Financial technology (FinTech) is an evolutionary outgrowth of digital technology. Although it existed before, only since smartphones has it gathered steam and become omnipresent. FinTech is based around gathering and leveraging financial information and then automating it for the best user-end experience.
As a result of these massive investments over the past decade, it is now easy and intuitive to conduct one's financial affairs through a few taps on the phone.
Yet, further evolution has taken place in lockstep — blockchain technology as FinTech augmentation. While FinTech is in charge of financial streamlining, blockchain is in charge of decentralizing and tokenizing financial assets. Backed by smart contracts, blockchain projects are poised to disrupt traditional banking, hedge funds, stock trading, insurance, loans, wills and other legal contracting, crowd-funding and even crypto exchanges.
In short, blockchain projects represent a massive monetary shift, from human-based trust to algorithm-based trust. Yet, with all their promise, blockchain startups carry inherent risks as well.
According to CB Insights, Q1 2021 saw $2.6 billion invested across 129 blockchain startups. Furthermore, the PitchBook survey of Venture Capitalism (VC) investments revealed a new high of $3 billion in the same period, closing 239 blockchain-centered deals. In other words, despite the economic slowdown and the pandemic scare, investments in 2021 doubled compared to the $2.3 billion invested during all of 2020.
With Coinbase going IPO (Initial Public Offering) on Nasdaq, it's safe to say we are now seeing a second wave of blockchain/crypto-focused startups. Specifically, those that are geared towards building the infrastructure for Web 3.0. More developers than ever have turned their efforts toward Web 3.0, as demonstrated by the 250% increase in developers (from 100k to 350k) using the Infura blockchain development platform.
As you may have noticed, the internet is more centralized than ever, revolving around half a dozen Big Tech platforms — Meta (Facebook), Google, Twitter, Reddit, etc. More worrying is the fact that they tend to collude with each other as both gatekeepers of new companies and as de-platformers of existing ones, if they don't tow the line.
Web 3.0 is an attempt to solve this by emphasizing its open-source nature. This is in complete contrast to Big Tech's walled gardens. Instead of having proprietary code that is vulnerable to hacking and leaks, open-source code is built up and constantly audited by a large community of developers.
Most importantly, Web 3.0 fixes what has always been missing from the internet — the transmission of money as easily as transmitting information. The fix for this is elegant, as money itself is information, but not just any type of information. Only blockchain-based networks can transform information into digital money that is secure and can be authenticated as true.
Web 3.0 based blockchain projects are the ones that investors should look out for. Presently, they range from decentralized file storage (Filecoin) and cloud-hosting (Akash) to decentralized video streaming (Livepeer) and wireless networks (Helium).
With knowledge of these cutting-edge blockchain projects on the horizon, investors have to take care not to fall into certain traps. As a whole, from decentralized social media to DeFi protocols, they have at least a $37 trillion market at their disposal to tap into.
It is no secret that startups are inherently risky. After all, 9 out of 10 turn into revenue duds. Case in point, Deloitte revealed in 2017 that out of 26,000 blockchain startups, 90% grounded to a halt. One of the bigger stumbling blocks is that the VC funding model itself doesn't translate well from traditional to blockchain projects.
The critical obstacle is the depleted talent pool. VC funds have to compete with Big Tech and Fortune 500 corporations to extract the right personnel from an already small pot. There are about 24 million software developers world-wide, according to Evans Data Corporation. Yet, blockchain developers make only a fraction of that figure, at around 105,000.
With specialized talent pools being so rare, VC funds would gain better results if they had a full grasp of blockchain startups' potential. After all, when pushing the envelope of new technology, throwing around cash in the hopes something will stick can only go so far. This is why funding must secure a comprehensive package — university to blockchain pipeline, alongside experienced and sustained financial support for executing the right ideas.
Therefore, blockchain projects tend to fail because it takes too long for them to materialize. They may start off on a good track, but most lose their momentum. Case in point, even the most impressive whitepapers can deliver zero deliveries, as shown when Merl Tech investigated 43 blockchain startups. For investors, this translates to funding projects fully from the get-go, instead of relying on half-measures.
Such an approach removes developer uncertainty, makes sure that software engineering can be the primary focus and that extra talent can be brought in to keep up the momentum.
As with every endeavor, the success of a startup may rely on an idea that has some critical holes and inadequate execution. The right talent may even patch up the holes eventually, but the project may still fail if it lacks the funding necessary to execute the proposition laid out in the whitepaper.
Moreover, it is difficult for VC funds to gauge if a whitepaper has the potential it claims. It is then a prerequisite to hire the services of other blockchain developers to audit it and give their independent review. Lastly, outside of talent and operational support, blockchain projects should dedicate some portion of their funds to branding.
For these reasons, one of the most prolific blockchain funders, Andreessen Horowitz (a16z) has implemented the TOPSCAN strategy to minimize the inherent risks, put forward by David Teten of Versatile Venture Capital. It consists of :
In conclusion, to maximize the likelihood of a blockchain startup's success, all 7 cogs have to be properly prepared and actively monitored.