Folius Ventures: Seven advantages and disadvantages of Chinese Web3 startups

Author: Folius Ventures, Source: Author's Twitter @FoliusVentures

Abstract

In the past 30 years, China's Internet industry has nurtured countless technology giants and super applications, and has accumulated a large number of engineers, technology entrepreneurs, and Internet talents who are good at consumer-oriented (2C) applications, which constitute the basic base and background of Chinese Internet entrepreneurs. We estimate that there are currently about 2-3 million Chinese Web2 practitioners who have the knowledge and potential to start a Web3 business and will start a Web3 business in the next three years. This means that at least 200-300 potential Chinese-backed head projects will appear in the market at a rate of 1-2 per week in the next three years.

In recent years, the superposition of multiple macro-negative factors such as the slowdown in China's Internet growth, the peak of traffic dividends, and the shrinking financing and exit opportunities in the Web2 field have formed a sharp contrast with the Web3 industry as an emerging blue ocean market with a positive environment, abundant liquidity, and great room for growth. Therefore, we expect that more Chinese Web2 talents will accelerate their transfer to Web3 in the future. For those Chinese Internet people who are competitive and innovative, have the ability to learn and have sufficient background conditions, We believe that Web3 is the next stop of their era, just like the A shares in the 90s, the H shares in the 00s, and the Nasdaq in the 10s, and will go hand in hand with AI, thus opening a new wave of Chinese Internet entrepreneurship and innovation. At the same time, we believe that the Web3 industry has accumulated and settled infrastructure for many years, which has enabled the industry to have the soil to carry super applications, and will allow the pendulum of industry development to be swung from "strong infrastructure, weak applications" to "strong applications, weak infrastructure". History shows that technology follows the law of application-infrastructure development: applications appear before infrastructure and promote its iteration and upgrading, and the improvement of infrastructure promotes the emergence of new application paradigms. Signs such as the significant reduction in on-chain interaction costs, the popularization of customized solutions, the reduction in friction in fiat currency interactions, the improvement of data and middleware, and the update and iteration of financial gameplay all indicate that Web3 is currently on the eve of the application dividend period, and the turning point will come in the next 12-18 months.

Chinese Internet entrepreneurs should make good use of Web2 methodology, form differentiated advantages, focus on the scenarios of Web2 migration to Web3, and expand the incremental market. Chinese Internet practitioners in the Web2 era have made great achievements in C-end application fields such as social, entertainment, and e-commerce. They have rich cognition and methodology, and are well versed in user psychology, product design, and operation. However, Web2 cognition is a double-edged sword in Web3: these experiences are both wealth and constraints. Web3's smaller user base, different product strategies, financialization, and cultural differences are all new challenges for Chinese entrepreneurs. But we believe that Chinese Internet entrepreneurs can still reuse the methodology of Web2. In the projects that Folius has already laid out (StepN, Matr1x, SleeplessAI, Memeland, Metacene, Myshell, etc.), we have observed the full potential of this group. We encourage Chinese teams to play their advantages in Web2, especially in user growth, community building, business model innovation, products and operations. Differentiate from overseas teams, and focus on exploring scenarios that promote the migration of Web2 to Web3. At the same time, we should also attach importance to cross-cultural exchanges and cooperation, broaden our international perspectives, and better adapt to the international environment of Web3.

1.Three factors for the outbreak of Chinese entrepreneurs in this cycle

The huge bonus of consumer-side engineers, the strong catalysis of internal and external factors, and the turning point of Web3 infrastructure. Its advantages and disadvantages are equally prominent.

China’s engineer dividend for consumer Internet products since 2000 has laid a foundation for about 15-20 million potential Chinese entrepreneurs in the entire Web3.

“Total potential base of Chinese Web3 entrepreneurs: 15-20 million people

• China’s Internet industry has accumulated 15-20 million employees from scratch in just 30 years, and accumulated a large number of reserve talents facing consumers and applications during the rapid development of mobile Internet after 2008. This number determines the basic base for Chinese entrepreneurs to start businesses in Web3.

• As the world’s largest single user market, China has seen the emergence of many world-leading innovative application categories in the past golden decade of mobile Internet, including social media (such as WeChat), mobile payments (such as WeChat Pay, Alipay), entertainment platforms (such as Bigo, Huya, Douyu), content sharing platforms (such as Xiaohongshu, Douyin), and e-commerce retail (such as Alibaba, Pinduoduo, Meituan). These fields have developed innovative models and product forms that are completely different from overseas markets, and each has its own characteristics in terms of interaction methods and gameplay. The teams behind the top products have all stood out after sufficient market competition, and have accumulated rich and proven methodologies in user insights, product design, operation strategies, traffic acquisition, growth fission, and commercialization. This group of Internet talents is the most competitive group of people. We have observed that many Internet people have begun to devote themselves to the encryption industry, and we expect this trend to continue to accelerate in the future.

Based on this base, we believe that there are 2-3 million potential core head groups, which have the initial foundation for entrepreneurship and the ability to successfully obtain financing.

Chinese core head group: 2-3 million people ( 10-15% )

• Many well-known Web2 Internet giants are not only the cradle of technological innovation, but also an important source of Web3 talent ecology. In our initial assessment of the talents of China's top giants, even conservative estimates show that there are more than hundreds of thousands of product technology elites with high quality, rich experience and outstanding innovation capabilities. These talents include not only a wide range of grassroots developers, but also many executives from the top of the industry, whose levels are equivalent to or exceed ByteDance's 3-2 level and Alibaba's P9 level. They have devoted themselves to the Web3 field, and the projects they have created not only demonstrate the efficient execution of the giant team, but also show the ultimate pursuit of fine polishing and perfection of products.

• In addition to the leading Internet companies, China's game talents are worth discussing separately: China has 1.5 million game industry practitioners, of which R&D personnel account for about 70%. China's game companies from the Shanda/Giant era have demonstrated top development and commercial innovation capabilities, especially the new production pipeline innovation changes brought about by the mobile game era. They are able to quickly iterate products in a short period of time, maintain a development rhythm of fine-tuning while entering the market, listen deeply to user feedback and improve, and use methods such as multi-product matrix trial and error. A group of developers with strong execution capabilities have been trained, and this group of game developers is naturally more suitable for Crypto development.

• Therefore, we believe that among the 15-20 million practitioners in the entire industry, about 15%, or 2-3 million people, have initially possessed the vision, ability and background to start a business and successfully obtain financing and attention. This group of people is also the group that Web3 needs to win over the most.

Based on this base, we believe that the current Web2 -> Web3 conversion rate is about 1% in three years. In the next three years, the Chinese Web2 industry will provide 200-300 top teams for Web3, with an average of 1.5-2 high-quality teams emerging every week.

Web3 enthusiasts: 200,000-300,000 people (10%)

• In the top circle, we believe that there is currently about 1 in 10 people who do not hold too much prejudice against Web3, are very curious, and then have a passion for learning, and finally have a deeper understanding of the industry and have interacted on the chain (not pure hype). This ratio will change with the cycle.

Qualified and willing to start a business in the next three years: 20,000 to 30,000 people (10%)

• Among the enthusiasts, we believe that they will eventually go overseas, and their own personality, wealth accumulation, industry accumulation, and family background are suitable for the next three years to enter the Web3 industry to start a business in an unfriendly macro environment. There may be no more than 1 person out of 10 enthusiasts. In other words, we believe that in the core Web2 circle, the conversion rate for Web3 entrepreneurship is about 1%.

Average founding team of 5 people: 4,000 to 6,000 teams will emerge in a three-year cycle. Top 5% teams: 200-300 teams, an average of 65-100 teams per year, 1.5-2 teams per week

• Given the relatively unregulated industry and uneven team levels, we believe that teams with multi-faceted combat effectiveness, long-term values, reliable business models and insights, cultural and language capabilities to go overseas, and a better understanding of the Web3 financial field will have a better chance of becoming the top teams. This ratio may be 1 in 20 teams.

Therefore, we believe that in the next three years, the Chinese Web2 industry will deliver 200-300 top teams to Web3, with an average of 1.5-2 teams per week. We will be extremely looking forward to in-depth exchanges and cooperation with them at the earliest stage.

Since 2020, a new world pattern of confrontation between China and the United States has taken shape. The traditional Web2 Internet industry is in sharp contrast with the rapidly developing Web3, which will make the latter the best cradle for these outstanding Web2 teams (especially Chinese teams).

The Web2 to Web3 singularity has emerged, and the gradual improvement of Crypto infrastructure has provided the industry with the soil to carry super applications. The pendulum of Web3 development is about to swing to the "strong application" end.

Looking back at the history of technology, the iteration cycle of App-Infra is like a pendulum: App always appears before infra and encourages the latter to iterate and upgrade, and the improvement of infra prompts the emergence of new app paradigms. Email preceded TCP/IP, which led to the emergence of early portals; portals led to the emergence of browsers (Mosaic) and high-level programming languages, which brought prosperity to Web1.0; high-speed networks (broadband) and cloud service providers (AWS) born to meet the needs of Web1.0 made more complex social applications and streaming media possible, which brought prosperity to Web2.0. At the same time, better and faster demands promoted the further iteration of infinite technology and semiconductors, making the application of AI/AR/VR possible.

We believe that Web3 also follows the above rules, and with the technological iterations of the past few cycles, the industry pendulum of cryptocurrency is about to swing to the "strong application" end.

In the past cycles, the Web3 industry has developed infra components that can carry explosive consumer applications. We are in the transition from the accumulation period to the dividend period, and we expect the inflection point of application explosion (LTV>=CAC) to come in the next 12-18 months.

In the past cycles, the industry has developed infra components that can carry explosive consumer applications. We are in the transition from the accumulation period to the dividend period. The driving factors include: 1/The cost of on-chain interaction has been greatly reduced, making user conversion possible; 2/The popularization of development and customization solutions allows most developers to quickly try and fail; 3/The friction of legal currency interaction has been reduced, greatly increasing users' willingness to pay; 4/The improvement of financial and token models can boost ARPU in all aspects, improve retention, and reduce user acquisition costs. These factors have a great promoting effect on the unit economy (LTV/CAC) of dApp and can form a positive flywheel. We expect the inflection point of application explosion (LTV>=CAC) to come in the next 12-18 months.

II.Seven advantages and seven disadvantages of Chinese entrepreneurs

But we remain optimistic and see many advantages from Chinese entrepreneurs, and these advantages will continue to shine in Web3 in the future:

1. Grasping human nature and matching mechanism design

Chinese large companies are good at cultivating excellent product managers with delicate human perception and aesthetic pursuit. They not only explore different interaction methods and gameplay strategies from the mobile era and Europe and the United States, but are also extremely good at fission growth. Taking WeChat's social interaction and Pinduoduo's innovative shopping model as examples, these strategies not only accelerate the expansion of the user base, but also increase user activity and brand loyalty. These product strategies that have been tested in actual combat are particularly prominent in the face of the relatively monotonous and primary growth methods in the current Web3 field. It is a general consensus that Web3 urgently needs excellent and high-quality consumer products that can be promoted to the public. How to identify the native needs of the Web3 user group and the obstacles to the migration of Web2 users is an important topic.

2. Comprehensive operational capabilities

China's Web2 platform operational strength and commercial closed-loop capabilities in the market with low ARPU are impressive. Whether it is a complex creator ecosystem, a diversified revenue distribution mechanism, or an advanced algorithm-driven content recommendation system, it has demonstrated the team's deep foundation in platform operations. The achievements of Chinese entrepreneurs in the field of platform operations such as cryptocurrency exchanges have already proved their outstanding ability to build and manage complex platforms. Web3 content creation and operation are still in the exploratory stage. Chinese teams should focus on measuring how to combine the incentive effect of the token model on the original basis to further amplify the network effect on the creator and consumer side.

3. Core technical strength

The technical strength of the Chinese team is a key point that people easily forget. Chinese people have advanced technical accumulation and research in many future technical aspects of Web3 innovation, such as ZK, ML, and AI. Chinese scholars/technical talents in related directions account for a considerable proportion, but Chinese teams are often the technology providers behind many first-line projects. We should focus on tapping key talents who are technical masters standing in the center of the stage.

4. Rapid iteration methodology

Chinese people are diligent and well versed in the methodology of the competition. They are not stupid overtime workers, but have strong execution capabilities to deliver products quickly. Faced with the dual blessing of China's existing supply chain dividends and engineering dividends, they abandon the thinking of large factories and play the advantages of strong execution capabilities in the Web3 era of rapid growth in the future, which requires fast PMF and fast trial and error.

5. The insights and pursuits of Chinese entrepreneurs

Very valuable innate advantages. The growth rate of China's mobile Internet in the past ten years is a miracle. Chinese entrepreneurs born in the "high-speed system" have a pursuit of system efficiency, strong learning ability and the fastest response speed. They can be pragmatic in the face of needs. They have seen large-scale, systematic and efficient business systems. Practical experience in a high-speed environment is more important. This group of people is a generation of native globalization.

6. Cognition of the latest consumer application routines

Copy from China has proven to be successful in the past few years and is still creating new greatness. The time machine theory has been reversed. Referring to the models, products, and businesses that have been verified in the Chinese market, seeking blue oceans in overseas markets, Chinese entrepreneurs in the future are very likely to have a strong advantage of copying from Web2 in the fields of 2C/games.

7. Chinese communities all over the world

For the Web3 entrepreneur group that must and can only go overseas to start a business, another advantage is the Chinese community all over the world. The Chinese have had the spirit of adventure and adventure in the world since ancient times. The innate population base has led to the gathering of communities and hometown groups all over the world. For example, Singapore/Hong Kong has gathered a large number of Web3 OGs of the last era. Even in the fields of mining and exchanges, Chinese people have taken the lead. It will be more effective to give full play to the resource advantages of the race.

III.Advantage tracks for Chinese developers

Large DAU base, creator economy, strong platform economic system, and business model verified in Web2.

We believe that tracks with the following characteristics can unleash the greatest potential of Chinese entrepreneurs:

1. Large DAU base, strong social attributes

It is possible to form a strong network effect by combining token incentives and gamification. Compared with traditional marketing and customer acquisition, this model does not require close cooperation, high costs and declining efficiency, and can especially bring into play the potential of Web3 decentralized marketing/distribution.

2. Creator economy

China has a large group of content creators and abundant human resources, and breakthroughs in AI have further improved individual creativity. In such an environment, everyone has the possibility of becoming a traffic node or a creation node, becoming a "super individual/node".

3. A platform economic system with strong operations

A platform economic system that can fully utilize the capabilities of Chinese operational experts, especially through crypto to provide new ways of value exchange and incentive mechanisms to promote wider participation and collaboration.

4. Business models that have been verified in Web2

Business models that have been successfully verified in Web2, especially those with high ARPU characteristics, good cash flow and high profit margin potential. If the user behavior, user relationship chain, user data, etc. in this vertical direction can be superimposed with the possibility of being assetized, and the scene can be embedded in the transaction, and the probability-based gameplay such as blind boxes can be added, the business potential can be further released.

At the same time, we believe that the entrepreneurial tracks selected through the above dimensions combined with the Web3 token playbook (wealth effect/revenue share) can greatly amplify this flywheel effect:

1. Lower user acquisition costs;

2. Higher user ARPU and Retention;

3. Lower group operating costs, especially the platform system of multilateral networks;

4. More diversified business models bring more revenue possibilities, and the addition of over-the-counter liquidity is further strengthened.

However, it should be noted that different types of directions have different focuses. For example, high ARPU products are more likely to promote user growth through revenue share, thereby getting rid of dependence on traditional channels.

Fourth,The shortcomings of Chinese entrepreneurs who come to Web3 to start a business

1. It is easy to misjudge because of lack of understanding

Confidence in the methodology of Web2 itself, misjudgment of the development level of the Web3 industry, and lack of understanding of the overall Web3 industry. This leads to all-round deviations in user needs, direction selection, and final product derivation.

2. Customers with huge differences in habits

Web2 and Web3, China and overseas have huge cultural and linguistic differences. This leads to the situation of "experts in internal wars and laymen in external wars" in many aspects of product design. There is a huge gap between domestic product design concepts, UIUX, aesthetics, etc. and whether they are recognized by overseas users.

3. A very fragmented market compared to China

Web3 has a small user base, and user groups are scattered across countries. Traditionally, the customer acquisition methods and GTM strategies that rely on large user groups, single cultural and language markets are not applicable. Cultural differences make the final solution very poor.

4. Over-equipped functions compared to scale and industry progress

Similar to the above two points, when building products, based on past Web2 habits, there is a tendency to over-equip functions and advance to the platform too early, ignoring the fact that the Web3 market itself is currently small in scale and users prefer small and beautiful products. Ultimately, the vertical track is not fully understood, the product is not in demand, and the company's resources are wasted.

5. Discomfort with the need to acquire customers from zero to one

Many entrepreneurs are used to the customer acquisition bonus brought by the parent company's near-monopoly platform-level traffic and cash flow in the past. When it is really necessary to acquire customers from 0 to 1, a series of problems such as inaccurate demand capture, insufficient product polishing, and lack of customer acquisition capabilities are exposed.

6. Conflict between open and closed concepts

China lacks an open developer ecosystem, and the concept of closed loop and pursuit of monopoly. This concept has a natural conflict in creating a product ecosystem, especially in creating a consensus among developers, and cannot effectively gather real global recognition.

7. Lack of understanding of finance as an amplifier

Due to the influence of various cultures and the macro environment, there is a general lack of understanding of financial financing, secondary markets, and the corresponding expectation management. The specific results are that it lags behind in terms of Web3 functional integration, narrative and public trust, as well as the final financing amount and ecosystem valuation.