Welcome to Web 3.0: a more connected, open, intelligent internet with distributed databases, machine learning and natural language processing abilities.
Q4 2019 hedge fund letters, conferences and more
We’ve come a long way over the past 20 years. Web 1.0 was simply about accessing information. Web 2.0 added the element of connecting people and making the internet a social endeavor. Today’s internet is about taking advantage of Web 3.0 as a decentralized, personalized network where people and computers work together to optimize outcomes, aided by AI technologies that can enable intelligence into the online fabric.
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
We can see a corresponding progression in the structure of successful technology startups. Before the internet, building a tech company meant building on-premise software solutions to be used on a PC. As the internet started, it meant building applications that customers access through a private network. Today, with the evolution of the cloud and increased interconnectivity, making a splash in the market requires a new paradigm. Essentially, we’ve gone from building products to building platforms to building components that power entire ecosystems.
Buidling Business Models In Web 3.0
As we usher in Web 3.0, investors should seek out companies that understand how to build their business models around this new reality. Here’s exactly what investors should be looking for and why:
1) Companies that develop products to power broad ecosystems — “Ecosystem enablers"
Companies that want to succeed in the age of Web 3.0 need to move away from standalone products. Instead, they need to seek out ways that their products can power and enable existing ecosystems. In other words, they need to be an ecosystem enabler, establishing business models that facilitate marketing and productization of ecosystem components.
With this in mind, almost every time an entrepreneur approaches me with a narrowly focused idea for a pre-packaged product, I ask them to consider additional options to go to market: can they break up that product into smaller, reusable components or widgets and license it to thousands of companies?
If the answer is yes, that can often expand their target market, improve speed to market and change how they position themselves in the market. Suddenly, they’re no longer thinking about how they can beat out their competition and take a piece of the market share; they’re thinking about how to sell their ideas to all of the competition. Instead of selling to as many people as possible, they should be considering how to sell their technology to as many businesses as possible.
2) Companies that can build their own ecosystems - "Ecosystem creators"
More ambitious entrepreneurs can go a step farther than helping to power the ecosystems of other companies; they can build an entire ecosystem themselves. For an example of a company that understands the impact of building an ecosystem, just look at Epic Games’s cross-platform hit Fortnite. The company built a developer ecosystem around the Fortnite franchise, featuring a virtual world and even its own virtual currency. Another great example is Service Cloud, which gives businesses access to its comprehensive customer service platform.
We’re still early in the ecosystem-building phase of innovation, but the conditions are ripe for these types of businesses to explode. Amazon, Azure and Salesforce have already taught us the significant benefits of building large ecosystems. Additionally, 5G technology and the exploding deployment of IOT devices will continue to increase the interconnectivity which allows this model to flourish. In this environment, a company that could get a wide audience on board with a new ecosystem can prove to be incredibly valuable.
3) Corporates that can overcome technical challenges to reinvent themselves
For software developers and system architects, the transition to Web 3.0 poses a major technical challenge: most of the technology widely deployed today was not built to power entire ecosystems. Much of it was based on simple, internalized databases rather than distributed systems. Companies looking to transition to the new paradigm are facing challenges with API management, scalability, security, and data management. They are facing strong culture barriers related to traditional product management, sales and competitive strategy thought processes. Moving to this new interconnected world requires them to rethink traditional product boundaries, reassess their views of who they are really competing with and potentially destroy profitable legacy business models.
Corporate investors should be seeking out companies that have the technical know-how to overcome these challenges to position themselves for web 3.0 growth. Successful companies will also be able to adjust their company culture to meet a new set of values that better align with this new distributed, interconnected world. It won’t be easy.
4) Companies that have created technology to help the world move to Web 3.0.
As the Web evolves it will give rise to a new breed of technology enablers. As companies try to adjust to this new paradigm, they need technical solutions to address the significant challenges these large interconnected systems pose. This is giving rise to a new series of technologies to help the world move to Web 3.0. The rise of companies like Fluree (full disclosure: this is a portfolio company of 4490 Ventures) makes it easy to transform traditional databases and applications into a multi-source, multi-consumer model, addressing the significant issues of API management, scalability and security that these large distributed systems pose. As this evolution gains more steam it will give rise to a whole class of investable companies.
Clearly, success in today’s Web 3.0 world is much more complex and elusive than it was just a decade ago. Investors that can navigate the new terrain and correctly pick tomorrow’s winners will be richly rewarded.
About the Author
Malcolm Thorne, Venture Partner, 4490 Ventures
Malcolm is serial entrepreneur who made a transition to the fortune 1000. As lead investor and/or CEO he has helped build and sell 3 software companies over the past 20 years. Most recently he spend 7 years at CDK global managing a global team of 750 people covering marketing, strategy, product management and M&A, in addition to running a $150M EBITDA data and analytics business. Malcolm has taught 6 courses in marketing & strategy at the University of Wisconsin and has also taught a life strategy courses to hundreds of aspiring leaders. Today he splits his time between venture capital and private equity.
He is a venture partner in 4490, a Madison based software-focused early stage VC firm, while also helping Global Private Equity firm Advent International invest their money in Automotive technology. Malcolm is an avid tennis player, downhill skier, audiophile, car enthusiast, golfer and world traveler with a deep passion for data and analytics. Malcolm has a deep passion for mentoring future leaders and looks forward to being an alumni rep to help drive the program and students forward.
About 4490 Ventures
Partnering with entrepreneurs to build billion-dollar businesses in underserved markets.
As investors, we have the advantage of having learned the craft of early-stage technology venture capital investing at firms on the West Coast and the East Coast. We brought our knowledge, networks and experiences to 4490 Ventures where we apply those learnings to the unique opportunities available in underserved markets. Underserved markets contain the majority of the inputs into America’s innovation economy, yet receives a disproportionately small amount of all venture capital. We’re committed to changing that ratio.