Benchmark Partner: My Thoughts on the Web3 Sector and Crypto Funds

Author: Connie Loizos

Compiled by: Afatu

Benchmark has invested in projects like Ebay, Instagram, and Dropbox; Sarah Tavel is one of the partners at the venture capital firm Benchmark. She has been paying attention to the crypto space for some time, but her investment strategy is relatively cautious. In recent years, Benchmark's crypto investments have mainly included only Chainalysis. She recently accepted an interview with TechCrunch, where she shared her views on a series of issues regarding Web3.

1. Core Views

When people talk about Web3, they almost use the term as a synonym for cryptocurrency, but I don't think that's the case. Users own cryptocurrencies, which also involves various decentralized infrastructures and financial incentive methods—tokens—and the economics related to tokens, coordinating all decentralized entities and the users behind them.

Decentralization itself is not the goal. My view is that decentralization is like a new palette that allows participants to build new experiences. The current decentralized infrastructure is merely a means to an end. Creating real value for users does not mean that we need to decentralize as much as possible to achieve that value.

Look at the well-known projects mentioned around us—Sorare, Axie Infinity, OpenSea—these are actually centralized companies built on decentralized infrastructure, using this decentralized infrastructure as a means to create more value.

It's similar to when the iPhone was released; the iPhone is a new infrastructure, and this new hardware device was built by people with very specialized skills. Professionals built the chips, system architecture, and all the components that made the iPhone a groundbreaking device.

Then there are builders from different disciplines, like Kevin Systrom (the founder of Instagram) and Zuckerberg, who use different skill sets to build new consumer user experiences on an infrastructure platform like the iPhone.

Investing in consumer-facing products and founders requires a certain level of expertise. Understanding the underlying infrastructure, knowing how people in the entire network are incentivized, and the pros and cons of various choices that consumer builders must navigate is very meaningful.

But I believe that companies that have established a lasting consumer investment strategy and possess their own expertise will be very significant in the Web3 era. That's why, although I focus on Web3, I acknowledge that I have not yet concentrated on the protocol-level crypto technologies.

2. Introduction

In recent years, the only company related to the Web3 space officially announced by Benchmark is Sorare, a Paris-based NFT + gaming company that raised a total of $730 million in two rounds of financing last year.

Sarah Tavel has long been interested in the idea of blockchain-based smart contracts and has previously led "white paper reading sessions."

Although Benchmark seems to be relatively slow in the crypto space compared to some of its peers, which have launched dedicated funds for crypto investments, Sarah Tavel believes that Benchmark's strategy is still quite cautious (prefers its age-old practice of making concentrated bets in all areas, with each general partner leading just one to two new deals each year) with each GP leading only two new deals a year.

Sarah Tavel believes that Benchmark's cautious strategy gives the investment team more time to think about the changing landscape. This article is based on Sarah Tavel's interview regarding Web3, crypto, and DAOs.

3. @Sarah Tavel

Reporter: There is quite a bit of debate about Web3 right now. Do we really need a new era of the internet? Do we need more decentralized organizations? Or is this just the same group of people rehashing old ideas and engaging in brand hype? What are your thoughts on this?

Sarah Tavel: Let's start with the origin of BTC. The 2008 financial crisis essentially supported decentralization (the bankruptcy of Lehman Brothers, the so-called failure of the financial system). Now, we hear a lot on social media about people's dissatisfaction with centralized giants like Facebook.

The idea of decentralization intertwines with the idea of creating value for users, leading to today's crypto ecosystem, which features a variety of protocols built on Layer 1 solutions like BTC, Ethereum, and Solana, which have breadth and diversity. The whole characteristic of this crypto infrastructure is decentralization, which brings many benefits.

But this is different from my understanding of Web3. When people talk about Web3, they almost use the term as a synonym for cryptocurrency, but I don't think that's the case. Users own cryptocurrencies, which also involves various decentralized infrastructures and financial incentive methods—tokens—and the economics related to tokens.

Coordinating all decentralized entities and the users behind them (To me, they're very distinct. You have crypto, and that involves this focus on decentralized infrastructure and the financial incentives, the tokens, the tokenomics that you need in order to coordinate all the decentralized entities and people behind them).

However, decentralization itself is not the goal. My view is that decentralization is like a new palette that allows participants to build new experiences. The current decentralized infrastructure is merely a means to an end. Creating real value for users does not mean that we need to decentralize as much as possible to achieve that value.

Look at the well-known projects mentioned around us—Sorare, Axie Infinity, OpenSea—these are actually centralized companies built on decentralized infrastructure, using this decentralized infrastructure as a means to create more value.

From a Historical Perspective

It's similar to when the iPhone was released; the iPhone is a new infrastructure, and this new hardware device was built by people with very specialized skills. Professionals built the chips, system architecture, and all the components that made the iPhone a groundbreaking device.

Then there are builders from different disciplines, like Kevin Systrom (the founder of Instagram) and Zuckerberg, who use different skill sets to build new consumer user experiences on an infrastructure platform like the iPhone.

Part of my thinking and hypothesis about the future is that we will start to see more and more innovations in Web3 branching out from the crypto space. Web3 is a revolution of Web2.0, not just an evolution belonging to crypto.

Reporter: What role do you think decentralized organizations should play?

Sarah Tavel: Like many entities in the crypto space, DAOs are one of the many new concepts with broad application potential, and in terms of this application potential, they are quite radical. But my view is that the most meaningful use cases for DAOs should be somewhat narrower than where people are currently applying them. Let me explain:

Returning to the idea of bifurcation, for crypto companies, there are already decentralized companies that need to meet regulatory requirements while continuing down the path of decentralization (with crypto companies, you have companies that are decentralized already and almost as a regulatory imperative, have to continue down the path of decentralization).

DAOs are a further embodiment of this spirit of decentralization. Undoubtedly, these economically aligned organizations contain certain value. The Constitution DAO, although this DAO has not yet successfully achieved its goal, is a good use case for DAOs because this organization has a very specific goal: to purchase a real-world item, thereby aggregating on-chain capital and making collective decisions.

If everything is placed in a DAO without a goal, it will take a long time to build. The value of centralized entities with a goal is that they can allow organizations to act quickly, make difficult decisions, and build unique and hard-to-establish consumer products.

Reporter: How do you view the flaws in the industry? The so-called POW has environmental issues; POS blockchains also have their own problems.

Sarah Tavel: There is a lot of noise right now. What I understand is that these different types of blockchains are making some progress.

Reporter: What do you think about NFTs? Many people now see them as digital artworks or similar media art. Over time, do you think we will see NFTs applied in other scenarios, not just pictures of cartoon monkeys?

Sarah Tavel: Currently, the market for NFTs is absolutely in a skeuomorphic phase, with a certain digital scarcity. That's why we see these collectible categories of NFTs. Although I initially had some skepticism, I now understand it. Sometimes I think, I don't just want a picture of a CryptoPunk; I want to truly own it from a digital perspective, and this idea has an emotional connection.

But currently, the NFT scene mainly consists of collectibles or profile picture categories, which is a bit exaggerated. NFTs can actually have many attributes, and we are starting to see several different categories of NFTs.

One is gaming, where users can create or earn NFTs in games. Additionally, beyond NFTs in closed ecosystems, users are starting to have the opportunity to truly see what they win in games through decentralized infrastructure, trade them through their own wallets.

Reporter: How do you view the rise of specialized cryptocurrency funds? There are Pantera, Polychain Capital, Paradigm, Andreessen Horowitz, and Sequoia Capital, and now Katie Haun also has one. Do you think it makes sense to continue merging these types of investments with more traditional venture capital, as Benchmark is doing now?

Sarah Tavel: First of all, I'm very interested in Katie Haun's fund (laughs).

This goes back to the bifurcation theory I mentioned. The first generation of investments in this field is in these protocols and blockchains. And this is a specialized field. Investing in blockchain protocols and DeFi is a very specialized area.

Investing in consumer-facing products and founders requires a certain level of expertise. Understanding the underlying infrastructure, knowing how people in the entire network are incentivized, and the pros and cons of various choices that consumer builders must navigate is very meaningful.

But I believe that venture capital firms that have established lasting consumer investment strategies and possess unique expertise will also be very significant in the Web3 era. Although I focus on Web3, I acknowledge that I have not yet studied the protocol-level crypto technologies. (I also think that investing in consumer-facing products and founders is its own specialty. And it's useful to understand the underlying infrastructure and understand how people in the network are being incentivized and motivated and the pluses and minuses of the various options that consumer builders have to work through to figure out. But at the end of the day, I think the experience of a firm that has built enduring consumer companies is its own specialized discipline that's going to be more and more relevant in this new web3 world. It's why though I'm focused on web3, I'm confess that I'm not focused on crypto at the protocol level.)

Reporter: (jokingly) You’re not going to leave Benchmark to start your own fund, are you?

Sarah Tavel: Part of the reason why people have to launch crypto-focused funds is that when they are investing at the protocol level and buying tokens, my understanding is that those are technically a passive investment, so that's why you have to register. For traditional venture funds, only a certain percentage of the fund is allowed to exist for this type of investment. Once you exceed that threshold, you must establish a separate crypto fund.

Benchmark's model is that we view our collaboration with startups as our product, so our main investment direction is those startups that must build organizations, hire personnel, and create experiences.

Reporter: If more companies start engaging in token trading, will Benchmark eventually restructure into an RIA?

Sarah Tavel: This is certainly an important bridge to the crypto space. If we ultimately have to establish it, we will. But it is still unclear whether this is a path that Benchmark must take.