Great app, awful ICO
Anyone who is interested in cryptoassets will invariably see the Telegram logo feature on the vast majority of project websites. It has become ubiquitous; there is perhaps no other social media platform as influential as Telegram in crypto. Project subreddits are often barren, their Twitter feeds empty, their LinkedIn or Facebook pages afterthoughts. But Telegram groups are routinely filled with thousands of people, featuring direct communication from developers to their supporters and investors.
Developers frequently communicate their most important information over Telegram first, providing important clues and insights that are impossible to garner elsewhere. It has become an important part of the space and is the first port of call for many seeking information.
It is also a popular app in its own right, with 180m users. It has a particularly heavy following in countries such as Iran, owing to omitting the need to provide a phone number or any other identifiable information when signing up, as well as the ability for 'Secret Chat' (although leading cryptographers have claimed this to be an unproven and insecure communications channel). Pavel Durov, the founder, claimed last year that a stunning 40m people in Iran use the app - half of the population - with 25m considered daily users.
Given the symbiotic relationship between Telegram and crypto, and Durov’s interest and investments in cryptoassets (he has spoken publicly of his Bitcoin investments), it was not a surprise when Telegram announced their intentions for an ICO. Telegram are promising to build a decentralised messaging app, in which the token (‘TON’) acts as the basis for micropayments and services such as file sharing. Through this, Telegram are aiming to take on the likes of WhatsApp and Facebook and become a western WeChat – a one stop portal for all services, including becoming a hub for cryptoasset wallets and exchanges.
What was something of a surprise was the scale they were aiming to achieve; $2bn, nearly 10x the raise of any other ICO thus far. A recent filing with the SEC showed that they have already raised c. $850m from institutional investors in a private presale at a 40-60% discount to the public sale coming later this year.
If this was a standard IPO then $2bn would be a steal, given the valuations of platforms such as WhatsApp and WeChat. But this is not a standard IPO. The ICO gives no voting rights, no share in the company and as such must be judged by the valuations of the cryptoasset market. It is an absurd valuation for the messaging app given no equity in the company will change hands in the sale. It is nothing more than a raise to provide Telegram with the money to continue operating (which Telegram estimate at rising to $100m this year and $220m by 2021) what is currently a loss making business subsidised by Durov.
Although Telegram has been an important part of the ecosystem, the company does not actually have any experience in blockchain itself. With regards to its experience as a cryptoasset project, it is on the same level as any other project which has nothing more than a whitepaper and a pledge to implement a grandiose dream.
It will need to hire staff (the whitepaper noted the team has just 15 developers, but most of these are presumably working on the current incarnation of Telegram and are not blockchain specialists), build out a whole new part of the company and then compete with other organisations in the space. Investors are being asked to put in $2bn into a company with no product on the back of a whitepaper that does not give many assurances the company will be able to create the product it needs in the timelines provided.
Given a lot of the money has come from supposedly clever and well-resourced VC firms, there is a temptation to think they must have spotted something that justifies the valuation. It is just hard to figure out quite what that would be.