Designing a Blockchain / Decentralized Web Company for Long-Term Value Creation
Decentralized web and blockchain companies are fundamentally different than their centralized counterparts.
- They fundraise differently (token sales vs traditional VC / angel fundraising)
- They scale differently (creating decentralized, autonomous networks instead of closely-held products)
But what does this mean in the long-term?
The best way to structure these companies to create value for employees, investors, and users will undoubtedly be different, as well.
Early decisions could have far-reaching implications and standard procedures that are currently taken for granted might need to be re-thought to maximize long-term value.
This article is meant to suggest how tokenized companies could position themselves to parlay a novel funding approach into an equally novel exit strategy.
Company Structure
Early blockchain and decentralized web companies were structured as not-for-profit foundations tasked with maintaining an open-source network. This paradigm can be seen with Bitcoin, Ethereum, Litecoin, Monero, and many other projects with the highest token market caps today.
As the industry has evolved, and project purposes have expanded beyond basic use-cases, though, a new standard has started to take shape. This new paradigm is equally “tokenized”, but features a for-profit corporation at its core (although sometimes paired with a foundation).
At the center of this structural shift is the need for businesses with more corporate governance to facilitate the hiring of full-time staff, as well as the need for formal partnerships or business development efforts that are difficult to coordinate with a constellation of freelance contributors.
Examples of projects run in this way include Filecoin and Ripple, both of which are well-funded, ambitious projects with a corporate entity at their core (Protocol Labs and Ripple Labs, respectively).
How Value is Accrued
Tokenized for-profit companies, including Protocol Labs and Ripple Labs, are likely to accrue a significant percentage of their valuations through holdings of their tokens. This reliance on token valuation means that companies must have two distinct elements to drive long-term value growth:
- Companies must hold a meaningful share of their tokens
- Companies must structure the token economics correctly to accumulate value
Derivation of Company Value from Tokens:
Ripple is probably the cryptocurrency company with the highest non-token valuation, having raised $90M+ through traditional venture capital, presumably at a multibillion-dollar valuation (couldn’t find it listed anywhere). Nonetheless, with an estimated 60% of tokens owned by Ripple Labs (the for-profit entity) worth ~$18B today, the token valuation almost certainly dwarfs any enterprise valuation that could be possible for Ripple Labs without tokens included.
Other tokenized companies are even more extreme versions of Ripple in that the aggregate value of tokens comprises nearly the entire enterprise valuation of the company.
While Protocol Labs (and many others) have been accused of greed for holding too many of their tokens, these for-profit companies are often only worth as much as the tokens they hold, meaning that keeping a meaningful share of their tokens is essential to long-term success.
Structuring Tokens to Accumulate Value
In a world where the token value is the predominant driver of company value, creating a token economic structure that facilitates price appreciation is one of the most powerful determinants of long-term success.
Much has been written about the “velocity problem” of tokens, which presents a theory that even with very high usage and user adoption, a token will find an equilibrium price and not accumulate value, similar to how pricing works in an efficient market. This would result in flat valuations for even rapidly scaling companies, which is a problem that doesn’t exist with valuation conventions today.
To accumulate token value, companies need to combat the “velocity” problem with different methods for slowing velocity, causing users to hold onto their tokens for more extended periods of time through strategies including profit sharing, staking functions, or burning.
The strategies needed to structure a token economy merit a standalone blog post (or 50); however, the key takeaway is that “how” a token economy is structured, a decision typically made at the outset of the company, is crucial to creating a high ceiling for long-term value.
The surprising implication of all of this is that as long as the token economics work out, the company can make money simply by holding tokens and having no other revenue. This is a completely new business model that could replace the predominant one today of monetizing through subscription SaaS or selling accumulated private user data to advertisers.
Realization of Value for Employees and Investors
The ideal vision for a tokenized company is to provide the launching pad for a mostly-autonomous network that, at-scale, creates significant value for its users while also encouraging the prolonged holding of tokens that results in the appreciation of the token price. “Ideal”, in this instance, means that it delivers value for employees, investors, and users, capitalizing on the network and funding structures that tokens best facilitate.
It’s worth noting that the relationship between an employee’s equity position, tokens held by an employee, and tokens held by the company still isn’t entirely clear. Someone still has to own the equity in the company, and for the company to accrue value it needs to hold tokens. Still, in most cases, it seems that blockchain startups are also issuing tokens to individual employees — usually with these vesting over time — meaning that employees are getting (1) A salary (2) Traditional equity (3) Tokens. Ultimately, it’s unclear which of (2) or (3) will be the most valuable long-term.
Once the decentralized network created by a company is mostly autonomous, and the value of the token has grown sufficiently, then the company can start removing itself by slowly selling its supply of tokens on the open market.
Rather than an exit, through an acquisition or IPO, it seems likely that companies will sell their stockpile of tokens over time, slowly removing themselves from the decentralized network while creating fiat liquidity to be redistributed to employees and investors — unless of course, bullish investors would like to buy more tokens directly from the company.
Interestingly, this system of value creation more closely resembles the “dividend model” championed by blue-chip stocks than the splashy exit approach of VC-backed startups.
The end-state of a successful decentralized organization is likely a complete liquidation of all company-owned tokens, leaving the network to be governed and supported by the users and investors that purchase its tokens on secondary exchanges.
It is still possible for a tokenized company to have a more traditional startup “exit”, although, in the case of Ripple, an acquirer would need to purchase both the multi-billion dollar Ripple Labs, as well as the ~$18B in tokens owned by the company, which presents a high barrier.
In the case of an acquisition or IPO, though, the new owners would likely just profit from the same slow liquidation of tokens to the open market that was described above, buying a residual stream of cash that ideally would be timed to track with the peak of the token’s “market cap”.
Conclusion
One of the main objectives of a startup is to create a product that people want, therein creating value for their employees and investors. The methods by which this has happened for startups historically are well-established, with decades of precedent and countless examples of successful templates to follow.
The template for tokenized companies, though, is much less clear, as it seems unlikely that so much would change about the product and up-front fundraising strategy, with no paradigmatic changes to how the employees and investors eventually profit from a successful outcome.
The first implication of this post is that companies should pay attention to decisions made up-front that could have a dramatic impact on the ceiling for long-term success (or at least have a sufficiently sophisticated governance model for their token economics so that changes can be made as best practices become clearer). Two of these decisions are:
- A company should choose to hold a meaningful share of its tokens (but not so much that it impacts the odds of the community deeming it “unfairly” high)
- A company should design its token economy to promote holding (and therefore appreciation) by implementing ways to reduce token velocity
The second implication is that the creation of a successful decentralized network likely means that its company (or “launch pad”) will have decreasing importance throughout the network’s lifetime. If designed successfully, the role of the original creators should become less pronounced over time as the autonomous network claims ownership (much like Bitcoin with Satoshi).
It’s worth noting that B2B or vertical-specific companies may have a more centralized component long-term; however, some degree of eventual autonomy seems inevitable if the network is designed correctly.
The final implication is that it’s difficult to predict precisely how these companies will eventually realize value for employees and investors — this is a major point that should be monitored closely by anyone involved in the industry as data points make themselves available over time.
Regardless, significant tokenized companies are already being constructed, with founders, employees, and investors using intuition and reason to make guesses in the absence of empirical evidence. As time goes on, it will be more evident which frameworks were more efficient, but for now, the best we can do is think critically about these exciting new technologies and their long-term implications for building world-changing businesses.
