ConsenSys: Sustainable business or billionaire’s folly?
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This is the second part in a series looking at ConsenSys. The first part can be found here.
How does ConsenSys fund itself?
The subject of ConsenSys’s funding rears its head on a regular basis. Many speculate that it is bankrolled by majority owner Joseph Lubin, someone who Forbes have estimated has a personal wealth of between $1–5bn (claims Lubin denounced as having no basis in reality). Others estimate ConsenSys’s annual to be c. $100m a year, wondering how a young company with no external investment could otherwise fund itself. Lubin himself stated on a 2016 podcast that ConsenSys was “internally funded by private investment” and has previously said that he has sold some of his ETH holdings to fund the company.
As a private company, ConsenSys does not have to disclose financials, so these will remain mere conjecture. I would expect its annual expenditure to be in excess of this $100m estimate now. With over 1,000 employees, if we assume an average salary of $100k then we arrive at $100m in salary costs alone. Given the supply/demand imbalance for blockchain talent, I suspect that this $100k figure is on the low side.
Despite these high costs, it is also eminently possible that ConsenSys is less of a cash drain than many contend. Most perceive the firm as generating no revenues, something that is likely not the case given the firm’s three routes to income:
ConsenSys business lines
Stakes in ConsenSys projects
Lubin noted recently that some of its business lines make “small amounts” and some make “big amounts”. The strong business lines (such as the Diligence, Solutions and Capital arms) operating in high margin fields likely subsidise other areas of the business, with Lubin confirming that the consulting branch alone makes “tens of millions of dollars”. These will likely be drivers moving forward, and represents ‘real’ and replicable business which can be sustained.
However, what is less clear is how much of that is ‘real’ business right now and how much is business being won due to aggressive inducements typical of a firm growing fast.
Lubin noted in a piece last December that “we can’t help but move into the black anytime soon”, stating that a number of projects were expected to start generating revenues shortly.
The other benefit of having so many different inter-dependent entities in the mesh is that they can cross-sell across projects. For example, Token Foundry has been used for several ConsenSys ICOs, including Virtue Poker and Civil and is partnered with many ConsenSys entities:
This cross-pollination occurs across the mesh projects and keeps revenues in-house whilst likely reducing costs.
In a similar fashion, SingularDTV outlined prior to its ICO that it would use generated funds to purchase a stake in a fellow mesh project that ConsenSys also held an investment in, Ujo, for $2m (again, the team declined to comment if this investment transpired- I could not find any confirmation it ever took place). There are many ways in which the companies interoperate, beyond a mere technical perspective.
Secondly, although the company declined to clarify for this article the extent to their equity holdings in mesh projects, Lubin confirmed previously on ConsenSys’s own ‘State Change’ podcast that ConsenSys have “equity in all of the different quasi-independent, yet interdependent, projects” in exchange for financial assistance.
One early example of a ConsenSys venture being spun out was BlockApps, which had a pre-Series A funding round led by Fenbushi Capital and including investors such as the Novogratz Family office back in August 2016.
Again, ConsenSys didn’t clarify if it has sold down any of its stakes or if there have been any external investment in a similar manner to BlockApps, but at the very least this equity will presumably sit on the balance sheet for future sales.
Finally, the third avenue of revenues for ConsenSys came in the ICO rush of 2017/18. There are at least seven ICOs in the mesh posted previously:
Civil and OmegaOne have postponed or failed to meet their ICO target so will be ignored for now. Virtue Poker has concluded its ICO, raising $18m, but has not yet made tokens tradeable. There are other ICOs which could be included such as adChain (a joint venture between MetaX and ConsenSys) but which have been excluded for simplicity. Of the rest:
AirSwap: Raised $20m in presale and private purchases prior to the ICO, then raised a subsequent $12.8m at ICO. 10% went to advisors and partners, 13% to ICO buyers and 15% to presale buyers. AirSwap still has 38,908 ETH under its control.
Gnosis: One of the more infamous token sales due to the model used, only 400,000 GNO tokens were sold out of a total of 10m, leaving the remaining 9.6m in the hands of the team. The sale raised $12.5m — 250,000 ETH. Gnosis still possesses 190,121 of this ETH.
Grid+: Raised $29m in its oversubscribed presale, a total which rose to $38.5m following its public sale. Current circulating supply is c. 40m. There are a further 141m tokens currently locked up (with 90m of those due to be unlocked in the next fortnight).
SingularDTV: An early ICO back in 2016, SingularDTV raised ‘only’ $7.5m but due to the comparatively low price of ETH at the time this amounted to over 585,000 ETH, with 224,000 remaining.
It is well known that owning a token does not entitle you to a share of the company assets. But as ConsenSys has a more direct investment in these projects (Gnosis’s FAQ states “ConsenSys [holds] equity in the Gnosis entity and vice versa, Gnosis founders and early employees will hold equity in ConsenSys”), it is reasonable to draw the assertion that ConsenSys likely would have a claim on the assets of the projects. Again, ConsenSys declined to comment if this was the case.
The ETH holdings of just these 4 projects alone runs to some 500,000 ETH. If we assume ConsenSys has just 10% equity in each company, that would run to 50,000 ETH or c. $10m at current prices (or over $70m at the highs).
ConsenSys would presumably have also received tokens from each project like other investors. It is hard to assign an exact amount to this, but if we similarly assume 10% then that would amount to $900k currently in AST, $1.7m in GNO, $600k in GRID and $1.1m in SNGLS.
While paltry now, these sums would have been worth at their all time highs roughly $26m, $44m, $11m and $26m for a combined total of $107m. Again, unfortunately these are ballpark estimates which could be substantially off. Furthermore, there is no way of knowing if or when ConsenSys may have divested its holdings.
Furthermore, ConsenSys personnel would have presumably received tokens in their personal roles as advisors (ConsenSys declined to answer). By project these include:
AirSwap: Joseph Lubin
Gnosis: Joseph Lubin and Jeremy Millar
Grid+: Joseph Lubin, Mike Goldin, John Lilic, Matt Corva and Patrick Beraducci, as well as Igor Lilic who is the cofounder and CEO of Cellarius, another mesh project (only one of the advisors, Jeffrey Char, is not from ConsenSys)
Virtue Poker: Joseph Lubin and Andrew Keys
Lubin is also an advisor on Civil, as is Amanda Gutterman. Both are also advisors on OmegaOne. SingularDTV is slightly different, as Lubin is both co-founder and CTO of the project. Lubin and Millar are both advisors on the spun out BlockApps and likely many other projects too.
Virtue Poker assigned 4% of tokens to advisors. Divided equally between the eight advisors listed in the whitepaper, that would mean 0.5% of tokens per advisor, or roughly $90,000 per advisor at ICO rate. While the other projects are less clear on distribution to advisors, it is likely to be a similar proportion (this would be in line with wider crypto projects). It is possible that at token highs, these advisor fees could have been in the millions (obviously subject to varying vesting rules).
A High Growth Company
There will be some reading this who will be thinking this is outlined in order to suggest that ConsenSys has been duplicitous or taking advantage through dodgy ICOs. That is not the case.
In fact, it could be argued that the number of ConsenSys backed ICOs is substantially below the rate of the wider ecosystem. Even though some of the projects do not lend themselves well to an ICO, there are many infrastructure-based projects which have done token sales. Furthermore, SingularDTV and Gnosis were in development well before ICOs rose to global consciousness. If a criticism could be made, it is that ConsenSys backed projects seem to retain a higher than average proportion of token supply.
Much of the above relies on estimates and guesswork. Ultimately only those at ConsenSys know the state of their finances, but the above was intended to highlight that ConsenSys isn’t necessarily a business burning through a billionaire’s capital. It would not be surprising if it has generated substantial revenues already (whether ICOs are a replicable/sustainable business model is another matter, but given ConsenSys’s connections one would suspect they will be at the forefront of future developments in this space anyway).
In fact, in an interview published after I had already finalised this article, Lubin confirmed that:
We’re still in the burn. We’ll probably be that way for a long time, just because we’ll continually invest rather than try to extract profits. If you [were to] consider some of our token launches revenue, then we’d actually be profitable, but a lot of those tokens are things that we’re going to keep frozen for a long time. If we calculated everything, then yes, we’re above zero. (Joseph Lubin, Breaker Magazine)
So I guess this article was kind of pointless, because that pretty much sums it all up.
Disclaimer: Of the tokens mentioned in this article I have previously held AST . I do not hold or intend to purchase any of those mentioned.