1. Team and Founders

Traditional Criteria

From a traditional perspective, we look closely at the founder’s background, including their experience, entrepreneurial successes, and deep industry expertise. For instance, a founder with a proven track record of building and scaling companies in related sectors or roles often demonstrates the ability to navigate the challenges of a startup. Sometimes we come across serial entrepreneurs that have had successful exits in the past through an M&A or IPO, and this track record gives us more confidence in the founder’s ability to replicate the success in the new venture.

We also examine the team’s composition and chemistry, to see if they have complementary skill sets, such as strong leadership, product development, and business strategy. And of course we consider how well they work together.

Layering on the Web3 perspective, we look to the founders’ technical expertise in blockchain, understanding of the industry and its current state, and the ability to “connect the nodes” or build a community. This includes their hands-on experience with decentralized technologies, smart contracts, and cryptographic principles, which are essential for developing robust blockchain solutions. An example might be a founding team that has contributed to major blockchain protocols or built successful decentralized applications (dApps), showcasing their technical capabilities.

We appreciate founders that have the market understanding, product knowledge. and connections that allow them to either be an early trailblazer innovating a new use case or building something complementary and interoperable with the current system. Their ability to build and engage a decentralized community is critical — especially in tokenized ecosystems. Founders who have successfully fostered active, supportive communities around a token or decentralized platform demonstrate that they can drive network effects and long-term user engagement, which are key to Web3 project sustainability.

Furthermore, if the founder is developing hybrid Web2 and Web3 solutions — leveraging Web3 capabilities to address traditional industry challenges — it’s crucial to evaluate the opportunity through both a Web3 and traditional industry lens. This approach requires assessing the founder’s depth of experience and understanding of the conventional market they aim to disrupt, as well as their capability to effectively integrate Web3 technologies to deliver a competitive advantage.

2. Market and Product-Market Fit

Traditional Criteria

In general, we examine the size, growth potential, and accessibility of the market to ensure there’s sufficient demand for the product or service that the startup is offering. We also consider the startup’s timing — whether market conditions, technological advancements, or regulatory shifts create an optimal window for entry. Being too early or late can hinder adoption.

We seek products or services that effectively solve a significant customer pain point, with customers showing a clear willingness to pay. It’s essential for us to see broad adoption across diverse customer segments and regions, rather than being confined to a narrow niche. We also prioritize companies that demonstrate consistent growth in both adoption rates and revenue over time, as this signals a scalable and sustainable business.

For example, we evaluate how quickly the company is expanding. When a company achieves product-market fit, we often see a shift where demand transitions from being driven by the company to being pulled by customers. This shift typically leads to rapid growth in key metrics like revenue, user engagement, retention, and other performance indicators.

Here we focus on several key factors to assess whether the decentralized approach provides clear advantages over traditional centralized solutions. First, we consider the tangible benefits of decentralization — such as enhanced transparency, immutability, and censorship resistance — and whether these features offer meaningful value to users beyond what conventional systems can provide. We also look at the startup’s ability to foster strong network effects, analyzing how the platform incentivizes early adopters and drives the growth of a decentralized ecosystem (this is often done through token incentives that hopefully will lead to a network effect).

Timing is a critical consideration when evaluating Web3 startups. We assess whether the company is entering the market at a favorable moment — ensuring it’s not too early when the infrastructure or demand may still be underdeveloped, nor too late when the space is already saturated. Striking this balance is essential for identifying opportunities with strong potential for growth and adoption. For example, while our investment team had access to major Centralized Finance (CeFi)/Decentralized Finance (DeFi) opportunities like Binance US and Celsius, we hesitated to move forward due to regulatory uncertainty at the time. Similarly, since the NFT market has cooled down and adoption has slowed, it may be too late to invest in an NFT deal or yet another NFT marketplace. On the other hand, now presents an excellent opportunity to explore innovations at the intersection of AI and Web3, as we’ve witnessed significant AI advancements and adoption this year.

3. Product and Technology

Traditional Criteria

From a traditional perspective, we evaluate startups by looking for product differentiation and technological advantage, focusing on their ability to sustain long-term competitive advantages. This includes analyzing proprietary technology, unique business models, strong brand identity, network effects, and high switching costs for customers. For example, a startup offering a unique solution in decentralized finance (DeFi) with proprietary algorithms for optimizing liquidity not only demonstrates innovation but also establishes a competitive moat. A strong moat implies defensibility against competitors and the ability to maintain pricing power or market share as the business scales.

We also assess the startup’s ability to innovate and adapt, ensuring that its moat remains relevant in an evolving industry landscape. We ask whether the product or service is technically complex, requiring specialized talent and years of research and development that would make it difficult for competitors to catch up. Additionally, we consider whether the company holds registered intellectual property or enjoys regulatory protections that offer a competitive edge, enhancing its ability to maintain leadership in the market.

Three key issues in the Web3 space are security, token necessity, and blockchain infrastructure.

4. Traction and Metrics

Traditional Criteria

We often ask ourselves, is the product so good that customers are willing to pay for it? Early user adoption and engagement are the tell-tell signs of a startup’s potential. Data such as user acquisition rates, retention, and users engagement with the product, and strategic partnerships are evaluated during due diligence. For example, a mobile app with rapid daily active user growth and high retention rates indicates a strong product-market fit (PMF).

Here we assess metrics such as the number of active wallets interacting with the protocol, total and daily transaction volume, and liquidity within the ecosystem. For example, a new Layer 1 blockchain that attracts a significant number of developers building within its ecosystem strongly indicates that the ecosystem is thriving. A useful analogy is to think of a Layer 1 as a new phone operating system — you want to see what apps are available, who is developing them, and use.

In his book Read Write Own, Chris Dixon highlights “ownership” as a defining feature of the internet’s next phase. The term “own” signifies users’ ability to become stakeholders and gain genuine ownership of digital assets and networks, made possible through blockchain technology. And this brings up another salient feature of many Web3 products — the involvement of token holders and their staking participation, which reflect the project’s community involvement and governance activity.

Staking in blockchain refers to the process of actively participating in the validation and maintenance of a blockchain network by locking up a certain amount of cryptocurrency in the network. Participants, known as “validators” or “stakers,” help secure the network and verify transactions. In return, they earn rewards, typically in the form of additional cryptocurrency, as an incentive for their contributions.

As VCs, we like projects with widespread staking participation and active governance that demonstrates strong alignment between token holders and the protocol, as well as long-term commitment from its community. In early October 2024, our portfolio company Babylon Network was able to attract close to $1.5B of BTC staking on its chain, in addition to the $62.4M inflow in its first staking round in August 2024, signaling a strong PMF.

5. Business Model

Traditional Criteria

We want to understand how the startup plans to monetize its product or service. Is it a recurring revenue model, like subscriptions, or based on transaction fees? Startups with a clear, scalable revenue model provide a more predictable path to growth. For example, a SaaS platform offering subscription-based services has a stable and recurring revenue stream, which is more attractive to investors due to its predictability.

Furthermore, we want to know the specifics about unit economics — such as customer acquisition cost (CAC) and customer lifetime value (LTV). A business with a high LTV to CAC ratio is more likely to scale profitably. For instance, an e-commerce platform with low CAC but high LTV indicates that each customer brings significant long-term value compared to the cost of acquiring them.

When layering on the Web3 lens, we example the token utility. Is the token actually needed, and how is the value accrued (to the company or to the protocol?) For instance, in a decentralized social media platform, the token could be used for content creators to receive rewards, incentivizing usage and fostering a self-sustaining ecosystem. If the token is crucial to the platform’s operations and generates tangible value for users, it enhances the project’s long-term prospects.

One of the distinguishing aspects of Web3 startups is decentralized governance, often implemented through DAOs (Decentralized Autonomous Organizations). We look at how these governance mechanisms impact decision-making and the project’s sustainability. A Web3 project that successfully implements decentralized governance allows token holders to participate in key decisions, ensuring community alignment and potentially greater resilience in the long term. For example, a DeFi protocol governed by a DAO gives users a say in the protocol’s evolution, aligning the community’s incentives with the project’s growth.

Having served as a DAO governor for a protocol myself (I believe hands-on experience is the best way to learn), I quickly realized the immense coordination, communication, and alignment required to make decentralized governance effective — especially when governors are unpaid. Despite our best efforts, our group struggled to maintain the necessary cohesion and ultimately failed to make the governance work as intended. It was a valuable lesson in understanding the challenges that come with decentralized decision-making, particularly the need for clear incentives and strong collaboration.

6. Competitive Landscape

Traditional Criteria

In any market, understanding the competitive landscape is key. We want to know if this is another “me too” product that is facing fierce competition in a crowded space. Or is it solving the same pain points but with a much differentiated approach or offering? It may be a better product, stronger team, or a more efficient solution. For example, if a fintech startup is offering a payment solution, we would assess how it stacks up against established players like PayPal or Stripe and what gives it a competitive edge, such as lower fees or better user experience.

We would also ask, what’s the barrier to entry? This also echoes the consideration about moat as discussed under the product category.

In Web3, being a first mover or having strong stakeholder support can provide a significant competitive edge. For example, in every Layer 1 blockchain ecosystem (the foundational infrastructure of an on-chain network like Bitcoin), there’s a need for a decentralized exchange (DEX) to enable token trading and facilitate on/off ramping into the ecosystem. The first DEX to offer this liquidity or access, and do so effectively, is well-positioned to build a strong network effect, becoming the default gateway for users and establishing a dominant market position.

On the flipside, it’s crucial to recognize that being a first mover doesn’t guarantee long-term success. While early entrants may enjoy initial advantages, they can be quickly outpaced by new players who disrupt the market with superior technology, innovative features, or a better understanding of evolving user needs.

Take Zoom, for example. It entered a market dominated by established players like Skype and Cisco Webex, which had the first-mover advantage and significant market share. However, Zoom’s ability to challenge these incumbents through a seamless user experience, more reliable performance, and a keen focus on video communication rather than broader functionalities allowed it to redefine the space and emerge as a leader.

In the multichain world of Web3, interoperability is crucial. A great example of interoperability in Web3 is Chainlink, a decentralized oracle network that provides real-world data to blockchain smart contracts. Chainlink’s technology is interoperable across multiple Layer 1 blockchains, such as Ethereum, Binance Smart Chain, Avalanche, and Solana.

For instance, developers building decentralized finance (DeFi) applications on any of these Layer 1s can use Chainlink oracles to access accurate price feeds or external data, regardless of the underlying blockchain. This cross-chain compatibility makes Chainlink a key piece of infrastructure, enabling seamless interactions between different blockchain ecosystems and increasing its utility in the broader Web3 space. Its interoperability helps projects on various platforms benefit from the same trusted data source, strengthening the decentralized ecosystem as a whole.

This brings us to the next point of Collaboration: Successful Web3 projects often rely on strategic partnerships and integrations with other blockchain protocols. We look at how well a project collaborates within the decentralized ecosystem, enhancing its network strength through partnerships. For instance, a project that integrates seamlessly with multiple DeFi platforms or other blockchain networks creates synergies that strengthen its position in the market, making it harder for competitors to displace. On the flipside it’s important to be cautious about investing in projects that prioritize personal connections or friendships over strong business fundamentals.

For example in DeFi, strategic investors play a crucial role in a project’s success, particularly market makers, exchange venture arms, or prominent angels who are founders of successful DeFi projects. These investors not only provide capital but also bring significant value through liquidity and user adoption from their respective ecosystems. For instance, a market maker can ensure deep liquidity on a decentralized exchange, while an exchange’s venture arm might facilitate faster listings. Founders from strong DeFi projects can leverage their networks and experience, driving integration with other platforms and fostering rapid community growth, all of which help the project gain traction in the broader DeFi ecosystem.

7. Legal and Regulatory

There are a lot more legal and regulatory considerations that we’d factor in when evaluating a Web3 startup. Two risk factors come to mind: