When an enormous technology bubble bursts, a lot of air is released, true, but it also magically plants the seeds of a new future. We saw it with the Internet and the dotcoms at the beginning of this century. And the story repeated itself with last year’s cryptocurrency market crash.
Suddenly, the skyrocketing virtual currency prices, the extraordinary amounts of capital inflows into the sector, and the ubiquity of Bitcoin in all conversations received a reality bath. Last year investors poured roughly USD 30bn worth of capital into crypto projects both in 2021 and in 2022, according to capital markets data provider PitchBook.
In practice, this is evident in plummeting share prices, the realization that many of the ventures were covert frauds and in one concrete fact: a new study by dappGambl has found that 95% of NFT collections are “worthless”.
The value behind the volatility
Beyond the volatility and speculation surrounding cryptocurrencies, the underlying Web3 technology demonstrated its potential to transform the business world: endowing all processes with transparency, trust, and traceability, enabling a universe of smart contracts and revolutionizing the customer experience.
Thus, while the most important companies in all industries are beginning to analyze the impact of using these technologies on an organizational scale, forward-looking PEs are evaluating how to add this trend to their portfolios. The consulting firm Bain & Co estimates Investors have poured approximately $94 billion into Web3 start-up companies in recent years, most of it since 2021.
Specifically, the Web3 universe encompasses concepts such as blockchain (for secure and traceable transactions), smart contracts, cryptocurrencies, NFT (non-fungible tokens), tokenization of real-world objects, open digital wallets, the metaverse and the entire decentralized world: dApps (applications), DeFi (finance), ReFi (regenerative finance, with a sustainable outlook) or DAO (autonomous organizations).
The link between private equity and Web3
For the PE world, the interest that Web3 generates is three-fold. First, as a direct investment opportunity: startups in the sector become more interesting as more companies adopt blockchain and other related technologies.
Secondly, as an alternative funding strategy, as the token model can add simplicity, controllability and manageability to the funds being raised, while allowing them to easily open up to more people, including amateur investors or enthusiastic individuals.
Third, driving the adoption of Web3 tools by companies in other industries, including traditional mid-market companies, that are part of their portfolios or have the potential to join, to improve their competitiveness, value and positioning going forward. Web3 solutions have a strong disruptive potential, and companies that defer integrating them into their strategy run the risk of being left out of the market.
The road to transformation
Of course, it is easier said than done. In addition to the challenges of incorporating new technologies, the adoption of Web3 must be accompanied by changes in culture, mindset, and habits, a major barrier when it comes to companies that have been around for a long time.
At the same time, changing regulations is another point to address, especially because the tremors produced by the crypto world made many governments decide to put the spotlight back on the subject.
For all these reasons, having the support of a technology partner capable of discovering how this innovation can improve the business, align with the objectives, and modernize certain structures is key.
The crypto bubble burst, but it didn’t completely melt. It left behind the potential of Web3, which PEs are starting to look at closely and that companies willing to continue leading in the next few years cannot fail to consider.