How Web3 startups can navigate the funding winter

Some of the most valuable companies in history have emerged during periods of economic slowdown or bear markets. Microsoft in the 1970s, Amazon in 1999-2000, or Airbnb and Uber as recently as in 2008 are examples of companies that have successfully identified market gaps and solved relevant consumer problems despite sluggish economic conditions.

For Web3 startups active funding and substantial growth were common. While these startups are still in their early stages, they are poised to experience a surge in innovation. In some ways, the ecosystem is witnessing the emergence of its own giants like Amazon or Uber.

Their success, however, is partly also reliant on securing funding at the right time, which can be difficult given the current economic climate. To navigate through a funding winter, here are some key considerations and guardrails that startups should keep in mind.

Strong value proposition and team

If the Fear of Missing Out or FOMO, was a key driver during the previous bull market, focusing on the basics is key to navigating current market conditions. By building a strong value proposition with a capable team, you will discover that there are still plenty of interested investors. Equally so, it is important to show how your project addresses a genuine problem, offers innovative solutions, and stands out in the market. Investors are more inclined to support startups with a compelling vision and strong differentiation. Companies like Push/EPNS, Unstoppable Domains, Space & Time, and Stan have undoubtedly achieved a perfect product-market fit.

Revisit customer acquisition strategies and focus on community

In a bear market, reassess strategies that worked in a bull market for customer acquisition. Tactics like airdrops and DeFi incentives can still be used, but business plans should account for their limitations. They can serve as a means to jumpstart user acquisition, but the value proposition of the offering must be strong enough to ensure that customers are retained after the removal of these incentives. Emphasize organic growth through community building.

In Web3 companies, the community plays a crucial role, similar to the importance of marketing in Web2 companies. Initial evangelism and promotion are driven by the community itself. This activity cannot be outsourced, especially in the initial days. Founders must invest time and effort in engaging with the community. Active community building and consistent engagement not only provide founders with valuable feedback but also foster a strong sense of belonging and loyalty. Some of the largest protocols in this space, such as Polygon, dYdX, and Uniswap, have enjoyed a remarkably robust community right from inception.

Study the competition

A notable distinction between Web3 and Web2 is that Web2 platforms tend to be, especially in the early stages, regionally focused. They concentrate on serving a specific country, allowing entrepreneurs to primarily consider competition within that country. In contrast, Web3 presents a more intricate challenge as companies are inherently global from the beginning. Founders in Web3 must gain a comprehensive understanding of the competitive landscape and comparable ecosystem. Researching and exploring the successes and failures of other startups, particularly by speaking with their founders, can help make more informed decisions.

Have a strong network and advisory team

Securing advisors with relevant experience is integral to credibility and addressing industry skepticism. High-caliber entrepreneurs as advisors boost credibility, build trust, and can help attract top-tier investors, especially in a bear market. Leveraging your network is vital to identify investors interested in Web3 technologies. Actively participating in industry events, joining communities, and engaging with influential individuals in the Web3 space can lead to valuable connections. Building relationships with investors who understand and appreciate Web3's potential increases funding opportunities.

Have fair valuations

The Web3 venture capital and funding landscape is undergoing its own evolution and maturation process, as a natural part of the innovation and growth cycles of the industry. The current bear market calls for a more tempered and rational approach to valuations. Also, consider raising a smaller funding round quickly instead of spending a year chasing a larger round at a higher valuation. Don't be swayed by stories of massive capital raises at high valuations. Maintain a balanced approach in your fundraising efforts.

Lastly, be prepared for setbacks and maintain resilience. Fundraising can be a challenging endeavor, especially during a funding winter. Each interaction should be seen as an opportunity to learn, improve and refine your pitch. In addition to traditional venture capital firms, consider reaching out to angel investors, crowdfunding platforms, grants, incubators, or strategic corporate investments. Remember, every fundraising journey is unique, and it is imperative to adapt your approach based on your specific circumstances and the evolving market conditions. We are still in the early stages or "day one” of Web3 innovation.

Rohit Jain is the Managing Director of CoinDCX Ventures.