Ethereum has been a bit like the Velvet Underground – everyone who saw them started a band. What we see with public blockchain-based fundraising and token distribution is a total realignment of value within firms. This really is a brave new world, not just for venture capitalists.
A most interesting example is Telegram, the messaging app which has raised about $1.7 billion through a token sale.
Telegram’s “tokenomics” present a radical new business approach which could remove the need to monetize users’ data and flood them with advertising – the sort of behaviour we have come to expect from big tech platforms.
Provided the token appreciates in value as more people use it, reliance on the “surveillance economy” of Facebook and Google would be removed, leaving the company free to focus on the technology and preserving a nice and unobtrusive user experience.
This is how BnkToTheFuture CEO Simon Dixon framed it at a recent conference in Hong Kong: “Telegram finds itself in a position where they have got a product that people really love, they’ve got traction, but they don’t have a business model.”
He added: “The next logical business model of all of these platforms that get traction is to start selling client data; it’s to start putting advertising on there and then the technology changes from something that originally had a very strong mission and evangelism behind it, to something that is kind of demonised, frowned upon and hated.”
This evolution has become the norm, which nobody would question: you have to shift from technology to monetisation to pay for all your servers; you must have a business model to attract VCs.
It could just turn into a speculation like tulip bulbs and bitcoin
But in Telegram’s case not having a business model could actually be thought of as a feature. Indeed, the company’s website clearly states that: “making profits will never be an end-goal for Telegram”.
Dixon points out that Ethereum was a crazy idea without a business model and so they launched their own token. As it started to become apparent that smart contracts were disrupting IPOs, the price increased and Ethereum became as lucrative as investing in a seed round of Google.
“If the same happens with Telegram you have now got a model whereby people can just focus on building the best technology and getting the maximum number of users to use it, while the token value appreciation is what drives the funding of the company,” he said.
“They sold it in line with securities laws so this is a regulated model for decentralised technology that might create a new business model. That really changes things.
“We haven’t seen that before.”
The foundation controlling development of the Telegram Open Network (TON) sets out a predictable formula for the sale of its tokens, with the very first token selling for 10 cents, and each subsequent token sold from the reserves sold for no less than one-billionth more than the last token sold for.
As the token price increases, Telegram and the TON Foundation would bring in something like $14.7 billion. In accordance with the white paper, the last ‘gram’ token would be sold at $14.84, which would value the five billion gram supply at over $74 billion.
The Telegram team could easily have gone down the equity route, but instead chose crypto assets instead. This really swung it for Silicon Valley VCs, who were left salivating, notes author and co-founder of Placeholder Ventures, Chris Burniske.
“So many of the traditional VCs have done the dance around the crypto assets ecosystem for a while and a lot of them have kind of been dismissive of it. Now everyone, Silicon Valley VCs especially, seems to have sort of capitulated here and jumped in,” said Burniske.
He believes this is because investors see this fascinating alternative to the traditional web business model, which is really a “surveillance economy, which doesn’t align platforms with the interests of its supply-side nor its demand side – and people are waking up to that more and more.”
It’s important to note that Telegram has opted to go down the crypto asset route from a position of strength. This is not some struggling operation that has retrofitted a blockchain token to buoy the business up.
“In the case of Kik and YouNow, you could argue that they did that because they were struggling. In the case of Telegram, it’s harder to say that,” added Burniske.
“We don’t have much data on Telegram because it’s privately owned, but the indications are Telegram is growing extremely strongly. It’s really an active decision to choose crypto assets as the monetization model over equity as the monetization model.”
Burniske acknowledged we are in the extremely early stages of understanding how this value is created and sustained, like being in the early 17th century when people were experimenting with how to launch stocks and equities and of course they went through all kinds of bubbles. But he believes that what Telegram has chosen to do comes from a very well-intentioned place.
“Pavel Durov (Telegram CEO and co-founder) and these guys are pretty independently wealthy. They don’t strike me as the kind of people that are insatiable and need to get to 10 billion more or whatever. It feels a bit more ideologically geared and so there may be a method to the madness here with the size of the raise. I think directionally it feels right – a radical new model,” said Burniske.
Returning to the question of data monetisation, Family Capital reached out to Google vice president and internet pioneer, Vint Cerf, to ask if the search giant sees any value in tokens.
“Not clear yet,” Cerf replied via email. “It could just turn into a speculation like tulip bulbs and bitcoin.”
Ian Allison is a specialist writer on cryptocurrencies, ICOs, and blockchain