FirstMark Capital’s Lisa Xu: Driving Utility & Sustainable Value Creation within Web3
Thesis BriefsLisa XuWeb3Crypto/Web3UX DesignConsumer AdoptionFirstmark CapitalEVC List 2022

Terra Nova Insights Team,

FirstMark Capital’s Lisa Xu: Driving Utility & Sustainable Value Creation within Web3



The crypto and Web3 winter, exacerbated by the collapse of FTX, has brought skepticism to all-time highs as both institutional and retail investors flee the market. Lisa Xu, principal at FirstMark Capital, explores how this downturn is creating the conditions necessary to birth the next generation of companies who will build practical and valuable use cases for Web3 technology. Crypto innovators may need to - begrudgingly - take a hybrid, ‘Web 2.5’ approach that regains consumer trust in order to build networks that can be progressively decentralized when the market accelerates again.


Why is Web3 value creation such an important category moving forward?

  • Downturns have their own advantages for founders committed to the space. Now that they can no longer depend on the marketing value of “Web3,” Xu argues the bear market will force companies to focus on delivering real and measurable value to users. It will undoubtedly be a very difficult environment for startups, she says, but it will ultimately spur the creation of long-term value in the space.
  • Despite the swirl of negative press, developer activity remains robust and talent continues to be attracted to Web3. This has cemented Xu’s conviction in the future of the space. “Blockchain infrastructure has made huge strides over the past couple of years thanks to this activity,” she says, “and it is now possible to build on top of this infrastructure to solve meaningful problems for both Web2 and Web3 customers with multi-chain platforms, token structures, and more.”
  • FTX’s downfall is forcing the regulatory evolution that is needed for the next phase of application layers on Web3. “Base layers are only as valuable as the protocols and products built on top of them,” Xu says. “In this next phase of Web3, crypto applications will gain momentum as regulatory clarity improves.”

What are the business models or use cases that might be attached to this category?

  • At the application and protocol level, emerging use-cases for blockchain could disrupt legacy consumer industries. Xu cites a few examples: new creator monetization models; enabling trustless, peer-to-peer transactions via smart contracts; decentralized social networks that allow users to own and monetize their data; and tokens that incentivize pro-network participation and prevent platforms from becoming overly extractive. “These use cases have the potential to disrupt large, legacy consumer industries,” Xu says, “especially where transactions play a critical role and where incentives may be misaligned between companies and creators or participants.”
    • “I expect to see most of these companies leveraging familiar business models like transaction fees and subscription models,” she says. “However, that revenue could be earned on-chain and/or governed by smart contracts, compared to Web2 companies.”
  • Contrary to the desires of crypto natives, a hybrid ‘Web 2.5’ approach may be the most realistic path through the bear market. Companies building around the application layer can leverage accessible, ‘Web2 UX’ designs in order to reach critical audience mass. This could include things like custodial wallets, built-in fiat-to-crypto onramps, and private key recovery methods that collectively remove the frictions of consumer adoption. “In certain markets, it may make sense to abstract away the technology completely, especially with marketing, and let the products speak for themselves,” Xu says.
    • The second go-to-market option is to empower small communities of enthusiastic, native crypto users. Even if the customer base is small, companies can solve a meaningful problem and build product depth based on very strong usage. This model will involve keeping a lean team and low burn profile to survive the crypto winter, and then grow when adoption starts accelerating again.

What are some of the potential roadblocks?

  • A collective lack of faith poses the greatest threat to adoption. “The biggest risk right now, catalyzed by FTX and the other bankruptcies earlier this year, is lack of confidence from both retail and institutional investors,” says Xu. Stigma and fear of the overall category may seriously hinder near-term adoption of any crypto products.


saidbyblock~ via email correspondence
Lisa Xu

We just went through a massive boom and bust cycle in crypto from the beginning of 2021 until now. We are undoubtedly in a bear market and, with FTX still unraveling, the market is far from stabilizing.

The crypto market cap hit an all time high of ~$3 trillion last November. It is hovering around $800-900M now and could still slide further as the ripple effects of FTX continue.

While token prices climbed last year, we saw speculative markets explode around NFTs, DeFi, and DAOs. There was - and still is - huge potential in the underlying technology, but the value of these markets was orders of magnitude greater than their actual utility.

What was interesting to observe during this time was that many of the startups in the web3 "space" were formed to serve these speculative markets, rather than working on actual applications of the technology, creating or improving use cases.

For example, there were a myriad of NFT marketplaces and tools for NFT traders because there was a lot of trading volume that was driven by pure speculation, but as those markets declined it wasn't clear why you would want to own or trade NFTs if you weren't going to profit from them.

As I look ahead in this bear market, this is an incredibly realistic time for companies to build in this space. I say realistic because customers are not going to buy/use your product because of “web3” or “NFTs” as a buzzword - more likely, they will use it in spite of this - but because it is delivering something of real value to them, whether that is a better user experience or functionality that is only made possible by blockchain technology. This is an incredibly difficult test for companies, but will be required to build true value in this space.

I believe in the long-term potential of blockchain technology and think that the developer community and startup ecosystem will continue to build out both infrastructure and applications through the bear market that will continue to grow the value of these networks.


Q: What can you say about the time horizon of adoption for this thesis?

A: “Timing is still a big open question for everyone. I do think that the next few years will be a very promising time to invest in companies in this sector, particularly as valuations come down from unsustainable levels, companies delay token offerings in favor of more traditional company building, and both founders and investors who are less committed leave the space.

The exciting part is that it is up to the founders themselves to drive adoption of these technologies by building products that are accessible to new users and deliver net new experiences to them which are not possible without blockchain technology - programmable revenue sharing, peer-to-peer, trustless transactions, etc.

Despite all of the volatility, we are still seeing long-term investments by forward thinking Fortune 500 companies, like Starbucks, Nike, Meta and Reddit. These companies will be critical for onboarding large swaths of customers into Web3, whether they know it or not.”

The 2022 EVC List honors the top 50 rising starts in venture capital. Terra Nova’s Thesis Brief series showcases each investor’s insights and category expertise.

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