The total amount of money invested in Web3, which is widely regarded as the next generation of the internet, reached more than $23 billion in 2022, according to Crunchbase data. Though venture capital seems to be slowing down their Web3 funding rush, Web3 is still among the most interesting areas for VCs.

Three guests from Web3 and investment companies spoke with moderator ShinWei Teh, an Investment Banker at Credit Suisse, about whether Web3 investment is all hype or based on science, as well as how to evaluate the performance of Web3 companies and other Web3-relate questions at the BEYOND Expo 2022 tech conference, held online in BEYOND Metaverse.

The text below has been condensed and edited for clarity.

XIAO Feng, Chairman of Hashkey (top right); Haseeb Qureshi, Managing Partner, Dragonfly (bottom left); Milton Santiago, Global Head of Digital Services, SVB (bottom right). ShinWei Teh, Investment Banking at Credit Suisse (top left and moderator).

Haseeb Qureshi, Managing Partner, Dragonfly

One word to describe my latest thoughts on the recent development in the Web3 space is macro.

We’ve seen this entirely different macro environment coming and beating down on all risk assets since last November. Crypto, of course, is the quintessential risk asset, so it’s been at the center of the macro fire stream that’s been hitting almost every asset class. At this point, we obviously just saw the Fed raise rates, markets once again are trying to digest what exactly is going on and crypto is no different. What Nasdaq did, you probably know what crypto did that day.

I think there’s going to be some time until we get out of this macro environment and there’s some return to normalcy, and I think crypto can get some room to breathe again, but I think until we get past this macro instability, this is going to be what crypto looks like for the probably the next six to twelve months.

In my opinion, there hasn’t been too much money invested in Web3 if you look into the return for folks investing in January. Anybody who invested money in January has lost money because the entire industry has gone down as with almost every asset class. 

If you are investing in tech generally in January, the money is also down quite a lot. Now, you could argue that’s a sign people were putting too much money into these assets,  but the right way to think about it is there’s an adjustment of the price of risk because of interest rates and the macro environment.

The reality about what makes crypto and Web3 so powerful is that Web3 is pure software innovation, which means that your cost structure is extremely slim. It doesn’t require a lot of capital, you don’t need to build plants, manufacture anything, and invest a ton into hardware for the most part, so that makes the space very capital efficient. 

As the valuations have come down over the last six months, what we’ve seen is a lot of late-stage capital that was really crowding the market late last year, and I felt there was way too much money in the space and teams that really didn’t need to raise as much capital as they did end up becoming overfunded.

A lot of growth capital is pulled back, if you look at the big groups that were throwing money at the top like SoftBank, Tiger, and a lot of these players, they’ve pulled back. What you have left is that most of the capital that’s still investing into crypto are the crypto native investors, who spend all their time in this industry, who understand very deeply the technology and have a better ability to discriminate where exactly the R&D money being well spent and where is it being malinvested. 

So I think in the long run there’s a ton of applications that need to get built, but they have to get built at the right time with the right level of resources. Giving people a bunch of money right now when the infrastructure is not fully in place yet is mostly going to result in the money sitting around not really doing anything useful. So the pipelining of investments is very important, it’s too easy to make bad investments in Web3, which is part of why it’s so difficult to invest in this industry.

Milton Santiago, Global Head of Digital Services, SVB

I’ll use education to describe my thoughts on Web3. What I’ve seen over the last six months is a hunger and an appetite of people in all classes and all lifestyles – consumers, business people, and executives who want to know more about the Web3 space, and they’re really driven to understand how this could transform their business.

I remember an article that I read saying 82% of CEOs felt that Web3, cryptocurrencies, and the metaverse are something they need to invest in now and over the next three years. So there is a voracious appetite to learn more about how they can do so during this time when we have advancements in speed if you think about the internet speeds that we have now. If you think about the cell phone speeds equipped with  5G, they enable a form of AI, Web3, and AR that we could never have had before, like the phone that you have in your pocket, something like this that could provide so much value and immersive experience, not only to do business but to express yourself and to share, is changing the way we communicate and it’s changing the way we do business. And that appetite is just every single person I talk to asks me what should I think about when it comes to Web3, crypto, metaverse, and how could this influence my business, so it’s education.

In terms of how to evaluate the performances of Web3 companies, user sentiment is an important part. You can’t underestimate the power of marketing of communication and value. I have two more things really well with more traditional businesses and that is the roadmap, which isn’t meaning roadmap short-term here, but we’re talking long-term, so the problem that you solve today, a need, or uncover an unsatisfied want tomorrow, so having a long road plan that gets communicated, that drives adoption, that drives user sentiments, which is going to create a really solid foundation when it comes to any type of company that is focused on Web3.

And then the last thing is going to be brass facts, kind of traditional things. If you have a utility roadmap, obviously, it’s like what’s the revenue model look like? What’s the profitability of the solution at times to invest in an organization or in a solution that may not have the highest margins? But if I’ll have user sentiment so solid in a solid roadmap, it goes down to term,  instead of being a short-term win, it becomes a longer win. And there are so many examples in the market today where if you have those kinds of ingredients that really deliver a very sound solution that will frankly survive any market condition, because these cycles that we see have existed for years and the companies that survive are those that really focus on those things.

XIAO Feng, Chairman of Hashkey

The word to describe my thoughts on Web3 is “application.” Before 2022, investments in Web3 were more focused on infrastructure. And since Ethereum2.0 promises to process 100,000 transactions per second, meaning that all the technical foundations are in place for a major explosion of applications, I think as the Web3 infrastructure matures and create real values, VCs will shift their focus on a wide variety of other applications.

For now, the real investors in the Web3 space are still some pioneers, and there’s a large number of institutional investors have not entered the space yet. But in my opinion, Web3 application-level funding in the future will reach tens of billions of dollars to support its growth.

I am optimistic about the future development of Web3, no matter in the short, medium, or long term. And I believe it’s a combination of technological innovations that can bring disruptive paradigm change, which is not simply a marginal improvement to traditional things.

Besides, since international geopolitical turbulence and structural inflation may last for the next two years, Bitcoin’s natural ability to fight inflation and protect against geopolitical turmoil could be more fully recognized by the market.

Cheyenne Dong

Cheyenne Dong is a tech reporter now based in Beijing. She covers e-commerce and retail, blockchain, and Web3. Connect with her via e-mail: cheyenne.dong[a]technode.com.