Decentralizing Growth Capital: Part 2

The Token Pledging Model for Blockchain Adoption

Overview

From the outside investment world’s view, 2017’s token sales raised funds backwards.

A rush of money upfront without product or growth achievements. Much like what we saw with Kickstarter, this allows for two directions for each surviving project now. Either a faster road to launching a product without funding delays, or the fallout of over-promising and under-delivering.

This leaves an interesting landscape at the start of 2019. Large pools of funds for future growth and product launches are being carefully guarded by projects and industry leaders to steer their future. Other projects and experts stand in need of new funding to continue their mission. We see a path forward that helps coordinate our industry and speed blockchain adoption.

Rick (SpaceFund), David (YGC), CZ (Binance), and Prad (Abacus Protocol) at the Malta Delta Summit 2018

The key to this new model is a reward mechanism based on what we term token “Pledging” which involves large token holders, foundations, and community treasuries partnering with growth capital firms to define milestones, fund outcomes, and balance out their existing capabilities.

New projects can take the model below to kickstart their growth efforts as well. Even existing token holders can pool their efforts in a co-venture to achieve the same result. In effect, blockchain projects can take advantage of their “backwards” funding to incentivize the best experts to work on its growth in a targeted manner.

Defining “Pledges” vs “Staking” of Crypto Tokens

Many in the crypto community are familiar with the practice of “staking” their tokens. Often this is a function of governance (voting weight as is done in the case of Binance) or used in distributing block rewards (new tokens entering the system, as is done in the case of Decred) to committed long term holders of the tokens.

For growth capital we propose a similar approach to staking, we call “Pledging”. The benefit of which, instead of voting power or block rewards, drives a series of growth milestones completed by a subject matter experts.

Acme Protocol Pledging Example:

  1. Bob the Acme founder (“Bob”) has 200,000 Acme tokens, worth $4M USD.
  2. Bob pledges 5% of his tokens, (10,000 ACME).
  3. Bob contributes the 10,000 Acme tokens to a third party custodian (effectively $200k USD of growth investment).
  4. Bob signs a contract with a growth company, Alice’s Experts (“Alice”).
  5. Bob & Alice agree on a list of growth related milestones and a vesting period of 2 yrs.
  6. Every month the custodian releases 417 pledged tokens to Alice, over a 24 month vesting period.
  7. Alice’s team digs into the work, releasing monthly updates and reporting regular progress.
  8. If Alice fails to complete milestone progress on time, Bob cancels and regains the non-vested tokens.

At the end of this process ideally Alice has delivered and Bob’s project of choice is thriving with more users, more customers, whatever metrics of growth it needs to be successful.

The equation for Bob is very simple. He expended 5% of his tokens to increase the value of the other 95%. We’ve found that over a 6 month period, direct results begin to show, and accelerated results accumulate after that. We recognize that pledging requires mutual trust. We believe that 24 month terms capture the need for longer engagements to drive a full enterprise sales cycle, full marketing campaign, or other efforts that need longer cycles of true hard work.

I realize that for both Bob and Alice, there is a leap of faith. For Alice’s team to earn the full contract value from Bob, her team needs to deliver results and be strong communicators. Regular progress updates. For Bob, he wants to see results and get a return on his pledge. With Bob having the option to terminate at any time, Alice risks not earning the full pledge amount. And Bob risks early months’ pledges if Alice doesn’t deliver results on time. As with any good relationship, good communication and shared goals will drive the greatest likelihood of a positive outcome to speed adoption.

Adoption itself has been underfunded in blockchain. Across the board. Our studies from 2013 to 2018 tend to show that it takes a 4 to 14% expenditure of a project’s total annual budget spend to make a meaningful increase in adoption through sales, marketing, or partnerships. This means Pledging requires a substantial pool to achieve true value growth.

How The Model Works

This model is driven by growth capital firms making proposals to large token holders, protocol foundations, or community run token treasuries. The growth stage projects selected should have main net implementations and customer ready software. In other words great projects, that are ready to scale adoption.

Milestones are agreed to by founders, major stakeholders or communities making their pledges in order to attract the best growth capital firms to work on their particular project. This will give more form and substance to tokens pools that many projects have set aside for “business development or promotion of the protocol” but so far have gone underutilized. Just like our piece on evolving airdrops into smartdrops, these growth funds can be better deployed.

Aligned with the milestones from the Pledges, the growth capital firm then deploys expert operators in order to help the project with its milestones, to build sales teams, increase user acquisition, sign enterprise customers, and complete growth milestones with a view toward long term value creation.

The Advantages of Crypto Growth Capital Pledging

  1. Non-custodial — the vast majority of Bob’s tokens he keeps himself, managing his own private keys as he normally would. Bob is only placing a small portion of his tokens (5% in the example) in the hands of a custodian. Compared with contributing capital to a traditional growth capital or private equity firm where 100% of your capital is held by the company, this is a 95% improvement. While custodianship is required for now, it is obvious that over time smart contracts can be developed to provide this trust function, effectively removing the last custodial bit from the model.
  2. Token based — instead of needing to sell tokens for fiat and then paying that fiat to workers, this model selects for experts willing to vest tokens in which they have a long term interest. Much as proof of work mining systems align the interest of the miner with the long term success and growth of the protocol, this model auto-selects for teams that share a vision of token appreciation.
  3. Better aligned — instead of selling off tokens to bootstrap the project or putting tokens into an ecosystem fund to be sold off by the startups given the tokens, the Pledging model allows for experts to vest tokens over a longer period of time and bet on themselves, if you will. The experts’ efforts gain adoption for the project and in turn that builds up the real fundamental value of the project.

Who This New Growth Model Fits

This new model works particularly well for sophisticated large position holders and the treasuries of decentralized protocols because they already have large positions in tokens which they want to hold long term. They are also willing to pledge a portion of those tokens for the growth of the project.

From an investor perspective, we seek signal. Strong teams bet on themselves. At YGC, we look among Pledging offers to deploy our capital as well to further accelerate the pledged amounts. For outside investors too, Pledging signals a growth focus and a path to technology adoption.

David Johnston, Vitalik Buterin, and other judges at the 2014 Bitcoin Expo in Toronto Judging the Hackathon

To attract new capital into blockchain projects, a growing market for services with real points of adoption will help drive token purchases and equity investment. We see inbound interest from endowments, pensions, corporate venture, new family offices, and traditional private equity investors that haven’t had much involvement in the first waves of crypto investments. Many among this cohort are looking at enterprise traction as a signal for long term investment potential. When they adopt, this creates a new pool of stakeholders that can provide future pledges as well.

The Free Rider Problem & Edge Cases

I often get the question, what about the holders of a token who choose not to make a pledge toward and effectively act as free riders and let the large stakeholders, foundation or community treasuries carry the cost of fueling growth? The free rider issue is seen in many industries. In the case of Warren Buffett, he has dealt with this for decades as his reliable analysis and fundamental value-based investing model has made him a figure many investors follow, even mirroring his trades.

One immediate benefit of the free riders is that they may choose to follow in and add their value to the project or more seriously evaluate becoming a customer of the brand or partnering with it given its strong backing. So even while Buffet doesn’t get a direct benefit of a fee or carried interest, he gets the indirect benefit of his companies becoming stronger via their association with him and the perception of him being a kingmaker.

Telethon Time

Your pledges can drive real change. We want to put more crypto in the hands of engaged community leaders, growth experts, middleware developers, API integrators, and other new stakeholders that will help with this next phase of adoption.

I have pledged my portfolio to this model. I am humbled by the others that are joining the call. We have a phenomenal window in 2019 to drive fundamental growth for the serious projects in our space and to attract incredible talent to help.

Pledging offer: Please review The ABC Model below if you didn’t just come from that article. If you think you can help drive enterprise growth, I have pledge funds to share with high performing growth teams. Pledging request: for all the blockchain founders, early stakeholders, and community leaders, please let me know what growth milestones you’d like to hit in 2019 and beyond.

Read Part 1: The ABC Model for Blockchain Adoption

Thanks to friends and YGC team (Henry Liu, Mark Thorsen, and Gavin Gillas) for reviewing versions of this post.

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David A. Johnston

David A. Johnston

Entrepreneur, Investor, Technologist, Voluntarist, Future Martian Settler, & Evangelist for Decentralization.