In an exclusive interview with Avalanche, Tom Schmidt (general partner at Dragonfly) reveals how he has spent over a decade immersed in the evolution of cryptocurrency and web3. His journey began in 2012, mining Dogecoin as a Stanford student, back when digital assets were often dismissed as a novelty. A decade later, web3 has matured into a serious investment class, and Schmidt now focuses on guiding founders through the challenges of building sustainable businesses in the space. His experience offers valuable insight into how investors and entrepreneurs can navigate the changing landscape of early-stage web3 opportunities in 2025.

Navigating Investments in Web3: An Interview by Avalanche

Evolution of Web3

One of the most notable trends Schmidt has observed over the years is the increasing involvement of developers from traditional tech backgrounds. More engineers with web2 experience are now entering the web3 space, bringing with them a strong understanding of how to build scalable applications. This shift marks an important stage in the industry’s development, as technical talent is no longer limited to crypto-native developers. The availability of better tools and a growing market for on-chain applications has enabled this transition, allowing developers to build products with real utility rather than speculative value.

Schmidt’s own career mirrors this industry-wide evolution. After studying computer science at Stanford, he worked as a product manager at Facebook and Instagram, where he gained firsthand experience with marketplace dynamics. When Ethereum’s ICO boom took off in 2017, he recognized the potential for decentralized, permissionless applications that extended beyond Bitcoin’s financial use cases. This realization led him to join 0x, a decentralized exchange protocol, before transitioning to his current role at Dragonfly in 2019. His experience in both traditional tech and web3 investments gives him a unique perspective on how the industry is evolving.

Dragonfly Team

Changing Investment Landscape

Schmidt describes the current state of web3 investing as fundamentally different from past cycles. In previous bull runs, investment trends were largely driven by broad thematic waves, whether ICOs, DeFi, or NFTs. Now, the industry has developed into a more nuanced ecosystem, with specialized investment funds focusing on specific sectors such as consumer applications, blockchain infrastructure, and decentralized finance. This growing specialization reflects the maturity of the space and has changed the way both founders and investors approach new opportunities.

The structure of investment deals has also evolved. In the past, token launches were often a prerequisite for securing funding, which sometimes led to short-term speculation rather than long-term product development. Today, Schmidt sees a shift toward more traditional venture capital models. Many early-stage investments now follow structures such as SAFEs (Simple Agreements for Future Equity) combined with token warrants, giving founders more flexibility in determining when and how to introduce tokens into their business models. This approach aligns incentives more effectively and allows startups to focus on building viable products before committing to tokenomics.

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Prioritizing Practical Growth Strategies 

One of the key lessons Schmidt emphasizes is the importance of having a clear, practical go-to-market strategy. During past bull markets, many founders pitched grand ideas without a concrete plan for acquiring their first users. This approach often led to unsustainable businesses that struggled once market hype faded. Now, investors are more cautious and look for startups with realistic pathways to adoption.

Schmidt advises founders to start with a small, engaged user base rather than relying on partnerships with major companies from the outset. He believes that the most successful web3 applications are those that provide unique value propositions that could not exist in traditional web2 environments. Instead of simply replicating existing business models with blockchain integration, the strongest startups leverage decentralization, transparency, and permissionless access to create fundamentally new experiences.

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Recognizing Red Flags

Through years of investing in early-stage web3 companies, Schmidt has identified common pitfalls that founders should avoid. One of the most frequent red flags is an excessive focus on token economics before a viable product has been built. Many teams present intricate token models early on, yet lack a functioning prototype or clear user demand. This focus on financial incentives over product-market fit can be detrimental and often leads to misaligned priorities.

Another warning sign is when founders attempt to recreate existing web2 applications without considering why their product needs to be on-chain. Simply making a web2 service “more efficient” by adding blockchain elements is rarely enough to drive adoption. Instead, successful web3 projects tap into the fundamental advantages of decentralized networks, enabling use cases that were previously impossible. Schmidt compares this shift to the early internet era, where the real breakthroughs came not from putting newspapers online but from enabling new forms of media and communication that traditional institutions could not support.

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The Future of Web3

Looking ahead, Schmidt sees significant potential in application-level projects that focus on building sustainable business models. While much of the industry’s attention has historically been on infrastructure and protocols, he believes that undervalued application-layer companies will gain recognition as they demonstrate strong retention and profitability. These businesses, often overlooked due to the lack of immediate liquidity, may become some of the most successful in the space as web3 adoption continues to grow.

For founders navigating the evolving landscape, Schmidt’s advice is to prioritize building strong products and real customer value before focusing on tokenomics or regulatory challenges. While external factors such as regulation remain important, long-term success depends on creating applications that solve real problems. As more experienced web2 founders enter the industry, the standard for product quality is rising, making execution more critical than ever.

As web3 matures, the most successful companies will likely be those that can balance innovation with practical business strategies. Rather than relying on speculation or market cycles, sustainable growth will come from products that leverage decentralized technology in meaningful ways. Investors like Schmidt are focusing on supporting founders who embrace this approach, helping shape the future of an industry that continues to evolve.

Source: Avalanche