ApeCoins
Image: BAYC; Protocol

DAO as I say, not as I do

Protocol Pipeline

Hello and welcome to Pipeline! This week: how to Ape like a pro, Instacart’s valuation drops and a changing IPO market.

Will VCs want to ape ApeCoin?

Yuga Labs’ ApeCoin experiment could point out a Web3 way to democratize access to VC-backed startups. Or it could be the glaring example that brings the SEC in to spoil the DAO party. Either way, expect more debate about whether Web3 is really decentralized, or just a technological coat of paint on the old Silicon Valley model where insiders profit off of outsiders.

Who’s behind ApeCoin? That’s the $3.5 billion question.

  • Yuga Labs is the creator of Bored Ape Yacht Club, the wildly successful NFT project. It also recently bought the rights to CryptoPunks, Meebits and others and raised $450 million in equity funding from a16z’s crypto fund and others. Yuga Labs also announced a new metaverse project, Otherside.
  • ApeCoins were issued in an airdrop to a variety of parties, including Bored Ape NFT holders. Airdrops are a common way for crypto promoters to get people interested in new coins, because they can be targeted to people who already own specific tokens.
  • But it’s not purely for the NFT holders. A full 38% of the DAO’s tokens are allocated to insiders: Yuga Labs (16%, with 6.25% of this going to charity), Yuga’s founders (8%) and launch contributors (14%), a category that includes Yuga investor Andreessen Horowitz.
  • A DAO and a foundation sprang up to oversee ApeCoin. The foundation’s board is Alexis Ohanian, FTX executive Amy Wu, Maaria Bajwa of Sound Ventures, Yat Siu of Animoca Brands and Dean Steinbeck of Horizen Labs.
  • Yuga is quick to assert that ApeCoin, the ApeCoin DAO and the foundation are separate from Yuga Labs, whose only ostensible link was the gift of an NFT and its IP to the Ape Foundation. Yuga is a “community member” in the DAO and will use ApeCoin as its main token for its projects. Andreessen Horowitz was given an allocation because it was a key contributor to launching ApeCoin, according to Yuga. A16z is the only BAYC investor that is a launch contributor.

The line between centralized and decentralized is blurry, but crucial. That’s why ApeCoin might end up being such an interesting test.

  • Handing governance over to a foundation or a DAO is a familiar approach in crypto, where a startup will create a protocol and issue tokens, but cede control over time to the broader community.
  • Investors have gotten savvy to this. Venture firms often get tokens by buying equity in crypto startups and getting an option, warrant or right to tokens if they are later created, says David Pakman, managing partner at CoinFund. Or they just buy the tokens outright, at a low price, in a project’s early days.
  • There’s ongoing debate over how, even whether, VCs should exercise the governance rights that tokens give them.

The SEC isn’t unaware of these token issues. Tokens have been on the agency’s radar for years.

  • Bill Hinman, at the time a director of the division of corporate finance at the SEC, gave a famous speech in 2018 that is credited with acknowledging that bitcoin and ether were not securities.
  • In that speech, Hinman also explained a framework for how a cryptocurrency could become decentralized enough so that it is no longer a security. (He’s now an adviser to Yuga investor a16z.)
  • The key passage: “If the network on which the token or coin is to function is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract.” If there’s no investment contract, it’s not a security.
  • Yuga Labs has hastened to correct anyone who says it issued ApeCoin or created the DAO. Like Hinman’s decentralization model, Yuga says ApeCoin is decentralized. It’s just a coincidence that Yuga plans to adopt ApeCoin for future projects (even though that’s presumably why people perceive value in APE tokens).
  • “As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful,” Hinman said. But is that really the case with ApeCoin?

There’s a crucial difference between tokens and private shares. And that’s that tokens are immediately liquid.

  • The answer is something cribbed from IPOs: a lockup period before the tokens can be sold. Lockups are growing longer, to one to three years after launch, Pakman said. He thinks that “does a decent job of aligning the investor and company.” Some of ApeCoin’s launch contributors have a 12-month lockup plus monthly releases for three years.
  • Still, that’s a much faster path to liquidity than the typical startup. Pakman disagrees: “The idea that tokens simply exist to provide some early windfall for VCs is not really the way most of us view the space, nor is it borne out by the actions of many of the investors and companies with whom we work.”

So is the DAO the new IPO? It does point out a way to profit twice from a crypto investment — once in the company itself, and again in the economy that grows up around tokens it issues. If everyone’s making money, things will probably work out. But what if a company and a DAO end up in conflict — if, say, Yuga dumps ApeCoin for a different token, rendering the tokens effectively worthless? There don’t appear to be any guarantees.

Overheard

“I get a weekly ‘Unicorn List’ email of secondary shares available in notable companies (via a broker). On 10/4/21 there were 32 names. Today there were 103 names ... Probably nothing,” tweeted GGV’s Jeff Richards. “For those who aren’t in the private markets, an increase in people selling secondary in highly valued companies is generally a negative signal. People generally don’t want to sell when things are good/they believe there’s 10X upside.”

LPs are getting worried about Russia exposure, markdowns and the upcoming date of March 31, when valuations get adjusted, says Meghan Reynolds of Altimeter Capital.

Points for consistency? “The great irony is that we are the least Russian fund right now and have been because we made a consistent effort,” DST’s Yuri Milner told Bloomberg Businessweek of his efforts to distance himself from Russia.

A MESSAGE FROM INTEL

In a few years, we may be largely living “on the edge.” As the amount of data grows exponentially, there is a greater need for edge computing solutions to aid in real-time decision-making.

Learn more

Inside track

What to know about token compensation at a startup, according to Paradigm’s Dan McCarthy.

Web3 investor Variant Fund is hiring a consumer investment partner who wants to dig into “marketplaces, NFTs, DAO infrastructure, crypto wallets, decentralized social networks.”

Some takeaways from Ramp’s recent big fundraise from Hustle Fund venture partner Haley Bryant.

Need to know

The IPO market has shifted. Not many IPOs are getting out lately — and bankers are seeking more companies with actual profits.

Sequoia Capital China is raising $8 billion in new funds. It comes despite a downturn in tech stocks and a range of regulatory issues in the U.S. and China affecting China.

Instacart cut its 409A valuation to $24 billion. This was a steep drop from the previous $39 billion. But … this was the 409A price, not the typical “valuation” that is cited in news stories, because the latter is what outside investors pay for preferred equity shares. The change means employees can get cheaper RSUs and more upside in a potential exit, but it doesn’t trigger ratchets like a down round would have.

Lux Capital launched a digital health ETF. The fund, with First Trust Advisors, comes after it previously released a Nasdaq Lux Health Tech Index.

Return of the Denominator Effect? The Wisconsin Investment Board approved a cushion to address the issue that occurs when public-market shares drop while private-market valuations stay high — which can force LPs to cut private-markets investing.

On Protocol: A Ukrainian crypto pioneer’s crusade: “We need to protect our home”

Your weekend reading: Researchers are working on new “contagious” vaccines for animals designed to stop wildlife from spreading Ebola, rabies and other viruses.

A MESSAGE FROM INTEL

As a form of distributed computing, edge computing enables processing to happen where data is being generated. The convergence of 5G networks with edge computing means data is not only traveling faster, but can be quickly translated via media, inferencing and analytics into insights and action, enabling new, ultra-low latency applications to come to life.

Learn more

Thanks for reading, see you next week!

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