Dialogue with Web3 Entrepreneur Sota Watanabe and Guo Yu

Author: Hideo Natsume, East Ventures / Li Lucheng, Z Venture Capital

*Image: * Shinchousha Foresight

"I firmly believe that the arrival of the Web3 era will promote the growth of the Japanese economy." This was a speech given by Japan's Prime Minister Fumio Kishida on May 26 during a House of Representatives meeting regarding Japan's economic growth strategy.

"Web3" may be the hottest new buzzword globally, referring to services that do not rely on specific internet services, platforms, or companies. Carrying the idea of decentralization, Web3 is seizing the benefits of the times and is poised to completely overturn the dominant position of the GAFAM platform era. Countries such as the United States, Singapore, the United Kingdom, Portugal, and Dubai have also successively released laws related to crypto assets, all of which are pushing towards an emerging new era.

Entering 2022, Japan has launched a series of national strategies related to Web3 with a latecomer advantage compared to other countries. The remarks made by Prime Minister Kishida mentioned in the preface and the "Digital Japan 2022" initiative promoted by the Liberal Democratic Party indicate that the trend of Web3 in Japan is unstoppable. However, issues related to taxation and the regulation of licenses for crypto exchanges have led to a talent drain to countries with more favorable regulations, which has become an urgent issue to be addressed.

At the same time, China, once known as a virtual currency powerhouse, identified the issuance of tokens (ICO) for fundraising by companies operating blockchain businesses as illegal in 2017 and issued bans to individuals and enterprises. Since then, although the government has recognized blockchain technology itself, mining and trading of virtual currencies have been prohibited, leading to a similar outflow of blockchain talent from Japan.

In this context, we interviewed top Web3 entrepreneurs from China and Japan. One is Sota Watanabe, a 26-year-old standard setter for Japan's Web3 and the founder of the Japanese public chain Astar Network ($ASTR); the other is Guo Yu, who at 28 announced his FIRE (Financial Independence, Retire Early) from ByteDance, the world's largest unicorn company, and is exploring the Web3 field. They choose to dance with shackles under the rules, striving to explore the forefront of Web3. We interviewed them about their views on the future of Web3 and the potential of Japan's blockchain industry.

This interview was conducted and hosted by Hideo Natsume, an early investor in Astar Network from East Ventures, with Li Lucheng from Z Venture Capital serving as the translator.

Natsume: Could you first share the opportunity that led you both into the Web3 industry?

Guo: It might surprise everyone, but I only started getting involved with Web3 six months ago, in November 2021. At that time, I was chatting with a friend in Beijing, and he casually mentioned that he had moved most of his assets into DeFi (decentralized finance). I became very interested in these new concepts and immediately asked him many questions about DeFi. After he introduced me to various projects, I gained a basic understanding of Web3, and thus began my own research into NFTs (non-fungible tokens) and DAOs (decentralized organizations) and other interesting new terms.

After gaining a deeper understanding, I spent a few months thinking more deeply about what changes and significance Web3 might bring to the world. Subsequently, I wrote an article titled "About Web3: The Latest Technological Trends I Missed During Two Years of FIRE" on "Mirror" (a decentralized blogging platform) summarizing my thoughts.

Natsume: That is indeed surprising. Because you are already quite well-known in China's Web3 community, I didn't expect you to have only been involved for half a year.

Guo: Yes. After spending half a year deeply researching Web3, I launched two projects, Checks Finance and CodeforDAO, in March this year. After I started writing that article on Mirror, I spent about a month conceptualizing the projects. Meanwhile, I noticed that the Federal Reserve (FRB) decided to raise interest rates at the beginning of this year, which made me think about what kind of projects could survive in this bear market cycle and bear fruit when the market recovers. So in the end, I chose Checks Finance and CodeforDAO as my entrepreneurial direction, believing they could withstand the cycle. This excitement reignited my passion as a developer, even after I had already "retired."

Sota: I first went abroad during my freshman year to India. There, I personally felt the severity of poverty and environmental issues for the first time, which sparked my desire to solve these problems. So, I began searching for technologies that could address social issues, and in the process, I encountered blockchain. After learning about blockchain, I joined a blockchain technology company in Silicon Valley, USA, to conduct in-depth research. My work there made me realize that people are not only concerned about issues within their own countries but also about what value they can provide beyond their own nation. This inspired me greatly, and I decided to start my own business. After returning to Japan, I became a blockchain researcher at the University of Tokyo and began developing a public chain project with friends I met there.

Natsume: When you started your entrepreneurial journey, it was actually during a bear market for cryptocurrencies, and it took a cycle for things to change. I believe that was not easy for you. From your experience, even though the current environment is still not optimistic, I would like to know what strategies entrepreneurs looking to start in the Web3 field should adopt and where they should choose to start their businesses.

Sota: Web3 is very different from Web2; it is not limited by geographical constraints. As long as you can connect to the internet, you can participate in Web3 work, whether you are in the Arctic or the Antarctic. At the same time, since Web3 is a brand-new field, many countries' regulations are still unclear, but strict regulations may emerge in the future, causing losses for entrepreneurs. Therefore, compared to geographical location, it is important to go to countries with clear regulations for Web3.

So far, Japan still has many unclear aspects in its regulations, and the high tax rates due to the tax system are causing more and more Japanese entrepreneurs to move to countries like Singapore, Dubai, and Switzerland. However, just as Guo Yu chose to come to Japan from China, I believe Japan is a country with excellent tourism resources and living environments. Although Japan still adopts a regulatory bias regarding Web3 issues, if Japan actively improves its laws and tax systems, I believe that entrepreneurial talents who once regretted leaving Japan will eventually return, and at that time, Japan will usher in its first spring of Web3.

Guo: As Sota mentioned, the state of laws and tax systems is the most important point for entrepreneurs in the Web3 cryptocurrency industry. I heard from a friend in the UK who works in venture capital that many Web3-based startups are now moving their companies to Dubai, Portugal, and Eastern Europe. These countries share a common feature: they have stable policies that are very friendly to the cryptocurrency industry and actively attract capital and talent. In contrast, China's policies regarding Web3 remain unclear, leading to a talent exodus.

Natsume: What specific methods are being used for this migration? Are these Chinese entrepreneurs moving not only their headquarters but also their development teams overseas?

Guo: Not necessarily. In some of the countries I mentioned, the density of talent in the Web2 field, the so-called traditional internet industry, is not as high as in cities like Beijing and Silicon Valley. From a common-sense perspective, the development headquarters should be in cities with a high concentration of talent. So, in the long run, Chinese Web3 startups are more likely to move their headquarters to countries with more complete legislation while keeping their development teams in China, using the VIE structure familiar to Chinese entrepreneurs. I know of an example where their development team is in Shanghai, and their headquarters is in Singapore.

Author's note: "VIE Plan."

VIE refers to Variable Interest Entity, which involves setting up a company in tax havens like the Cayman Islands or the British Virgin Islands to raise funds and serve as the listing entity, while foreign investors establish a wholly foreign-owned enterprise (WFOE) in China. This plan involves setting up a WFOE in a tax haven jurisdiction like the British Virgin Islands, where foreign investors establish a company primarily for funding and listing, while actually controlling a domestic Chinese business and extracting profits. This structure is commonly used by Chinese companies engaged in internet businesses to accept foreign investment and list overseas in the United States and other countries.

Guo: Regarding Japan, at first glance, people often have the impression that Japan is not an immigrant country and that its immigration policies must be very strict. However, in reality, it is a country with very friendly policies toward foreign talent. For example, regarding highly skilled talent visas, many Chinese people (involved in Web3 development) can relatively easily enter Japan with a highly skilled talent visa. However, due to a lack of publicity about these policies, not only Chinese developers but even developers from Western countries are unaware of these policies, leading many Web3 entrepreneurs to exclude Japan from their plans.

From a business perspective, I believe Japan is a place where culture and commerce coexist well. A market where culture and commerce coexist is driven by creators, and such a market with a large number of creators aligns very well with the Web3 emphasis on private ownership. As long as the shortcomings of the tax system and the low density of development talent can be addressed, Japan's nascent Web3 market will one day surpass any other country.

Natsume: Based on Guo Yu's response, I would like to ask Sota, what is Japan's positioning in the global Web3 market? At the same time, what do you see as Japan's advantages?

Sota: From a global perspective, I believe Japan has been catching up at an astonishing speed recently. For example, on the government side, Prime Minister Kishida and other members of the Liberal Democratic Party, especially the younger members within the party, have been sending positive signals about Web3. It is rare for a political party to work so hard and promote Web3 globally. Additionally, the youth department of the Liberal Democratic Party recently issued NFTs and tokens, and these positive experiments have brought many positive effects. On the other hand, native Web3 services require a token system, and due to regulatory restrictions, it is still very difficult to issue tokens in Japan today. For example, for us (Astar Network), under the current tax system, it is almost impossible to create a Layer 1 blockchain or DeFi. So, the most feasible area right now is NFTs.

Natsume: So currently, do you see NFTs as the only direction in which Japan can compete with other regions?

Sota: Yes. Japan has many content-related IPs (intellectual properties) that can be converted into obvious opportunities. Unfortunately, the Japanese people's English communication skills somewhat limit their ability to operate globally, restricting their speed of development overseas. While NFTs may hold some hope, I believe Japan's island effect is still developing, meaning many Japanese projects are still only playing within their small circles.

However, this is a chicken-and-egg problem; if projects like ours do not achieve remarkable results globally, policies will not change. If policies do not change, there will not be more positive outcomes, creating a knot that cannot be untied. Therefore, as entrepreneurs, we need to strive to achieve accomplishments on a global scale, providing various feedback and influence on tax systems and national policies through our results, thereby promoting industry progress.

Guo: Since the beginning of the year, I have also been paying attention to the Web3 national strategy promoted by the Liberal Democratic Party, which proposes many very positive measures, such as the incorporation of DAOs, relaxing visa requirements for overseas talent, amending funding settlement methods, and improving tax systems, etc. However, these measures are merely revisions of the framework, and it will still take at least six months for the details to be fully finalized. On the other hand, I also believe that Sota's views on NFTs are correct.

In fact, in China, due to regulatory reasons, it is almost impossible to create products involving tokens, so under these circumstances, Chinese entrepreneurs will also prioritize NFTs. Of course, Chinese startups are usually more flexible and will try various solutions even when legislation is not yet clear, so the VIE plan I mentioned earlier will be the preferred option for Chinese Web3 entrepreneurs. The last thing I want to talk about is Japan's potential.

The natural moat formed by language barriers makes the Japanese market itself a market that is difficult for foreign entrepreneurs to enter. Many Chinese products have attempted to enter the Japanese market, but the only successful one is TikTok, whose video platform nature allowed it to overcome language barriers, making it easy for people from various countries to understand the service. However, in the upcoming Web3 revolution worldwide, if startups from Japan can attract foreign development talent, leverage their domestic content industry advantages to gain market share in Japan first, and eventually expand globally, I believe we can see Japanese startups that are highly competitive on a global scale.

Sota: I completely agree. I believe each of us has our own role, so I am not qualified to comment on government policy issues; the best choice is to leave that to the politicians. As an entrepreneur, what I need to do most is to broaden the horizons of young people.

In China, the emergence of world-class unicorn companies like ByteDance naturally stimulated the entrepreneurial spirit of the same generation and elevated everyone's vision. Unfortunately, there are still very few such examples in Japan's Web3 field, and we have a long way to go to achieve our vision. Therefore, our mission is to build Astar Network into a top-tier Layer 1 Protocol, and I sincerely hope it can become a good template for young people, encouraging more to enter this field.

Guo: Yes, Web3 is a very special field, and its development and trends have almost started simultaneously worldwide.

In this sense, Web3 has a strong ripple effect; what Sota is doing can influence a large cultural circle, not only Japanese people within Japan but also Japanese people scattered around the world, all of whom may be influenced by Astar's achievements. This is extremely meaningful for more Japanese people who may join Web3 in the future.

Image: Shinchousha Foresight

Natsume: Both of your viewpoints are very interesting. So far, the questions have been from a macro perspective, but I would like to change the angle and ask you both to talk from the perspective of entrepreneurs. Especially Sota, you have seen many top investors in the US and China; what are the differences between Web3 and Web2 investors, and what strategies should entrepreneurs adopt when raising funds?

Sota: I have personally raised funds twice from Web2 investors and twice from Web3 investors, and I can roughly discuss the similarities and differences between the two types of investors. First, Web3 investors generally observe global projects, so when I communicate with Chinese Web3 investors, I find that they almost never look at projects that circulate only in the Japanese market. This judgment can be summarized as follows: what Web3 is most concerned about now is how big a project can grow globally.

Additionally, there are fundamental differences in the financing logic between Web2 and Web3, such as whether to invest in equity or tokens, the distribution of tokens, and the locking issues involved, so directly applying Web2 investment decision-making methods to Web3 investments often does not work. Personally, in Web2 investments, market share determines sales, and sales determine market value. In contrast, in Web3 services, decentralization is the real value, so creating community-driven services and measuring value through community-driven metrics is very important. In this sense, the sources of value for the two are completely opposite, and entrepreneurs should carefully consider their project valuation logic when raising funds.

Guo: I share the same view. The Web2 investors I am connected with in Beijing are all investing in the TMT sector, and after multiple communications, I feel they are still in a wait-and-see phase for Web3 investments. They still use traditional Web2 valuation models to assess Web3 startups, but Layer 1 protocols, DeFi, or NFTs cannot simply be evaluated using key metrics like DAU (daily active users). For example, in DeFi, we typically look at metrics like TVL (total value locked, the amount of assets under custody). Web3 investors have a better understanding of Web3 products and can invest in tokens. However, at the same time, they often focus on short-term returns and are more easily influenced by market trends.

Sota: Yes, after all, in Web3, there are not as many established valuation model cases as in Web2, so there are many opportunities for modeling the sources of value in Web3 (for entrepreneurs). For instance, we can define what the most important metrics for our projects are, such as TVL, community active users, monthly active wallets, etc. If entrepreneurs can provide unique evaluation criteria and clearly explain the logic when discussing their projects with investors who do not yet have a clear methodology, it will greatly benefit them.

Guo: Exactly, I think this is directly related to why Web3 projects are currently easier to finance, as investors still making primary market investments have not established specific evaluation metrics. If entrepreneurs can tell a good story while providing some quantitative evidence during fundraising, it can significantly enhance the project's persuasiveness.

However, even after preparing a comprehensive financing logic, there will still be times when things do not go smoothly. The best way for entrepreneurs to secure funding still needs exploration. Therefore, Web3 is still in an early and uncertain stage, and there is so much to study and learn that it makes it incredibly fascinating. When Web3 products cross the chasm of mass adoption and have hundreds of millions of users, their valuation logic will be completely different and more mature than it is now. The current stage is a necessary exploration of the unknown. This journey will not only illuminate the path for future Web3 venture capitalists but also light the way for Web2 venture capitalists investing in TMT.

Sota: I think we may see quite a few failures from now on, but without failure, there is no success. Both the government and entrepreneurs should see the positive side. Especially in such a bear market, it is particularly important to maintain a positive and optimistic attitude.

Natsume: So how do you both view the current bear market?

Sota: Regarding this cryptocurrency bear market, I personally believe it will last for a long time. There have been countless events in the past that led to bear markets, such as China implementing cryptocurrency regulations, but most of them were single and short-term. However, this time, the bear market driven by macroeconomic factors will be relatively longer. That said, I am not pessimistic about this; on the contrary, I am quite optimistic about the future. Recently, the famous Silicon Valley venture capital firm a16z commented that the current cryptocurrency shock may have many similarities with the previous internet bubble (dotcom bubble).

There are endless reasons to exit and flee during a bear market: loss of momentum, cash depletion, and so on. However, entrepreneurs who exited the internet bubble early ultimately missed out on the most innovative decade in human history. a16z stated, "If Web3 becomes the next mainstream, it is very likely that various inventions will emerge, just like the previous generation of the internet led to the mobile internet." This suggests that we are actually at the entrance of the golden age of cryptocurrency. I agree with what they said; looking ahead to the next decade, innovations will emerge one after another, and the future is full of possibilities. Even at this point in time, entering the Web3 field still offers endless opportunities.

Guo: I personally believe, as Sota mentioned, that the winter of the cryptocurrency industry is caused by macroeconomic factors. The stock indices, including the Nasdaq in the United States, are currently in the largest decline cycle in a decade, which was almost impossible in the past. The reasons behind this are due to the Federal Reserve raising interest rates, global supply chain issues, and other problems that are not particularly related to Web3.

This bear market has already led to the collapse of projects that originally had operational issues, such as Luna UST. However, this can also be seen as the greatest opportunity to improve the soundness of the Web3 industry. Personally, I believe we are at the bottom of a downward cycle, and I am preparing to convert most of my personal assets into Ethereum. I believe that future services will be built on Ethereum and other blockchains in the Web3 field. I will overcome this cycle, believe in long-term development, and prepare to go all-in on Web3.

Natsume: Your enthusiasm for Web3 and determination to go all-in on Web3 are truly amazing. Finally, could you give some advice and suggestions to young people who are about to enter the Web3 field?

Image: Shinchousha Foresight

Guo: I want to tell them that this bear market is the biggest opportunity in history. For young people, there is no better opportunity than a bear market. When the economy is in recession, many startups want to hire but do not have enough cash, so they are likely to hire young people without mature skills and complete knowledge when they urgently need manpower. If you work hard and hone your personal abilities and knowledge in such circumstances, I believe you will eventually achieve great success.

In fact, when I started learning programming in 2008, people around me jokingly asked me if it was too late to learn programming now, but later the arrival of the mobile internet era allowed me to catch that train and witness the rapid development of China's internet industry. So if I had given up programming back then, I wouldn't be where I am today. Therefore, if you want to learn programming, please learn Solidity and other software, and actively participate in projects. If you cannot program, please join a DAO and become a core user of your favorite Web3 product. I believe that if you do this, you will ultimately cross the cycle and win in the next bull market.

Sota: In fact, facing a bear market is very difficult and can easily lead to frustration for every entrepreneur. Even so, I still recommend that everyone stay alert and maintain a fighting spirit. Many entrepreneurs may choose to retreat during an economic downturn, but maintaining long-term output and growth is the key to maintaining a competitive advantage in a particular field. Just like in the Web2 era, it was during economic recessions and bear market cycles that world-changing companies and products like Amazon and Google were born. Therefore, these economic changes can be seen as noise; we should focus and persist in developing products.

Natsume: Thank you both for the interview; the information shared is truly substantial. In this harsh winter, I hope that both I and our readers can continue to maintain an optimistic attitude and do our best to prepare for the coming Web3 era. Thank you again for your participation.