In the high-stakes world of venture-backed startups, not growing is the same as dying. Historically, stalled companies sought a sympathetic acquirer or quietly shut down. Now, startups have a new potential lifeline: They pivot to blockchain.
Kik kicked things off in September. The messaging app, which has struggled under competition from Facebook and Instagram, created its own cryptocurrency called Kin, which can be used to buy and sell things via the Kik app today, and other apps in the future. The company sold tokens for the project, raising nearly $100 million from institutional and individual investors. Since then, a flood of startups, including Skedaddle, an “Uber for buses” company, and Loomia, a wearables company, has followed suit.
Take Listia, a peer-to-peer marketplace for exchanging goods. The site experienced early success after launching in 2009, amassing 10 million registered users and raising $11 million from well-known venture firms General Catalyst and Andreessen Horowitz. But in the past year, the company cut its marketing budget in order to turn a profit, which meant its growth stalled. “We had a business that was working but wasn’t growing as fast as everyone wanted,” says co-founder Gee-Hwan Chuang.
Over the summer, Chuang and his team began to explore how Listia might participate in the excitement swirling around cryptocurrencies. The company already had a virtual currency, called Listia Credits, which people use to buy and trade goods on its platform. Listia even allowed users to trade bitcoin. Turning Listia Credits into a cryptocurrency would take things to the next level.
Listia began building a blockchain-based platform called Ink Protocol, which will offer smart contracts (an automatic way to strike deals without a third party), payments, and reputation data that can be used on marketplaces beyond Listia. Once it launches later this year, Ink Protocol will employ a cryptocurrency called XNK and keep track of all transactions and feedback with blockchain technology. The company announced the plan in September, and collected around $1 million from pre-sales of its tokens to investors. The firm plans to sell more tokens to the public when the platform is finished.
The rush by startups into cryptocurrencies mirrors similar moves among publicly traded companies, where shares of several cheap, thinly traded stocks have spiked after merely adding the word bitcoin or blockchain to their names. (Even the stock price of the parent company of Hooters leapt nearly 50% at the mere mention of blockchain in a press release.) The Securities and Exchange Commission has taken note, halting trading in some cases, because of the risks these currencies posed to inexperienced investors.
The crypto game is complex, volatile, and lacks clearly defined legal protections. At startups, there are risks for both investors and the companies themselves. Investors risk holding a worthless currency---typical in the world of high-risk startups, but many ICOs are raising money from outside the world of typical startup investors. Meanwhile the companies are even more dependent than venture-backed startups on maintaining confidence in the enterprise, because few have launched their projects, meaning they need to convince employees, customers, suppliers, and others to support a currency that’s not yet worth anything.
Brad Garlinghouse, CEO of cryptocurrency and payments company Ripple, has noted the uptick in “tourists” in the sector. “If you have a business and a business model and you’re trying to figure out how to put a token in it, that’s the wrong way to think about it,” he says. “If there is a usefulness of a token and it has utility, then people are going to demand a usage for that. But don’t retrofit your business to try to offer a token to raise capital because the traditional capital markets are not interested in what you are doing.”
Nikhil Kalghatgi, chief investment officer at digital currency asset manager CoVenture Crypto, advises companies considering cryptocurrency offerings to also raise traditional venture capital. “It’s a very strong signal that there are long-term investors backing the company, not just investors looking to flip a trade,” he says.
Startup studio Science Inc. launched a blockchain-focused incubator last year, and CEO Mike Jones has seen a number of startups pivoting to the sector. In some cases blockchain technology is a perfect fit for a startup, he notes, but many don't have a clear reason for launching their own cryptocurrency. "People are kind of shoehorning non-fintech ideas into this thing called blockchain believing they have struck some sort of gold, and in the end it doesn’t make any sense," he says.
Ultimately, no investor will complain if pivoting to crypto means saving a portfolio company from the deadpool, or worse---eternal stagnation. But Garlinghouse cautions that issuing cryptocurrency could lead to lawsuits. Some high-profile projects, including Tezos and Centra, have already been sued by investors. Munchee, which said it was building an “immutable blockchain ledger for food reviews,” last month agreed to refund money to investors after the SEC accused it of selling unregistered securities.
Even if the lawsuits are frivolous, they will cost startups time and effort. “You need to assume you are going to spend years in litigation because the class-action lawyers are salivating,” Garlinghouse says. “This isn’t risk-free money. There are consequences.”
Still, many startup founders see crypto as the best path forward for their companies. The trend is particularly strong among startups that already employed a system of points or credits for transactions.
YouNow, a mobile livestreaming company that’s been around in various iterations since 2011, has amassed more than 40 million registered users and raised $30 million in venture funding. In recent years, the company has faced steep competition from the likes of YouTube Live, Periscope and Instagram Live. “We asked ourselves, how can we leverage our strengths and what would the next generation of social video look like?” says CEO Adi Sideman. In YouNow’s current form, viewers can give performers digital gifts, some of which cost money. Sideman opted to create a cryptocurrency, Props, that could be used for these transactions, so YouNow’s performers could have an ownership stake---of sorts---in the company’s fate.
Sideman says the crypto project is critical to YouNow’s survival, even though the platform has turned a profit continues to grow. In December, the company held two pre-sales of Props (one for institutional investors and one for retail); both sold out, bringing in $25 million.
In some cases, startups are turning to crypto to open more opportunity. Seattle-based Unikrn operates at the intersection of hype and regulation: esports betting. The company didn’t need to change its story, says Rahul Sood, CEO and co-founder. But using blockchain technology, which creates a record of each transaction on the platform, helps Unikrn comply with Know Your Customer and Anti-Money Laundering laws, he says. “By doing crypto, we have opened up the ability to go over borders without having to worry about multiple currencies and multiple banks,” he says. In September, the company raised $31.4 million worth of ether in an initial coin offering for a token called UnikoinGold. Those tokens can now be exchanged for other cryptocurrencies (and ultimately, fiat currency). “Think of a Unikoin wallet as a PayPal for esports using cryptocurrency,” Sood says.
