A new set of angel investors has emerged since the advent of Web3. Web3 startup founders are increasingly seeking value addition, expertise and mentoring from investors, while offering them much-needed mentorship and community-building, perhaps even more than monetary aid. The fundraising landscape has also changed, as, for a considerable number of startups, token assets are gaining more prominence over equity stakes.
On a rudimentary, ‘tip of the ice-berg’ level, the pre-requisites of angel investing in the web3 space can be summed up in the following steps:
4. Identify the Founder's Expectations: Modern entrepreneurs aren't just looking for monetary aid in the form of massive capital injections. Operating in a decentralized world, they expect guidance on equity allocation and building an open-source community. Much like founders of traditional startups, they might also expect you to hook them up with a sound network of fellow investors and like-minded founders. Last but not least, they might expect access to adequate commercial and operational expertise.
In Web3, the defensibility comes down to switching costs and prior networks built. In this decentralized space, projects are open-source and maintained by a distributed network of contributors. This means that any project can be adapted, and a personal copy of the said project can be produced (forked) by contributories in the network. For example, the Uniswap DEX retains the top spot in terms of Total Value Locked (TVL) despite numerous competing DEXs on the Ethereum blockchain (such as SushiSwap). This example illustrates that in Web3, defensibility is more about timing and community.
Unlike Web2 startups where founders and early investors find their ownership diluted over the course of funding stages, private funding rounds for Web3 startups don’t usually go beyond Series A. Once they reach a certain level of traction in their target markets, they resort to decentralized fundraising (crowdfunding), thereby eradicating the need for private funding rounds. Even if Web3 deal structures have different dilution concerns, it still is a matter of one. However, due to the absence of multiple private funding rounds, many Web3 startups primarily deal with this issue at the beginning of their fundraising journey.
To streamline the logistical mess of angel investing in this globalized era, the concept of 'Mirrortable' has found prominence in the Web3 angel investing space. Consider mirrortables as capitalization tables for stable coins and digital tokens. Since a particular company usually stores all its fundraising processes within a single platform like Carta, a mirror image of a company’s main capital composition table can easily be written to the Ethereum blockchain, and maintained during the company’s life cycle. Then, the shareholders will receive the mirrored shares to their ENS address.
From an investor’s perspective, the relevance of mirrortables can be noted as follows:
Mirrorable smart contracts can be configured through the platform’s interface to allow or disallow asset transfers between entity names or allow conditional transfers. Other than these examples, various complex clauses, such as lock-in clauses, liquidation, priority superposition, etc., can be encoded in the mirror. Contracts can also be updated as and when new terms emerge. For example, if they new shares are issued or if the share price changes, the relevant information can be fed into the interface of the platform, to be reflected by the mirrortable on the chain. Then, all digital wallets held by investors will be made aware of the revised ownership structure or asset valuation, whatever the case maybe.
Since mirrortables operate on a blockchain (primarily Ethereum), record-keeping is an inherent feature. From the date of your investment to the stablecoin or asset sent, one can dig any precise piece of information. However, an equally important financial function is the ability to carry out instant valuations. As an angel, you can calculate the valuation of your investment portfolio instantly by looping through your digital wallet without email confirmation. Lastly, there's no significant application of special rules and regulation as mirrortables are built on the existing compliant web2 capital table platform.
Web3 is still an evolving concept, angel investing in Web3 even more so. Nevertheless, it is interesting how capital markets have drastically changed over the years. From the domineering presence of a select few elite investors in the past to virtually no barriers of entry, we're witnessing insane levels of competition, particularly in innovative, community-owned projects and products. Although highly risky, this fusion of an age-old concept with a super-modern one, accompanied by previously untapped technologies, may just open the doors to a plethora of investment opportunities for seasoned investors and commonfolk alike.
Credits: Tarun Singh for illustrations.