Revisiting Peter Thiel’s investment in Block.One, 2 years on
Watching a YouTube video recently, I was reminded of a news event I read about in 2018. The news was Peter Thiel had invested in Block.One, a crypto startup with headquarters in the Bahamas and operating out of Hong Kong.
The articles announcing Mr. Thiel’s investment were from July 2018. Besides Thiel’s investment itself, there were a couple other striking things about this news. For one, it was striking that Block.One raised $4 Billion in their ICO token sale that year.
That’s $4B cash. US Dollars. It was, and remains, the largest ICO raise in history, by a factor of more than double the next largest (Telegram).
The second striking thing about this transaction was that there was no clear product or business. But maybe that’s not striking to those who are familiar with this arena. That is still the joke to make over a cocktail on the topic of crypto. These things are different in nature than the software startup species we have come to recognize.
They’re pitching the infrastructure, the protocol, a layer below any business model. It would seem that makes the situation more complex, and with a longer time horizon than a “normal” startup right there. That’s before any question about why this infrastructure is so much better, and why it will win.
Nearly 2 years on from this news story, what has happened with Block.One?The VC apparatus is active, and they launched their first application, the social media platform Voice. Four early employees left, and they did a share buyback. The market value of shares has nearly halved, but it’s far too early to judge success. In this story, we see the nature of the platform crypto startup, and its’ stark difference to traditional companies.
First, the Peter Thiel part of this. He has earned the status of being a signal unto himself on track record alone. And to those of us who thoroughly enjoy his speaking and writing, there is an extra level of attention paid to his new investments.
He was not the only billionaire investor involved in the raise in July 2018. Hedge fund managers Louis Bacon, Alan Howard and Mike Novogratz invested, as well as Bitmain, the largest manufacturer of bitcoin mining hardware in the world. Bitmain’s co-founder Jihan Wu is a well known figure in the crypto world, and his involvement is seen as meaningful vote of confidence.
So what is Block.One, and how did they attract $4 Billion in investment?
Their tagline is “Building a more secure and transparent world.” That’s very generic, but it points to their “stealth mode” style and scope of their ambition. But one does wonder, is lack of focus a problem?
Right now, there are 3 discernible components. The base component is the EOSIO, the blockchain infrastructure itself. It runs on EOS coin, the 9th largest cryptocurrency in the world, with a total market cap of about $2.25 Billion at the time of this writing in May 2020.
The second component is the venture capital arm, EOS VC. It appears a main reason for raising so much capital at once was to start the process of promoting development of third party applications on EOS, to increase the value and momentum of the network and community. At the time of this writing, there appear to be 24 invested company logos on their site. As of March 2019, the company had made $174 Million in venture capital investments, and pledged $1 Billion just to venture capital firms investing in EOS companies.
The third component is applications. In summer 2018, no application had been launched. Now, the first application is live in Beta. It is a social media platform, called Voice.
It aims to solve pernicious issues of social media, especially misinformation, bots and fake accounts, and hiding and obscuring real identity.
The goal, in their words, is to bring real identity to social media, and create a more authentic online experience in doing so.
To sign up, you have to enter your full name, email, date of birth, a photo of your government-issued ID, and take a live photo (no uploads) on your device. The identity verification process is not immediate.
There is a 160-character minimum for posts, and you can add photos, videos, and links. You collect Voice tokens for being an active and engaged user, and can spend them to increase the visibility of your posts.
Right now it is early in Beta and the posts are on the whole pretty sterile. Telegram, the second largest ICO, is a success with over 400 million active users. In some ways, Voice seems like a natural extension in the same line of fundamental communications tools on blockchain, but they differ in success criteria. In any case, it’s too early to judge Voice.
But it sounds like the main selling point to investors was, and is, that EOS is supposed to be a best-in-class platform for applications who need to be extremely scalable, user friendly, and fast, and with minimum transaction cost.
To quote Kyle Samani of Multicoin Capital in his Analysis of EOS:
“EOS is making a strong play in a specific market sector — high throughput, no fee, user-facing dApps. This is a huge market, and we expect EOS to gain an early lead in becoming the default platform for these use cases.”
That brings us to other questions around Block.One activity since July 2018.
Just a couple months later, in September 2018, 4 major technical employees left to start a new blockchain project, StrongBlock. They supposedly were employees 2–5 at the company (perhaps beyond the founders). Isn’t this strange? Again, a cocktail crypto joke. This activity for a “normal” startup would be alarming.
In May 2019, Block.One returned capital by buying back 10% of oustanding shares at a valuation of $2.3B. The valuation of its shares dropped by almost half in less than a year. Its’ assets were down from the $4B raise to $2.2B in the same time frame, after spend, VC investments, and loss in value on the crypto portion of its balance sheet.
You can interpret this action any number of ways. Negatively, spending on shares could imply few immediate opportunities. Positively, they are buying low on themselves because they are confident the value will go up. In any case, it is strange to see what is supposed to be a startup behaving immediately like a large corporation. Again, does this imply lack of focus? Regardless, it’s a different animal.
The story of Block.One 2 years on highlights the fundamentally different, multi-faceted structure of an infrastructure-level crypto startup. This implies some complexity, different behavior, and perhaps a longer time horizon. Ultimately, it will come down to ground fundamentals. Telegram is a success because it has fundamental growth.
Perhaps it’s not the Block.One application fundamentals, or high level company behavior, we should be scrutinizing most though. Rather, taking a hard look at the development of the 24 invested logos on the EOS VC site is probably the better indicator of success to date.
