Investing in the Open Web: A New Thesis
Olaf Carlson-Wee and Bettina Warburg discuss financing a new ecosystem of business models and services on the open web.
Entrepreneurs can potentially change the world with an original idea and good product-market fit. But launching a bootstrapped concept off the ground and into action requires money. Startups building on the Internet Computer and the decentralized web need resources to hire developer talent and attract users.
Financial backers see tremendous upside in the open web’s ability to create opportunities for innovation that previously didn’t exist. Decentralized computing empowers developers to design new applications and services without being hindered by the proprietary infrastructure of corporate gatekeepers, allowing them to scale and explore new business models.
Because the technology is so pivotal, funding the growth of Web3 will involve a different investment thesis than before.
Funding the future of the internet
At DFINITY’s recent launch event for the Internet Computer’s Tungsten release, we heard from two expert blockchain investors who are eager to finance ventures that evolve how the internet does business.
“We’re going to see standards emerge that also allow for whole new economies to flourish, whole new marketplaces to flourish that wouldn’t have been possible,” said Bettina Warburg, co-founder and managing partner of Warburg Serres Investments.
She was joined in conversation by Olaf Carson-Wee, who was employee number one and the head of risk at Coinbase before going on to found Polychain Capital.
“One of the things that we at Polychain and many others in the investment landscape are excited about are novel business models that are uniquely enabled by the features of these new Web3 platforms,” he noted. “It’s really working on building that native business model that’s a completely new paradigm.”
Adapting established models and services to an open network infrastructure only hints at the possibilities of emerging computing platforms.
“We often see with new technology frameworks, we just take the old and slap it on the new,” Warburg said. “We saw that with things like radio. People who used to do radio, once TV came out, they just did radio on TV and didn’t totally utilize the affordances of the technology or the format.”
“I’m way more excited to fund the service or product that is native to the new system rather than what feels like a porting of an application from Web 2.0 to Web3,” agreed Carlson-Wee.
Countering tech giants
A new investment thesis is derived from a key fact: Big Tech’s effective monopoly of the web is a detriment to innovation. Investors in the decentralized web see it as an opportunity to negate platform risk — the critical dependence of products and services on proprietary platforms that can rewrite the rules of access, or withdraw it altogether.
“Historically, building on platforms like the Facebook API or LinkedIn API has been like building on sand,” remarked Carlson-Wee, referring to changes on those platforms that shut off API access for startups. “Your entire core business model can get swept out from under you very quickly. The ability to have more resilient web services on the open web is a very big deal.”
Offering another example of platform risk, Warburg referred to Lyft’s IPO filing, which publicly disclosed the ride-sharing company’s three-year, $300 million-dollar commitment to Amazon Web Services as a risk factor. Something as commonplace as downtime from a third-party provider could destabilize an early stage company, illustrating one of many flaws in the existing digital architecture that’s available to startups.
Read more: Rebooting the Internet: Andreessen Horowitz’s Chris Dixon on the Decentralized Web
When it comes to funding the decentralized web, venture capitalists with billions in assets under management are eyeing decentralized infrastructure that will make it easier for developers to innovate and scale-out their internet services to billions of users, in anticipation of the application layer that will follow.
“From the application standpoint, we’re still hopeful that people are going to come up with models we haven’t even imagined yet,” said Warburg. “But we’re going to need some of that infrastructure and middleware to really open up the possibility for devs to be able to use these environments as effectively as possible.”
One of the biggest creative implications of open web services is that developers can compose completely open programmable systems that aren’t owned or controlled by anyone, and which are freely interoperable with other programs.
“It really is remarkable to think about what is possible and what can be created when every single one of these open internet services is sort of remixable and reusable by any other developer in the world in a totally permissionless manner,” said Carson-Wee.
“You’re going to have a much more additive feeling to this open system,” he went on, “where everyone is building one big experience together that’s better for everyone rather than what you have today, which is these extractive competitive platforms basically attempting to monopolize and shut down competition that’s trying to interact with their closed APIs.”
What replaces the ad revenue model?
In order to get funding from blockchain investors, startups must design new ways to make money. “The business model of our internet is advertising, at the end of the day,” said Warburg regretfully. She and other investors are asking entrepreneurs to get creative and build businesses that aren’t entirely based on optimizing for ad revenue.
“We’re going to see phenomenally different kinds of businesses emerge that aren’t hamstrung by this one business model of the internet that has been our reality over the last several decades,” Warburg added.
Carson-Wee wants to invest in more internet sovereign corporations — underlying financial services or web applications that are owned by a series of token holders. “This way, the value accrual and web service is all native to the internet and the underlying internet computer,” he explained. “There’s no dependence on a specific geography or legal jurisdiction in which that operates.”
Community-owned platforms are also promising. What if users of Uber or Etsy could share in the upside of marketplace growth by collectively owning the web platform?
“This is a radical new idea where you have to squint to see what that looks like,” emphasized Carson-Wee. “But community-owned applications are going to be a huge part of the future and dramatically change the way we think about the business model of the internet.”
Read more: How Software Developers Build Better on the Internet Computer
VCs are eager to deploy billions in capital to foster the decentralized web, and the programs and enterprises that can generate advance interest will benefit.
“This is a fast-paced area for innovation, and the earlier you’re in, the earlier you’re learning,” said Warburg. “Being able to be early and learn as quickly as possible — what works, what doesn’t, how to best take advantage of this new architecture — I think puts any entrepreneur or developer far ahead of the pack. And right now that’s the advantage you want. Absolutely.”
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