It may be hard to believe, but Africa's Web3 and blockchain sectors were the toast of investors about a year ago. After raising just $5.1 million in 2021, Web3 startups in Africa raised $88 million in 2022.
But 2022 also came with interesting developments. After facing a liquidity crunch in November 2022, the repercussions of FTX's quick shut down were felt across the globe. Nestcoin lost some of its funds held by the crypto exchange, prompting the Web3 startup to lay off staff.
These developments have contributed to reduced investor activity in the sector, but a few people are still hopeful.
In December 2022, Uwem Uwemakpan expressed hope that African cryptocurrency startups would see renewed investor activity and pointed out that it still had some utility in Africa.
While that hope has not materialised, one man is confident in Africa's Web3 potential, backing some notable names in the sector. Vincent Li, Founding Partner, Adaverse, is our guest on Equity Merchants and he shares reasons for his optimism.
Hello Vincent, it's great to have you on the podcast. Before we dive into our conversation, can you introduce yourself?
I started my career in China 15 years ago, as a product manager. So I did all kinds of products starting from Web1.
After several years, I started investing. So I oversaw investment in Silicon Valley, India, Southeast Asia, and parts of Latin America since 2015. At the same time, I started my startup called Qutoutiao Inc., a Chinese news aggregator targeting lower-tier cities in China. It went viral, and we just spent two and a half years from zero to getting listed on NASDAQ in 2018.
After that, I decided to go all in on emerging markets. I joined Transsion Holdings and started working in Africa. I established Future Hub, the Transsion Holdings-backed seed fund and incubator, in 2019 and officially started my career in Africa, especially in Nigeria.
I've made a couple of investments since then, and also done some venture building. In 2021, I started a bunch of Web3 ventures. Right now I'm the Founding Partner of Adaverse, Co-founder of Future Hub, and Co-founder of two other startups — Vibra and Cassava Network.
What got you started with Web3 investing?
From my previous experience, I just see the evolution of technology from Web1, then Web2, and then Web3. So to me, it's just like a natural evolution of web technology. That's one.
Secondly, I see more space for Web3 to disrupt emerging markets like Africa. There are so many new opportunities, and so many places that we can leverage the Web3 technology.
VCs are typically guided by a thesis; they're either investing in fintech startups or climate tech startups. What guides your investments in Web3 startups in Africa?
We really like the companies in Africa that can solve real world problems by leveraging the power of blockchain and Web3. Most of the startups or companies from the United States or Asia are pretty much crypto-native companies.
They're building layer one, the blockchain itself, or building different applications on-chain. For example, they're building things like DeFi lending or DeFi exchange.
It's nothing to do with the real world if I may say. On the contrary, if you look at economies in Africa, quite a few founders try to solve real world problems using the blockchain. For example, we invested in House Africa, from Nigeria. What they do is that they try to use blockchain to verify the land parcel. It's a great solution they offer to the buyers and also to the developers, to build trust and solve the trust issue.
You've been in Africa for a bit, so you probably have a better understanding compared to when you first arrived. What are specific use cases for Web3 that you can see, especially now that the hype seems to have died down?
Before answering that, I'd like to clarify some concepts. Firstly we have blockchain and then we have tokens or cryptocurrencies. Thirdly, we have Web3 and the ownership of digital assets. When we talk about blockchain, it's just a ledger where people keep their transaction history.
It has nothing to do with tokens or with cryptocurrency. With the blockchain, we can do a lot of things. As I mentioned, we use blockchain to store and verify data. So in this case study we have House Africa, as I mentioned.
We also invested in Chekkit, a Nigerian company dealing with counterfeit issues using the blockchain. So it's nothing to do with tokens, cryptocurrencies, crypto exchanges, or those kinds of things; it's purely technology.
When we talk about the second part, cryptocurrency, I see quite a lot of people here who think blockchain is cryptocurrency. For example, they see Bitcoin as blockchain. They see USDT as blockchain, but actually, it's just the tokens or it's just a cryptocurrency based on the blockchain. So that is the hype we see, and we also see all the crashes.
The third thing is Web3. Based on the blockchain, you have the tokens, which are more like gas to a car. When the token value is widely accepted by a bunch of people, which we call a consensus, we see the tokens as a cryptocurrency. Web3 is all about people owning their own digital assets instead of giving all the data to a centralised platform.
For the Web3 part, we also have a couple of investment deals, TalkSay for instance. They provide an online audio chat room for Hausa people to exchange their thoughts, exchange their ideas, or maybe just do fun things. For the moment, I think apart from the hype, we still see a lot of good founders. They're using blockchain to solve issues. They also leverage the spirit of Web3 to bring that ownership back to the users.
How do you help portfolio companies navigate unclear regulations around Web3 and the blockchain?
We're seeing this challenge in many places. From the United States to China and down here in Africa. But let me start with the three elements — the blockchain, cryptocurrency, and Web3.
We see many bad things happening typically around cryptocurrency. Most of the regulations from different countries also focus on cryptocurrency. In Nigeria, it's the same thing. I noticed that we just got the regulation of blockchain like several weeks ago.
But, I believe it's still about the regulation of cryptocurrency, it's the regulation of money. We see quite a few companies doing great things without integrating any cryptocurrency, or without receiving any money from the end user. I don't really see any regulated risk for them.
The spirit of web3 is to give ownership back to the user. Of course, the platform will take a split of revenue but, by and large, it's the user who owns the digital assets. As long as we have a very clear boundary on this, I think that the companies are fine, they can do their business.
But if it is highly related to financial products, then my suggestion is that the founders need to be working with the government very closely to make themselves as compliant as possible.
What are some lessons you've learnt in the almost three years you've been investing in Africa?
I would say two things. The first is that we need to be patient because investment itself is highly dependent on the cycle. It's not a short-term thing, like crypto trading, so we need to have a long term persistence, and long term commitment to support our portfolio companies in the long run. The other thing is that, compared with the capital, I feel that we should offer more experience, knowledge, mentorship, and support.
At Adaverse, we don't just invest, but we also provide the acceleration programme or support.
After the investment, we include the company and the founder in our accelerator programme where we offer extensive support in four major topics starting from product design, technical support, community building, and fundraising and listing advisory.
During this whole curriculum, we try to equip them with as much Web3 knowledge as possible. This is essential because now we see many great founders in Africa who know how to hire a team, how to build a team, how to build a product, and how to build a business model. Quite a lot of them don't really have the Web3 knowledge yet although they're very keen to learn from others. When we provide this kind of acceleration support to them, it's highly complimentary to their own skill set.
So how long does the accelerator last?
A typical cohort lasts three months sliced into three different phases. There's the one-on-one diagnostic with our internal advisors and experts. In the second phase, we match them with the relevant experts outside, so that they can have mentorship sessions. The third phase is more like public workshops and also demo days for them to present themselves.
Earlier you mentioned that every market has its unique nuances that affect how business is conducted. How do you work with partners to ensure that your portfolio companies in Africa have the benefit of your global Web3 experience, but also learn from people who have done business in Africa?
I can think of two major angles. So the first angle is among our portfolio companies; they can already learn from each other. For example, the founder of Chekkit can learn how the founder of House Africa leverages blockchain technology in their product.
So they can have that internal communication based on the platform we offer during the acceleration programme. The other is that we also help them to expand to other markets where their solutions can be applied.
Besides solving real world issues, what are the other factors that you look out for when you decide to invest in a startup?
Apart from the major thesis, we also have founder criteria. So we welcome founders who have been working in the same area with some relevant experience, and we also consider the stage of their product or their company.
We prefer to invest post-MVP, which means they at least have a workable product, with some early-stage traction, for example, a couple of clients, or maybe hundreds of users so that we can easily evaluate the proof of concept. And the third thing is, for sure, their openness to the new technology, especially blockchain and Web3.
You're investing in an emerging market, so it's a little bit harder to get exits, especially in Africa. How do you prepare for that on your part, and secondly with the founder?
As investors, we need to see returns. But as I mentioned, the two lessons I have learned here are persistence and offering more support. I think we just need to respect those two factors.
We have a long-term vision in Africa and that's why we established the $100 million fund. We tend to respect the momentum of the founder and also the market.
The second thing is that the support we are offering can also help the company grow. The more business we can bring to the founder, the more regional expansion we can facilitate for the founder, the quicker the company can grow and we can expect more returns.
We've come to the end of this. Thank you, Vincent, for coming around.
Thank you, it's a pleasure.