Digital Oak Part III — The VC Opportunity in Passionware

Navigating venture investing in the new Web 3 world of shared ownership

Digital Oak Part I outlines how NFTs will underpin the new digital economies we dub Passionware.  The magic of NFTs as ownership legos allows anyone to create digital goods and services from an idea, easily accessed by fans who want to be part of it in some form and who spread the word on their own, enabling a market-network to take form.  The ascendancy of capital over labor and mind over brute force.

Digital Oak Part II details how the digital convergence of Passionware in the Web3 era extends from “me-commerce” to shared ownership where anyone and everyone is a business. Everyone can be consumer, designer, builder, promoter, investor, financier - each owning a piece of the ecosystem.  A new society of self-employed entrepreneurs.

This Part III will outline how we see the market opportunity, in terms of both its overall size and likely evolution, with brief conclusion on how VCs can navigate the new world.

Bottom line -- there is a $60 trillion market opportunity across an entirely new playing field where ownership is shared among its participants.

Getting Paid to Play, Not Paying to Play.

As Chris Dixon brilliantly outlined in his post NFTs and a 1000 True Fans and in his tweetstorm of August 12, 2021. its all about the take-rate.

We are all conditioned to a world where people ‘pay to play’. We work to get paid. We use our money to fund our leisure. We use our money to ‘get ahead’.

The revolution that Web3 drives is the exact opposite to this: the economy is peer to peer: players fund other players, not just the game developers. As Chris Dixon explains, the new revolution gives power, cash and margin to the creators. That’s the revolution encapsulated.

The Economist called it correctly a few years ago when it applied the metaphor of the ‘Cambrian explosion’ – when life forms on planet earth began to multiply 500 million years ago – to the “cheap and ubiquitous building blocks for digital products and services that have caused an explosion in startups”.

The new Cambrian explosion is the entrepreneurial explosion creating opportunity in “an astonishing variety of products that are reshaping entire industries and even changing the very notion of the firm”.

That was written in June 2014.

With Blockchain, NFTs and 5G soon-to-be ubiquitous, that crystal ball gazing is here today. We see Passionware as an entire new category "reshaping" industries and "changing the notion of firm" by empowering anyone to start, grow and scale a business.

The Web3 TAM: Heading to $60 Trillion

What does that all mean in terms of dollars and cents - the TAM?

Back to Ram Parameswaran of Octahedron Capital.

Ram asserts (on an Invest Like the Best podcast) that globally we all spent $60 trillion on products and services in 2019. With average growth rates, this will be $120 trillion by 2040. If you look at online penetration today at only 10% (even with the pandemic), and conservatively estimate that this will grow to 30 to 35%, one still ends up with 40 to $45 trillion conducted via the internet in JUST eCommerce, with 50% penetration the more likely result.

What about beyond eCommerce — when everything becomes commerce through common participation in Web3 ecosystems?

As example, Ram believes that 30X over the next 20 years alone on eCommerce is conservative.

"So when you put infrastructure, tools, and people together, we're at the beginning of that S curve, and potentially a Cambrian explosion of companies that convert every single piece of consumer internet, and every single piece of the business internet onto the overall flow of the internet.... By any definition, we're so dependent on the internet right now, and yet, even today, less than 10% is still conducted via the internet.But when you put together the explosion of people capability, explosion of tools, and connectivity together, you have to believe or we definitely believe that over the next 20 to 30 years, we go up that S curve from a 10% penetration rate to 50-60-70% in the course of time."

Hard as it may seem to believe, we’ve only just begun!

Benson Oak believes that Web3 will represent that Cambrian Explosion that both the Economist and Ram Parameswaran describe. This  digital convergence will generate enormous economic growth and network effects with these new economies via:

  1. Digitalization of Existing Economies

  2. Creation of New Economies via Digitalization

  3. Digitalization of the Entrepreneur: Me-Commerce

The Internet took books, taxis, hotels, etc and made them accessible to everyone at any time in any place.  If we knew that the markets that functioned in the physical world in 2000 would similarly function on the Internet in 2020, investment decisions from 1995-2000 would have seemed easy!

But even with crystal ball, timing is everything - and infrastructure has to be built to provide for real world adoption. What seems like out of nowhere growth in Web3 has actually been propelled by VC investment into infrastructure over the last five years: with over $10B of VC money flowing into projects. Between 2015 to 2020, and double that figure in the first 6 months of 2021.  Just like  the investment in Internet and mobile infrastructure in the 1990s and early 2000s, it is this investment that is now enabling Web3 products and services and decentralized economies to enter the mainstream and enable adoption.

Many of the tech companies with over $100B market cap today sell consumer items anyone in 1995 could easily identify by name: phones (which are actually phone/cameras), books, advertising, news media, payments, taxis, hotels, classifieds, TV&DVDs, music records, conference calling, etc.

However, even with foresight, it would be hard to imagine the size of these B2C markets and resulting winning companies (hint, its not IBM). These new markets have not just functioned online, they have been transformed by mass market global reach. In 2000, the top 100 list was dominated by the "atoms" world of companies devoted to oil, cars, equipment, food and drink. The only "consumer" tech company in the 1990 top 20 was Eastman Kodak (they sold cameras and film for you millennials). For laughs, Xerox was #21. Two industries that basically no longer exist except as novelties.

Thanks to Web2, the current top 100 list is dominated by platforms that basically enable consumer access to online products. By controlling the levers of distribution, those companies are basically middle-men between buyers and sellers and between capital and labor. That is all about to change.

At its heart, passionware is all about the removal of the these middle-men. Market TAMs grow larger as take rates get eviscerated and ownership returns to the passionate creators. NFT's and tokens will be the orchestrator of this me-commerce revolution, where everyone is business and owner.

Digitalization of Existing Economies: Its All About the Take-Rate

The pace at which existing economies will digitize is directly correlated by the removal of rent-seeking intermediaries charging access to platforms and their distribution channels. The higher the take rate, the more ripe is an existing market for disruption when intermediaries are simply removed from the scene - a leading indication of “how fast” a new economy can grow as its stakeholders simply click to the new world.

How big” the market can eventually be is a function of the current market size (and again the higher the take-rate, the higher the desire to move) but also the new market opportunities being created as more players enter the space -- both as they can enter, and because they are no longer intimidated by high take rates.

This is "more of the same" as we digitize and create financial and tangible products from all types of assets and intellectual property as the Internet becomes a true ownership economy. Many familiar markets will simply be transformed to the new world, greatly expanding their output and efficiencies -- running the gamut from content to fashion to services to gaming to real assets such homes, cars and land.

For example, the analogue art world has enormous barriers to entry and requires numerous intermediaries (curators, agents, brokers, etc) while the digital world has literally none.   Digital art NFTs have thus exploded not just because more artists can enter the market and directly engage with fans --  but also curators, agents, financiers from all over the world no longer have their own barriers and can enter the market.

We are now seeing the earliest adopters of Web3 from those asset categories that did not have an Web2 online outlet, thus the early adoption of NFTs among collectibles, digitize artwork, digital land, and in-game items. NFT marketplaces have come to the forefront - leveraging years of infrastructure building especially on Ethereum blockchain.

OpenSea marketplace is now doing almost $200M of daily trading volume -- $3 Billion in August a 400x increase from $8M in January 2021, with over 200,000 users making at least one transaction, compared to 7,000 in January. And this is just beginning as SuperRare, Rarible, NBA Top Shot all grow to new heights and new projects are being built on Etherum competitors such as Solana and Terra.

All stakeholders in these new economies act together with shared ownership, orchestrated and fully aligned by a common token in a free market open to anyone with a digital wallet.  They thus all contribute to a virtuous circle, massively increasing the overall pie and TAM, rather than seeing the market reduced in scope and volume through take-rates, as in the old world.

The Advent of New Economies from Digital Assets: Lets Unleash True Creativity

New Markets from Digital Assets

The above covered the new markets of “business as we know it” unleashed Web3 efficiencies and an army of global explorers and their passionate crew/fans.   Alignment of interests can alone create large market opportunities.  Alignment and shared ownership will also engender entirely new markets of goods and services powered by NFTs and crypto currencies.  As with the Internet, many of these markets will be outside our current imagination, spurred by an explosion of ingenuity, built on digital convergence and stakeholder alignment.

One inevitable new Web3 category will revolve around the Metaverse. Defined as new worlds created by convergence of physical, augmented, and virtual reality in a shared online space, the Metaverse will enjoy its own ecosystems and economies, driven by scale and new markets for consumers to enjoy and small and big brands to penetrate.

By re-creating online ecosystems and transforming them into seamless peer-to-peer environments, these new platforms will disrupt current online markets and create complete new ones. Moreover, with the advent of XR, VR and AR, these digital worlds will also morph into their own economies, constructed on digital real estate, populated by digital identities and avatars, and powered by native applications, games, fashion and all other consumer items we know from the physical world. The Web3 Digiverse will truly encompass both decentralized communities and virtual communities.

For example, Superworld has mapped the real world into 64 billion AR-equivalent blocks navigable in multiple forms with or without glasses - on web, mobile, AR, VR. It is selling off this world it has created  and enabling owners of their virtual land to reap the benefits of all economic activity (which Superworld also enables through NFT creation etc) and potentially harmonize analogue and digital activity.

The Revolution Will Not Be Televised - The Revolution will be Replicated Online.

Vietnam-based Axie Infinity is the largest NFT-based ecosystem (est 2018) that just passed $1 billion in all-time sales. A Pokemon-like game where users have to collect ‘Axies’, (characters with own unique combination of body parts, shape and abilities), Axie has its own a virtual economy of in-game tokens, combining finance and gaming to create a play-to-earn ecosystem. In the last 30 days, the game has generated nearly $780 million in sales across 1.4 million transactions - but with less than 2 million users (incredibly small in relation to the volume). Yes, you earn cryptocurrency just by playing Axie Infinity and yes, I have told my kids to get on it.

There will be entire new industries and platforms created for only the Metaverse worlds. These new virtual economies will require the same intricate and interwoven commercial relationships we experience in the physical and digital worlds.

Whether we are wearing glasses or not to navigate these "new worlds", the basic operating system will be the same -- relationships will be direct, business will be conducted in P2P, currencies will be native to it and value can be earned, spent, borrowed or invested interchangeably in both a physical or virtual sense and most importantly without the need for a centralized actor - governmental or commercial in nature.

In the virtual worlds of the Metaverse, new businesses spring into life, with avatars as next digital identities, engendering usage, discovery, and explosion of use cases.

‘Me-Commerce’ - The Return (not the Revolution) of Entrepreneurship

Part II outlined how the ‘Me-Commerce’ generation of individuals can become their own unicorns. This will serve to increase economic output (and again without middle-men taking a cut) by building businesses that leverage the above -- digitizing existing assets and creating new assets.  We should not be surprised at this - a we said in Part I , the last 150 years are the true anomaly.

This time, working for yourself will have a different tone.  NFT marketplaces are creating digital art entrepreneurs overnight. A 12 year old London boy just made headlines by selling 3,500 digital whales for $400,000 - for the record he plans to HODL his earnings in ETH, in part because, in his own precocious words, "he is bankless".

DeFi is one of the biggest growth areas to date - and symbolizes the Me-Commerce entrepreneur marching into new territories wielding an inverted ownership model to disrupt the poster-child of middle-men: the banks. DeFi means someone can be both a lender and a borrower, say using their ownership of crypto to lend to projects and make passive income, while also playing Axie and borrowing money to get into the game and earn. With its own base level protocols that operate without a bank as middle-man, this is an entirely new financial system, as yield generators, lenders and borrowers all seamlessly and permissionlessly interact.

Total Value Locked (TVL) – a measure of DeFi transaction value – grew by 14x in 2020. And already in 2021, TVL has more than tripled to a total value of $81.85 billion.

These DeFi platforms are multi-layered, showing the potential of the entire ecosystem, including digitalization existing asset and entire new forms of financing

Take, for example, Yield Guild Games (YGG).  Founded in 2020 in the Philippines and recently received funding from A16Z, YGG is a play to earn community than enables multiple Me-Commerce actors on multiple game platforms (Axie and others).

YGG is itself decentralized so the YGG token owners provide financing to lend in-game NFT assets to players who use them to earn game tokens to pay off the loan (with interest) and earn a profit. Community managers help find and onboard new players and receive a portion of recruited players’ earnings. That is at least 4 revenue generating actors (lender, player, community manager, and YGG owners).

Finally, there is a potential 5th stream via the NFT creation which further inverts the model -- people can create virtual swords, skins or other NFT-based assets to be used in games which will be created just to take advantage of the these newly created items. YGG has already attracted more than 4,700 ‘scholars’ that have borrowed assets, a 45,000 gamer community and earned over $8.6 million in revenue and is paying out $1 million weekly.

‘Me-Commerce’ will explode as anyone can make revenue by contributing to an ecosystem. It is happening now and it's global.

The Revolution Will Reverse Backward

There is an analogue component to convergence that represents another growth offshoot in Web3. Ironically, many items will transform backward into the physical world - similar to how Web2 e-commerce brands reinvigorated old world retail in many markets.

A huge element of the Passionware era is social status, which now can be manifested in social currency and not just branded sneakers, fashion and Instagram followers. There are many digital art projects - Cyberpunks - where the NFT entitles the owner to get a print of a physical representation on sneaker or shirt. Big brands will use NFTs to sell physical fashion items, with anti-ripoff provenance on the blockchain.  Today, big brands like Gucci, Burberry and Nike are creating virtual versions of their fashion apparel to sell online to supplement digital identities. The possibilities are endless. In the end, all products and services will inevitably move to Digiverse.

Virtuous Circle of Shared Ownership

Decentralized economies are formed organically from the bottom-up. The explorers of the Web3 Digiverse utilize technology and code - not ships and compasses. Their crew consists not of paid mercenaries but communities driven by common affinity and passion for the world they share.

These fast-moving digital explorers drive rapid first product launch, reducing the need for capital - and, in turn, reducing risk significantly. The use of tokens and NFTs makes it possible for anyone to own a piece of the ecosystem, democratizing how projects are funded and creating a financially incentivized community to promote itself and its projects and creators, turbocharging distribution, marketing and word of mouth branding, turning everyone into both an entrepreneur and potential investor.

  1. New economies are kick-started by disruption of economies, with the highest take-rates going first to Web3 (social media, content, music, art, gaming). These are typically bootstrapped.

  2. Multiplying the number of potential actors by the likely volume of their individual actions will define the speed and force with which these economies will accelerate.

  3. As economies expand, developers and me-commerce entrepreneurs will create new applications, services, and products to meet the pent-up demand inherent in these newly created economies.

  4. They will often build new digital apps and their own protocols on top of these markets, creating the same pattern of growth from bootstrap to mass market, but leveraging an early community already active.  And so on.

Digital convergence is the growth engine of Passionware due to network effects, enabling these new projects to capture the value from the virtuous circle of participation by multiple parties all seeking to consume, earn, promote and stake. The result will be an explosion of growth and the estimate of $60 Trillion of online output.

Conclusion: How to Invest in the Web3 Opportunity

The shared ownership model of Web3 brings opportunity for VCs - but requires the right approach. As James Currier from NFX pointed out in a recent podcast, there was a new VC invention in early 2000s - “Internet Funds” investing in this thing called “the Internet”.

At Benson Oak Ventures, we see ourselves not as a crypto fund - we are a Fund focused on Web3 opportunity as a new $60 trillion category, with a core thesis around Passionware

There will still be traditional VC deals, with "centralized" offerings, disrupting and creating new markets. Startups will continue to be funded as before, with equity financings in traditional seed to Series ABC rounds all the way to IPO.

We believe eventually the Web3 opportunities will dwarf many of the traditional plays. However the financing approach will change.

The new forms of capital pools enabled by the Digiverse which, unlike "modern finance" are open to anyone who can set up a crypto wallet - provides unlimited financing opportunities for these ecosystems. In Web2, venture capital firms spurred start-up growth of the Internet era by funding ideas and using funding to scale. In Web3, the early communities are staking and bootstrapping the early protocols, promoting products of the projects, games and applications they use and earn from and staking and financing others. Only then is the real capital required - and often value and brand as much as capital — as DeFi protocols and sale of tokens will complement specialized pools of capital to enable financial growth, once product market fit is shown and early community is built.

Web3 entreprenuers are thus very careful about who they let in early - they want long-term supporters and value-add investors and not quick-flippers. Reputation and credibility is key, as well as knowledge and experience. Great investors are investing together and most important element is strong investor network.

Leveraging Conviction Model of Investment

Digiverse fundraising is through global access and small check sizes, using early launchpads to get exposure and pitch themselves through story and token economics to global market that have already bought into the protocol they are building. The VC investment strategy is thus to get in early in private sales at low valuation with small bullets, support Founders in building their community, and then double / triple over time as build conviction.

As outlined in the picture above — our investment buckets include:

  • Protocols and Economies that attract loyal early community and great entrepreneurs and developers and provide conviction of market dominance in their space and extension into the future.

  • New markets and especially marketplaces built on these economies, especially those (a) replicating existing and (b) targeting those plagued by high "middle-man" costs

  • Complementary good and services that enable the early entrants and millions of Me-Commerce entrepreneurs to scale and grow business in the digital world

  • Portability Infrastructure that leverage the eventual trade across different chains

Our in-going investment decisions and follow-on funding utilizing the Digital Oak Conviction Index will be based on —

  • Volume. How big do we estimate is the TAM: a function of the existing take-rate, and the underlying market economy being built.

  • Reality. Brand, investors and the underlying product being built for real world. The winning Web3 markets and businesses of the future will have similar characteristics as Web2 ones: strong brand and great UI and UX, as table stakes for building a community of users whose multi-layered participation will produce network effects and growth

  • Intensity. Usage and adoption rates by early developers and users are key signposts as well as the rate at which new developers are entering the community to build applications and services in parallel.. Activity among developers and community on twitter, discord, telegram and the like are more indicative than any other KPI or online research

  • Velocity. How fast can the economy cycle through, attracting new users, developers, apps and going cross-chain. This is function of the convergence among the economic actors and network effects. How are the "circles meeting" as token owners engage in multiple actions on the platform — thereby increasing the extent of the market and its promotion, curation, investment and more.

We have recently made initial investments from the new Fund in Passionware projects including DeSo and Talis, one of the first NFT projects on Terra.

DeSo (formerly Bitclout) represents big market, high intensity, immense density and potential for huge velocity as it combines digitalization of an existing asset (social media), new market creation (social currency investing) enabling Me-Commerce (anyone to build a business around themselves). The entire ecosystem is the very definition of the concept of ‘everyone is a business’ digital convergence as Bitclout enables the acquisition of creators’ tokens and help them through promotion and assistance. See our why we invested in Bitclout blog for more.

Benson Oak Ventures is positioning itself for this new era by (i) leveraging our specific skills in B2C, B2SMB product and business models; (ii) building a global network of like-minded investors and deal flow and (iii) choosing our investment spots on the Web3 Digiverse evolution to apply a value-added, high conviction investment approach.

This concludes our three part “Digital Oak series”. We will be highlighting all our investment decisions using the frameworks outlined here to explain our decision-making — and moreover, using our platform to spread the word! It is an exciting time to be part of this new world and we have been energized in the last few months in speaking to entrepreneurs and investors in Israel and all over the globe.

The future is now and it is happening fast.

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