The Breakdown - What All This VC and M&A Activity Tells Us About The State Of The Crypto Markets

Episode Date: February 5, 2020

If venture investments and acquisitions provide a window into the sentiment in markets, boy did we get a big dose of information today.  Today we look at investments in the world’s best known developer of the Lightning Network; a new prominent corporate investor for a tokenized securities platform; and Square’s investment in a real-time payments company.  We also look at a set of acquisitions, including a ConsenSys acquisition poised to get them in the $3.8T municipal bond space; a Bakkt acquisition poised to get them ready for a consumer app that includes more than just cryptocurrencies; and an attempt by Bakkt-parent ICE to buy eBay for north of $30b. 

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Wednesday, February 5th, and today we are going to look at the market through the lens of some fundraising and M&A activity. In traditional tech circles, most of the news that you see day, in and day out is about one of these two things, right? Look, if you go on tech crunch on any given day, it's here's a financing or here's someone acquiring some other company. That's the way that the tech market, which is, of course, a private market, not subject to public market forces in the same way as many companies, gauges progress and gauges where it's at, right? How evaluations

changed. Who is funding who? Crypto markets are a little bit different because they have aspects of both private and public markets at the same time, which can make them quite chaotic. But I still think that it can be useful to occasionally step back, look at funding activity and mergers and acquisitions in the space as a way to just take a barometer reading of where we are. Now, there were a lot of different takes about this story. Consensus is a controversial company in the space in so far as it is the most associated with Ethereum and takes a lot of the flack for accusations of Ethereum centralization and so on and so forth. So in any given outlet, in any given tweet, you might see this news as very different depending on who was sharing it.

So let's first talk about just what was actually announced. And then we can talk about what it means and whatever slant we think is correct. So first, what was announced? Basically, consensus is effectively shifting into two different parts of the company. They are separating the operating company from its venture investment part of the company. What's more, in the context of the operating company, they're transitioning away from the sort of venture studio model they've had, where they fund projects and incubate them and then spin them out, to something that's much more focused on four core parts of their infrastructure platform. So there are really four focuses for them moving forward, which is infura, Pegasus, Metamask, and CodeFi. Inferi, Infuri,

being the development suite that Ethereum apps are often built on, Pegasus being their enterprise blockchain solution consulting business, codefive, basically their link into the traditional world of commerce and finance, and Metamask being the wallet that allows people to use Ethereum on a variety of different apps. So at least on a glance conceptual level, it makes sense that they're shifting from this wide-ranging all over the place, sort of spin up and see what works focus, to these four key business lines that really are how Ethereum is going to touch a variety of different parts of the market, the developer market, the enterprise market, the finance market,

and the consumer or retail market from the standpoint of how people actually use Ethereum in the context of DAPs. Now, they also said that there will be continued consensus investments, that that is not going away, but that it's going to be its own thing. So they were kind of, didn't really say that much about it. They said that there will be a focus on early stage equity, liquid digital assets,

and strategic opportunities were applicable, which is another way of saying, nothing at all, more of the same. Now, importantly, and this is where a lot of the headlines were, as part of this shift, as part of this restructuring, they're shrinking headcount by something like 14%. This is the second time, Over the last couple years, that consensus has shrunk. The last time was in December of 2018

when they announced that 13% of people would be laid off as part of the first shift to a more consolidated streamlined model. So a lot of the conversation yesterday was either shot in Freuda around 14% headcounts from people who are rooting for Ethereum to fail, or a lot of sympathy and empathy from other projects, other people in the space who were reaching out and offering the, you know, whoever finds themselves terminated to actually have new opportunities. Now, two other interesting bits of the consensus story. The first is from the block, which basically is reporting that consensus is doing this in part because they're trying to raise something like $200 million. Now, this raise ambition was first reported last August by the information,

but according to the block, they've had trouble raising it. So the direct quote is, A source with knowledge of the process told the block that the split, this is consensus split, obviously, in efforts, was a result of difficulties in raising money for a company that was involved in both investment and software development. So that's the story, at least from one source around the block. So that was the other part of the narrative, depending on who you asked, was that consensus was outlooking for $200 million more. Now, in a completely separate announcement, consensus announced that they had acquired a broker-dealer

heritage financial systems and that they would be looking to get into the municipal bonds game, which is a notoriously hard to disrupt archaic part of finance, but it's also a $3.8 trillion market. The market for state and local debt is absolutely huge. And so in the story, Bloomberg broke this news, some of the folks from consensus talk about why this is so exciting or an example of why this is so exciting. And they're talking about mini bonds, which is basically where state and local governments are able to sell these bonds to local residents rather than just big mutual funds or banks. The upside of this activity is that citizens are actually literally investing in their local community. Their community and the important projects within it aren't just owned by

outside forces, they're owned by locals. The problem is that it's massively more expensive. A study from the University of Colorado at Denver a few years ago found that to focus on this type of investor, it was actually 2.5 to 7.8% higher cost to the governments who are issuing these bonds versus just selling to those mutual funds to those banks. So consensus is really excited about the possibility of shifting that methodology and allowing more local residents to participate in mini-municipal bond offerings. And they're even talking about why or how in the context of blockchains where you can actually have this immutable record of who has engaged, there can be different benefits for those citizen investors. So the Bloomberg article gives a

very simple example of a recreation center. And they say, if debt is issued for a recreation center, for example, the technology could easily verify a resident as owning the bonds and allowing them free access once it's built. So that's the promise. People are slightly more open to this. So Frank Shapiro from the block says, yesterday the focus was on consensus's layoffs and restructuring, but its acquisition of a broker-dealer also announced yesterday to break into the $3.8 trillion muni bond market looks pretty promising. Okay, so now we've gone through what the actual news is. let's take a step back and try to figure out what we should think. I think it's pretty undeniable that the fundraising market is harder out there than it was a few years ago,

which is obvious, even for a company the size of consensus. And in fact, what this suggests is that investors are less and less interested in the sort of, let's freewheelingly bet on the future and more and more interested on practical use cases, real revenue lines, proven needs. You know, within the context of those four businesses that consensus seems to be focusing on now, you have two that are core infrastructure for building a new set of technology environments, right, which is in Frura and MetaMask. And you have two that are about integrating that new technology with very traditional markets, both the enterprise market in the context of Pegasus and the larger financial markets, the traditional financial

markets and commerce in the context of CodeFi. We don't know. We're not in those conversations. We can't have any real insight into how they've gone, but it seems just based on actions that it is likely that investors are demanding a little bit more reality and real focus and tangible focus than perhaps they were a couple years ago, which isn't necessarily a bad thing. I think that, let's put it this way. There's going to continue to be people who iterate and experiment and push the boundaries and who fly with very loose resources in order to do so. And I think that it's likely that some of those entrepreneurs who have the ability to take on massive risk and try things that are unfathomable and unimaginable today will likely create some of the most interesting

things. However, once you get up to the stratosphere of wanting to raise hundreds of millions of dollars, investors aren't just going to throw that at ideas, right? They want to see something real. So to me, this is just the maturation of the market and the reality confronting companies that want to play at scale. So in a lot of ways, I like having this force of consensus in the market just as a barometer for where this new market hits the old markets and what people are willing or not to invest in. But consensus was not the only funding news this week. In fact, just this morning, Lightning Labs announced a $10 million. Series A. Lightning Labs is probably the best-known company working on Lightning. It is the company

that is founded and led by Elizabeth Stark. And they just announced this morning that they had raised a $10 million series A, led by Kraft Ventures, including the participation of Ribbett Capital, RRE Ventures, Slow Ventures, M13, and a number of other individuals. So just notable in terms of the participation is that these aren't all strictly speaking crypto investors. RRE and Slow Ventures have much broader portfolios as well, although Slow Ventures recently brought in Jill Carlson, which makes me think that they are likely having more of a focus on crypto than perhaps they did in the past. So the funding news is probably the biggest part of the Lightning Labs announcement, but they also announced that they're releasing the beta release of their first

quote financial project Lightning Loop. Basically, they've been focused for the last little bit on actually developing the underlying Lightning Network, basically the implementation software that allows Lightning to run. But this Lightning Loop software is basically a way to make the Lightning Network more usable. So the way they describe it is a non-custodial service that allows basically for an on-and-a-framp between the Lightning Network, which is the Layer 2 solution, obviously, and the Bitcoin network itself. The goal of Loop is basically to make liquidity easier and to allow companies to move more Bitcoin out of Lightning to free up the channel to receive more. So this matters for companies like Fold, which is an e-commerce startup, and several others. So right now the company

says that there are something like 30 companies that have been integrating this. So the takeaway on this isn't particularly surprising. It's that there continues to be interest in Lightning and continues to be interest in making Bitcoin more usable, not just in the context of hoddling, but in the context of commerce and digital commerce. So I think this is exciting to see. I think we want to see more investment in Lightning and Bitcoin businesses in general. And this is the type of investment

that is going to have larger ramifications than just for this one company because they are building infrastructure for others. But now let's jump over to a few other smaller announcements and see if there's anything interesting there. First up, we have a new $14 million series A round. for a real-time payment startup called Transparent. Transparent financial systems based in Seattle spun out of Vulcan, which was the Paul Allen, the late co-founder of Microsoft's fund.

And for what little information transparent has given us, it looks like it's focused on B2B approach, right? So it stresses that it, quote, creates solutions, not currencies, and is about the way that businesses can pay each other. The most interesting thing about this announcement, I think, is who's involved, specifically that Square has invested alongside more traditional crypto investors like Pantara Capital. So to me, this suggests that there is still appetite from investors for projects that are affiliated with crypto and affiliated with blockchain that are focused on a more kind of

fintech use case. Next up, let's look at the latest from Securitize. Securitize announced a few months ago that it had raised, or it was raising 14 million. And in some ways, the most interesting thing about that announcement was also who invested. Santander, the bank from Europe, in particular, had made an investment. Today, Securitize is back in the news with that same fund because Sony has joined that round as well. Sony Financial Ventures has joined that $14 million round. They haven't added any more information about exactly how big the raise is other than saying that it's, quote, more than 14 million,

but Sony is basically in. So the founder of the company said the Sony investment validates securitize as one of the most important architects of digital capital markets while adding another marquee name to a growing list of companies who are investing in digital securities as the future of global capital markets. Okay, so what's interesting about this to me? Sony is actually mildly interesting. I think what's more interesting is just that we've had this idea of tokenized securities around for so long. It's been such a promised area for so long. The interesting question is, is there something changing now?

And why? And what is that thing that's changing, right? Why are people more interested in getting more excited about the tokenization of traditional securities now versus the two years ago when we started talking about this or the three years ago, even longer. Is it just a matter of the time it takes for traditional markets to evolve? Is this just a slow linear growth exactly as it's supposed to be for traditional markets to get comfortable with the benefits of the tokenization of traditional securities? It feels to me like these are going to be questions that we are asking a lot more coming up. And so perhaps it's worth watching

the financial activity around firms like Securitize. Again, just as at Bellwet, for where the larger markets are in this idea of tokenized securities. Now, here's one from the crypto M&A realm. BACT is set to acquire Bridge 2 Solutions, which is a loyalty reward solution for merchants and financial institutions. This will be BAC's third acquisition, and it has absolutely to do with their planned forthcoming consumer app, right? So this is something that they've been talking about for a while.

They say they have partners like Starbucks lined up. And at Davos this year, the president of backed Adam White said that this wallet, this application that they will be creating will support more than just cryptocurrencies. It will also host a variety of different crypto assets, loyalty points, in-game tokens, and many other things. So this acquisition is meant to give them tools to build those loyalty and points solutions into that consumer-facing app. In fact, though, that wasn't the only bit of news that involves BACT, or at least ICE, the

Intercontinental Exchange, which owns BACT. But with that, let's finally shift to one little bit of M&A news that is outside of crypto, but is sort of tangentially related in an interesting way. Yesterday afternoon, Pomp wrote, whoa, the owner of the New York Stock Exchange is thinking about taking over eBay at a valuation of more than $30 billion. This is the same company that realized the importance of Bitcoin enough to start backed. would be incredible to combine NYSE-backed an eBay under one roof. All right, so let's dig into this news a little bit more.

Again, from the block, basically the Wall Street Journal reported that ICE, the Intercontinental Exchange, has made a takeover offer for eBay that would value the company above $30 billion. That said, the WSJ is also reporting that the companies haven't held formal talks and that ICE released a statement saying that eBay

has not, quote, engaged in any meaningful way. So at this point, it's very clear that this is ICE chasing eBay around this. The question is, why would they do this? And part of that has to do with what's going on in other parts of the exchange market. So recently, NASDAQ announced a deal with Airbus to create a trading venue for the airline industry. And I think that Maya Zahavi had a really good take on this. So she tweets, this is a big deal in my opinion. ICE is taking a swipe at a lot of Silicon Valley marketplace businesses and their deal flow, sneakers, cars, and collectibles. Mix the eBay marketplace with backed and voila, a secondary market for anything and regulated. So this is, I think, the key point in what makes it interesting for crypto, is that you're talking about effectively

exchanges, the world is being eaten by exchanges, and that all of a sudden we're seeing that there is maybe not such a big difference between traditional financial market exchanges, crypto exchanges, and these secondary markets for goods, right, in the context of eBay. So that's what's so interesting about this to me. Now, Maya goes on and talks about the Airbus deal, which for those who haven't read anything about it is really interesting. She says, the NASDAQ move, an air travel derivative market via indexes, an awesome pairing given travel points are already derivatives bought in advance by credit card

companies. The perfect frequent flyer product can be found on an air travel derivative market, aka, how much are you willing to pay to ensure you always pay the lowest price for that route instead of the spot price? It's a perfect real crypto-based security due to the fact an issuer needs to verify both the spot price, the amount of flights, and the highest future flight price in order to price that product. The point and what makes this so interesting is we're seeing the exchangeification of everything, right? That the presence of of these marketplaces is blurring the lines between what is a traditional exchange and what is a new type of exchange and what is just a secondary market, right? It's all becoming part of one

process and these big, huge financial companies are actually seeing links between them and trying to bring it together. So this to me is something that's worth watching, not just in the context of this deal, but in the context of what it represents more broadly. Anyways, guys, a little bit of a different episode today. It was kind of a slow news day, and I thought it might be worth just looking at the markets from a different angle. As always, I appreciate you hanging out and listening. Let me know what you think about these deals. Let me know if you think that this consensus thing is going to actually be real and big and good for the company,

or if it's just a death rattle. Let me know if you think this eBay thing is just nonsense and it doesn't actually have anything to do with crypto, and it's just another example of us trying to cryptoize everything to care about it. Hit me up on Twitter at NLW. Subscribe via email, nLW.substack.com, and thanks again for listening. I will be back with another breakdown tomorrow. Peace, guys.