Metaverse and Web3 have become some of the hottest buzzwords and tech trends in 2022. Over the past few weeks, we’ve witnessed the launch of ginormous new venture funds focusing on the space. It’s undeniable that there are billions of dollars being invested in the space. Venture capital firms poured more than $32 billion into digital-asset startups last year and there’s plenty more dry powder out there:
- Haun Ventures – $1.5 billion new fund to invest in crypto/web3 by Katie Haun, former A16Z crypto partner
- Griffin Partners – $750M fund II to invest in gaming, web3 and Metaverse tech
- Bain Capital – $560M venture fund to invest in crypto/web3 (roasted for launching with a male-only team)
- Makers Fund – $500M for gaming focused fund
- Qualcomm Ventures – announced a $100M AR/VR/Metaverse fund
There are more than 35,000 engineers working on building this so called ”New Internet”, and a strong level of passion/engagement in the communities being built around it. But with that said, there are also challenges, which are less discussed.
In this post, I wanted to touch on some of these challenges from our vantage point as investors at Remagine Ventures. In case you’re not yet familiar with us, we’re a seed/pre-seed venture capital firm investing in Gaming, Consumer and Metaverse/web3 tech with a spotlight on Israel and UK.
Kevin covered some of the opportunities for startups building the Metaverse in his post published earlier this week on VC Cafe. The list is by no means exhaustive, but covers several areas ranging from retail, education and gaming to infrastructure and creator economy tools.
We will continue to elaborate on opportunities for startups building in the Metaverse and Web3 space in future posts. In this one however, I want to call out the challenges investors face when investing in the Metaverse and Web3 space. For founders reading this, hope its help you better understand how investors think and address it in your pitch. For investors, I hope to learn from others in the space, so please chime in if you disagree or if I missed anything.
1. The definition of the space is still vague
Metaverse has overlap with Web3, Blockchain and Immersive tech like AR/VR, but it’s important to tell them apart. The Cambridge Dictionary added a definition for the Metaverse this week:
Some might find this definition too limiting. Metaverse goes beyond just virtual worlds and gaming. A Goldman Sachs report on the future of Web3 described Metaverse as “a successor to mobile Internet that will 1) elevate physical world experiences, 2) be co-created and built responsibly”
Even though the terms ‘Metaverse’, ‘Web3’, ‘Crypto’, ‘Blockchain’, AR/VR, all get conflated sometimes, the venn diagram below is probably best way to describe how the various themes intersect. In reality, the Metaverse is still being built and there are some overlapping parts with the other terms. I touched on this in my post ‘A very short peek into the Metaverse‘.
McKinsey (and others like JP Morgan, WEF, etc) refer to Metaverse and Web3 as two of the biggest tech trends in 2022. In the panel I moderated on the role of startups in building the new Internet, at Calcalist Mind the Tech 2022, Jay Jubas, a Senior Partner at McKinsey made a clear distinction:
- Web2 – the Internet as we know it today. A small number of platforms that mediates and control most of it, make all the decisions and capture a disproportionate rent from our usage.
- Web3 – is about a set of principles that try to get rid of the control of the platforms. It looks forward to a world where users and creators govern the Internet and the economics flow more fairly to the creators directly via the platforms. It will take off only if startups make it happen, by developing better use cases and benefits for users that are better than web2.
- Metaverse – it has both B2B and B2C applications. It’s real, it’s happening, and it has several layers, from infrastructure to creator economy to consumer.
2. Talent shortage
Both Metaverse and Web3 are both relatively very new. You’d be hard pressed to find people with 10 years of experience in crypto, blockchain, VR game development, etc. For the market to develop, new talent must come in to the space, and developers, designers, product managers etc, who are looking to enter this space must go through the ‘rabbit hole’ and face the steep learning curve.
As an investor, it’s not always easy to assess the team at the very early stage, especially if they didn’t come from working in the space before. While talent availability is a risk, it can also become a big opportunity as more diverse backgrounds enter the space and as the tools to launch a metaverse and web3 project improve access to new talent from creators to cryptographers.
3. Platform risks
Platform risks arise when startups build their business on top of an existing platform in order to leverage on its existing services and users.
If you bought an NFT in the past few months, you may have encountered high ‘gas fees’. For example, a friend launched a new AI-generated avatar collection as a series of NFTs and wanted to gift me one as a digital collectible. The ETH gas fees, i.e. the transaction fees that users pay to miners on a blockchain protocol to have their transaction included in the block, were $600. Other protocols, like Solana, are working on cheaper alternatives but each platform comes with its own pros and cons.
The Platform risks don’t stop at gas fees. Startups in the Web3 space need to connect to wallets, work with exchanges, regulate tokens, etc. The biggest risks entail losing access to audience and losing access to monetisation. Platform risks can’t be eliminated, but they can be mitigated by reducing dependency on a single channel and having ownership of the user (or at least a direct way to communicate/engage them).
4. Decentralised tech, centralised ownership?
Yuga Labs, the team behind the Bored Ape Yacht Club (BAYC), announced earlier this week that it had raised $255 million seed round led by A16Z at a $4 billion pre valuation. At time of the announcement, there was very little built in terms of product, or code, but the consensus was that the potential is high.
In addition to the Bored Apes, Yuga Labs also owns the two other most expensive NFT collections: Crypto Punks and Meebits.
Take a look at the Yuga Labs deck (that was leaked earlier this week at GDC) and try to put yourself in the investor shoes. Would you invest in a seed round at $4 billion pre if you thought it could be the next Facebook, Amazon, Warner Music, Zynga and Gucci combined?
The issues of control goes beyond owning digital assets. As Bloomberg points out:
Powerful and wealthy investors have earned major profits and gained substantial influence over a space that prides itself on decentralization and control by users. That disconnect was on display with the release of ApeCoin, a new governance token tied to the popular Bored Ape Yacht Club NFT collection. When the coin launched, VC firms Andreessen Horowitz and Animoca Brands were part of a group that received a collective 14% of the drop, equivalent to more than $2 billion at prevailing prices.
The most poignant criticism came from Jack Dorsey, CEO of Square and former co-founder and CEO of Twitter, which caused Marc Andreessen to block him. Personally, I disagree with Jack on this one, but his point was made.
5. ESG impact of Metaverse tech and Web3
Regardless of the space, Limited Partners, investors in venture funds, want to know the ESG (environmental, social and governance) impact of their investments. Said differently, they would like to know if their investments are making a positive impact on the world.
We’ve all heard about the negative environmental impact of crypto mining (the high use of electricity, the need for powerful processing power, etc) but there’s still very little measurement and documentation on the positive ESG impact of Metaverse/Web3/DeFi etc. For example, virtual worlds can help children with Autism interact better, play to earn games have already helped people in the developing world earn more money than their average monthly income by playing Axie Infinity, and the creator economy could contribute to social mobility, by helping creators earn directly from fans.
This is still all very early. Unlocking the positive impact of these technologies on society, and being honest/trying to fix the negative impact will be an important step in helping the entire sector grow.
6. Lack of transparency, impending regulation
The first wave of crypto, which heralded the birth of the ICO (Initial Coin Offering) was a real wild west. I’ve heard stories of people showing up to crypto conferences with suitcases full of cash to buy tokens in the next hot ICO. I didn’t follow what happened with any of them, but the number of scams, failed projects and alleged fraud and money laundering left a lot of people weary of investing in this space.
On March 9, 2022, Us president Joe Biden released the executive order on the responsible development of digital assets, directing agencies across the federal government to coordinate efforts to regulate cryptocurrencies and other digital assets. Cameron Winklevoss, one of the twins from ‘the social network’ movie about Facebook and president of bitcoin exchange Gemini Trust, called Biden’s executive order a “watershed moment” for the industry. Regulation is coming.
7. Boards vs. DAOs, Equity vs. Tokens
A DAO is a Decentralised Autonomous Organisation. “Investment DAOs,” are collectives of crypto-enthused individuals capable of investing their personal capital or directing portions of the DAO’s treasury into early-stage crypto startups. There are more than 100 DAOs managing over $10 billion in capital. The trend raises the question of whether DAOs will encroach on, or one day, replace traditional venture capital, per Coindesk.
A play to earn crypto gaming studio needs little equity money to build a community off the ground. Once they sell NFTs to their users (think of it as pre-selling the characters in the future game), they can finance much of the operation with crypto and are less dependant on external capital. Later on, they can increase their monetisation with virtual goods/land sale and raise money externally in the form of tokens which are non-equity in nature.
Today DAO’s still lag behind VC and the signalling of having specialists funds in the round can support raising from DAOs as it adds to the project credibility. Some VC funds are getting ahead of this by changing their mandates to be able to invest in tokens (vs. equity) and Bessemer even launched its own $250M DAO to invest in Web3.
8. Tech vs. Content
Gaming is the leading form of entertainment in the US for people aged under 50. As an industry, it’s bigger than music, tv and film combined. But it’s a risky investment.
As a generalisation, VCs prefer to invest in businesses that leverage tech and have some defensibility. In gaming, much of the investments are content driven and have little defensibility. Consumers can be fickle and it’s not straightforward (or easily replicable) to produce a hit (same goes for music, film, art and any creative content). It took Rovio 50 games to come up with Angry Birds, and while they did a great job with the Franchise, it’s no longer in the top 10 games on mobile. That said, studio investments can be extremely lucrative. Micrsoft’s acquisition of Activision for nearly $70 billion in cash his just one example.
9. Competition from big tech
Meta (formerly Facebook) wants to hire 10,000 engineers in Europe to build the Metaverse. It owns Oculus, the first mass market VR headset. Microsoft owns the Xbox, Minecraft, Activision Blizzard, Teams, the Hololens and a huge gaming catalog. TikTok is home to the fastest growing audience and is looking to expand to new areas, and the list goes on and on. How can startups compete?
Like in any other space in tech, to be successful in the Metaverse/Web3 space startups need to start with a niche and a clear use case, build a product that users want to create escape velocity. Most of the new giants in this space are startups themselves.
10. Longevity – is this truly the new Internet or HYPE?
This is the big questions that investors worry about. It’s easy for investors (who must be future positive by nature) to put on their rose-coloured glasses and drink their own cool aid with every new projection and announcement:
- Metaverse commerce seen as a $8 trillion opportunity according to Goldman Sachs
- There are 1.1 billion people using mobile AR in 2022
- 27 million people tuned to watch Travis Scott’s virtual concerts on Fortnite
- Lil Nas X virtual concert on Roblox was watched 33 million times
And indeed, there are already a number of Unicorns in the Metaverse and Web3 space.
This is how we at Remagine Ventures evaluate this risk. We (as in society) are more connected and spend more time (and money) online than ever before. Consumer habits are changing – Gaming, for example, has become the top form of entertainment for people under 50 in the US. So generally speaking, we need to be patient. When we talk about the Metaverse it’s still ambiguous term as it’s currently being built. But on a macro level, it’s hard to deny the capital, number and caliber of founders and underlying tech and consumer behaviour shift that makes Metaverse and Web3 startups an attractive sector to be investing in.
Are you a founder building in the Metaverse and Web3 space in Israel? you don’t need a warm intro to talk to us about your project. Please drop us a line to info@remagineventures.com – we read every email and reply to most.
I’m a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google’s first physical hub for startups.
I’m also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we’ve built 11 schools and 50 libraries in the developing world.