Dear Web3 Founders..

Outlier Portfolio & Partner Network,

At Outlier, we are in an advantageous position when it comes to times of uncertainty; we speak with thousands of Web3 founders and investors through running our accelerator “Base Camp”, and later stage launch platform “Ascent.” This doesn’t always give us a crystal ball into the wider macro environment and the cycle of retail demand, but it does give us a near unparalleled view on the health and sentiment of the venture industry; in particular, investment trends often 6–12 months ahead of the wider market.

In response to Terra’s collapse and the wider macro volatility, we have been actively reaching out to our network of founders and co-investors to get their perspective, experiences and sentiment on the market (including a small survey). We would like to share this feedback with you now to hopefully help inform your decision making during this difficult time.

Setting the scene

(feel free to skip to next section to get straight to key insights and suggested actions)

The failure of Terra Luna shook crypto markets. A widely held stablecoin and Top 10 token economy disappearing overnight was, to many, shocking. It undermined the confidence people have in stablecoins as a means to hedge against crypto volatility and be a reliable foundation of digital commerce — cue regulatory oversight and push for CBDCs.

Yet in crypto, history has shown that even an event as seismic as this would be a blip on its overall upward trajectory. However, this time it has happened against a backdrop of a wider drag on all capital markets and assets.

To be blunt, the macro world we live in sucks: war, the COVID resurgence in Asia, inflation, the effects of de-globalisation, disruptions to supply chains… and now monkeypox?! We are not immune to these forces in Web3. In fact, we have witnessed something strange over the last 18 months; crypto is seemingly amplifying the general macro sentiment, both the highs and the lows.

Now the reality is that we didn’t complain when it worked in our favour; stimulus money flooded into crypto and NFTs and the world was enamoured resulting in an increase in the digital consumption and the Metaverse narrative. As that falls away it is only natural that like Big Tech, crypto, the ultimate COVID stock, experiences a similar correction.

But why should the war in Ukraine negatively affect the price of crypto? If anything it has shown to be an effective means to raise and distribute money as a parallel financial system in the ultimate trustless environment… a warzone. So what all this tells me is, for the first time since its inception, crypto is now a widely held enough asset (by both retail and institutional players). Therefore It reflects the wider macro environment sentiment. However, because crypto is universal, permissionless, 24/7 (with no stop breaks like tradfi markets) and has shallower liquidity, it exaggerates the macro mood.

However, it is also true that the new venture capital coming into crypto (even going back to the 70% correction in September 2021) has not stopped. There is an estimated $15 billion in total capital raised this year to date for Web3 investments, up from almost $12 billion during the same period in 2021, with a new fund launched almost every week. And as we will see through some of the survey results this continues to be invested, albeit at a slightly slower rate.

A Crypto Winter akin to 2018–20, where there was no capital being deployed, this is not!

What’s changed?

Here are some thoughts to consider when making your plans:

• VCs are back. People always love to speculate on the death of VCs in every bull run. However, VCs continue to be a steady constant throughout cycles and actually how projects are able to get financed. Right now they are the only game in town.
• Equity is back. For better or for worse, equity is back. Form a commercial entity and raise via either a SAFE or a SAFTE. This also allows you to access a wider pool of capital.
• Valuations are down. But, only by 25% in early stage vs 50% in later stage ventures and up to 75% in publicly listed tokens.
• Fundraising will take longer. In this buyers market investments will predominantly come from institutional investors, therefore expect more discipline and diligence. This takes time and is constrained by the limited human capital of the funds.
• Always be raising. In the past founders could run intensive investment sprints (a couple of times) to secure their multi-year runway. Now founders will need to dedicate a significant amount of management time to constant fundraising.
• Invest in growth. Linked to (5), investors want to see teams that can turn capital into increased adoption and growth. The temptation in times like these is to slow spend to conserve runway but VCs invest in growth, and teams that can demonstrate it will be able to continuously raise money at increasingly aggressive valuations with little to no discounting.
• Flight to quality. This is true across equity and NFTs. On the former we are seeing the top decile teams that can nail (6) are oversubscribed with barely discounted valuations. With NFTs we observe the Top 5 NFT franchises by volume have held their prices well and dominate trading volume.
• NFTs as recurring income. Investors now want to see NFTs as a continuous revenue stream rather than crowdfunding windfalls, whilst mint prices are low to free, perhaps increasingly through secondary royalties than at mint.
• From Token Sales to Network Launches. This has been a trend over several years but if we look at the pipeline of 15 tokens we expect to launch through Ascent, many will primarily be as pure network launches to benefit from incentive design, rather than fundraising events.
• NFTs have officially decoupled. Furthermore we are seeing NFTs increasingly decoupled from the broader crypto market, with their performance geared more towards the particular community utility than the price of ETH.

Investor Survey Feedback

As mentioned in the beginning of my note, we have surveyed more than 50 investors with diverse profiles and geographical origins, something we will continue to do over the coming weeks and months. Here are the results:

• Rebalancing of markets is generally viewed as ‘healthy’. Most investors see this as an opportunity to invest further, find good deals and take their time to do due diligence without the pressure of FOMO.
• Bear not Winter. Half of the investors expect the market downturn to last up to 12 months, the rest are spread equally across shorter than 6 months and longer than 12 months timeframes.
• Slight discounting. The majority of investors expect at least a 25% reduction in valuations over the next 12 months.
• Fund strategies unchanged. Most importantly, they do not expect any change in their deal flow or investment commitments.

Closing Statement:

We have been investing in Web3 startups for over 8 years now. We have come to expect volatility and indeed plan for it. If you’ve been in our accelerator you will know that bull or bear we always advocate for operating a 12–24 month cash runway to ride out the market volatility when it manifests. By doing so you maintain the optionality for when you choose to launch your token economy. Hopefully you listened, I know many of you did. Congratulations, your odds of survival just significantly increased compared to your competitors. Now get ready to steal their talent.

I do not believe what we are experiencing now will be a crypto winter equivalent to 2018–20. All of the fundamentals are significantly stronger and there has never been more capital dedicated to the space that continues being deployed. We remain as ever deeply committed to the space and will continue with our plan to accelerate 200 Web3 startups this year.

And in a world of low/no growth and even recessions, I strongly believe the Open Metaverse, and crypto’s role in it, IS the growth engine.

If you are an early stage Web3 startup, join us and our 130+ strong portfolio by applying to our Basecamp Accelerator.

Best,

JB of OV