Dialogue Benchmark Partner: Startup competitions should focus on user value creation rather than decentralization

Original Author: Berber Jin
Original Title: 《Benchmark's Approach to Crypto Takes a Page From Web 2.0》
Translation: Hailsman, Chain Catcher

The well-known venture capital firm Benchmark is famous for its early investments in startups like eBay and Uber. In recent years, Benchmark has also begun to turn its attention to the crypto market, investing in crypto projects such as Chainalysis and Sorare. However, Benchmark has not jumped into the crypto investment frenzy like other venture capital firms such as a16z; instead, it has its own investment methods and pace in the crypto market.

Recently, The Information interviewed Benchmark's general partner Sarah Tavel. In the interview, Tavel elaborated on her views on venture capital in the ever-evolving crypto market, as well as how some early major investors should adapt in an environment crowded with billions of dollars in funds and specialized venture capital firms.

She also discussed the prospects of decentralized autonomous organizations (DAOs), how more traditional startup structures can play a role in Web3, Benchmark's views on tokens, and debates on VC Twitter, among other topics. Below is the full interview.

The Information: There seems to be a divide among cryptocurrency investors; some investors not only buy tokens but also assist governance teams and protocols, while another faction consists of traditional VC investors like Sequoia Capital and Benchmark. Do you think traditional VCs will inevitably evolve into the former?

Tavel: I think this is a real divide. When you look at these crypto-native companies, you find that very few of them are building lasting consumer relationships or nurturing long-term customers. This group is articulate and seems to have superpowers when explaining things. It’s a very specialized field, quite different from the idea of building lasting consumer networks in the past.

I truly believe that for what people now call the Web3 network, which is still a consumer-owned network, the consumer-facing part of the crypto space still needs to possess the same skills as those typical, enduring companies of today (Web 2.0).

Therefore, you want the people in these web3 companies to have skills very similar to those in Web 2.0. However, in this highly specialized, smart contract-driven world, you need to master more specialized knowledge and skills like liquidity mining and governance. For me, this is a very different field, and I admit I’m not quite comfortable here yet.

The Information: What areas of the crypto space does a more traditional venture capital firm like Benchmark focus on? What is outside your capability?

Tavel: Sorare and Chainalysis are two crypto companies we have invested in, and they represent the type of investments we make well. Additionally, I have made an undisclosed investment in a gaming company that is similar to Web3. These projects fall within the super map of our investment types.

These types of companies will build a team with centralized aspects, whether it’s part of the team or infrastructure, but they also participate in decentralized infrastructure. As you can see, Sorare and the NFTs they sell, or in the case of Chainalysis, as a major infrastructure player in the field.

Of course, we are also investing in companies with token components; I just did a case. But if you ask me as a consumer, rather than as a representative of Benchmark, I personally lean away from new DeFi protocols; this is not my world. Just like I don’t look at lending startups, this is an area I’m not familiar with.

Similarly, the company I just invested in will also have a centralized team, at least in the short term. Some of the infrastructure will be centralized. And I think we will encounter more such companies in the future because this is a more practical way to build consumer experiences.

The Information: Since the cryptocurrency boom last year, how has your experience as a consumer and investor changed?

Tavel: For me, when I started working at Benchmark, as they say, I had already been "chosen" by the "red pill." From the beginning at Benchmark, what I wanted to do was spend all my time on cryptocurrency. So I read as many white papers as possible, joined white paper reading clubs, talked to really smart people, and explored early protocols. This actually led to my first investment at Benchmark, which was Chainalysis.

Then I realized that I was actually a consumer-oriented investor. I usually consider consumer use cases, and making such investments seemed a bit premature; the crypto world needs to build infrastructure. So, in the following years, I returned to the market and internet space and made some more traditional investments.

Then in the fourth quarter of 2020, I started learning about NFTs and heard more and more dynamics.

As an investor, this was a profound moment because at that moment I opened up my imagination about new types of consumer experiences. These experiences can be realized through NFTs, digital ownership, consumer ownership of the web, and so on, in unprecedented ways and new economies, even before all this happens on the blockchain and smart contracts. So, from then on, I began to grasp the thread, and afterwards, we invested in Sorare, and I started spending more and more time in the crypto space until it became everything I did.

So, most of my current time on new projects is spent looking for companies that have some decentralized infrastructure that they use to create new consumer experiences.

The Information: How do you view the moves by venture capital firms like Andreessen Horowitz or Spark Capital to invest in decentralized autonomous organizations? Would you consider investing in DAOs?

Tavel: We haven’t made similar investments yet, but we’re not opposed to it. DAOs have some very profound aspects, but I think we should currently raise more questions about DAOs, their limitations, and discuss the scenarios where DAOs are most applicable, rather than describing DAOs as a "magic bullet" as many do. I have looked at some DAO organizations, and I am excited and hopeful about the development prospects in this field.

The Information: Last year, companies like Sequoia Capital and Lightspeed Venture Partners engaged in a flurry of deals to prove their commitment to crypto investments. What are your thoughts on this?

Tavel: There is indeed a flurry of deals. But our structure is different; we have a total of five partners, each making one or two investments a year.

The Information: So you don’t think Benchmark should raise more funds or make more investments?

Tavel: No.

The Information: How do you view the relatively loose atmosphere among decentralized crypto founders, and whether it might make venture capitalists who want to gain significant ownership in companies skeptical? How do you see the evolution of VC-founder relationships, especially in the crypto space?

Tavel: It feels like this question circles back to the "divide" mentioned at the beginning. I think there may be different cultures among crypto-native, protocol-level companies, founders, etc., where the atmosphere has its own culture. We can look back at the beginnings of cryptocurrency, namely Bitcoin, which was created in contrast to what happened in mainstream centralized systems, where banks were kicked out. Its creation was meant to contrast with centralized ways of doing things.

A lot of what has happened recently on Twitter is… this kind of opposition. Twitter and social media tend to exaggerate oppositions because when you’re limited to 280 characters for this type of conversation, misunderstandings naturally occur. There will always be those pockets. In regular, traditional companies, there are some founders who are self-reliant and come from nothing. That’s how they want to build their companies. Of course, there will also be companies like Sorare, OpenSea, and Axie Infinity, where a large part of the company’s valuation comes from the board and investments. Like everything, there is no single culture.

The Information: How do you think cryptocurrency has changed venture capital?

Tavel: This is definitely changing. For example, crypto companies may need fewer funding rounds, and the amount of funding may also decrease, but they can obtain some early funding through NFT presales (buying NFTs for blockchain-based games or networks still in development).

But there are also companies, like gaming companies, that have been working for years before releasing their games. The early stages must involve venture capital; they need to have a board because some infrastructure must be built before anything can be sold.

The Information: Early crypto investments are incredibly exciting, but there are not many successful cases of entering the public market. What signal does this send?

Tavel: We can look at this separately. First, these companies take a long time to mature to the point of being ready to go public. For example, Coinbase was founded in June 2012, and some of the recognized companies that can go public were only recently established. Take Chainalysis as an example; it was founded in 2014, and it has been seven years. Typically, going public takes more time. Fireblocks is another example; they were only recently established.

First, it’s still early, and second, crypto companies have other financing mechanisms. If you are an on-chain crypto company, then you may not have the need to go public because you already have a liquid market. But I also suspect that in the coming years, we will see a large number of companies in the crypto ecosystem go public.

The Information: Do you think consumer startups that do not adopt blockchain technology will still have a place in a few years?

Tavel: I don’t know; many things are uncertain. However, I am willing to believe that the next wave of iconic consumer companies will have Web3, meaning their infrastructure will incorporate some decentralized aspects that allow consumers to own the internet or these digital assets. Because that’s what I’m focused on.

The Information: Is there anything else you would like to add?

Tavel: I want to emphasize that we should not throw the baby out with the bathwater. Is the centralized way of building things perfect? Of course not. Web3 has a decentralized architecture and can empower users with ownership of the web or digital assets, which is a profound change. But it’s not perfect either.

The competition among startups should not be a competition of decentralization but rather a competition to create user value. Decentralized infrastructure must be a means to achieve this goal. If we think this way, we will begin to realize that we should embrace the Web 2.0 world more rather than simply rejecting and resisting it.

Every now and then, you see people in the crypto circle tweeting, "If you’re only interested in the crypto world for six months, then get lost." This is completely the wrong attitude because everything is still too early, and companies that have already built large-scale consumer networks will learn incredible lessons on how to build lasting consumer networks.