Is it Profitable to Invest in Web3 Startups Right Now? That Depends on Whether Your Investment Meets

As the markets face turbulence, investor perception over Web3 investments tends to be lukewarm, with most becoming skeptical about their ability to weather the crisis. In the case of Bitcoin, for example, some thought it was doing well as it reached an all-time high while the crypto market, in general, shrank from $3 trillion in November 2021 to $1 trillion as we begin the second half of 2022.

However, Bitcoin eventually joined the unfortunate downward market movement. Bitcoin price dropped by over 70%. It didn't help that UST/Luna crashed, Three Arrow Capital (3AC) became insolvent and Celsius froze withdrawals.

Still, not everyone is abandoning Web3 investments. Blockchain is considered the biggest winner amid all the meltdowns, as it continues to demonstrate transparency. This on-chain transparency provides valuable information to the market, something traditional finance will never deliver. With these in mind, anyone interested in Web3 assets must carefully evaluate their options.

Since 2016, I founded Elevate Ventures and invested in more than 50 Web3 investments. Through this first-hand knowledge, I learned what to look for and where to investigate for opportunities.

Related: Making Sense of the Noise in Web3

Sometimes, there's excessive optimism during bull markets and unwarranted fear and doubts during bear markets. Below are five elements to assess before investing in a Web3 startup.

1. The team

It is easy to start up a Web3 business idea but running, sustaining and growing it is a completely different ball game. It makes no sense to invest in a business that does not have competent leadership and a coherent membership.

At the very least, examine the top three co-founders of a Web3 business: the chief executive officer (CEO), chief technology officer (CTO) and chief marketing officer (CMO). All three play crucial roles in the success of the business, with the CEO guiding the planning and execution of plans, the CTO providing the tech expertise and the CMO taking charge of the promotions. There should be reasonable proof that they are enthusiastically working with each other and not trying to compete unhealthily.

It also helps to have a credible advisory board. This body can provide useful guidance when it comes to planning and implementing growth tactics, acquiring and retaining employees, building company culture and finding investors and growth strategies.

It is reassuring to know that everyone in an organization is on the same page in its business model and plans. Rumors or news of disagreements in the management or even labor issues should be enough to rethink investing in a company. Rarely anything good comes out of an organization operated by persons in conflict.

2. The market and opportunities

The market is another crucial factor. Even during recessions, a business continues to operate normally or even thrive, particularly if the market is considerably large and demand for a product or service is considered essential.

It is tricky to find such a company in the Web3 realm, though. Amongst the hundreds or thousands of companies that seek funding, it is difficult to find one that stands out for serving a market that is unlikely to fail. The niches served by businesses in the decentralized web are still mostly narrow, especially given the internet penetration rate in regions outside the "developed world."

Even in the developed world, the knowledge and understanding of modern technologies underlying the product offerings of Web3 businesses still leave much to be desired. Even now, many do not actually understand or mock crypto, NFTs and other blockchain products.

It is important to choose an investment with a high potential for defying not only the prevailing market conditions but also the preconceptions and prejudices of consumers, users, regulators and the media.

3. The product or technology

Similar to traditional investing, it is advisable to find companies that are engaged in services considered important for everyday activities. FinTech companies that specialize in innovative payment and other financial services are a good starting point.

There are instances when companies offer products or services that are not considered essential. Still, they may introduce a solution that is trailblazing or highly innovative with the potential to change conventions or create new market segments or serve institutional customers.

Choosing a company that can protect its product or technology is advisable. It should have the patents to make sure others cannot simply copy what they offer. They cannot be profitable if their business model can be taken over by copycats or even outmaneuvered legally and technically by industry giants.

Moreover, for companies that do not have a technical founder or CTO yet, it may be necessary to consider getting a CTO when a company's technical requirements are crucial, a large-scale technology upgrade is needed and the company requires decisive and experienced technical leadership like in the case of deciding on tech purchases and interfacing with technically knowledgeable clients and business partners. Avoid investing in a company that cannot demonstrate adequate technical expertise and leadership, especially when it comes to Web3.

Related: Why We Need to Invest in Startups?

4. The customer or users

A viable investment is one that is profitable, and it can only be profitable if it has existing customers who can lead to further growth. Never invest in a Web3 firm that has yet to test its business model or product ideas. By identifying and studying existing customers, you will know if a business model works and has potential for growth.

There are no market sentiments to measure if a business does not even serve actual customers yet. There are very few instances when it pays to gamble on a novel product concept or business idea. If you have the stomach to deal with the risks, you must meticulously study everything about the market and the potential customer response.

Take the case of overly large mobile phones. Before, the media mocked the use of phones that were almost as big as the faces of their users. Now, phones with screens bigger than six inches are already the norm. The same can happen with Web3 company product ideas in the context of customer reception. You just need to study the trends carefully.

5. The connections and strategic partnerships

Moreover, it is important to look at the strategic partnerships or connections of a Web3 company. Research the organizations or trade associations, business partners, authority figures and established corporate players to which the company is connected. Examine if these connections actually contribute to the success of the business. Also, ascertain that it is a sensible long-term strategic partnership and not just a surface-level connection or temporary association.

A product becomes more acceptable when supported or promoted by a strategic investor and partner with the potential to convince customers to use a product or service.

Take note of false clout, though. An influential billionaire businessman who randomly comments positively about a cryptocurrency, causing its value to dramatically increase, is not necessarily the kind of strategic connection you are looking for. It only becomes strategic if that billionaire actually makes it a policy to accept the cryptocurrency in selling their products or paying for transactions within their business.

Related: Web3 Is About More Than Tech, Thanks to Its Inclusivity

Making the right call

Assessing each component requires rigorous due diligence, intuition and deep analysis to determine the score for each criterion.

There are certainly many criteria that can provide a foundation for making Web3 investment decisions. A good investment option should not just be a good business idea. It also needs to be backed by a formidable team, in line with the market conditions and prevailing opportunities, evidently acceptable to a sizable number of customers and has strategic links with significant industry players or authorities.

Always think about how to contribute to the project. If the project resonates with your curiosity, knowledge or passion. Start getting involved with the community, ask questions and find ways to support. It is a great way to get to know the team and the community involved.