Unraveling the Ecosystem Financing Landscape (Part 2)

This is Part Two of a two part series. Click here for Part 1.

Navigating the Ecosystem Financing Landscape

Developer activity is growing and near all-time highs, but real-world use cases still feel years away with the exception of crypto as a speculative asset class. The long road to adoption will open many opportunities for savvy developers and founders to identify the existing shortfalls of the ecosystem and build solutions.

However, amidst a prolonged bear market, and declining crypto fund AUM, many credible teams still struggle to find financing solutions.

Ecosystem financing options seem to be one viable path forward. There are a number of well-capitalized protocols that are deploying grants and investments to build their ecosystem in a highly competitive environment.

Ecosystem financing typically comes in two forms:

1. Dilutive Capital — this includes venture investment and accelerator programs. Investors take ownership in an entity and invest for profit.
2. Non-dilutive Capital — this includes protocol foundations and grant programs. No ownership is granted and there are no profit expectations, but different incentives for investors.

However, information on these financing programs is scattered and often contradictory, so this is a challenging landscape for entrepreneurs to navigate.

EOS.VC A Case Study in Confusion

One of the largest ecosystem development funds is EOS.VC. Block One created EOS.VC which then announced partnerships with five outside venture capital firms in early 2018 to deploy $725M into EOS-related infrastructure and dApps.

With such deep pockets, EOS has the ability to take market share from Ethereum by offering large investments to companies that build on its protocol. Most recently, EOS partner Galaxy Digital led a $15M investment round into blockchain-based gaming company, Mythical Games.

However, from an entrepreneur’s perspective securing investment from EOS.VC may be confusing and this is true of the ecosystem financing landscape at large. First, it is unclear who is truly in charge of the funds. In July 2018, only a few months after BlockOne announced its five independent partner funds, the company hired Michael Alexander as the CEO of EOS.VC.

Because there are multiple funds and little to no transparency into decision-making, it is difficult for teams to understand what to expect. For example, one of EOS.VC’s partner funds, Galaxy Digital, also makes principal investments off its balance sheet. If an entrepreneur is speaking to Galaxy for investment, does he/she need to build on EOS? It is not 100% clear.

In addition, information is constantly changing. For example, EOS.VC announced a partnership with Tomorrow Blockchain in January 2018, but if you search the EOS.VC website for partners, TomorrowBC is nowhere to be found, while the four other partner funds remain. To date there has been no announcement of a meaningful change in the EOS.VC partner network.

Finally, many in the industry wonder if capital alone is enough. Teams like Block.one also need to entice developers via other community building activities, marketing, hackathons, and ethos. This has been a challenge for EOS as developer activity on the core protocol has declined since launch.

Believe it or not, I do not mean to pick on EOS.VC. In fact, it is one of the most transparent of the ecosystem development funds, which highlights exactly why I decided to consolidate all ecosystem financing information.

Protocol Level-Risk

Another, more cautionary example is that of the RChain Protocol and its ecosystem development fund, Reflective Ventures. The Reflective Ventures website states that the fund deployed $21 million into 21 companies that were interested in building on the RChain network. However, Reflective has since pivoted to become protocol agnostic and rebranded as Counterpointe Ventures.

The website does not specify how Reflective’s investments were structured or the currency it used to make these investments. As The Block announced in December 2018, the RChain Protocol is now “functionally bankrupt.” Development on the protocol has all but ceased and the price of the native token, RHOC, declined over 95% from all time highs. With essentially zero liquidity, it is essentially a zombie protocol.

If Reflective invested RHOC and portfolio companies did not immediately sell, were mandated not to sell (lock up), or were not sent the RHOC all up front (milestone-based financing / earn outs), then those investments, and as a result, those companies might be in trouble.

It’s important to note that ecosystem financing is strategic capital that creates an alignment between the funded team and the native protocol. Receivers of grants and investments take the risk that the underlying protocol might fail.

What Questions Should Developers & Founders Ask?

If you are a developer or founder seeking financing from an ecosystem fund or foundation, it is important to ask the right questions. The below questions are certainly not exhaustive, but may offer a reasonable starting point.

1. Is this an investment (dilutive capital with the expectation of profit) or is this a non-dilutive grant?
2. By taking your investment am I mandated to exclusively develop for your protocol or can I remain protocol agnostic?
3. If the answer to the above is exclusive, am I comfortable taking on the additional platform-level risk?
4. Do I lose my rights to any intellectual property that I develop?
5. Are you investing using your native token, fiat, a stablecoin, ETH, or BTC?
6. Is there a lockup on your investment capital?
7. Do you offer tech support to help us integrate into your protocol?
8. Is the financing milestone based?
9. Do you write follow-on checks?
10. What other value add can you offer (ie: BNB trading support)

Our Findings

Our research identified 28 protocols that offer one or more forms of ecosystem financing. This includes 25 venture funds and accelerators that manage upwards of $1.6 billion and have funded over 100 companies to date. It also includes 20 foundations/grant programs managing over $350 million assets that have funded dozens of developers and companies to date.

This nearly $2bn AUM represents a whopping ~44% of Vision Hill’s estimated Q4 crypto hedge fund AUM, although the $2bn estimate is likely inflated. Many funds launched during late 2017 and early 2018 before the rapid decline in crypto prices. Therefore, it’s more than likely that actual AUM is meaningfully smaller than that listed here, but even so ecosystem financing should not be ignored.

*While Vision Hill does not track venture funds, I expect the AUM distribution to be similarly concentrated with a handful of leading funds such as a16z ($300m), Paradigm ($400m) and Pantera ($175m). This means the funding landscape for early-stage projects extremely scattered and hard to navigate.

Our landscape includes the following fund and foundation information:

1. Name and Protocol
2. Key Contact
3. Representative Investments / Grants (either specific companies, tools, or services)
4. Investment Thesis (High-level fund goals)
5. Fund Size — as of last announcement
6. Range of Investment / Grant Sizes
7. Date of last publicly announced investment (proxy for a fund’s activity)
8. Website / Application Page
9. Medium & Twitter Accounts

I may have made other mistakes, so if you are part of one of the teams represented in this landscape and identify inaccurate information, please reach out to help me correct it. I hope to keep updating this over time. Click here for more information.

This is Part Two of a two part series. Click here for Part 1.