There’s a new venture studio in the world that looks rather different from earlier venture studios from a structural standpoint. Unlike renowned outfits like Atomic or Science or Expa that create companies that then sell equity to VCs who expect that equity to rise in value, this new studio, SuperLayer, plans to spin up consumer projects then instead of sell equity to VCs, it will invite the communities that use these products that invest in them by acquiring tokens, which can then be bought or sold or used to participate in other projects.
Indeed, in the case of SuperLayer, the tokens might all look a bit different, but they will all be tied to a blockchain network called Rally that SuperLayer’s founders created earlier and want to help popularize by creating more interesting apps atop it.
It’s part of what early crypto adherents have labeled Web3 and describe as the internet owned by the builders and users and orchestrated with tokens. It’s also a world that many venture firms continue to shy from. But they may well miss the boat as more outfits like SuperLayer begin to emerge, many of them created by battle-tested founders.
In the case of Superlayer, that founder is Kevin Chou, who sold his gaming company, Kabam, for $800 million back in 2018 and almost immediately jumped headlong into the world of blockchain technologies, which he believes can unlock new economic opportunities, including for gamers and or creators.
In fact, before spinning up SuperLayer, Chou cofounded the blockchain gaming startup called Forte; he is also the cofounder of Rally, a launchpad for creators to build and distribute their own digital currencies that are essentially white-labeled versions of the RLY coin, as it’s called.
Chou has had the support along the way of investors like Coinbase Ventures and Andreessen Horowitz, and they’ve already seen meaningful upside. Those RLY coins, worth five cents when all 15 billion of them were minted, are now trading on Coinbase and several other exchanges for roughly $.052. Investors and team members reportedly control more than three-quarters of that supply right now — so they have to hold them or tank their price — but the idea is for the community to own 70% once all are distributed over time.
If all goes as planned, it could make a lot of wealthy people wealthier, and enrich many less wealthy token holders, too. Consider: just about 7% of the coins are in circulation, giving the currency a market cap of $800 million. But if all 15 billion coins were released at today’s price, the coins’ fully diluted market cap would be $7.9 billion.
The efforts of Chou and company to decentralize its social token infrastructure is interesting on its own. Still, the real story here may be the opportunities and challenges that an organization like SuperLayer is beginning to pose to venture firms because of its relative complexity compared with traditional equity investments.
It’s largely why Sequoia Capital announced earlier this week that it is becoming a registered investment advisor. As Roelof Botha, the head of Sequoia’s U.S. operations, wrote Tuesday on Medium, becoming an RIA expands the firm’s flexibility in a number of ways; it also enables Sequoia to further increase its investments in emerging assets classes, such as cryptocurrencies.
Chou doesn’t necessarily think Sequoia is restructuring itself because of its growing interest in crypto deals. But he does think more firms will need to follow suit if they want to capitalize on endeavors like his own.
“In a world where there are these new types of technology platforms that are being created that are powered by these tokens with a very different business model and very different technology architecture,” smart firms recognize that “We have to do that,” says Chou.
By “that,” he means, evolve. One of the biggest challenges of traditional funds, notes Chou, is that once an investment becomes liquid, a firm’s obligation to its own investors is to either give them the cash from that “exit,” of distribute their shares in the entity, at which point, their investors can decide if they want to hold them or sell them.
But in the world of crypto, the idea is often to use the tokens from one project and to use them to participate in the growth of another project. It can mean buying and selling and being both an active — and sometimes very patient — participant. And it’s work that comparatively few venture firms right now fully understand, Chou suggests.
They may come to regret it, as Chou says that crypto founders are running out of patience with traditional VCs — and just as more blockchains and their applications are beginning to reach mainstream adoption. While a few years ago, entrepreneurs didn’t mind having to hold investors’ hands, he says, “More and more in 2021, a founder of a cryptocurrency that’s getting some traction and is trying to raise money is not going to go to the traditional Sand Hill Road firm.”
It’s not worth the time and effort, says Chou. Many have strict limitations around tokens, and most still need a whole lot of hand-holding. He knows, having lived it. “We’ve had to spend a lot of time with finance [teams] that [have] never done a crypto investment. We’ve had to do investment committee meetings, CFO meetings, lawyer meetings — just to give them delivery of their tokens. Then [you have] to help them set up their security and operations around how does the general partnership hold the tokens and how does it disperse the tokens to their LPs…”
The process, he says, was “really painful.”
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