – Burning Man. At first, you have the innovators who dream up and create something bold and new. Then iterators who love what’s going on get involved and organize and centralize the planning and running of the event. They get the permits, the insurance, establish infrastructure and rules and protocols. We see the same thing happening with new technologies. We start with amazing tech that innovators play with but how do we take it to mass adoption? In technology, it’s always been the play between Innovators and Iterators.

Kandice agreed that you have to watch what the innovators are going after. To her, it’s like building a bunch of gum ball machines; today we investors are buying the gum ball, but is that really where the money is to be made? And do we know the value of that gum ball within the bigger picture? Do we know if its value will hold up in the future? As investors, you want to own a piece of the gum ball machine. And Blockchain is moving to where investors can buy a piece of the gum ball machine. The machine only becomes valuable when people understand what the gum ball is. Right now, we see a lot of activity in NFTs – creatives, artists, and musicians are the ones driving the adoption and innovation. It will be interesting to see how this innovation goes and where the iterators will take it.

Irene added this analogy into the mix: Web1 was like watching baseball. Web2 is like playing baseball. Web3 is like deciding whether to own the baseball team or buy a football team.  Irene further noted that early versions of the Internet appeared to be a permission-less utopia with bottoms-up control, but we diverged from that.  How did that happen and where are we with Web3 and that same utopian promise? What exists now that didn’t in Web1 to allow this to happen?

Kandice pointed out that it did happen before. The early Internet was rawer, but we had peer-to-peer technology then too – she was part of that movement – and she saw similar ideology and excitement over what the promise of peer-to-peer networking could mean; that nobody needs to own a particular entity and our information can be serviced by machines without human influence. It was the true age of this decentralization innovation – but it got regulated. She sees the same phenomena happening now. We live in cycles. We’re moving towards more democratization, diversification, collaboration and sustainability, but as Web3 moves toward broader adoption to becoming mainstream, it moves toward corporatization, which could challenge Web3’s promise.

We then had Sara share with us how she makes decisions on Web3 investments.

Sara looks for mass adoption opportunities where she and her team at 3+Ventures want to see the promise of Web3 applied.  They ask themselves: What are the tools that allow creators and engineers to control what they’re creating, but also create equitable outcomes for everyone who works on the project? There’s got to be a layer of tech that transitions people from Web2 to Web3. Her favorite example is Zapier – it’s a simple to use product with simple code with mass adoption that made the transition from Web1 to Web2 easy. Zapier opened up access for the masses. She also looks at what is the infrastructure that needs to be replaced. For example, Blockchain today still runs on Web2 Cloud technology – it’s hosted on AWS and Azure, so they look for companies that rethink this piece of the infrastructure. Sara and her team strongly believe that innovators don’t usually win but the iterators do. They look for companies that fill those holes.

Sara’s background is in B2B and SaaS, so that is the lens she looks through on deals. Sara got into the Blockchain space in 2018 and into Bitcoin back in 2016, so she’s seen the evolution in the space. Her team is also looking through a greener lens for mass adoption as well because some of these early chains are really energy-intensive and also require advanced equipment. They look at those things as a barrier for a majority of the world. They prefer to look for chains that are light on energy consumption and that use older hardware so that adoption will go quickly in places like India, Sub-Saharan Africa and Southeast Asia. Those types of places don’t have the capital to access energy and equipment heavy technology.

Kandice pointed out that the social impact lens Sara talks about has both a qualitative and a quantitative aspect to evaluating the subject matter. At where Kandice is, they use AI models to predict future unicorns, and they are sector agnostic. They use predictive data and intelligent data sets to determine what their portfolio will be. Kandice knows well the pain of bias in the investing world. As a female founder years ago, she faced it – it was almost impossible in the past for female founders to get funded by VCs due to sway caused by qualitative biases. In’s model, those sways or biases don’t come into play.

Irene then asked our panelists to go deeper and help us understand what are the indicators that an investment will become a unicorn.

Kandice’s approach is to track forecasts using a lot of data. They ask: Who’s invested? What’s their competition? What are the valuation models? What are the lengths of time to milestones? They work with variables to help assess if the companies fit the pattern of the last 50 years in a sector.  As a female founder, Kandice knows how hard it is for those outside of the 40-year-old male model to get funding so she likes how their approach helps level the playing field for anyone, anywhere in the world.

Sara and the 3+Ventures team took the anti-pattern matching approach. For her, there has to be a female founder with equal equity on the cap table. She’s noticed that this approach opens them up to so many projects that other funds aren’t looking at. She’s seen incredible traction early on – and they don’t care who else invests; and they invest early. What do they look at when looking for unicorns? They look at the founding team and how fast they execute, and how quickly adoption is going. Who’s adopting the protocols? What companies are licensing or using their tech or protocols in their day to day working? Who’s using it? How often? What the scalability of it is and what is the longevity of it? Will it scale quickly and lead to a 5x acquisition or will it become a legacy infrastructure for the long term? She likes infrastructure a lot because in the end you may be splitting pennies, but you’re splitting them over billions of users.

Kandice: In the past it was about the team and what was represented by their backgrounds or pedigree. A lot of successful entrepreneurs don’t often come from those pedigreed backgrounds. So, this social lens is an important qualitative aspect vis-a-vis the quantitative patterns when looking at investment structure – qualitative intelligence of one’s social views is important to know about yourself as investors, especially if we want to grow this democratized way of investing.

Irene then deepened the discussion on impact, whose implications could be far reaching. For example, banking the unbanked stems from identity issues or a lack of portable identity. And a secure, portable identity is the bare minimum needed to enter our modern economy.

There are many solutions out there but Identity needs to be solved – it’s a key issue. What are we talking about here? Will NFTs be the new passport?

Kandice described how tokenized IDs and systems – globally or locally– were innovated in the early days of gaming where you could get badges. Those badges went with you and were worth something. So, what are your badges in this real world today? Tokenized IDs let you interact in different spheres – those spheres could be countries or something else like a token for transacting in the future.

Sara reminds us that the need for mobile IDs is so important in war zones and refugee camps, and in areas in need of economic development. There are problems with moving people regarding IDs, especially in areas impoverished or without a lot of capital resources. IDs are hard to create and authenticate – and a lack of ID is a big problem for refugees and people caught in human trafficking. An NFT could be your picture ID but the contract verifies its validity – so who issues and verifies? Passports can cost $500 and aren’t even affordable to many Americans. We need to create a more affordable and accessible form of ID. This would help immeasurably in situations where you’re moving massive amounts of people; it would make it more efficient and safer. And who verifies our IDs brings us back to centralization, so we battle the centralized vs decentralized solutions, but there has to be a give and take.

There will be a government structure of blockchain. Everyone would like to see more mobility and access for everyone as a result of Blockchain. “KYC” (Know Your Customer laws and protocols) gives people control over their own data vis a vis banking, so there’s no reason it can’t be done by the government.

Kandice reminds us that our IRL governments today are in a direct juxtaposition with the Blockchain’s way of Identity. There’s a tension because they are worlds apart right now in how they approach Identity and it remains to be seen if the governments will want to relinquish this kind of control. Because of Covid, people understand now that we’re moving to a more placeless society. How do we bring that back to Blockchain’s mobile society while there are still regulations around how Identity is managed. So, the question remains about control vs freedom. How much control do governments want to give the user? And how much control can the users manage? It’s the same question that UX designers deal with: If you give the user too much control, they’re overwhelmed. Too little and it feels like jail. We’re playing in that same dynamic right now.

Benching off of the design and control analogy, Irene points out that with any emerging technology, we’re in a moment that’s highlighting where existing frameworks are falling short. There are a bunch of challenges facing Blockchain development, like UI/UX, interoperability, speculation and regulation. A critical action for Web3 organizations is to protect the data in ways that large tech companies have not.

Regulation could be a floor not a ceiling. What went wrong in social media? And people get supercharged when talking about the metaverse and its implications for surveillance capitalism.

Back to Kandice: “the real challenges of sustainability have come into play in the last few years with ETH and other Blockchain technologies. A guy lived in a remote town and wanted to play music with his band, but couldn’t because the sound of BTC mining nearby was too loud. It sounded like a jet that never takes off.” That woke Kandice up. She didn’t see that as a challenge to the metaverse, but rather what are the protocols that will win? How will those protocols be established and regulated is the big question. Also how do we deal with the metaverse vs irl, and how do we make it sustainable? ETH is a protocol for human organization.  The metaverse is this place for humans to organize but we still live on this planet. How do we not infringe on how people want to live? It’s a heart and soul matter.

For Sara, it’s a very repeatable and knowable process. “Innovation is followed by regulation, taxation, corporatization and probably a little bit of jail time. We’re seeing this with crypto and the SEC stuff now. Indictments are coming in every day for the last 4 months. It’s interesting to watch the FTX’s of the world who swooped in during this void of regulation and became a giant who is now gobbling up many small players and squashing the competition. They are the Facebooks and Googles of Web3 that we have to be careful of. There has to be competition for this because we’re still so early in where this all can go. FTX is now working on the regulation side and getting it to favor them. We want strong competition.”

Irene then asked about the unsexier but very important side of these opportunities: How will the “powers that be” regulate tokens and securities? Where will the taxation come in? And who is the party who taxes and what’s their jurisdiction? Who will be the H&R Block and how do you value it?

Kandice spoke again about how cost prohibitive ETH is; it has astronomical gas fees. How does a chain scale sustainably vis a vis energy and fees to be accessible for mass adoption? Cryptos were massively adopted but there’s nothing behind them – it’s just liquidity. When the market is great people can day trade and do well, but when the market tightens up, you see a massive removal of equity. So, who gets left holding the bag? It tends to be the retail investors.

Irene begs the question: What will be the broadest application?

For Kandice, that’s where the quant side of pattern recognition comes into play because it helps identify market sway. When as an investor you’re dealing with multiple agnostic data sources, she calls out that there’s a lot of lobbying money spent on influencing regulation. The innovators and evangelizers of new tech won’t be able to move and act as fast after the regulators come in. She thinks it will be the next round of innovators or iterators who will be the ones to win.

Irene: “so in terms of the UI/UX situation, the wallet experience isn’t great. For the average Joe user, it’s a bad experience. When it comes to mass adoption, we’re so far away from it. It feels so embryonic. We won’t see mass adoption until you can use Web3 similarly to how people use Instagram today.”

“You’re right” from Kandice. “It’s like the evolution of Craigslist. It started out at a grassroots level. There was always talk of changing that interface but you can see it hasn’t changed mostly due to the founder. There’s an early grassroots feel in Web3 and the W3 builders seem reluctant to move away from its core roots because they don’t want to lose that first niche community. It’s a younger audience – different than the stock market users.” There may be deliberate intent behind making the user experience more challenging to avoid going mainstream – “going mainstream may mean that they’ve corporatized and become more like a bank. Which they don’t want to do; it’s a psychological aspect more than anything else.” Whether Blockchain becomes more like Instagram and Uber is a really good question right now. The renegade spirit in the Blockchain world right now is hesitant to release the grassroots feel.

To counter this, Sara said she believes that a product should solve a problem so well that users will use it. There are exceptions of course, when people overlook horrible UI and UX because they want it so bad. But she does look at security and it’s a huge problem to not make concessions on. “Right now we’re like in the early days of email. People would receive Nigerian spam and not know any better. The exact things are happening in the NFT space; people are being told to ‘just give us your wallet’. It’s kind of humorous and the analogy is close.”

And Crypto specifically has a very strong young “Bro culture” that has to change. Sara doesn’t believe that Blockchain has to go corporate but it should be something that people can see themselves using and investing more time in. Mainstream hasn’t occurred yet and very few women hold wallets. She thinks it has a lot to do with stigmas around the culture.

“A lot is dictated by the psychological look and feel to the product – to Irene’s point”, added Kandice. “Some people won’t take on the task of learning Blockchain because it’s scary, and that’s where UX and culture could solve these issues.”

“When grandma feels safe to buy XRP and store it in her Nano Ledger, the industry will thrive.”

~ Allison Goodwin

Sara’s view is that it takes younger generations to onboard new technologies, which is natural. Someone has to make the other feel confident or the market needs to make them feel confident – right now the market is making them feel scared or not confident.

“Like Sara said – in war times or otherwise times of crisis, urgency often drives change and adoption. Maybe we’ll see that happen in the Eastern Bloc – Ukrainians are incredibly talented technologists” added Kandice.

“Argentina too, with its unstable government’s regulation. Or when truckers were getting their crypto seized by the government. What’s the reach on this? Some governments reached into foreign bank accounts to seize funds. Where does jurisdiction fall too? Looking from the 3,000-foot view, there’s a lot to still figure out. Making people feel safe is key.” Sara further asserts that wallets are also very traceable. There’s a history on every wallet so it’s not hard to track Identity through them. If you’re a foreign national or you donate to a political party in an authoritarian-leaning country, people would rather pay cash. Traceability can be a double-edged sword.

So, we’re back to Kandice’ point about living in two juxtaposed worlds right now: IRL vs the metaverse. Which one wins in Blockchain will be interesting to watch.

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