Venture capitalism in the metaverse – a look at risks and opportunities

Greatest of all Time

Cypherpunk Holdings recently announced its strategic investment in MetaFi platform developer GOAT (a.k.a ‘Greatest of all Time’). Discussions commenced in early November 2021 and, with funding finalised, GOAT formally commenced operations in December. Under the leadership of Phil George and Wayne Hughes, GOAT is developing a platform that enables digital natives (‘metazens’) to manage their content, assets and revenue streams in the metaverse. Starting out with Axie Infinity and recruiting players from the Philippines, GOAT adopted an aggressive metazen-centric growth strategy that saw it deliver staggering numbers over a very short period of time.

“Metazen – A digital native who lives and earns across the metaverse.”

Player Progress: 

  • GOAT has partnered with 1700+ Gamers.
  • Expanded into Pegaxy (Metaverse Horse Racing) which is currently producing an ROI of ~50 days per asset.
  • Unlocked ~$3.5M+ current annualised revenue in the initial 70 days.
  • Grown discord community to over 13,000 members.
  • On track to produce (an additional) $3M+ annual recurring revenue in February.
  • Expanded our Player operations into the Philippines, India, Indonesia, South Africa, Morocco, Egypt, Chile, Argentina, Venezuela & Brazil and growing.

Platform Progress: 

  • Continued development of GOAT Pay & GOAT Play (Currently deployed for Payment Automation and Player Management)
  • Automated Payments Platform Beta is being expanded to account for Real-Estate & Fashion Leasing and Ownership
  • PlayNow, PayNow moved into beta (more to come) 
  • The Platform has now facilitated over $250,000 USD in automated payments between asset owners and players.
  • GOAT now has over 25 Managers globally and 8 Core Team.

Not bad for two months of work.

Truth be told, in making our entrance into the metaverse, Cypherpunk could not have chosen a better project to partner with. Thing is, almost everything looks and feels like a ponzi in the beginning. So how to tell the difference? How do we do things differently at Cypherpunk to create compelling value for HODL-nation?

Meta-what?

Don’t feel bad if the metaverse feels confusing. It perplexes me just as it perplexes anyone else who is honest about it. The absence of terra firma when it comes to definition shouldn’t come as a surprise – the metaverse doesn’t exist…or at least not to the extent it’s being sold to us by zealots. Conceptually grandiose but substantially lacking, the ramifications of ‘metaverse’ and ‘web3’ – and the promise of new monetization streams – have nonetheless piqued the interest (and concern) of Silicon Valley. Facebook felt jolted enough to rebrand itself! Serious VC money is pouring into the sector. Love it or loathe it, the metaverse has become too big to ignore…for now.

Google search – relative popularity index for ‘metaverse’ and ‘NFT’ over 12 months.

The term was coined by Neal Stephenson in his 1992 sci-fi novel ‘Snow Crash’. Stephenson’s metaverse was a black, featureless spherical planet upon which real estate was owned and developed by mega corporations. Similarly, the metaverse in the age of cryptomania is conceived as an extra-physical reality – virtual and augmented – in which life, human experiences and commerce could thrive. It is envisioned to not only facilitate but also to drive the interactions that define how we work, rest and play. 

Arguably many aspects attributable to the metaverse already exist in web2. You can’t eat a burrito in the metaverse but you can order one via Menulog, have it delivered to you and then post it on socials. The metaverse is an information organisation layer, designed to help coordinate and organise our lives and become the bedrock to our services economy the way roads were the bedrock to the Roman empire. To achieve this, entities within the metaverse must leverage the self-sovereign nature of web3 to enable users to own and earn from their data. Web2 does not allow this since the infrastructure is centrally controlled by Silicon Valley big tech and that ownership of the ‘roads of the internet’ allows these megacorp to rent-seek and profit from user data.

The wheat from the chaff

With opportunity, and the color of green, comes rampant fraud and greed. I’m not weary of the metaverse, however, I am wary of it – not for what it is – but for what it brings out of the woodwork. With so much liquidity sloshing around, Cypherpunk has noticed a spike in the number of ‘founder’ enquiries coming through our pitch channel asking for money. Most of these ‘projects’ amount to nothing. There’s no swequity, no business plan, but otherwise the pitch is full of buzz and fervor. Most VCs are disciplined enough to sort through the noise but occasionally the odd vapor-project makes it through screening to eventually bleed investors. 

Much work needs to be done to figure out what aspects of the ‘metaverse’ would make commercial sense. Founders and content creators first need a viable product to work towards. I don’t believe we have that yet; to say that the industry is still very much in its infancy is an understatement. Facebook’s VR initiative is a garage project at best – creating immersion and value is incredibly difficult, within and without the metaverse. We have yet to arrive at a point where there exists a genuine and sustainable willingness to pay for the kind of services envisioned. We can’t even agree on what ‘metaverse’ is. Nor do we have agreement on the standards and protocols for web3. 

Something that holds promise is NVIDIA’s Omniverse. The product vision is to transform the way we work – from interior design to animation and sound to designing a factory floor from the ground up. Unlike monolithic enterprise resource planning systems like SAP R/3, Omniverse is designed for broad appeal and provides different experiences based on the nature of the user – content creators, designers and app developers each have a separate user journey and experience when they interact with the Omniverse. But ultimately it is a productivity optimisation tool and, as such, lacks the aggressive impulsive habit build that social and gaming apps possess.

Like Omniverse, GOAT shared a user-centric design philosophy. The robustness of GOAT’s business contingencies and sound implementation plan gave Cypherpunk the confidence to invest. Note that:

  • GOAT achieved phenomenal growth right out of the gate over a very short period of time in only having deployed players to a single game – Axie Infinity.
  • The growth happened right in the middle of an aggressive crypto correction which more than halved the take home pay of players (with SLP continuing to fall).

Players who earn SLP in Axie convert to USD which becomes their crypto gig economy wage. Despite having lost two thirds of their take home pay, GOAT’s player base growth has only accelerated. This speaks to the emphasis on player welfare and player excellence in GOAT’s growth formula. While many projects in the metaverse focus on curating NFTs, GOAT’s founders instead built their entire platform around player autonomy and digital self-sovereignty.

The metaverse is an incredible opportunity – yes – but any and all who take metaverse seriously and back their resolve with serious money are highly selective, methodical and circumspect in who they choose to work with. Likewise, Cypherpunk works with handpicked founders who we would be proud to call partners. Our partners have go-to-market proposals that are narrowly-focused to surgically target specific facets of the space and scale use cases along these narrow and deliberate trajectories. Grand ideas can become reality. The adoption and integration of augmented reality (sight, sound and touch to begin with) into everyday experiences like shopping, work and entertainment will be analogous to the dotcom era – an industry of giants built on mass graves of failed projects. But the minimum viable go-live solution cannot be all-encompassing. The survivors know how to preserve capital; their launches are often dirty and bootstrapped – but works. And from that imperfect beginning, they refine as they scale. Those that expend treasure for that silver bullet moment have very low odds of survival. The public only sees the winners but we, the VCs, see the mountain of failures upon which their success stands.

Crypto is in sharp correction. Greed has largely dissipated, replaced by fear. For companies like HODL – with a light footprint and a clean balance sheet – this is the perfect moment to start thinking about the problem and acting decisively when opportunities present – opportunities like GOAT. To succeed in metaverse and DeFi venture capital, one must be purposeful, methodical and well-studied. Cypherpunk is all of the above.

Lessons to date

Presently, it looks like the quickest path to web3 and metaverse adoption is via crypto games and social apps. And believe me the development effort across metaverse projects isn’t focused on immersion right now – it’s on addiction and financial incentives.

I read this thread on Twitter the other day. Here are two posts that resonated with my own startup experiences…

“Most product ideas are Dead On Arrival because the conditions to derive value are impossible to orchestrate. Getting 7 adult friends to install an app on a reproducible basis is non-trivial. If you can figure out how to do that, that’s a bigger idea than your original concept.”

“If you can’t use your app from the toilet or while distracted—like driving—your users will have few opportunities to form a habit. There is a graveyard of live video apps that didn’t make it because of the attention they require.”

The essential properties of a successful product are (1) reproducibility and (2) habit-forming…even if it is toxic. HODL is more than just an investor and a source of capital for projects. We advise and help platform developers build reproducibility and habit-forming into their product in an agile fashion because (as product developers ourselves) we understand that 9 out of 10 ideas will fail and fade into irrelevance. So if failure is unavoidable, even healthy, then fail often and fail fast. Non-critical failure is simply the (sunk) cost of doing business.

Here’s an example of a successful metaverse interaction. When the Trump team accidentally booked Four Seasons Landscaping instead of Four Seasons the hotel to do a press conference, an out of work graphic designer nicknamed ‘Cooper Tom’ jumped on Second Life (a VR open world chat program) to rebuild that scene and invite his friends over. They recorded the session and it went viral on Youtube and socials. So many users then tried to visit that the server had to be heavily throttled.

Here’s an example of metaverse fail. Remember – it’s very easy to ridicule in hindsight. Walmart worked on something out of left field using only what it knew … and it failed. It can’t be blamed for lack of trying. HODL takes these failures seriously because, beyond the humor, there are lessons to be learned. Recall the two quotes above. There is an enormous amount of survivorship bias in this industry. We see and herald the successes of the few and never realize the mountains of mass graves of failed experiments that had to happen to see those successes through. The metaverse has staying power but in concentrated pockets. We are at the inflection point between reckoning and mass adoption. 

Same but different

When bitcoin rose to prominence in the wake of Nakamoto’s seminal paper, it did so on the back of a global financial crisis. Bitcoin wasn’t the first attempt at creating decentralized money but it had the good fortune of being in the right place at the right time. The fallout from the GFC galvanized enough interest from the disenfranchised to start a movement – and from there the euphoria spread to retail and subsequently to institutions. Crypto had all the messiness one can expect from the creative destruction of talent converging across a multitude of industries and domains. It became a brain drain on other industries, hoovering up their talent, and all that creative dynamism was deployed to build an ecosystem that would become an alternative to centralized finance. It was classic David vs. Goliath and, true to the lore, the Goliath that was CeFi was as cumbersome as it was clandestine. Cryptocurrencies made enough noise and drew enough old money blood to eventually warrant its own Congressional hearings [1] [2]. And a separate hearing on stablecoins is in the works. In hyperbole, crypto and DeFi were the forces at the bleeding edge of innovation fighting against a fossilized but formidable incumbent.

The metaverse presents a new set of dynamics. It is the Wild West. There is no suitable analog and few, if any, incumbents. Standards and protocols are forever evolving and everyone is fumbling in the dark, seeing what sticks. The winner can easily be a second or third mover; the trailblazers take the risks and the chop. The David vs. Goliath asymmetry no longer exists – everyone starts on the same footing. Founders are competing in an industry that has managed to drain the best and brightest from their former (physics and engineering) day jobs. This changes the race to adoption dynamic quite a bit. My team is of the right calibre and pedigree to take on this challenge. I am confident that we have the right formula and approach to find collaborative opportunities with like-minded partners in taking their ideas from seed to success. What we have achieved in GOAT is just the first step – one of many to come.

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