IOSG: Web3 investment, direction > team > product?

Author: Momir, IOSG Ventures

Web3 Investment, Direction > Team > Product?

In 2007, Marc Andreessen published a famous article titled "The only thing that matters," arguing that among the three dimensions of market, team, and product, the market should be the most important aspect for investors when evaluating startups. For investable areas, Marc mainly favors companies that discover real demand and have a large number of potential customers. "The product doesn’t need to be perfect; it just needs to be usable."

The Example of Uniswap
If you prioritized product as your judgment criterion in 2018, you likely would have missed the unicorn that is Uniswap. Most professionals in the financial sector would probably tell you that its design is quite foolish.
If you focus on the team, you might have doubts about the qualifications of inexperienced founders, first-time entrepreneurs, and those without a financial background to build financial applications.

However, if you focus on market direction, you will notice a significant potential demand for on-chain exchanges that can support price discovery and value exchange, and Uniswap was the first project to truly deliver on that. That's where its investment worth lies.

Previous attempts before Uniswap either involved on-chain order books that were not feasible or AMM designs like Bancor that required the use of their governance tokens to trade, negatively impacting user experience.

"Whether to enter the market first is not that important. Instead, those who find the perfect product-market fit first are the ones most likely to be long-term winners."

Thanks to its timely launch and good functionality, Uniswap became a unicorn and a multi-billion dollar project. This is not to underestimate or belittle the importance of the founders. Without talent, they wouldn’t be able to notice demand or produce a "just usable" product first. However, if founders with qualities similar to Hayden Adams chose to build the first prediction market instead of a DEX, that project would likely fail.

Looking further back, we can find another similar example—Ethereum.

Imagine if Vitalik recommended the Ethereum white paper to you in 2015.

Similarly, if you focused on the team, you might have concerns about an inexperienced founder, a first-time entrepreneur who didn’t attend an Ivy League school, taking on such a challenging task with global implications.

For many who truly understand the technology, they would not consider Ethereum to be the most impressive architecture. The EVM is one of the most criticized inventions.

However, from a market direction perspective, you would see that this was the first blockchain to support smart contract development, even if those smart contracts were merely usable.

In recent years, Ethereum has become recognized as the leading public chain, despite facing pressure from competitors. The conclusion is that Ethereum opened the right market and attracted the smartest talent to build around it and even innovate further based on it. This unique advantage compensated for all the initial shortcomings.

What is the current state of the market today? How can early-stage startups find the right PMF? How can they identify real demand versus fake demand?

Without forward-looking bias, judging PMF is more of an art that requires a considerable degree of imagination. Fairly speaking, luck also plays an extremely important role. For example, the explosion of P2E was based on the simultaneous occurrence of several unlikely events.

While we cannot predict the future, we can at least try to identify potential demand. Understanding the current market and possible user behaviors is a logical strategy.

Uniswap v3 and dYdX are defined as the most successful DEXs because they lead in trading volume in the spot and derivatives markets, respectively. But what factors determine their leading positions?

Undoubtedly, the enormous trading volume makes Uniswap v3's slippage more competitive, and as more retail trading volume flows through DEX aggregators, slippage pricing will be key to gaining trading volume.

However, the reason for v3's superior trading volume lies in the high participation of MEV bots. As shown in the image below, bots account for 75% of Uniswap's trading volume daily. Therefore, even without user participation in the Uniswap protocol, as long as liquidity providers are willing to be arbitraged, Uniswap v3 will still have greater trading volume than most DEXs.

（Source: https://dune.xyz/momir/MEV-Ethereum）

Bots and whales dominate on-chain activity on Ethereum. Understanding this, would you want to invest in an Ethereum DEX that eliminates MEV and optimizes the experience for small traders? Probably not.

AMMs and DEX Aggregators are among the most successful verticals in DeFi precisely because they serve the two largest categories of on-chain users: bots and whales.

Connecting the dots

"It is ironic that once a startup succeeds, if you ask the founders what made it successful, they often cite various unrelated factors. People are not good at understanding causality. But in almost every case, the reason is actually Product Market Fit (PMF)."

Investors also seem to struggle with understanding causality. Recently, I have heard many people trying to quantify the characteristics of founders of projects like Axie and Uniswap to know what to look for in future projects. While this is an interesting intellectual exercise, I believe it has little value in the decision-making process.

Not finding a product-market fit immediately is not a big deal unless…

Finding PMF can be a very lengthy process that requires constant iteration. However, problems arise when a project implements aggressive growth strategies without achieving PMF.

Because the risk of a project not achieving PMF on its first attempt is high, overly aggressive liquidity mining in the early stages often leads to premature scaling issues: projects trade future ownership for short-term product metrics, attracting speculators rather than true product users.

Nevertheless, this seems to be the mainstream practice in the industry. Founders tend to adopt aggressive liquidity mining at the product launch, for reasons including:

Overconfidence in the project—while confidence is good, a healthy dose of skepticism is certainly helpful.

Believing that tokens should be launched during market booms, regardless of fundamentals—this logic only sounds good when you are looking for a good pump and dump opportunity.

The project already has strong momentum, either due to OG founders having a devoted following or the community being very excited about the project.

Due to the peculiarities of the crypto industry, we often see a third category of projects that achieve astonishing valuations even without an MVP (Minimum Viable Product). Or, some projects maintain 10-digit valuations without reaching a certain scale of users.

Do these types of projects undermine our PMF reasoning above? Should community power and memes be considered as important categories as market, team, and product, or do they stem from these aspects to some extent?

In any case, I believe these types of projects are exceptions rather than the rule, and as the industry matures, the importance of this factor gradually diminishes. Essentially, community power merely buys time and resources for projects to find PMF. Without real demand, these projects will eventually fade away.

Therefore, depending on your investment time horizon, you may have different value judgments regarding community and memes compared to other factors.

You might be rationally correct that the product will never achieve real usage, but you can still make a good deal out of it.

"Would you rather be rationally correct and lose money, or would you prefer to be rationally wrong but save your trade?"

Issues in PMF Assessment

Speculation in cryptocurrencies often begins even before token issuance. Does a high user count mean the product has found PMF, or are most users merely mining early because the project announced Paradigm's participation in their seed round?

There are certainly many nuances in discovering and assessing PMF and pricing aspects like market, product, and team. After all, each factor is critical and must reach a certain threshold for project success. However, if I had to rank these factors by their importance in assessing a project, I would do so in the following order: Direction > Team > Product.