What to look out for when doing an Angel Investment into a web3 venture
The existing web2 landscape is fraught with many rough edges, including centralization, weak security architecture and data privacy concerns. Estimated to be worth $6 billion in 2023 per Market Research Future data, web3 is seen as as an alternative to the status quo. It involves a grand use of blockchain, artificial intelligence, semantic web, and sophisticated VR technology for a highly immersive digital web experience. The actualization of web3, as presently perceived, relies on investors who believe in the space, can provide knowledge and resources and of course financing to web3 startups and entrepreneurs in exchange for equity stakes (or tokens) in the web3 startup or company.
Web3 investment is a high-risk venture. The probability of failure is too substantial to ignore, so angel investors must exercise restraint and do detailed due diligence before investing into a web3 startup. Here are the crucial factors to consider before angel investing.
1. Founder and management team
Ever wondered why Elon Musk has no difficulty finding investors for his numerous companies? His track record speaks for him. It is important to invest in web3 startups with founders and/or a management team with verifiable track records of excellence. You must be sure of their competence, strong work ethics, drive, knowledge depth, experience, and discipline to grow a web3 startup to prosperity.
Unveiling founders and their management team relies on your ability to ask pertinent questions. It is necessary to ask questions about the team’s motivation, the scalability of the web3 startup, and its long and short-term operational and financial goals. It is also necessary to ask questions about the startup’s organizational structure, the management team’s capacity to actualize its objective, the business plan, operational costs, and likely additions to the management team.
Needless to say, the decision to invest must be based on the conviction that you can work with the founder and his management team. The questioning session must reinforce your belief in the team. It must guarantee that their integrity is not challenged. It is highly recommended that you involve experienced advisors and investors to help unravel the team.
2. Market opportunity
Understanding the web3 landscape and the problems it seeks to solve gives a deep insight into its resultant market opportunities. Before investing in a web3 startup, you must identify the problems it intends to solve and the market potential of solving these problems.
What percentage of the web3 market does the startup intend to capture long and short-term? What is the startup’s marketing strategy, and does the startup have the potential to scale and become indispensable in the web3 space? These and similar questions must be answered satisfactorily before proceeding. Make sure you define satisfactory for yourself beforehand through benchmarking, market research and if possible detailed conversations with experienced investors.
3. Early traction
While angel investors are not averse to investing in very early-stage startups like venture capitalists often are, taking cognizance of a startup’s early traction before investing is crucial. A web3 startup’s early traction can be a key indicator of its ultimate viability. It also indicates the team’s confidence in their web3 startup, in which they have invested time and resources to achieve this early traction. Early traction includes the existence of a customer base, a web3 product or service (MVP), participation in early-stage web3 incubators, and strategic partnerships entered in furtherance of the startup’s objective.
4. In-depth analysis of the startup financial metrics
Financial metrics are used to evaluate a business’s performance across crucial areas, including marketing, finance, operations, and human resources. An angel investor must look beyond beautiful rhetoric and deeply evaluate a startup’s financial metrics before investing. He/She/They must have a firm grasp of the startup’s customer acquisition cost, projected revenue over a period, gross revenues and expenditure, future financing plans, the startup’s monthly burn rate and most importantly, its profitability. Due diligence is complete with an in-depth analysis of the startup’s financial metrics and other key performance indicators.
5. Investor pitch deck
An investor pitch deck enables you to scrutinize a startup before granting the founder an audience in an investor pitch. The document must show an interesting business and financial prediction, a well-crafted executive summary, compliance with relevant regulatory authorities and other necessary information. Think of the investor pitch as the window to the web3 startup. It gives a brief insight into the startup, its arrowheads and the business venture seeking your investment. It is of no use to arrange a meeting if the investor pitch deck does not strike you as interesting or expertly prepared.
6. Understand the risks involved
There is no business without a risk factor to consider. The web3 space being at the conceptual and early development stage makes it imperative for every angel investor to understand the risk involved fully. Identifying the legal, regulatory, technological, and operational risks involved in a web3 startup before investing is important. You must be convinced of the efficiency of existing precautionary measures presented by the founders to nip the risks in the bud or ameliorate their impact.
Please note that this is not financial advice and just a starting point to your research into becoming a web3 angel investor. Do your own research, do proper due diligence, understand the venture you are investing in fully and make sure you can explain both the venture and all the reasons why you invested with utmost clarity. Also make sure the contracts for the investment are properly vetted and the vehicle through which you do this investment, e.g., a syndicate, have the right legal structure.
What have you invested in? And what are your main thoughts?
