Roland Berger's due diligence framework for Web3 investments

09 May 2023 4 min. read
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With the number of investments and transactions in Web3 technologies and digital assets going through the roof, investors are in strong need for conducting a thorough due diligence on target companies.

The Web3 industry has been experiencing rapid growth over the past few years, with no signs of slowing down. According to one estimate, the Web3 ecosystem is expected to reach a size of $9.6 trillion by 2030.

The sector’s growth has attracted a significant amount of adoption from companies and investors worldwide, leading to a surge in investments in the industry. In 2021, venture capital firms invested $33 billion into the Web3 space globally, and although the investment frenzy has somewhat cooled down following the bear market conditions, the segment remains hot.

Roland Berger's due diligence framework for Web3 investments

While the potential rewards of investing in the Web3 space are promising, the complexity of these investments sets them apart from traditional asset classes, says Pierre Samaties, a partner at Roland Berger, a consulting firm that operates on the strategic front of the Web3 landscape.

“To succeed with transactions in the Web3 realm, investors need a unique set of skills and know how to navigate the intricacies of decentral ledger technology, decentralised finance, smart contracts and tokenomics, among other factors.”

“Moreover, the Web3 landscape is highly dynamic, with new projects and technologies constantly emerging. This creates both opportunities and challenges for investors, who must stay informed and adapt to the ever-changing environment.”

“In order to find value in the vast and intricate Web3 landscape, a robust Web3 due diligence framework is essential.”

Web3 Due Diligence Framework

To help investors address this gap, Roland Berger’s Web3 experts have teamed up with the firm’s M&A experts (who conduct due diligence projects for M&A lifecycles) to develop a specific due diligence framework for Web3-focused transactions.

Pierre Samaties and Akshit Adani (a Consultant at Roland Berger) walk through the framework and the key steps delivered by Roland Berger’s experts per phase:

Roland Berger's due diligence framework for Web3 investments

1) Market Assessment
We will gather and analyse information about the Web3 market to determine its size, growth potential, key trends, and other relevant factors that could affect market adoption for example understanding customer profiles, conducting competitor assessment, and benchmarking global best practices to determine key success factors.

2) Company Assessment
We will evaluate the company’s overall performance and potential, including its financial health, operations, management, market position, and other factors that can impact its success for example conducting value chain assessment of the business model and analyzing the availability of human capital and potential skill gaps that would need addressing to ensure the success of the project.

3) Technology Assessment
We will evaluate the feasibility effectiveness, and potential impact of the technology chosen and help understand its potential to scale, provide high performance and be secure against cyber threats. This would entail a deep analysis of the protocol, smart contracts, exposure to bridges, application layer, coding process and security related aspects. In addition, a detailed view at the tokenomics and a review of the user experience and user interface is relevant.

4) Business Plan and Valuation Analysis
We will assess the projects strategic roadmap, objectives, product offerings and conduct a financial analysis that will help determine the current and potential future value of the project. Strong understanding of the projects economic model (in alignment with the tokenomics) is key.

In addition, we will review the project’s community engagement, to ensure a clear view on adoption and developer activity beyond the speculative aspect. We will also review if the project ensures proof of reserves and identify improvement levers that are relevant for the project to fulfill its roadmap.

5) Regulatory and Risk Assessment
Regulation is key for Web3 projects to scale. We will evaluate the regulatory landscape, requirements and risks that are relevant to the company. In addition, we will review the company’s ability to mitigate the risks and influence regulatory changes. We will perform a 360 review of the project’s risk management and procedures and governance as well as their dependencies on other Web3 projects or layer 1 solutions.

“By following the robust Web3 due diligence framework, investors can effectively navigate the complex Web3 landscape and identify projects with genuine potential (and avoid the next Terra and FTX saga). As the digital assets and Web3 space continues to flourish globally, the future looks exceedingly bright for both investors and entrepreneurs,” concludes Samaties.