From a VC investor: Advice for Web3 startup founders

The flow of capital and talent into Web3 startups continues, pulled through this crypto winter by conviction in the generational technology transition it represents. Capital is in place and looking for an early-stage home. Valuations and expectations have normalized, and that is facilitating rational, purposeful engagement with Web3 startups. We believe the Web3 investment environment is riper than ever.

At SkyBridge, we have invested over $400 million in leading crypto and fintech startups since 2020. We expect to accelerate our efforts following our partnership with FTX Ventures, which recently bought a 30% stake in SkyBridge. Our collective goal is to grow the ecosystem, and we’re here for the long term.

SkyBridge Capital’s Anthony Scaramucci and FTX’s Sam Bankman-Fried at Crypto Bahamas

To founders and operators, now is the time to invest in Web3 builders who are focusing on real-world impact. Investors are looking for tangible use cases, including in the physical world. The recent SALT New York conference, for instance, featured two projects that are interesting to investors at the moment:

• Helium, the decentralized wireless network that enables IoT and 5G connectivity while leveraging blockchain technology and crypto incentives (SkyBridge is an investor in Helium)
• HiveMapper, the dashcam-enabled map builder that accomplishes what companies like Intel’s Mobileye are doing, but with a decentralized model that rewards participants

As an investor at SkyBridge, I have seen countless pitches, read my fair share of term sheets, and developed a good sense for what makes Web3 founders more likely to succeed — and more likely to fail.

If you are a Web3 entrepreneur, here is our advice for you:

1. Focus on the product.

Demonstrate economic value. The crypto winter is proving once again that token price is the last thing we should care about. The VC correction is proving once again that valuations are not an indicator of success. While money continues to flow, the crypto winter and VC slowdown have forced even the most committed Web3 venture capitalists (and their investors) to proceed with more caution.

Valuations have become less hype-driven and more realistic; the amount of time spent on due diligence has increased substantially; and every founder needs to directly, clearly, and concisely answer the question, “Does this project have any real-world utility, and does it create economic value?”

Just as you would with any other tech product, focus on the fundamentals: user growth, customer acquisition cost, burn rate, and all the rest of that really boring stuff that drives return on investment and really matters.

2. Embrace transparency.

Our LPs want to know that their money is safe with us — and we need to know it is safe with the companies we invest in. That means a couple things for you.

Be as transparent as you can be about custody and security, especially if tokens are part of the deal structure. Where are the assets held? What measures are in place to protect them? We have a long history of operational due diligence, and we place a premium on careful control over the assets.

Don’t underestimate the business impact of regulation. Incorporate its advent into your thinking. We believe, as many investors do, that regulation is coming — it’s just a matter of time — and that it will have a positive impact on the industry. Embrace it; don’t try to hide or operate in the gray area.

3. Play the long game.

Believe it or not, we’re still early in the age of Web3. That has several implications for founders.

Keep your nose clean. Good character is hard to find and selling at a premium in this space (see: 3AC). The majority of Web3 founders are unfamiliar to most investors. That means a clean track record, references, and being able to demonstrate trustworthiness are more important than ever.

Play nice. Whether it’s an investor who rejects you or a competitor you feel like you’re racing against, don’t sling mud or burn bridges. The landscape is constantly shifting, people move around in this industry all the time, and your paths will almost certainly cross again. The borderless economy isn’t a zero-sum game. Don’t treat it like one.

Protect your culture. Make sure your employees share the same values and standards of conduct. The talent pool is deep right now, but remember that, for startups, every single hire has an outsize impact on the culture (and chances of survival). If you make one bad hire in a company with 10,000 employees, you won’t feel it. But make one bad hire in a company with 10, and it’ll probably kill you.

*****

Projects built on financial engineering are a thing of the past. The excess and easy capital has left the system. This is a good thing. Focus on building great products or protocols, and the valuation will take care of itself over time. Obsess over valuation, and you may find yourself a zombie without access to capital.

We want you to succeed, whether that translates to capital investment or not. Because every win in this space, no matter where it comes from, pushes the tide a little higher.