Tl;dr -This is a long post that overviews Web3 through the lens of the industrial manufacturing ecosystem. Industrial™ Web3 will impact your business, gradually at first, and soon. Here's a preview.
Web3 Will Impact Your Business - On Your Terms or the Market's
Web3 will likely impact every aspect of your business including strategy, finance, operations, sales, customer success, and marketing.
That's a bold assertion and I don't expect you to blithely accept it. This article begins to introduce some of the concepts, trends, and technology to help you begin your company's journey.
Many companies have been slow to leverage the opportunities of Web2 (the internet as we know it today.) Like developing markets that skip full implementation of telephone landlines and advance directly to mobile, industrial companies have the same change with Web3 as it teases an accelerating and exciting new set of opportunities for those with vision.
Let's start with the basics.
What is Web3?
Andreessen Horowitz's recent report "The State of Crypto in 2022"1 provides a great graphic.
Web3 is the next phase of the internet. It's differentiated primarily through ownership. That ownership is often thought of in the context of cryptocurrency and payments.
But that's a narrow context.
To truly begin to visualize the opportunities of Web3, it's important to understand more broadly what that means.
Immutable proof of ownership documented on a distributed network is a better way to think of it. Let's look at what that means.
Property - Today when you buy a car with financing, the title is represented by a physical piece of watermarked paper which is withheld from you until you have fulfilled your debt obligation. Once you receive it, you must store it safe from damage or destruction and keep track of it during moves. When you're ready to sell the vehicle you have to produce the title as verification that it's yours to sell.
If somewhere along the way you lost or damaged the title, you must endure an expensive bureaucratic process to replace it. You can't sell it until you've done so, and the replacement understandably induces additional scrutiny.
All of this is about documenting ownership through an archaic and centralized system. It can only be verified through a single point - normally the original state registry of motor vehicles - and a cumbersome process.
Web3 enables ubiquitous documentation of ownership of property including digital property such as streaming music and NFTs (non-fungible tokens) which are often basically digital cartoons, and physical property.
Elements of Web3
Technology and use cases are evolving very quickly. For instance, within the last year, the massive NFT market developed and then substantially deflated, permanent capital investments into Web3 technologies became commonplace, and institutional adoption spread (e.g. Fidelity offering crypto to account holders.)
It's a very dynamic environment so the information below is intended as a brief overview and introduction only.
You can generally break Web3 into the following conceptual areas:
- Blockchain - this is the technical framework upon which Bitcoin was originally built. It is a decentralized digital ledger - in other words, a public record of transactions, including creation, ownership and more. This technology underlies most of Web3.
- Smart contracts - are software contracts that live on the blockchain and are automatically fulfilled as consideration is provided. Consisting of a set of rules that are immutable and open to public audit, contracts could define the point at which ownership transfers and payment is made, and then execute payment automatically, eliminating the need for escrow.
- Crypto - Cryptocurrency is a digital currency that is built on a public chain. There are thousands of different cryptos including Bitcoin, Ethereum, and many others. The spectrum includes Terra/Luna which crashed last week, through numerous proposed CBDCs (central bank digital currencies) such as the one being planned with MIT and the Boston Fed.
- Wallets - A wallet is a digital tool that stores your private keys which verify your ownership and allow access your holdings. Unlike a pocket wallet, it doesn't actually store currency, but rather the keys which allow you to access digital currency that resides on the public blockchain. Common wallet types include software (like Metamask and Coinbase) which you access through an app or browser, and hardware (like Trezor and Ledger) which resemble a USB thumb drive. Wallets also allow you to store and manage NFTs, and likely will store more personally identifiable information such as social media and interest attributes, DAO memberships and more.
- DeFi - Decentralized finance is a set of alternatives that are being developed on the blockchain to replace cumbersome and inefficient TradFi (traditional finance) functions. Rather than having to open an account at a bank, fund it, and then subscribe to their fees, regulations and limitations, DeFi provides full control and portability. It is growing in importance as other functions (e.g. blockchain-based smart contracts) require code-based interaction with financial instruments. Since decentralization is a core principle of Web3, similar "disintermediation" is happening in other areas. Just as traditional banks and brokers will be generally bypassed by DeFi, DeSci seeks to create collaborative research initiatives among individuals and entities but not necessarily requiring a corporate lab, coordinating institute, etc.
- Metaverse - a collection of virtual locations where you'll engage in immersive experiences including business meetings, social gatherings, gaming, consumption of music and visual arts, shopping, interaction with family and friends, and more.
- Gaming - Forget the assumptions and associations you have about gaming (it's not XBox on Christmas morning and arguments over homework schedules!) In early 2021 Accenture estimated the gaming industry at >$300MM/year, projected >3.2 billion gamers globally by EoY '23, and noted that women represent 60% of all new gamers.3 There is significant money and community growth here, and gaming will likely serve as a major on-ramp for Web3 participation.
- DAO (decentralized autonomous organization) - essentially a software-based organization. Think a corporation without a domicile, registered agent or "employees," and with bylaws and an operating agreement codified digitally into smart contracts that govern it.
This is a sampling. Each has hybrids, and detailed competing versions. Additionally, you've probably heard terms of art such as "Staking," "minting," "gas fees," "forking," and "sharding." These are material to the specifics of certain coin transactions but not necessary to understand the ways in which Web3 will potentially impact industrial manufacturing.
Why You Should Care Even if It's Not on Your Radar - Changing Web3 Environment and Adoption
Companies reading this probably haven't been asked to accept Crypto as payment for a machine. That doesn't mean that your prospects and customers aren't thinking of how it will impact their business operations.
If you sell to enterprise size businesses it's almost certain that their treasury operations groups are beginning to hold and plan for crypto, and they may be exploring DAOs and smart contracts. Many brands are establishing robust beachheads in the metaverse.
While that's happening at the enterprise corporate level, many of you (and your prospects) are spectators to the growth of the metaverse through the Oculus VR (virtual reality) headsets that you've gifted as parents or grandparents. Many of the young employees in your companies are likely active gamers on platforms powered by Roblox.
The next generation of engineers to join your company, and your prospects, are crypto natives. In fact, 94% of all cryptocurrency buyers are GenZ or millennials.2 In other words, your talent, and your prospects', are active in Web3 through gaming, Metaverse experiences, assets, and investments.
There are many tech-savvy high-schoolers who have accumulated more crypto wealth than many boomers - simply experimenting with coding and technology.
The point is that while it may feel foreign to you, it's something that your buyers, their customers, and the talent on both sides of your future transactions are all increasingly immersed in.
And as that trend continues it's likely that a company's activity and projects in the space will become a competitive differentiator. It might even be the gateway that allows your newer, smaller, less well-capitalized competitors to leapfrog ahead of you.
It's important, therefore, for your company to allocate strategic planning resources to Web3 issues, and for you personally to lead your staff in personal learning to become comfortable and conversant in the topics. You might even add a product marketing position that's focused on tracking Web3 developments that can impact your industry and company, and who can serve as a resource for senior management and your board.
How Might a Capital Equipment Manufacturer Build Web3 Into Their Operation?
It's important to understand that this isn't an all-or-nothing proposition. It's possible to take some small, discrete and isolated steps. It's also possible to seek to permeate all strategy and planning with Web3. And naturally, there's a broad continuum between those extremes.
The right spot for your company will depend on various factors, so here are some examples of approaches.
Simple, Currently Existing & Easy to Implement
CRM Data to Drive Revenue - You probably provide a CRM system to your team. And usage is probably uneven and disappointing. That means that many of the benefits you anticipated may not be realized. Shortened sales cycle, accurate forecasts, predictable opportunity management, sales rep productivity, prospecting and project creation likely all suffer. That's nuts!
Smart contracts and gamification to the rescue!
With about a week of planning, we can help you implement a solution of smart contracts built on the blockchain which will:
- track the CRM usage metrics and activity that you want to incent
- calculate and issue "micropayments" for each person completing them (suggest you fund these by pulling some commission money forward)
- create some excitement around the process and achievement of goals
- integrate with your payroll service to automate reporting
- issue payments to spend cards
It's here. It's readily implementable. It will help to fix one of your most intractable problems. (Learn more from this webinar)
Product and ingredient tracking - Capital machinery companies face the difficult challenge of building commercial relationships with prospects between occasional machinery projects. The solution is an "Entry Sale" (more here), or an operational transaction that provides customer value and puts you in their operation.
Many of my clients build machines for material handling, processing and packaging in the food, pet food, CPG, and pharmaceutical markets where ingredient tracking and product origin are important topics. Increasingly blockchain systems are being used to solve difficult tracking problems.
A partnership with a firm that's a leader in this space could help your sales team get its first sale, build relationships in the company, help to deliver immediate value, and begin to build some Web3-derived revenue into your revenue stream.
I recently helped two clients collaborate with ConnectingFood on a webinar around this topic.
Financial Firewall - What might put a target on your company or industry in the future? Do you sell packaging machines for ammunition packaging? Is your industry fossil fuel intensive? Do your machines process GMO grains? Has a senior exec publicly donated to a lightning rod cause? Might a marquee customer suddenly be canceled with a spillover impact on your company? It's hard to anticipate what might trigger a backlash, but when it comes often companies become unbankable. If that were to occur, you'd still face challenges with lending facilities and loan covenants, but your treasury operations team could begin to build resilience with parallel DeFi operations.
Trade Associations - Encourage your industry trade group to form a Web3 working group - not just an occasional meeting speaker or "futurist." If your association is archaic and more intent on preserving the association itself than delivering value, then consider creating a broad DAO for industry players (suppliers, vendors, customers, service providers, etc.) to do the same and to model best practices at the same time.
Partnerships - Identify organizations that are successfully incorporating Web3 into their business models which may be adjacent to yours. Build partnerships to create mutual business and learn from their success.
Strategic Planning - Add a Web3 component to each strategic planning session and decision. It may not be determinative early on, but it will begin to shape thinking and behavior in important ways.
Real revenue from the metaverse - Companies are already spending millions of dollars buying virtual real estate in the metaverse.4 The same manufacturing challenges you help overcome in physical factories may well arise as virtual products are made in virtual factories. After all, pets will need to be fed, food delivered, coffee roasted, clothing laundered, and more.
Many retailers already have parallel operations for brands in stores. Entrepreneurial teenagers are already creating and selling interesting products (and making serious money) in the metaverse.
We can't anticipate exactly how this will shake out. Will Horizon Worlds, Decentreland or another metaverse location dominate? Will minting physical product analogs be frictionless or will it require virtual manufacturing using virtual machines that you could mint (build)?
There's no way to know. But it stands to reason that if your customers and prospects are experimenting with locations and brands in the metaverse, you should also be engaged. Perhaps it will create parallel revenue opportunities if, as some predict, the size of the metaverse economy will dwarf the physical economy.
Phygital - The merging (or maybe forking) of physical and digital has a name. More important than the word, though, is the concept.
Increasingly fashion products are being produced simultaneously as physical luxury goods and NFTs to be worn digitally on avatars.
So it's likely, whether a virtual tractor-trailer delivers your virtually crated virtual machine to a virtual factory or not, that transactions could be executed on the blockchain using NFTs to represent the new capital equipment, replacement parts, training programs and more.
Mindblowing, and very early stage....but real.
DAOs for Distributed Operations - If you have remote employees then your payroll and compliance folks already wrestle with multiple jurisdictions. If some of your team is international, the complexity is multiplied and leads to questions of nexus and whether you need a local entity.
Perhaps a DAO solves for this in a simple way. It might let you easily access new markets and engage top talent in a streamlined way.
There is a lot of regulatory policy that will need to be developed to catch up with technology, and decisions like this will involve risk judgments. It's likely that your long-standing legal and accounting advisors will not be adequately positioned to advise on these revolutionary topics.
Smart contracts for PaaS models - Servitization and Product as a Service models are increasingly common in the manufacturing space. One significant barrier is the difficulty of administration. If you're charging per unit of output, for instance, how can you track and audit that? Who is responsible for calculating the fees?
Smart contracts offer the potential to solve for those issues. It's likely that companies will even arise to provide this service specifically.
What You Should Do Now
Start. Dip your toe.
Should you rush to instruct your marketing department to mint some NFTs? Or purchase property in Decentraland today and issue contracts to begin construction of your virtual factory? No. Will that ever be appropriate? I don't know.
However, if it might be at some point, you (your management team, investors, owners, board) will need to be conversant and informed in order to evaluate and decide whether to commit resources and how to proceed.
That means starting to learn and experience elements of Web3. Take these baby steps:
- create a software wallet
- purchase small amounts of various coins
- acquire an NFT (you could purchase one, mint one, have one dropped to your wallet because of some of your activity, etc.)
- experiment with some game - not to spend hours/week or win tournaments, but to know what's involved
- purchase something in a digital ecosystem in the Metaverse
- curate a list of resources to follow for education and information (prepare to be uncomfortable with the forum - most likely Twitter - and the pace of info and jargon...DON'T QUIT!!)
- plan a Q4 workshop (yes, I know it's busy and you're working on finishing strong and EoY planning, so schedule it soon!) for senior managers and the board on the potential and opportunities, as well as risks and likely disruption from Web3
Take your time. Check these off by the beginning of Q4 so that as you begin your '23 planning cycle this will begin to be part of what you consider.
Once you've completed the list, ask your senior management and board to do the same.
Also, begin to survey your professional advisors (legal, accounting, intellectual property) to ascertain their familiarity. Most likely you'll need to begin to identify some parallel advisors to assist. Get started on that.
Will Your Company be a Passive or Active Web3 Participant?
Companies in traditional industries faced a choice with the internet in the mid-2000s. They could resist the internet fad/gimmick or they could actively engage.
Some resisted. Others took superficial steps to create a website but didn't do much SEO and user experience work.
A few actively worked to understand and implement the technology, but more importantly, how it would change business for them and their customers. They saw opportunities to create competitive differentiation and really leverage search.
Those few businesses created an enormous first-mover advantage and a moat that in many cases endures today.
Many predict that Web3 will be even more transformational for business.
Are parts of it solely for B2C? Sure, but as we've seen with Web2 those quickly shape buyer expectations and end up adapted to B2B.
Is some of it gimmicky? Yes. Are there instances of fraud and risk? Yes, as there is every time you hire a controller or grant credit terms to a buyer. Will it require some speculative investment and resources? Yes.
And, is it yet another thing that you don't have bandwidth for? Of course.
So as you prioritize your tasks, it's a perfect opportunity to decide if you're a manager who's focused on today's operational KPIs, or if you let your talented team manage those while you reserve time for important strategic leadership.
It will be seductively appealing to highlight all the reasons you should procrastinate on this.