The VC PlayBook - Vol. 1: What VCs Look for in Web3 Projects

Venture capital (VC) funding is essential for the growth of the Web3 ecosystem. VCs provide financial resources and strategic guidance, empowering Web3 startups to innovate and contribute to the decentralized internet. However, Web3 presents unique challenges and opportunities, requiring VCs to adapt their investment strategies. This report provides a comprehensive overview of the key factors VCs consider when evaluating Web3 projects, drawing upon research reports, articles, and expert opinions.

The Web3 space offers incredible opportunities, but securing venture capital funding requires a clear understanding of investor priorities. This blog post outlines key factors VCs consider when evaluating Web3 projects, whether you're building a new Layer 1 blockchain, a DeFi platform, or other decentralized application. These insights will help you refine your pitch and increase your chances of attracting investment.

Team: Experience and Execution Ability

We invest in people first. We look for teams with a strong track record and relevant experience. Have you built and scaled successful projects before, either in Web3 or traditional tech? Do you possess demonstrably deep technical expertise in blockchain technology, cryptography, or distributed systems? Your team's background provides a significant signal regarding your ability to execute your vision. Previous exits or demonstrable contributions to open-source projects are strong positives.

Beyond pure technical skills, we rigorously assess your team's adaptability and resilience. The Web3 space is characterized by rapid change and unforeseen hurdles. Can your team respond effectively to market shifts, regulatory developments, and competitive pressures? Show us concrete examples of your problem-solving skills and ability to navigate ambiguity. Share instances where you've overcome significant challenges, pivoted your strategy, or learned from past failures. This shows your learning ability.

Carefully consider your team's composition and overall structure. Do you possess a healthy balance of technical proficiency, business acumen, and marketing expertise? A well-rounded team is far better equipped to handle the multifaceted demands of building a successful project. A team overloaded with developers, lacking business development or community-building skills, will find it difficult to gain traction. Demonstrate that you understand the importance of a holistic approach.

Problem and Solution: Addressing a Real Need

Clearly and concisely articulate the specific problem you are solving. Is it a genuinely significant problem within the Web3 ecosystem, or a marginal improvement? Does your proposed solution offer a demonstrable and substantial improvement over existing alternatives, or is it merely incremental? We need to understand the fundamental "why" behind your project, and it needs to be compelling.

Your solution must be not only innovative but also practical and achievable within a reasonable timeframe. Avoid overly ambitious or unrealistic goals that lack a clear path to realization. Focus on a well-defined niche where you can establish a strong foothold, and clearly demonstrate how your project solves a tangible need for users, developers, or other participants in the Web3 space. Provide concrete examples, use cases, or demonstrations of your solution in action.

Quantify the potential market for your solution. We seek projects that address large and growing markets, offering significant potential for return on investment. Support your market size claims with credible data, research, and well-reasoned projections. A large total addressable market, coupled with a clear path to capturing a meaningful share of that market, strengthens your investment case considerably. Can you prove demand exists?

Technology and Differentiation: Unique Advantages

Your underlying technology must be sound, defensible, and well-architected. Do you possess a unique technical approach that provides a clear advantage over competing solutions? Is your technology protected by patents (if applicable), or does it represent a significant and difficult-to-replicate innovation? Explain your technical architecture in clear, concise terms, avoiding unnecessary jargon. We need to understand how it works.

We prioritize projects that possess a clear and sustainable competitive advantage. What specific features or capabilities make your project stand out from the numerous other projects vying for attention and resources? Is it faster, more secure, significantly more scalable, or demonstrably more user-friendly? Clearly articulate your unique selling propositions and provide evidence to support your claims. Benchmarking data is useful.

Beyond your core technology, present a well-defined development roadmap. Do you have a clear, prioritized plan for future development, feature additions, and protocol upgrades? Show us that you are thinking long-term and are committed to continuous improvement and adaptation. A detailed roadmap, with realistic timelines and milestones, inspires confidence and demonstrates your commitment to building a lasting project.

Tokenomics: Sustainable and Well-Designed

Your tokenomics model is a crucial element of your project's overall viability and attractiveness to investors. It should effectively incentivize participation, foster network effects, and create long-term value for token holders. Clearly explain the utility of your token within your ecosystem. How does it drive user adoption, encourage participation, and contribute to the overall health of your project?

We meticulously examine your token distribution plan. Is it fair, transparent, and well-justified? How are tokens allocated between the founding team, early investors, the community, and future development? A balanced and equitable distribution builds trust and minimizes the risk of future conflicts of interest or perceived unfairness. Justify the vesting schedules.

Consider the long-term sustainability and economic soundness of your tokenomics model. Does your model incentivize continued participation, network growth, and long-term value accrual? Explore mechanisms like staking rewards, fee sharing, governance rights, or burn mechanisms, and explain how they contribute to a healthy and thriving ecosystem. A well-thought-out model addresses inflation.

Community and Traction: Early Signs of Success

A strong and engaged community is a valuable asset, particularly in the decentralized world of Web3. It demonstrates early interest in your project, provides valuable feedback, and can serve as a powerful engine for growth. Show us how you are actively engaging with your community across various channels, such as social media, forums, Discord, or Telegram. Metrics like follower count, engagement rates, and community sentiment are relevant.

Evidence of early traction, even in limited form, significantly strengthens your investment case. Do you have active users, strategic partnerships, or early adopters already utilizing your platform or technology? Even small numbers can be meaningful at an early stage, demonstrating market validation and initial product-market fit. Quantify your traction whenever possible.

Beyond initial traction, present a well-defined go-to-market strategy. How will you acquire users, expand your community, and drive adoption of your project? A detailed plan demonstrates your understanding of the competitive environment and your ability to execute your growth strategy. Who is your target user, and how will you reach them?

Securing VC funding in the competitive Web3 space requires more than just a great idea. You need a strong team, a clear value proposition, defensible technology, well-designed tokenomics, and a growing community. By focusing on these key areas and presenting a compelling narrative, you'll significantly improve your chances of attracting the capital you need to bring your Web3 vision to life. Remember to be prepared to answer tough questions.

Traction Metrics

Number of Active Users: This metric reflects the project's reach and user engagement. A growing user base indicates increasing demand and potential for network effects. For example, a decentralized exchange (DEX) with a rapidly growing number of active traders signals strong user adoption and potential for increased trading volume.
Revenue Generation: VCs assess the project's revenue model and its ability to generate sustainable income. This may involve analyzing transaction fees, subscription models, or token sales. A successful Web3 project should have a clear path to profitability, whether through direct revenue generation or through value accrual to its native token.
Community Size and Engagement: A strong and active community is crucial for Web3 projects. VCs evaluate the size of the project's online community, engagement levels on platforms like Discord and Telegram, and social media presence. A vibrant community can contribute to project development, provide valuable feedback, and act as a powerful marketing force.
Monetization Strategy: VCs seek to understand how a Web3 project plans to generate revenue and achieve profitability. This involves evaluating various revenue streams, such as transaction fees, subscription models, and token sales. A well-defined monetization strategy demonstrates the project's long-term sustainability and potential for return on investment.

Blockchain-Specific Metrics

Total Value Locked (TVL): TVL represents the total value of assets locked within a Web3 project, such as those staked in DeFi protocols or held in NFT marketplaces. A high TVL indicates strong user confidence and network activity. For example, a DeFi lending platform with a high TVL suggests that users trust the platform with their assets and are actively participating in lending and borrowing activities.
Transaction Volume and Frequency: This metric reflects the level of activity on the blockchain network. High transaction volume and frequency suggest a vibrant ecosystem and growing user adoption. A decentralized exchange with a high transaction volume indicates a large number of users actively trading digital assets on the platform.
Active Wallets: The number of active wallets interacting with the project provides insights into user participation and network growth. A steady increase in active wallets suggests that the project is attracting new users and expanding its reach within the Web3 ecosystem.
On-Chain Data Transparency: VCs appreciate the ability to verify a project's claims independently using on-chain data. This transparency builds trust and reduces the risk of misrepresented figures. By analyzing on-chain data, VCs can gain a deeper understanding of a project's actual usage, transaction volume, and overall health.

Regulatory Compliance

The regulatory landscape for Web3 is constantly evolving. VCs assess a project's awareness of and compliance with relevant regulations. Key factors that VCs consider include:

Token Classification: VCs evaluate how the project navigates token classification and ensures compliance with securities laws and other regulations. This involves understanding the legal status of the project's token and complying with relevant registration and disclosure requirements.
Regulatory hurdles for crypto-friendly banks: Crypto-friendly banks in Europe face regulatory hurdles, including the impact of MiCAR, stringent banking license requirements, AML/KYC regulations, and "debanking" risks. VCs assess how projects address these challenges and mitigate regulatory risks.
Legal Structure and Jurisdiction: The project's legal structure and choice of jurisdiction can impact its regulatory compliance and investor protection. VCs consider the legal framework in which the project operates and its implications for investor rights and obligations.
Anti-Money Laundering (AML) and Know Your Customer (KYC) Compliance: VCs assess the project's adherence to AML and KYC regulations to mitigate financial crime risks. This involves implementing procedures for verifying user identities and monitoring transactions for suspicious activity.

Conclusion

VCs evaluate Web3 projects based on a combination of traditional business metrics, blockchain-specific metrics, and factors unique to the decentralized landscape. They prioritize projects with strong traction, a solid technical foundation, a well-designed tokenomics model, and a capable team. While the Web3 investment landscape has experienced volatility, the sector shows signs of recovery and growth, with VCs focusing on infrastructure, AI integration, gaming, RWA tokenization, and ReFi.

The evolving relationship between VCs and Web3 startups is characterized by a growing understanding of the unique challenges and opportunities in the decentralized space. VCs are becoming more discerning in their investment decisions, prioritizing projects with sustainable business models, strong community engagement, and a clear path to regulatory compliance. This shift towards maturity is likely to drive the development of more robust and impactful Web3 projects that contribute to the long-term growth of the decentralized internet.

However, Web3 startups still face challenges in securing funding, including competition, regulatory uncertainty, and the need to demonstrate real-world utility. By understanding the key factors that VCs consider, Web3 startups can increase their chances of attracting investment and contributing to the evolution of the decentralized internet. This includes building strong communities, developing sustainable tokenomics models, prioritizing security and compliance, and demonstrating a clear value proposition to potential investors.