How VCs Judge Web3 Startups: The Metrics That Matter

How VCs Judge Web3 Startups: The Metrics That Matter

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Written by:

May 9, 2024

May 9, 2024

How VCs Judge Web3 Startups: The Metrics That Matter
How VCs Judge Web3 Startups: The Metrics That Matter
How VCs Judge Web3 Startups: The Metrics That Matter

Key Takeaways:

  • Web3 VCs look at a mix of standard business numbers plus new metrics that are unique to blockchain technology.

  • By focusing on the right metrics, Web3 startups can make a much stronger case for funding, showing VCs they have what it takes to succeed in this exciting space.

Think if you have an amazing idea for a Web3 marketplace where anyone can trade collectible game items in a secure and truly decentralized way. You might even have a rough prototype. But to turn that idea into a real company, you'll probably need funding from venture capitalists (VCs). VCs are always looking for the next big thing, but how do they decide which Web3 projects to back? The answer is metrics!

Metrics are the numbers that tell the story of your startup. VCs carefully analyze these numbers to figure out if your project has a real shot at success and deserves their investment. While some metrics are similar to what regular businesses track, Web3 startups need to pay close attention to additional numbers that highlight the strengths of blockchain projects.

Understanding the Key Metrics

Let's break down the different types of metrics that matter most to Web3 VCs. They look at a mix of these, depending on your project and how early-stage it is:

  • Traction Metrics: These are the numbers that show you're already getting customers (or even just early users!). Things like number of active users, how much money your project is making, and the size of your online community all fall into this category.

  • Blockchain-Specific Metrics: These shed light on how well the underlying blockchain tech is working. VCs might look at the total amount of value locked into your project, how many transactions are happening, and how many individual wallets (blockchain accounts) are active.

  • Tokenomics: Lots of Web3 projects have their own cryptocurrency token. Tokenomics is all about how that token works: how many were created, who gets them, what they can be used for, and more. VCs want to be sure the token is designed in a way that's fair and sustainable.

  • Team: VCs invest in people, not just ideas. They'll want to know that your team has the skills and experience to build something amazing with Web3 technology.

  • Market: Web3 is still new, so VCs need to understand how big the opportunity is. How many people might use your project? Who are your competitors? What problem are you solving that makes you stand out?

Web3 VCs look for a balance of traditional business fundamentals and metrics demonstrating the unique advantages of decentralization.

VCs aren't just looking at today's metrics – they're trying to predict the future of Web3. Understanding what they're keeping an eye on can give your startup an edge:

  • User Experience (UX): If Web3 is going to reach millions of normal people, it needs to be easy to use. VCs are putting more importance on metrics that show how smoothly your project works for beginners.

  • Regulatory Compliance: Governments are starting to make more rules about crypto and Web3. VCs are becoming extra careful about backing projects that follow the law and do things ethically.

  • Decentralization and Governance: How decentralized is your project, really? Can the community help make decisions? VCs are starting to measure this and it can impact their interest.

  • Impact Metrics: Could your project help make the world a better place, not just make money? Some VCs are starting to pay attention to these kinds of metrics as well.

"Web3 metrics must evolve alongside the technology itself. VCs increasingly favor projects demonstrating tangible traction, sustainable models, and a commitment to building user-centric products."

How Web3 Metrics Differ from Traditional Startups

While many of the numbers VCs care about are the same whether you're building a Web3 project or a regular app, there are a few key differences that every blockchain startup needs to understand:

Emphasis on Community

A strong, active community is super important for Web3 projects to succeed. VCs might look at how many people are chatting in your Discord, voting on proposals that shape your project, or talking about you on social media.

  • Engagement is Key: VCs don't just want to see a large community, but a highly engaged one. Look at metrics like the proportion of active users in your Discord, the number of governance proposals initiated and voted on, and the quality of social media conversations surrounding your project.

  • Network Effects: Web3 projects often rely heavily on network effects. Having a devoted early community can be a powerful catalyst for growth and adoption, as passionate users help spread the word.

  • Decentralized Foundation: An active community is the first step towards fulfilling the decentralized promise of Web3. VCs want to see that users are invested in the project's direction and have the opportunity to shape its future.

On-Chain Transparency

One of the cool things about blockchains is all the data is public. VCs might not need to just take your word for it – they can often check the blockchain themselves to verify your metrics.

  • Trust Through Verification: VCs appreciate the ability to verify a project's claims independently using on-chain data. Metrics like the number of active wallets, transaction volume, and total value locked (TVL) can be analyzed to provide a real-time picture of a project's health.

  • Beyond the Pitch Deck: This transparency builds trust and reduces the risk of misrepresented figures. Startups should get comfortable highlighting how to access and interpret their on-chain analytics, showcasing openness and confidence in their progress.

  • Data-Driven Decision Making: On-chain data can be used to inform product development and marketing strategies. Demonstrating the use of data-backed insights appeals to VCs.

Tokenomics Scrutiny

The design and utility of a project's token are critical. VCs carefully assess token distribution, incentives, and how the token aligns with the project's long-term vision.

  • Alignment with Purpose: VCs carefully examine how the token is integral to the project's functionality, ensuring it's not just a speculative asset. Explain the specific roles it plays in incentivizing participation, network usage, and governance.

  • Long-term Sustainability: The tokenomics should be designed to support sustained growth. Address issues like token distribution plans, inflation mechanisms, and how value will be maintained over time.

  • Regulatory Considerations: VCs assess whether the token design has the potential to trigger regulatory scrutiny. Demonstrate an awareness of the legal landscape and a proactive approach to compliance.

Decentralization Degree

How much power do regular users have in your project? This is important, and VCs might look at metrics about how voting works, or who gets to make important changes to the code.

  • Community Governance: VCs want to understand how much decision-making power rests with token holders, and how the governance process works. Highlight transparent voting mechanisms and community-driven initiatives.

  • The Path to Decentralization: Even if a project starts out fairly centralized, VCs assess whether there's a clear roadmap toward progressive decentralization. Explain how you envision the transition and the safeguards in place.

  • Balancing Innovation with Participation: VCs look for a balance between agility (the ability to make changes quickly) and distributed control. Explain your framework for incorporating community feedback while enabling your team to execute efficiently.

Technical Considerations

VCs who understand Web3 don't just look at surface-level numbers. They know that how your project is built makes a huge difference. Be ready to discuss these technical points:

  • Smart Contract Audits: Bugs in smart contracts (the code that runs Web3 projects) can lead to lost money or hacks. VCs want to see proof that your code has been checked by professional auditors.

  • Gas Optimization: Every transaction on some blockchains costs a "gas fee." If your code isn't optimized, these fees can be very high for users. VCs favor projects that have worked to keep these costs reasonable.

  • Technology Stack: What blockchain did you build on (like Ethereum or Solana)? What other technologies are you using? Your choices here tell the VC a lot about whether your team has the knowledge needed to overcome common Web3 challenges.

  • Data Analytics: Blockchains are full of data, but using it to improve your project is a skill in itself. VCs want to know how you track important metrics, spot trends, and make decisions based on what your users are actually doing.

Partnering with TokenMinds

Building a successful Web3 project often requires more than just a great founding team. Partnering with an experienced Web3 development company can greatly boost your chances of impressing VCs and securing funding. Here's how a company like TokenMinds can be a major asset:

  • Technical Excellence: We have a team of experienced blockchain developers who understand the ins and outs of building scalable, secure Web3 solutions. This shows VCs that you're serious.

  • Avoiding Costly Mistakes: Web3 is full of hidden complexities, especially around security and smart contract design. Our expertise helps you avoid mistakes that could scare off VCs or even lead to lost funds.

  • Hitting Deadlines: VCs want to see fast progress. We can work with your team to make sure development moves quickly and key milestones are met on time.

  • Credibility Boost: Partnering with a known, respected development company adds a layer of legitimacy to your project in the eyes of VCs.

Frequently Asked Questions (FAQs)

Let's tackle some of the most common questions Web3 founders have about metrics and the VC funding process:

  • Q. I have a great idea, but no users yet. Can I still get VC funding?

  • A: It's possible, but harder. Seed-stage VCs invest in potential. Having a strong team, a clear problem you're solving, and a well-thought-out plan can make up for a lack of early metrics.

  • Q. How much of my company will VCs want?

  • A: There's no one answer! In early rounds, it's common to give up a bigger chunk to get the cash you need. As you build traction, you'll have more power to negotiate better terms.

  • Q. Should I focus on Web3 buzzwords when talking to VCs?

  • A: No! VCs see through the hype. Focus on explaining the real-world problem you're solving, and how your Web3 solution makes it better than what exists today.

  • Q. What are the absolute red flags that will scare VCs away?

  • A: Bad security track record, unsustainable token models, teams with no Web3 experience, and not being able to clearly explain what your project actually does.

  • Q. Do I need to move to Silicon Valley to get Web3 funding?

  • A: It can help, but isn't a must. More and more funds are open to investing in remote-first Web3 startups with excellent projects.

Tips for Success

Here's a bit of final advice for Web3 startups looking to make the most of their metrics and win over VCs:

  • Track from Day One: Don't wait to start measuring important numbers. The sooner you have data, the better your story looks to VCs.

  • Tell a Story with Data: Don't just throw charts at VCs. Explain what the metrics mean, and how they prove your project has huge potential.

  • Be Prepared for Deep Dives: VCs with Web3 knowledge may ask very detailed questions about your blockchain usage, tokenomics, etc. Be ready!

  • Focus on Sustainable Growth: VCs value long-term potential over quick hype. Show them your plan for continuing to grow in a responsible way.

  • Stay on Top of Trends: Web3 moves fast. Demonstrate to VCs that you keep up with the latest developments and understand where the industry is going.

Conclusion

By mastering the metrics that matter in the Web3 landscape, startups position themselves to tell a compelling story that captures the attention of discerning VCs. Understanding what VCs look for and proactively highlighting the right metrics can make the difference between getting a "no" and securing the funds to make your Web3 vision a reality.

Those who strategically track key metrics, build strong teams, and embrace the evolving nature of Web3 stand the best chance of successfully navigating the funding landscape and achieving long-term growth.

Key Takeaways:

  • Web3 VCs look at a mix of standard business numbers plus new metrics that are unique to blockchain technology.

  • By focusing on the right metrics, Web3 startups can make a much stronger case for funding, showing VCs they have what it takes to succeed in this exciting space.

Think if you have an amazing idea for a Web3 marketplace where anyone can trade collectible game items in a secure and truly decentralized way. You might even have a rough prototype. But to turn that idea into a real company, you'll probably need funding from venture capitalists (VCs). VCs are always looking for the next big thing, but how do they decide which Web3 projects to back? The answer is metrics!

Metrics are the numbers that tell the story of your startup. VCs carefully analyze these numbers to figure out if your project has a real shot at success and deserves their investment. While some metrics are similar to what regular businesses track, Web3 startups need to pay close attention to additional numbers that highlight the strengths of blockchain projects.

Understanding the Key Metrics

Let's break down the different types of metrics that matter most to Web3 VCs. They look at a mix of these, depending on your project and how early-stage it is:

  • Traction Metrics: These are the numbers that show you're already getting customers (or even just early users!). Things like number of active users, how much money your project is making, and the size of your online community all fall into this category.

  • Blockchain-Specific Metrics: These shed light on how well the underlying blockchain tech is working. VCs might look at the total amount of value locked into your project, how many transactions are happening, and how many individual wallets (blockchain accounts) are active.

  • Tokenomics: Lots of Web3 projects have their own cryptocurrency token. Tokenomics is all about how that token works: how many were created, who gets them, what they can be used for, and more. VCs want to be sure the token is designed in a way that's fair and sustainable.

  • Team: VCs invest in people, not just ideas. They'll want to know that your team has the skills and experience to build something amazing with Web3 technology.

  • Market: Web3 is still new, so VCs need to understand how big the opportunity is. How many people might use your project? Who are your competitors? What problem are you solving that makes you stand out?

Web3 VCs look for a balance of traditional business fundamentals and metrics demonstrating the unique advantages of decentralization.

VCs aren't just looking at today's metrics – they're trying to predict the future of Web3. Understanding what they're keeping an eye on can give your startup an edge:

  • User Experience (UX): If Web3 is going to reach millions of normal people, it needs to be easy to use. VCs are putting more importance on metrics that show how smoothly your project works for beginners.

  • Regulatory Compliance: Governments are starting to make more rules about crypto and Web3. VCs are becoming extra careful about backing projects that follow the law and do things ethically.

  • Decentralization and Governance: How decentralized is your project, really? Can the community help make decisions? VCs are starting to measure this and it can impact their interest.

  • Impact Metrics: Could your project help make the world a better place, not just make money? Some VCs are starting to pay attention to these kinds of metrics as well.

"Web3 metrics must evolve alongside the technology itself. VCs increasingly favor projects demonstrating tangible traction, sustainable models, and a commitment to building user-centric products."

How Web3 Metrics Differ from Traditional Startups

While many of the numbers VCs care about are the same whether you're building a Web3 project or a regular app, there are a few key differences that every blockchain startup needs to understand:

Emphasis on Community

A strong, active community is super important for Web3 projects to succeed. VCs might look at how many people are chatting in your Discord, voting on proposals that shape your project, or talking about you on social media.

  • Engagement is Key: VCs don't just want to see a large community, but a highly engaged one. Look at metrics like the proportion of active users in your Discord, the number of governance proposals initiated and voted on, and the quality of social media conversations surrounding your project.

  • Network Effects: Web3 projects often rely heavily on network effects. Having a devoted early community can be a powerful catalyst for growth and adoption, as passionate users help spread the word.

  • Decentralized Foundation: An active community is the first step towards fulfilling the decentralized promise of Web3. VCs want to see that users are invested in the project's direction and have the opportunity to shape its future.

On-Chain Transparency

One of the cool things about blockchains is all the data is public. VCs might not need to just take your word for it – they can often check the blockchain themselves to verify your metrics.

  • Trust Through Verification: VCs appreciate the ability to verify a project's claims independently using on-chain data. Metrics like the number of active wallets, transaction volume, and total value locked (TVL) can be analyzed to provide a real-time picture of a project's health.

  • Beyond the Pitch Deck: This transparency builds trust and reduces the risk of misrepresented figures. Startups should get comfortable highlighting how to access and interpret their on-chain analytics, showcasing openness and confidence in their progress.

  • Data-Driven Decision Making: On-chain data can be used to inform product development and marketing strategies. Demonstrating the use of data-backed insights appeals to VCs.

Tokenomics Scrutiny

The design and utility of a project's token are critical. VCs carefully assess token distribution, incentives, and how the token aligns with the project's long-term vision.

  • Alignment with Purpose: VCs carefully examine how the token is integral to the project's functionality, ensuring it's not just a speculative asset. Explain the specific roles it plays in incentivizing participation, network usage, and governance.

  • Long-term Sustainability: The tokenomics should be designed to support sustained growth. Address issues like token distribution plans, inflation mechanisms, and how value will be maintained over time.

  • Regulatory Considerations: VCs assess whether the token design has the potential to trigger regulatory scrutiny. Demonstrate an awareness of the legal landscape and a proactive approach to compliance.

Decentralization Degree

How much power do regular users have in your project? This is important, and VCs might look at metrics about how voting works, or who gets to make important changes to the code.

  • Community Governance: VCs want to understand how much decision-making power rests with token holders, and how the governance process works. Highlight transparent voting mechanisms and community-driven initiatives.

  • The Path to Decentralization: Even if a project starts out fairly centralized, VCs assess whether there's a clear roadmap toward progressive decentralization. Explain how you envision the transition and the safeguards in place.

  • Balancing Innovation with Participation: VCs look for a balance between agility (the ability to make changes quickly) and distributed control. Explain your framework for incorporating community feedback while enabling your team to execute efficiently.

Technical Considerations

VCs who understand Web3 don't just look at surface-level numbers. They know that how your project is built makes a huge difference. Be ready to discuss these technical points:

  • Smart Contract Audits: Bugs in smart contracts (the code that runs Web3 projects) can lead to lost money or hacks. VCs want to see proof that your code has been checked by professional auditors.

  • Gas Optimization: Every transaction on some blockchains costs a "gas fee." If your code isn't optimized, these fees can be very high for users. VCs favor projects that have worked to keep these costs reasonable.

  • Technology Stack: What blockchain did you build on (like Ethereum or Solana)? What other technologies are you using? Your choices here tell the VC a lot about whether your team has the knowledge needed to overcome common Web3 challenges.

  • Data Analytics: Blockchains are full of data, but using it to improve your project is a skill in itself. VCs want to know how you track important metrics, spot trends, and make decisions based on what your users are actually doing.

Partnering with TokenMinds

Building a successful Web3 project often requires more than just a great founding team. Partnering with an experienced Web3 development company can greatly boost your chances of impressing VCs and securing funding. Here's how a company like TokenMinds can be a major asset:

  • Technical Excellence: We have a team of experienced blockchain developers who understand the ins and outs of building scalable, secure Web3 solutions. This shows VCs that you're serious.

  • Avoiding Costly Mistakes: Web3 is full of hidden complexities, especially around security and smart contract design. Our expertise helps you avoid mistakes that could scare off VCs or even lead to lost funds.

  • Hitting Deadlines: VCs want to see fast progress. We can work with your team to make sure development moves quickly and key milestones are met on time.

  • Credibility Boost: Partnering with a known, respected development company adds a layer of legitimacy to your project in the eyes of VCs.

Frequently Asked Questions (FAQs)

Let's tackle some of the most common questions Web3 founders have about metrics and the VC funding process:

  • Q. I have a great idea, but no users yet. Can I still get VC funding?

  • A: It's possible, but harder. Seed-stage VCs invest in potential. Having a strong team, a clear problem you're solving, and a well-thought-out plan can make up for a lack of early metrics.

  • Q. How much of my company will VCs want?

  • A: There's no one answer! In early rounds, it's common to give up a bigger chunk to get the cash you need. As you build traction, you'll have more power to negotiate better terms.

  • Q. Should I focus on Web3 buzzwords when talking to VCs?

  • A: No! VCs see through the hype. Focus on explaining the real-world problem you're solving, and how your Web3 solution makes it better than what exists today.

  • Q. What are the absolute red flags that will scare VCs away?

  • A: Bad security track record, unsustainable token models, teams with no Web3 experience, and not being able to clearly explain what your project actually does.

  • Q. Do I need to move to Silicon Valley to get Web3 funding?

  • A: It can help, but isn't a must. More and more funds are open to investing in remote-first Web3 startups with excellent projects.

Tips for Success

Here's a bit of final advice for Web3 startups looking to make the most of their metrics and win over VCs:

  • Track from Day One: Don't wait to start measuring important numbers. The sooner you have data, the better your story looks to VCs.

  • Tell a Story with Data: Don't just throw charts at VCs. Explain what the metrics mean, and how they prove your project has huge potential.

  • Be Prepared for Deep Dives: VCs with Web3 knowledge may ask very detailed questions about your blockchain usage, tokenomics, etc. Be ready!

  • Focus on Sustainable Growth: VCs value long-term potential over quick hype. Show them your plan for continuing to grow in a responsible way.

  • Stay on Top of Trends: Web3 moves fast. Demonstrate to VCs that you keep up with the latest developments and understand where the industry is going.

Conclusion

By mastering the metrics that matter in the Web3 landscape, startups position themselves to tell a compelling story that captures the attention of discerning VCs. Understanding what VCs look for and proactively highlighting the right metrics can make the difference between getting a "no" and securing the funds to make your Web3 vision a reality.

Those who strategically track key metrics, build strong teams, and embrace the evolving nature of Web3 stand the best chance of successfully navigating the funding landscape and achieving long-term growth.

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