Base jumping with no parachute
As this was pointed to me yesterday by a fellow steemian, in addition to @ned, @dantheman, and @steemit accounts that have already been powering down at full rate all the way down from ATH, the @dan account has started powering down too a few days ago. This account controls north of 4M SP. That means that starting very soon, another 40k STEEMs per week are likely going to start hitting the market. This is of utmost concern given that the price is already extremely low and the debt-to-equity is getting dangerously close to 1:10.
Why is Steemit doing that? Why are founders cashing out at maximum rate when at the same time they ask the community to make efforts and support the platform financially as Dan did in his recent interview with @dollarvigilante? Although I'm not privy of the details, there is a very simple explanation to that: Steemit Inc needs money to operate, and as it's customary for seed stage startups, probably can't afford to pay more than the most basic compensation to its founders and early staff, so Dan, Ned & co are probably powering down for the dead simple reason that they still have to make a living in the mean time.
Of course, the problem of selling STEEMs to pay for development efforts in these times of low demand where Steem is still subject to a lot of skepticism in the crypto community and beyond, is that market liquidity isn't a renewable resource, and Steemit Inc is not the only market participant tapping into the pool, far from it, as a quick look at steemdown.com will show.
Another nasty consequence of Steemit and founders powering down at maximum rate is that, when interpreted out of context (which means almost all the time given that Steemit hasn't made any statement on the matter), it sends a very bad signal to the market, including to other large stakeholders.
What can we do
But then, if Steemit & founders should lead by example and stop powering down and selling on the open market, what can they do to fund themselves?
(Credit: unknown @ yimg - Marie-Antoinette)
SteemIt potential revenue streams
Let's look at Steemit's business models and possible income flows.
- selling STEEMS: that's potentially a massive income stream, but as we have seen, the market isn't ready and doing so crashes the market, which undermines the product itself and threatens to kill the golden goose. It's also not a very good strategy to sell a potentially valuable resource at a price way too low as compared to the price it would fetch if they waited until the market is ready.
- selling Steem integration services to partners and customer companies: another potentially highly profitable business, but too early for its time as there are currently a limited number of partners and potential customers, and these are in a position of strenght to negotiate free integration given the experimental nature of the network.
- selling visibility on Steem to advertizers: same as above, viable in the long run, but too early
- selling blockchain consulting and development services: Steemit Inc is a blockchain technology company, these are highly sought after by large companies looking to add decentralization to their services. Although they could already do that, this would consume development resources and detract from the main objective of making Steem evolve. The way things are setup, the entity originally behind Steemit, Cryptonomex, is the one acting as a blockchain company and selling consulting and development services.
SteemIt Inc has value on its own
So it appears that Steemit Inc has much more potential and value, as a company, than simply giving birth to Steem and then disappear. Steemit Inc holds its own value, as a blockchain company, and as the obvious go-to service provider for anyone looking to do business on Steem, not to mention that the large stash of STEEM Steemit holds on its balance sheet also gives it a potentially tremendous value should Steem turn out to be successful. This makes Steemit's equity a valuable asset that could be sold for fiat. And that's precisely what Steemit should consider doing to fund itself going forward if it doesn't want to kill the golden goose.
Now let's look at the two options available for startups to sell private equity
That's the obvious option that most startups are choosing. In all likelihood Steemit will have already considered that, and rejected it. It could be that they thought Steem would prove sustainable quicker and that they wouldn't need capital. Or it could be that they had put enough personal capital and thought that would last them long enough. Or perhaps they already had a low profile round with investors close to the founders like Cryptonomex and some Bitshares time investors. Either way, Steemit now has a pretty awesome product that's much more impressive than the typical underwhelming MVP VCs are requiring to show the money, so they are in a good position to negotiate good conditions for a funding round. If this post is for real, some VCs are already drooling at the perspective of investing in Steemit. Now, given how obvious this option is, I sense that there must be some deeper reason for Steemit to have ignored it so far. Dan has been sharing quite a bit on his blog about his philosophical views, which I share for the most part, and I can see how he wouldn't want to have to accept to lose some control on the company and the project, and prefers having to work with a community than investment funds. This is only speculation on my part of course.
Equity crowdfunding is a relatively new approach to private equity funding that allows small investors to pool their capital via a specialized web-based platform and invest together in private equity via a type of company called a SPV (Special Purpose Vehicule).
There are three main reasons that startups usually refrain from accepting direct investments from small investors.
- overhead: having to deal with communication, pitching, negotiation, legalities, fund settlement, shareholder registration etc. for a couple thousand bucks at a time with hundreds to thousands of investors just isn't worth the hassle.
- compliance: this is a strong deterrent. Modern financial compliance is a mine field with as many different rule sets as there are jurisdictions, with harsh penalties going as far as jail in case of regulation breach (read @charlieshrem's blog for a very good example of how harsh consequences can be if you overlook compliance).
- VCs reluctance: the last reason is no less dissuasive: because of the two first reasons and the huge future headaches that come with them, VCs tend to refuse to deal with startups that have included many small investors in their earlier funding rounds.
That's where SPVs and equity crowdfunding platforms come in the picture. A SPV is a sort of holding company with a single and unique purpose and extremely simplified legal requirements. It is used in this context to serve as a proxy for smaller investors to invest in a startup. What happens is that small investors become shareholders of the SPV. And the SPV invests in the startup as a single shareholder. A new SPV is created each time a fundraising occurs, so that each SPV only ever has as shareholders the small investors who participated in a particular round of a particular startup, which gives a good level of direct legal control and tracability to small investors.
This is all managed transparently by the equity crowdfunding company. From the perspective of small investors, the experience is very similar to that of regular crowdfunding: companies publish a pitch on the web-based platform, answer questions via a forum, and investors back the pitch using common means of payment like credit cards, bank transfers or even crypto. From the perspective of the startup, it's equally transparent: from a legal standpoint they have to deal with a single share holder, the SPV created by the equity crowdfunding company, and from a practical standpoint, the fund raising process is not really different of a crowd funding pitch.
This mode of fundraising is very advantageous for all parties. It gives to small investors access to the high-risk high-returns segment of private equity funding that used to be the monopoly of VC firms. As for startups, they get the benefit of dealing with a very neutral investor (the SPV, represented by the investment firm) that won't act nosy, bug them with petty requirements, or try to co-opt C-level officer seats with acquaintances. What the SPV wants is the aggregate of what all the small investors wants, that is to say exposure to potential future large returns on exit if the company is successful. and as little headaches as possible in the meantime. Another big advantage is that small investors will often become clients and supporters of the startup they help funding, and help promoting it, just like a regular web community.
There are many crowdfunding platforms, some specialized in particular sectors and some more generalist. The most famous are WeFunder, AngesList and bnktothefuture (pronounced "Bank To The Future"). Of the three, BnkToTheFuture is the only one to be specialized in Fintech and Crypto, and effectively the one that is the most commonly used by crypto space startups.
What are other blockchain companies doing
Let's look at what other blockchain companies with similar revenue structure and/or business model are doing.
- Ripple: raised funds with VCs and strategic partners. USD 93M raised with equity only in 3 rounds at undisclosed valuation. Also selling XRP on the open market under contraints of volatility (XRP curve price is remarkably stable). Holding a ~80% premine of all XRPs including partners. In joint venture with SBI Holdings to sell XRP over Forex platforms of the group.
- Synereo: raised funds with public token pre-sale and equity + tokens sale on BnkToTheFuture. USD 4.5M raised with equity + tokens (around 2M with equity alone) in one round, at valuation USD 10M. Holding a ~90% premine. Not selling anything on the open market: tokens released exclusively during fundraising events, and for future network promotion and giveaways.
- Maidsafe: raised funds with private individual investors, ICO and equity sale on BnkToTheFuture in this order. USD 1.6M raised with equity only in one round at valuation USD 40M. No premine held but coins to be diluated 900% by future mining, and company to receive 5% as revenue.
- Factom: raised funds with ICO and equity sale on BnkToTheFuture. USD 1.1M with equity only raised in one round at USD 12.8M valuation. No premine held but coins to be diluted by inflation, and company to receive a cut (exact % TBC).
- StorJ: raised funds with ICO and equity sale on BnkToTheFutue. USD 500k raised with equity valuation to be determined at Series A round (convertible note). ~90% premine lelf for network rewards.
To sum up:
Equity sale: All of these blockchain companies are financing their operations by selling equity, and all with the exception of Ripple, have chosen to do equity crowdfunding, predominantly using BnkToTheFuture.
Token market strategy: None of these blockchain companies is doing unrestricted dumping on the market. Again with exception of Ripple, nobody is even selling tokens on the market at all. Ripple is selling under volatility restrictions and volatility is extremely low out of major news or market movements induced by Bitcoin, as can be seen from the charts. Another interesting point about Ripple is that they forced insiders who got large amounts of XRP to sign an agreement limiting their selling rate.
So far, all these projects seem to be doing well, and although correlation doesn't imply causation, it's interesting to note that these companies made the choice of funding themselves by selling equity and not dumping large amounts of token on the market and the only one that does some selling is doing it responsibly and holding insiders selling at arm length.
Given that the market can't take anymore dumping without triggering a blackswan, another model needs to be found urgently. Looking around, it appears that selling equity is a good funding model, and that equity crowdfunding in particular seems to be popular for doing so.
Accordingly, I'd like to suggest to Steemit to look into applying this model, stop as soon as possible open market selling and refrain from resuming it, or resume it under a controlled model, and consider negotiating limitations with insiders to restrict or mitigate selling.
Disclaimer: I'm not holding any interest in BnkToTheFuture. I'm a regular user of this platform however, and my experience so far has been good.
I think both Cryptonomex and Steemit Inc would make interesting investment opportunities in an equity crowdfunding context. As an investor, I'm still very hesitant buying Steem due to the ongoing dumping, the increasing blackswan risk, and the fact buying from the market helps short sighted profit-taking insiders more than it effectively supports Steemit. On the other hand, I would be looking to buy a fair amount of equity in both companies provided that valuation is reasonable. And I wouldn't be surprised if many steemians turned out to be equally interested in holding equity in Steemit Inc and Cryptonomex.
This post is primarily addressed to Steemit Inc. Given the low chance that Dan and Ned would read this post before it disappears into oblivion, if anyone has got a direct access to Dan or Ned and finds this potentially useful to them, please make sure to let them know about this thread.