Back to the Basics
Course Correcting from Tokens to Equity
Several mentors have encouraged me to publicly share a more detailed account of Transmute’s choice to shift focus solely to commercializing Transmute ID, the decentralized identity component of our original product, the Transmute Platform — a Heroku-like rapid dApp builder that seamlessly bridged centralized and decentralized tech, specifically for existing enterprises.
[Shoutout to our friends at Mainframe, Wireline and Golem who are keeping the dApp platform dream alive, successfully executing on it for the fully decentralized community!]
So here it goes:
Now that we’re an [emotionally] safe distance away from the crypto-crash of 2018 and crypto-goldrush that precluded it, I think we can all agree: some projects don’t technically require a token. This is the primary pushback any founder looking to drive adoption of a product with a crypto-token dependency faces in every pitch. And answering this in an accessible way that demonstrates technical chops and business acumen is no small feat.
The second biggest concern for potential partners and investors is the legality of the token as an investment. There was [and still is] so much unknown and undecided about the validity and treatment of crypto-token assets here in the U.S. And relocating beyond the U.S. as an American start-up offers an onslaught of complex formation, tax and liability variables such that there is no “easy” option.
The third area of question is where the above two intersect: the token economics. Are incentives aligned at network launch? What is the phased approach to reach equilibrium? How will we keep incentives aligned? How will we handle price volatility for enterprise customers? What will we do if, if, if.
These are the concerns I witnessed fellow founders spend the most time, energy and resources addressing — myself included. And it makes sense; addressing these concerns is about de-risking the business opportunity.
Since we were aware of these primary areas of concern heading into our initial raise, we came to the table with a de-risking plan as part of our first year’s roadmap. Upon closing our first million in pre-seed capital, we immediately began executing on our plan. We built our core team, and we rightfully spent a lot [in dollars and manpower] on finding the right solutions and answers to each of these questions for Transmute.
We ultimately concluded that a crypto-token is technically required to ensure specific functionality of the decentralized side of the platform (e.g. decentralized store and compute).
This resulted in fine-tuning our token economics through extensive modeling, and a decision to pursue a Reg A+ structure to run the token sale under. Since this meant we needed to functionally look like a publicly traded company [while realistically at the seed stage], we began the daunting task of reorganizing our operations to suit Reg A+ requirements (e.g. legal forms galore, GAAP audited books, etc.). At least, all of these signs pointed to a clear path forward to build the Transmute Platform.
Fortunately, we had one more chapter in our de-risking plan that we’d run in parallel to the aforementioned efforts: determine early product-market-fit.
This initial effort was conducted over a 4–6 month period and involved hundreds of interviews with potential platform users (developers) and customers (enterprises). And when the data was in, the results were clear: there was zero near-term enterprise demand in the token-powered functionality of the platform. We searched high and low, interviewing most of the major enterprise storage solutions out there and couldn’t even find one willing to admit that investing decentralized storage tech was on their 5 year innovation roadmap.
However, we did uncover a demand for user-centric identity tech (e.g. increased security, privacy, portability, infinite federation/scalable, etc.) and an enormous demand for the resulting efficiency gains and untapped revenue potential of implementing a decentralized identity solution. Because these directly address problems enterprises are facing today, and they directly connect to the cost/profit levers that enterprise stakeholders care most about.
This was not the data we wanted; it was the data we needed.
After taking time to reflect [and scrutinize our path to this point], the decision was clear: we needed to productize the decentralized identity component of our platform we found demand for as a standalone product and go to market sans dApp platform, and as CEO, I needed to re-align incentives across all our stakeholders.
First, I immediately ceased legal work towards a token sale, redirecting efforts to assess a path forward as a venture-backed company with equity as the primary asset value can accrue to. I settled on offering investors who invested via SAFTs (“simple agreement for future tokens”) the opportunity to convert to a SAFE (“simple agreement for future equity”) instead. This kept most terms consistent, and it helped me avoid pricing ourselves at the pre-seed stage.
Next, I reframed our mission with my team. A ton of work went into the early platform prototypes, and I wanted to ensure they understood how crucial their efforts were regardless of our new direction. Since the component that would become today’s Transmute ID was already the “core” of the platform, it was simple to refocus all of engineering on this single piece.
Lastly, I brought the data and the updated company plan to our investors. We’d achieved everything we set out to accomplish in year one, but this story wasn’t one I anticipated telling. As such, I was most nervous about this part as we have some highly esteemed crypto investors in our pre-seed round, and I know they [like us] strongly believe in a more decentralized future.
But I was armed with tangible evidence that the old approach was the wrong one. In fact, it was so wrong that it would have been overtly irresponsible for us to continue to pursue it. Minting and distributing a token to investors for an enterprise product with no demand for it would kill any company eventually. Furthermore, selling Transmute ID as a standalone product meant value would accrue away from our early token holders to the equity pool.
Not only did our investors understand and appreciate the thoroughness of our de-risking process, but they fully supported our decision and accepted the conversion offers.
Solving for identity was always a key part of commercializing decentralized technologies, but now we understand that it is THE key to adoption. When DID tech is pervasively integrated throughout enterprise infrastructures, we will finally have the tools we need to optimally own and control our individual data [and privacy], our intellectual property, our consent and our access. This is how we will reach the more equitable future this community is collectively aiming for.
Today, we don’t view this decision as a true pivot for Transmute; we view it as a distillation of our strategy, more impetus to focus aggressively on the things we know will make the biggest impact…and build a profitable business…because they’re actually being used and adopted in the enterprise today. Our larger mission hasn’t changed: we are bridging the centralized world to the decentralized. And we’ve double downed on our pragmatic approach to integration of decentralized identity with legacy tech and clouds [which enterprises like Microsoft are now voicing is the right approach].
I can’t turn back time, and I am immensely grateful for the learnings and resulting shift in focus for Transmute. However, in my next rodeo, I will remember this lesson and go back to the basics, aggressively seeking product-market-fit first and foremost.
