May 22 • 22M

Web3 for SaaS People: What is Web 2.5?

A conversation with Matthias Klenk at Passbase

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I’m now including transcripts in these podcast newsletters. Scroll down if you’d rather read than listen!

The delineation between Web2 and Web3 isn’t always clear. Some Web2 companies are serving Web3 use cases. And there are other situations where a Web2 company might incorporate the core Web3 tenet of decentralization into how they build their product or business.

In this podcast episode, I explored these gray areas with Mathias Klenk, Co-Founder and CTO at Passbase. We discussed:

  • What does it mean for Passbase to be a “Web 2.5” company?

  • What does it mean for them to advocate for identity verification in Web3 — a world historically known for anonymity?

  • How do they make money — and are they paid in USD or tokens?

See the lightly edited transcript of the podcast below if you’d rather read than listen. I hope you enjoy this conversation as much as I did, and feel free to reach out to me with any thoughts. Let's dive in!

If you’d like to hear more about topics related to scaling SaaS and Web3 businesses, you can subscribe to my newsletter (for free) here:

Leadership Roles:

As always, I’ll share some leadership roles at companies that I’m excited about:

Transcript:

Allison: Matthias, thank you so much for joining us on the podcast today.

Matthias: Thanks for having me.

A: I'm psyched to talk with you about all things Web3, and especially how B2B relates to Web3, because there are a lot of people who are listening to this that are in the Web2 B2B world, trying to understand how their careers might evolve in the Web3 direction. I think you can be educational in that area. To start, can you tell us how you got into Web3 in the first place?

M: I drank the Koolaid in 2015 or 2016. When I was at Stanford, everything was about blockchain and crypto. I was very excited about the possibility that cryptocurrency had at that time. And let's be real: back then, there was not really a use case. This was before we saw all these use cases that smart contracts enable nowadays. So this was pre-NFTs, and ICOs were at the 2017 peak.

I went down the rabbit hole, as everyone phrases it. Soon after, I started my first job. I was building a crypto wallet with one of my best friends, which was called Coinance. This was project that later involved into Passbase, the company that I'm running now, where we do digital identity verification - very boring, in the Web2 world. We basically came from the Web3 world, went back to the Web2, and I'm shifting us back to Web2.5. The idea is to adapt some of these concepts and mental models from Web3 and also work with lots of Web3 clients. And then later the question is, how can we be a little bit more the Web3 company that we intended to be?

A: I’d love at some point in this conversation to get more into what Web2.5 means, since I think there are actually a number of companies that identify as midway between Web2 and Web3. But to start out and give more context, I'd love to talk a little bit more about what inspired you to build Passbase and especially exactly what problem were you looking to solve when you started it?

M: You basically have to understand the crypto wallet that we built prior to that Coinance. We started as a portfolio tracker. Pretty much what Coinmarket cap is doing…You could connect your different crypto exchanges and accounts, see your portfolio, and check prices. We built a feature where you can connect all these crypto exchanges and do some arbitrage trading between them. And this is when we then really discovered how cumbersome and annoying it is to prove your identity to all these crypto exchanges. Everyone has probably done it at some point in time: when you sign up for bank account or a crypto exchange, and then you need to take the selfie and a picture of your ID.

From a developer standpoint, it was so annoying to do. And all these old vendors were doing it. It was slow and very annoying. We looked at it from the lens of, here is this Twilio or Stripe approach where you just get your API keys and integrate it, and you're done in a few hours — versus when we built it, it took weeks.

So we said, Hey, let's not build this crypto app anymore. We should rather focus on solving identity, not only for Web3 and crypto companies, but actually for financial services and many others, because we really saw that as the world becomes more and more digital in the future, we will have to do this over and over again, not only once or twice a year, but probably five times or maybe even more and in the future.

Proving your identity, that you are real, is touching almost any business transaction, especially when it comes to money laundering, everything that is somewhat regulated or where there is trust and safety component. Those things combined motivated us to try to fix and solve identity verification online and we then pivoted into that. That was a little bit more than two years ago.

A: Super interesting. Diving in a little bit more, do you do identity verification only for individuals or do you also do it for companies?

M: This process for individuals is also referred to as KYC. “Knowing your customer” process in a business context is KYB — “know your business.” We solely focus on the individuals. So we just do this on an end-consumer basis. There are companies that focus their whole company on that know your business aspect. Also the know your business aspect is a little bit more hairy and difficult because as you can imagine, the whole world has different registries and different company structures. Some are more open, accessible, some are less. And it's still sometimes a very manual process, how to check and find out what are the beneficial owners of a company. And then as you can imagine, that can be a company that is owned by a company that's from a company that is sitting somewhere in the Caymans.

Versus for us, the starting point was literally computer vision. I took the Stanford class on taking pictures of an ID document and then using computer vision / OCR / optical character recognition, then comparing those things.

A: Now, is there a B2B Web2 company that you are competing with in this area? And if not, is there a Web2 analogue that you would identify with?

M: Yep. The market is fairly crowded. So nowadays, in the US, for example, there's the old companies and layers that started maybe 10 years ago. Jumio is one of the big US companies that took a more modern approach to that. And in Europe we have Onfido or IDnow from Germany. There are in total already up to 10 companies that I would say we are somewhat competing with. We on the other side, really try to focus on a small niche nowadays. And also in terms of product roadmap, we’re more focused on the Web3 world. So we now thinking about more Web3 features.

There's now this thing called KYT, which is know your transaction, in the Web3 world that is very relevant. Companies like ChainAnalysis or SIS became big with that. So we're thinking about offering partnerships or product offerings with them and just really try to provide value to our Web3 clients as a holistic kind of identity verification company that helps them in staying compliant, following regulation, and verifying their users. Because in the end, this is what all these crypto companies haven't been doing in the past. And just the last two years we really started to do and to realize, oh, we actually need to comply and follow the regulations. Otherwise they technically contribute to money laundering.

A: Now I know at the start of our conversation, you said you're kind of a Web2.5 company. I'd love to dive into that a little bit more. For example, you've made it clear that you're serving Web3 use cases. I'm wondering to what degree is your product itself a Web3 product?

M: Things that I'm basically spending lots of time on right now is thinking about how can we adapt lots of these mental models and ways how Web3 companies work and bring that basically to the boring Web2 world. And this basically paired with the trend that Passbase is betting on is basically that decentralized identity in a particularly user-owned digital identity will be a thing in the years to come. And so projects that I'm spending my time on right now is thinking through how can we enable end users that are running through our verification flow, that we can enable them to claim and store their own digital identity on their end. So things that I'm looking into is in relation to Web3, how can a user, right on chain, prove via their crypto wallet, that they have actually completed a verification.

And the next time when they connect their wallet to any decentralized app, how can this decentralized app somewhat access and see that this user has actually completed a KYC verification to stay compliant? And here public blockchains are super interesting for me. So we have a prototype, for example, with Ethereum. Is it possible if a user completed a verification that we air drop them an NFT to that wallet. That this user has somewhat a passport NFT, whatever we call it, then. That is still bound, so it also can be transferred the next time they connect their wallet. We see this user has somewhat his digital ID NFT and say, Hey, I'm good, you don't have to verify my identity again. So this is the way I try to push the product roadmap vision of the company, from maybe Web2 to Web2.5.

But it's an illusion that we will ever land in a Web3 world, because we are operating in a highly regulated space and blockchains are not known for being good places to store PII in general. You should not store social security numbers or a document number of your passport on a public blockchain. But again, you can store cryptographic proof, which is somewhat encrypted and hashed, then try to tie this back to a very centralized old Web2 world in a database where this data is sitting and then try to tie the knots together between the companies that they access.

A: I want to generalize what you shared for Web2 companies in general. What do you think are the reasons why Web2 companies should embrace certain Web3 principles?

M: What we are currently seeing here in the last few years is basically a movement that has started. This wave is coming. Web2 companies should now realize that privacy and data ownership are real things that are probably here to stay. And if you, as a Web2 company are not embracing it, you will have inherently a disadvantage versus your competitors. The future of social networks will be built around NFTs. They will be built around creators. Creators will have tokens. Creators will be incentivized to get their community behind those, because this is a way you can get fans to support you, and your fans are benefiting from that. Companies are using air drops for a rewarding early users. There's all these mental models and concepts.

At this moment, that’s a very niche thing in the Web3 world, but companies will all soon swap over. And then suddenly at some point in time, we will not refer to them anymore as Web3. Cause it's just the thing. If you are a company you want to reward your users, you'll do it. And the biggest hinderer from this explosive growth is still this UI problem — it's still so cumbersome and difficult to create wallets for your users.

But I think as this becomes more and more normal and everyone has a crypto wallet or crypto address, these things become easier. The same way everyone has an email nowadays and nobody questions that anymore. So I think in really five or ten years, probably everyone has a crypto wallet tied to their bank account or their email address or their phone number.

We see this already nowadays in large social networks. Twitter is basically embracing NFTs as profile pictures. Instagram publicly shared already that they will also work on NFT integrations. And all these things will just become more natural and mobile at some point in time.

A: I want to talk about how concepts that certain go-to-market people in the Web2 world might have to embrace if they were moving into the Web3 world. And then on the other hand, what might be similar to what they're currently experiencing. Using your company as a test case, I'd love to learn more about your GTM in terms of, who are your target customers? What kind of pricing model do you have? What does revenue look like? And, are there certain people that you're hiring or already employing in GTM?

M: One role that hasn't been too common and popular in the Web2 world, except developer tools, is this role of a community manager or a developer relations manager. All these Web3 companies have a Discord. They have people dedicated to keep the community engaged and get them somewhat to support their product because they understand their only chance of succeeding is if users adopt their crypto or their token or whatever their project is for building on top of their platform. And I think that this is somewhat a GTM strategy that hasn't really been there five to 10 years ago.

Stripe has been doing a fantastic job at that and winning the hearts and minds of all the developers. This is the reason why Stripe is doing so well — developers love integrating them and using their product.

We can see this in Passbase that if we make our integration very easy with strong technical documentation and dedicated technical support, with videos, almost everything that a community manager would be doing and helping our developers, we will make more business because more clients will integrate us. And this is in the end, is how we make money.

Nevertheless, we’re pricing in a boring way, on a per-month, per-verification basis. So we don't have a token that somewhat incentivizes it. We’re not doing tokenomics.

A: Can you talk a little bit more about how you charge and make revenue?

M: We basically have different plans for depending on how many verifications you are doing per month. So we have a platform X this fee, which is just for accessing the product per month. And then on a per verification basis, you would pay us almost $2. So we somewhat usage based and are growing with our clients.

A: Do you ever accept payment in terms of a non-US dollar token?

M: Yes, we have done it in the past. We had clients who paid us crypto. But we are actually also the first, or even the only company in that space that accepts it. I think we even launched a press release on that — that we were the only ones at that time. I don't know if our competitors now accept it as well, but yes, we have been paid in Ethereum and in Bitcoin.

A: And I imagine well, the fact that there are more companies that are doing this, like you, is probably giving rise to these treasury management products that we're seeing on the market. Is that right?

M: Yeah. I think it's going to be a big need that market to fill. There needs to be a custodian crypto bank that partners with all companies that helps them store their crypto in the future.

A: Let's say I'm a candidate who is currently working in the Web2 world, but I want to get into the Web3 world. What tips should I keep in mind for how to go about finding my new job?

M: There are lots of great conferences and events nowadays that you can go into. I flew a few weeks ago to one in Denver, which was a fantastic event. I think just last week there was a big conference in Miami. So I’d encourage everyone who's still working in Web2 and is interested in breaking into Web3, just go to these conferences. Get to know those people and somewhat embrace it.

If you do not yet own any crypto, it's probably worth at least looking into that. No financial advice here, of course, but you should definitely at least get yourself into it. How do I borrow it, buy an NFT? How can I buy a Bitcoin and all of these things. And then, try to get to know the industry, how it works.

M: Because I think unfortunately the Web3 world still is very tribal. We have our own lingo, all these things and acronyms — like GM for “good morning” — which doesn't make it very inviting to outsiders. So if you read some of these tweets for the first time, you're like, what the hell is this person writing? So I encourage everyone to just try to understand what those people say. Talk to them and get to know them. And nowadays, so many companies are working on cool Web3 projects. There are plenty of opportunities and roles open.

A: Any roles that you're recruiting for that you'd to broadcast on this podcast?

M: We’re currently recruiting for developers and community managers. Right now I'm basically the evangelist and the community manager. We always are open to good engineering talent, as well as people for our business development and marketing teams.

A: Matthias, this is a super educational conversation. Thank you so much for having it with me, and looking forward to continuing the conversation as you grow your business.

M: No problem. Thank you for having me. It was fun.