For a very long time, the word Web 3 and Web 2 are used in rather contradictory contexts — entrepreneurs with previous experience in Internet companies who just started building in Web3 would be called “Web 2 founders”. There are also various stereotypes around Web 2 and Web 3 founders — Web 2 founders are considered strong in operations and user acquisition, but weak in product “taste” — delivering the user experience yearned by Web 3 users. On the other hand, Web 3 founders are looked down by Web 2 founders — not real founders but probably some clowns seeking for public attentions and launching "tech" projects that are scams underneath.

However, we don’t see such divide between other sectors. No one is trying to deliberately differentiate between founders in AI and other sectors like SaaS. So what so unique about Web 3 then? My personal theory is that crypto fundamentally changed the way venture capital and early stage investment work, which makes the requirement for a crypto startup to be successful slight different from an equity-based startups. And the TL;DR version is that the design of tokenomics in crypto creates unparalleled opportunities for startups and venture investors, crypto entrepreneurs would have more options than their peers in other sectors in terms of fundraising. As crypto industry matures, we will see more convergence between Web 2 and Web 3 companies — as it all boils down to PMF, user growth and value creation.

Alignment of interest between platform, developers and users

The misalignment is being described as “attract and extract” cycle in Internet companies. In the past 20 years, Internet companies have spend a lot of effort in attracting users at their early stage — as long as there is growth, investors could happily ignore the lack of a valid business model. Because as long as users are sticky enough to the products or services, there are always ways of making money off them. Once the maturity stage is reached, it’s all about extracting values from the users, as much as possible.

The convergence of primary and secondary market investment in crypto

In traditional finance, primary and secondary market investments are two separate categories. VC funds would not usually invest in listed projects and hedge funds would not deploy into early stage startups. It’s because funds of different stages are specialized in different fields. Early stage VCs are sharp in identifying new trends in tech and capable founders while secondary funds focus more on the fundamentals and financials. In the case of crypto, because asset issuance is permissionless, even early stage projects could raise capital through token sales and create tradable assets on crypto exchanges. You could see projects pre-product or pre-revenue with millions dollar worth of daily trading volumes, something that cannot be imagined in traditional venture.

It is a cruel game of probability for early stage investors in startups — it’s a home run that covers the whole fund or nothing. Equity for early stage companies has poor liquidity and an exit is usually only possible when there is an IPO or acquisition, with an average time window of 5 to 10 years. Since token places an important part in the crypto projects, they are usually offered at an early stage to both users and investors, both for accessing the services and decentralized governance. As a result, early stage VCs could still apply the same set of methodologies for listed projects because they are essentially still “early stage” both in terms of team and valuation. The access to liquidity creates a premium in valuation, but also adds a sweetener in risk management. Investors could capture a company’s growth along the way and does not necessarily need to hold an asset to zero if the investment thesis does not hold true.

Rule no.1 of building in Web 3 --"crypto native"

The most mythical term for Web 2 founders looking to build in Web 2 is probably “crypto native”. WTF is crypto native? The short answer is - don’t just try to add a token to replace the points in an existing product and call it Web 3. The longer answer is - to bear in mind the idea of decentralization and permissionlessness at the setup of a project, such that the features of token network are being captured for the most suitable use cases which would not be possible without the blockchain technology.

To quote from Reid Hoffman, founder of LinkedIn, "During LinkedIn’s Series A, when we pitched the importance of building the network, the classic objection was that the network wouldn’t be valuable to the first members, so why would it grow? For the first 500,000 or so members, the value of the network is zero. What I knew that many didn’t was that a combination of curiosity and a viral game mechanic would slowly get to a million people, at which point the network becomes valuable." Cold start for a network is real, even for LinkedIn.

Crypto networks are a perfect fit for creating products with strong network effects due to the nature of token economics. Token networks help solve the cold start problem by providing financial incentives for early stage users when the value of the network is not so high. Moreover, there are still plenty of opportunities to create networks in crypto as there are few incumbents too strong to be replaced. It is probably not a great idea to create another social network to battle Instagram or X, but it’s not impossible to build a decentralized social protocol with the potential of mass adoption.

Eventually, crypto will become a tool in the toolbox of entrepreneur, regardless of Web 2 or Web 3.