Challenges for Growth of Web 3.0 Start-ups

There is no need to repeat all the reasons why we are facing a harsh crypto winter and why the wider public has lost faith in both the story of blockchain and from trusting centralised industry participants. Prices in all crypto assets have dropped dramatically, trading volumes have faltered and valuations of many projects collapsed. Winning new investors is a big challenge for web 3.0 projects – especially for those moving from bootstrapped financing to early stage. Conditions for crypto companies have changed fundamentally compared to 2021, and the next year will probably be even more challenging.

Challenging times ahead
Today, we are facing an ambiguous outlook for 2023. Markets across the globe and across all asset classes seem depressed. Estimates vary between overvalued and too risky in general. Economies seem to be in bad shape, haunted by inflation, lack of qualified employees and uncertainty in many aspects including the geopolitical. Our global environment, societies, economies and all humankind are under pressure.

We see rising costs everywhere – not just because of the infamous «i-word» (inflation). In financial markets, we see higher costs for the use of capital. At the same time, the increase in interest rates offer other attractive and less risky alternatives to crypto and venture capital investments, traditional finance has become the new decentralised finance. Large and small companies have released many talented people; however costs for key employees remain high. There is still a shortage of qualified developers and programmers. In addition, competition among projects will remain high, so marketing will be key to differentiate the merits of good projects. Finally, new companies realise the necessity of winning trust by being properly regulated and legally compliant – an expensive endeavour that entails significant payments to lawyers and other specialists. Raising new capital to cover these additional costs will be even more of a challenge.

Significant loss of trust
Within a couple of months, the trust in a new technology and its proponents has widely collapsed. A trust developed arduously over more than ten years through education, information and regulation. We have seen many explanations, why decentralised platforms collapsed or centralised crypto exchanges faltered and failed. In the very fundamental, it is fair to admit that we all placed too much trust in the technology, security, code, and in high profile people as well as in the herd mentality of speculative investors selecting the best projects with little or no real due dilligence behind.

Trust in technology, advocates and high profile proponents seems lost and this loss hits hardest those who still believe in the potential of blockchain away from all the hype. Business builders, customers, investors and regulators are pivotal for the success of any innovative project – not just in the blockchain and crypto space.

Knowledge transfer to rebuild trust
Working together without trust might be fine for algorithms and non-hacked smart contracts, but we have to consider that every institution in the end consists of people and people need a certain level of confidence in a counterparty. For a good extent, confidence may be won through robust, secure code and reliable technology or proper regulatory compliance. Now, however, we see too little knowledge transfer about the capacities and limitations of blockchain technology and the potential of web 3.0 applications. This will be the key task for the coming year, maybe for the years to come. Regaining trust will be possible if there is a sound knowledge transfer and a higher degree of transparency in the crypto industry.

Regulation will continue to develop, become more detailed and presumably more restrictive. We must strive to have well informed regulators that are understanding and yet promote innovation in technology whilst safeguarding consumers. The same is true for the wider audience: investors, individuals, journalists and politicians should be informed and educated to have enough knowledge to form their own non-tainted opinion about blockchain, web 3.0 and its opportunities and perils.

Educating the broader public is one side of the coin, increasing professionalism and good governance practises in the management of protocol projects is the other side. Especially young companies need partners that can be trusted and that are clear and transparent in their judgement. In the past, not all investors have critically reviewed the quality of a business case, the composition of the management team and its capabilities. A neutral business partner could be helpful here.

Value of trusted partners
We all know the success factors of a start-up company, but sometimes we need a trusted partner who tells the blunt truth about existing weaknesses. For decades, banks have played this role as a critical but trusted partner, both as provider of loans and credits but also as a provider of benchmarking. Using their evaluation may result in a realistic approach of the company’s management and growth.

In the current environment, knowing people, networking and opening doors to key stakeholders become even more critical than in the past. Here, too, a trusted partner is valuable. We are confident that next year investors already involved in the potential of blockchain will return with new money and investments. Winning new – especially institutional – investors will continue to be rather challenging, unless, with patient explanation and detailed information, the opportunities of a new venture can be assessed realistically.

Financial services at a crossroad
The last 24 months showed an increasing interest of banks and other incumbent financial service providers in digital assets, tokenisation and trading in crypto assets. Many have implemented their first projects linked to blockchain. The new crisis may lead to some banks to rethink their already cautious approach to the new world turning away to areas that seem more promising. Trading volumes are down; so, why bother with trading of digital assets? Tokenisation has not yet solved the problem of lacking market transparency and liquidity for so-called non-bankable assets. We see projects at incumbent banks that have to undergo new and further scrutiny – a review with an uncertain outcome.

At the same time, we strongly believe in the inherent qualities and advantages of blockchain technology over the existing banking technology. We remain confident that the industry will carry on replacing outdated payment, trading and settlement solutions with blockchain technology because ignoring such applications will be fatal in the long-term.

Trust and reliability are cornerstones
Although the history of banks is abundant with their own crisis events, many institutions are still more trusted than new players and start-ups in the digital world. This may be due to their corporate age, solidity of capital structure, trustworthiness of shareholders or stricter regulation. Some banks can become the trusted partner for web 3.0 companies if they understand the industry and the technology as well as the needs of their corporate clients. They can occupy the strategic niche to be the bridge of trust between traditional investors and innovative start-ups, between the ambitious plans of start-ups and actual financial realities. Not all banks will be willing to collaborate with web 3.0 companies and not all blockchain-focused firms will be willing to work with banks. Nevertheless, a cooperation between both is central to build a bridge between both worlds of finance – the incumbent and the digital world.

About the Author
Article authored by Milko G. Hensel, Head of Digital Partnerships at Maerki Baumann & Co. Ltd.