Solana early investor: Web 2.0 investors are not suited for the Web3 world
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Solana early investor: Web 2.0 investors are not suited for the Web3 world
The Web3 world is exciting, but it does break many of the orthodoxies we expect in venture capital.
Navigating Web3 tides with focused insightsAuthor: Edith Yeung, Partner at Race Capital
Translation: TechFlow intern
Solana was my first token investment—and it wasn’t an easy one.
Back in 2018, when I first met Solana co-founder Anatoly Yakovenko, my fund at the time, 500 Mobile Collective, was legally prohibited from investing in digital assets. To support Yakovenko’s company, then called Loom, I had to get approval from two-thirds of my limited partners to amend the fund’s LP agreement.
I wondered: Had I gone too far down the rabbit hole? Was I taking on too much risk for my fund? Or was Web2 so different from Web3 that my LPs simply didn’t get it?
Fast forward four years, and all that trouble was worth it. Solana has become one of my most successful investments, delivering a 4,000x return. Yet what now feels normal to me—dealing with pseudonymous founders, betting on entrepreneurs on the other side of the world who don’t want to give investors any control—still confounds many of my colleagues who came of age during the Web2 era.
With a total market cap of $1.7 trillion in 2021 and over $30 billion in venture capital flowing into the space, cryptocurrency is an industry investors can no longer ignore. Yet even as major firms like Sequoia, Andreessen Horowitz, and more recently Bain Capital build out their crypto practices, many smaller funds remain unprepared to embrace the hope of the Web3 world.
A handful of large firms cannot sustain an entire industry alone. More high-quality investors supporting founders equals a stronger crypto ecosystem.
So it feels like the right moment to step back, reflect on what I’ve learned from my experience, and more importantly, open the door for new investors entering the Web3 world.
Lessons Learned
Investing in Web3 requires a top-to-bottom rethinking of the investment model—from how you distribute to your LPs, to how you structure your fund.
Investing in Web3 projects is legally tricky
U.S. venture capital firms can only allocate up to 20% of their fund to liquid assets; beyond that, the SEC requires them to register as a Registered Investment Advisor (RIA). This process can take up to 12 months and cost around $500,000 when factoring in the salary of the compliance officer you’d need to hire.
This may not be a big deal for firms like Sequoia or Andreessen Horowitz, but if you’re running a $10 million fund, becoming an RIA would cost more than your annual management fees. Another option is setting up a hedge fund with token trading at its core, which brings a whole new set of regulatory and operational requirements.
Control in Web3 is a blurry concept
Web3 founders go to great lengths to ensure their communities feel ownership over the project—not investors, and not even the founders themselves.
Most venture funds demand at least 10% equity in their portfolio companies, but Web3 founders often resist letting any single investor hold more than 5%. This ethos of decentralization extends into governance structures.
While Web2 companies have boards, decentralized autonomous organizations (DAOs) allow anyone holding tokens to vote on decisions, with voting power proportional to token holdings. The collective may choose to move in directions you as an investor never anticipated—or agreed to. The founder you initially backed might lose control over the project’s trajectory, but you must be able to accept that.
Crypto founders often don’t want to show their faces—or even use real names.
Protecting pseudonymity is a core part of crypto culture, but it unsettles many Web2 investors. Founders may wish to conceal their identities for various reasons—from avoiding judgment based on gender, race, or alma mater, to minimizing potential legal or personal safety risks.
Lawyers don’t understand Web3
Web3 terms are often not simple agreements for future equity, but Simple Agreements for Future Tokens (SAFTs), or sometimes SAFE notes with warrants giving investors rights to discounted participation in future funding rounds. These instruments are so new that most legal counsel don’t know how to handle them. Finding lawyers who can—or at least those willing to stay open-minded during legal reviews—is always a challenge.
No pro rata rights
In Web2, most investors fight for pro rata rights to maintain their ownership by participating in future funding rounds. In Web3, this concept largely doesn’t exist. Why? Because raising more capital doesn’t necessarily mean issuing more tokens. If I bought 5% of a crypto startup’s tokens early on, I still own 5% regardless of how much more money the company raises later. As a result, larger funds often end up buying tokens on public markets or directly from the company treasury—for example, Andreessen Horowitz’s investment in Solana in June 2021, over a year after it went public.
Exit strategies for Web3 investors are completely different
Young companies that reach certain levels of revenue, growth, and valuation typically seek to graduate from startup status via public listing—through IPOs, direct listings, or SPACs. In the U.S., they might list on Nasdaq or NYSE; in Asia, on the Hong Kong Stock Exchange, and so on. But this concept doesn’t apply in Web3. Most token projects launch directly on centralized exchanges like FTX or Coinbase, or immediately on decentralized exchanges like Uniswap or Serum. There are no specific growth or valuation thresholds, and no restrictions on where or how many exchanges a token can list on.
Web3 companies launch (list tokens) much faster...
A $30 million seed valuation would be considered quite high for a Web2 company. You might even call it expensive. In Web3, seed rounds ranging from $10 million to $70 million are common. Many investors are willing to accept these large numbers because listing on a crypto exchange takes far less time than a traditional stock exchange IPO, offering much faster liquidity and exit paths. For example, we invested in FTX in July 2019 and it listed less than two months later. (Yes, we still hold those tokens.)
…but lock-up periods are much longer
A successful Web2 startup might take 10 years or more to go public. In Web3, it’s not unusual for a project to launch within months—Solana took about 16 months, which is on the longer end. On the flip side, standard stock IPO lock-ups usually last between 90 and 180 days, while Web3 token lock-ups are typically at least one year, and sometimes as long as three.
Distributions are entirely different
In a Web2 liquidity event, a VC fund manager might choose to distribute cash or shares to LPs. In Web3, managers aim to distribute tokens, which can offer greater upside than traditional distributions since Web3 projects sometimes take months or even years to achieve real community adoption. Unfortunately, most LPs lack the infrastructure to handle tokens—they don’t know what a crypto wallet is and are unwilling to put in the effort to figure it out. One of my LPs took nearly nine months just to open an account on a crypto exchange to receive his Solana tokens; since then, their value has increased by roughly 700%, making all the hassle worthwhile.
The Web3 world is exciting—but it truly breaks many of the orthodoxies we expect in venture capital. Yet I firmly believe that great founders still need patient investors to back them through the inevitable crypto winters ahead. The essence of Web2 venture capital—the spirit of backing bold founders—still applies in Web3. But it’s far from simply copying what we already know.
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