When we invest, we think in terms of funding teams, and funding networks. Funding teams provides the financial capital to build the service. Funding networks supports growth by capitalizing the whole community. They’re very different kinds of investing, but both are essential to long-term network success.
The cryptoeconomic circle extended to include core dev funding.
Funding teams can happen through public token sales, SAFTS, private equity or tokens sold from core’s balance sheet. This is most common “pre-launch”, but it’s not unusual for teams to sell tokens after a network is running to raise more money.
In most pre-launch cases, we prefer to buy equity with a right to tokens because it better aligns entrepreneurs and investors. To tie the value of investor equity to the value of the tokens in the company, we add some token governance terms to the typical seed term sheet. But when entrepreneurs are selling tokens directly, we recommend they do so in stages to optimize the longevity of their capital – just as traditional startups learned to sell their equity in “series” as the value of the company grows.
Company stock, tokens with lock-ups, and SAFTs are illiquid, so it’s common for investors to demand discounts to market valuations given the additional risk. From the team’s perspective, giving a discount equates to paying a premium for getting a lot of capital (e.g. millions) in a single transaction, especially when it would be more expensive to get the same amount of cash by selling tokens on the market. However, there are situations where it’s upon investors to pay a premium to market in order to properly fund the team without taking too much of the tokens, such as when the network is under-capitalized and supporting the network becomes the priority.
Funding networks involves working with OTC desks, brokers and exchanges to buy tokens in the open market and support different price levels. Through the lens of the cryptoeconomic circle, it’s a way to capitalize the network as a whole – and in particular the supply side – rather than directing capital solely to core development. But of course, supporting prices also helps core developers indirectly by supporting the value of any reserve tokens they hold.
Funding core is closer to traditional venture capital, where financings take weeks to negotiate and close in a single transaction. Buying from the market requires a different strategy. As long-term venture investors we think in terms of building positions over time as networks scale. What’s challenging is matching the amount of capital deployed to the stage of each network while navigating the many swings of the market. You can’t negotiate with the invisible hand, so building public market positions involves developing investment and valuation models which we check against our conviction about the network’s prospects.
The goal is to get the best average price for the amount of capital reserved for an opportunity, which often means getting more aggressive with buying during downturns to reduce our “average price” and to help capitalize the network in trying times. But in other cases it requires the opposite – selling to provide some liquidity in heated markets and avoid harmful over-capitalization. This is all in our profit interest, if the investment pays off, but done correctly it contributes to overall network stability.