If you’re an entrepreneur or the creator of an NFT or metaverse project, you may have had interactions with or even received funding from venture capitalists. In many respects, VC funding is the veritable “stamp of approval” users and investors are looking for when it comes to putting their time and money into projects. But is it all sunshine and roses? Well, maybe not…
It’s Dog-Eat-Dog Out There
Many startups and creators have great, original ideas, but in most cases, they lack one important component in order to scale—funding. And of course, there are already established global multinationals that are putting a ton of money into developing solutions and new products for people to use. And then there are those folks who are very, very good at talking the talk to gain the attention and love of investors looking for an incredible (and almost always nonexistent) ROI.
In an article by Charles Duhigg appearing on The New Yorker, he discusses the case of Jeremy Neuner and Ryan Coonerty who formed a company that provided co-working spaces called NextSpace. While they enjoyed some success, to scale faster, they would need to secure some funding from investors. Neuner attended a conference to appear on a panel and meet some big players with enough capital to back his ambitions. However, another speaker named Adam Neumann, who sported designer clothes and spoke with confidence, informed investors about his co-working company called WeWork, describing it as “the world’s first physical social network.” He also informed investors that his company would soon have 10,000 clients and spoke of building a community that would “change the world” (sound familiar?)
Needless to say, when Neuner met with venture capitalists, they all asked him how he planned to compete with WeWork. Despite the fact that WeWork was losing millions of dollars a month, it was expanding at a rapid pace, so on the surface, the business seemed to be doing extremely well. Needless to say, Neuner couldn’t think of any good answer that didn’t somehow involve calling WeWork out for what it was: an outright scam.
Without going into too much detail, Neuner was eventually forced to close all of his NextSpace operations as venture capital continued to pour in for WeWork, and despite the fact that WeWork continues to lose money to this day, it continues to operate. The result here is that small businesses and entrepreneurs have been screwed over by reckless investment practices, gross speculation and, that one aspect of human beings we all know and despise: greed.
So Are All VCs Bad?
I think it would be reckless to say that all venture capitalists are bad, but there are certainly those who aren’t responsible or ethical in the way they go about their business. Now how does this apply in the world of Web3? It’s pretty simple to my mind, but I think this quote from Management Study Guide might be a little more eloquent:
Venture capitalists seem to have found the loophole in the system. They seem to have realised that the business they invest in does not actually need to make money. The business may be unprofitable to its owners and shareholders. However, it could still be very profitable to the venture capitalists.
That sounds like it applies to a number of NFT and metaverse projects. The sad truth here is that VCs (or at least the vast majority of them) are out there to do one thing and one thing only: create hype. Yup, it doesn’t matter if a project doesn’t have any actual product or ever really delivers on their promises. Just get people to invest, dangle the carrot, make your money and pull out when it’s no longer profitable or worth your time. Lather, rinse, repeat.
But not everyone agrees with this rhetoric with many individuals advocating for VC funding and asserting that without it, many crypto projects, some of which are quite promising, simply wouldn’t exist:
Do We Even Need VCs in Web3?
Getting funding from VCs might be the go-to for many projects, but given that Web3 is supposed to be about decentralization and community, it stands to reason that strong projects with good fundamentals should be able to raise the capital they need through the sales of NFTs or other crowdfunding measures. And when it comes to the Metaverse, there are those that believe those efforts funded by communities will prevail against corporate and VC-backed projects in the long run:
Of course there are problems with this theory as well, and while communities have backed ventures and speculated about projects in the past, many have come up short, losing all of their capital in the process. However, this also means that many communities don’t invest because they actually care about the project or what it’s building—they just want to make a ton of money, just like many venture capitalists, and when they throw their money at something built on hype, it pretty much never works in their favor.
This Is Pretty Confusing!
Look, the point of this article is that it’s meant to get us thinking about how projects are built and how funding is sourced and sustained. It’s reductive to say that VC funding is all bad and that you shouldn’t invest in projects backed by VCs. It also means you shouldn’t trust every project that’s being built exclusively by communities. At the end of the day, you need to back or participate in something for one reason and one reason only: because you actually think it’s a good idea.
And if you think venture capital in crypto (or anyone else for that matter) is going away, don’t bet on it. Binance just raised $500 million so that it can launch its own venture capital fund (you can read more about that here ), and while we may be in something of a bear market, Web3 is far from dead, and there are still plenty of VCs looking to invest.
So if you’re a creator and a VC approaches you about your project, should you accept the backing? That depends on a range of factors, and you’ll want to give it some good thought and do your research before signing any kind of agreement. Find out if the VC has a good track record, read about them, find out what the agreement entails and what the expectations are. Ask why they want to back you and how you stand to benefit. Heck, ask as many questions and be as careful as you can. Creators have to make sure they protect themselves as well, so whatever that means for you, do it.
So in closing, VC funding isn’t necessarily good or bad, and a whole lot of other factors come into play as well. Whatever the case, do your research, think carefully and jump in if you feel happy to in whatever way you choose.
What do you think about venture capitalism? Do you think it has any place in Web3? Or is community funding the way to go? Let us know your thoughts!