“Games are a stepping stone,” said Brian Mehler, who runs the internal venture-capital division at EOS VC – the arm of Hong Kong-based blockchain company Block.one.
The first generation of games for mobile phones had huge spillover effects. “Games like Candy Crush got people hooked on using mobile apps,” Mehler told DigFin. “Then banks noticed everyone was inputting their personal data to their phones.”
With a warchest to invest, Mehler is in charge of how Block.one uses its assets to invest in projects using its EOS technology.
Block.one came to prominence in early 2018 when it raised a whopping $4 billion in an initial coin offering (an unregulated capital raise, usually to back the promotion of a digital asset, in this case the EOS token).
That fund-raising was conducted via the crypto-currency ether, the token associated with the Ethereum blockchain. Block.one allegedly switched most of that windfall into fiat currencies before the price of crypto-currencies collapsed in later 2018.
It would make a snappy headline to say Mehler is the man investing the $1 billion that Block.one dedicated to venture investment.
Games are a stepping stoneBrian Mehler, Block.one
He’s not; that’s his boss, Mike Alexander, CEO at EOS VC. (Block.one executives declined to detail their treasury operations other than to say they run a diversified book.)
But Mehler joined the firm in early 2018 and was tasked with running the venture division before Alexander joined in July (Alexander was previously Asia CEO at brokerage Jeffries). Mehler, an experienced private-equity investor and operator, helped Block.one’s management establish the partnerships through which Block.one does invest most of its $1 billion of venture capital.
Today those partners include Galaxy Asset Management, a U.S. digital bank; FinLab, a German fintech investor; and SVKCrypto, a globally dispersed investor in blockchain and crypto-currency technology. They account for about $700 million of the total $1 billion VC pot.
Today Mehler is responsible for running the internal EOS VC portfolio. Which at approximately $300 million is still very big, particularly when he co-invests in deals sourced by the firm’s partners.
“For six or seven months, it was just me, running a $1 billion fund,” Mehler said.
We want to see companies use blockchain to improve settlement timesBrian Mehler, Block.one
(The gist of EOS versus, say, Ethereum is that it operates a hybrid model of incentives that are only partly decentralized; the result is a blockchain network that is faster and more scalable, but with different security and privacy features versus those of a fully public blockchain: see here for a background on Ethereum, here for one on blockchain, and here on EOS.)
The firm wanted to spread its funds among partners partly because it is pursuing decentralized computing, and therefore wanted to pursue a decentralized model of investing, too. Galaxy and FinLab in particular have lots of finance-industry connections, so they focus more on explicitly finance-related projects.
The long game
But Mehler and EOS VC’s direct investments reflect a different approach to the eventual mass adoption of blockchain as a technology underlying everyday commerce.
One project, for example, is what Mehler terms a ‘non-fungible token’. This is designed to solve a problem in gaming: you buy (with fiat money) something in one game – a magic sword, or an avatar skin that makes you look like Brad Pitt (not to be confused with a DigFin editor) – but you can’t transfer that item to another game. (A problem DigFin considered here.)
In language that financial execs would understand, gaming doesn’t have standards.
A non-fungible token is meant to allow compatibility and develop standards, using smart contracts under the EOS framework. Mythical Games, a company set up by the creator of the highly addictive shoot-em-up Call of Duty, is working on a solution using EOS (with EOS VC investing via Galaxy, along with other backers including OK Coin and Fenbushi Digital).
How to mainstream blockchain
“Games lead to mass adoption,” Mehler said. “It’s not about trading tokens. It’s about the underlying technology that removes a pain point.”
He believes games will move to small transactions and payments – by making, say, online ticket sales trustworthy and immutable, with smart contracts guaranteeing delivery versus payment.
EOS VC is working on this type of solution with a company in New York that Mehler declined to name. But from games it’s but a small step to much bigger payments for, say, airlines or other mass-market corporations. Eventually this will reach financial transactions – authenticating a consumer or a merchant, keeping track of everything that’s transacted, making it all transparent to consumers and sellers.
“We want to see companies use blockchain to improve settlement times,” Mehler said. “Transactions already take place instantly, but but settlements are slow, because there’s a lack of trust.”
But for specific financial applications, Mehler pointed to partner funds such as Galaxy and FinLab. “Block.one is not envisaging the future of banking,” he said.
A few other takeaways
- EOS VC invests across the deal curve, from seed to Series D, including a $30 million Series D investment in Everpedia, a for-profit company running an online encyclopedia (founded by one of Wikipedia’s co-creators). EOS VC’s coinvestments with its partners are not so much about getting a bigger allocation, Mehler says, but to show Block.one’s commitment to the underlying project.
- Companies developing projects that provide services or functionalities attract a higher valuation than a dApp (decentralized application). For example, a company making it easy for people to access a service can scale that to other protocols other than EOS; a dApp’s addressable market is smaller, and the dApp has to prove its popularity.
- It’s hard to put a value on these companies because none has a long track record and there’s no more than 10 years separating any given project from another. Sometimes small, publicly listed companies can serve as a benchmark, but not enough to project discounted cash flows. In general, says Mehler, “Valuations rise because your project is making someone operate more efficiently.”
- He does not compare blockchain to the internet of the 1990s; he compares it to the Apple app store of 2008, when the iPhone made its debut. The only apps available were static experiences and rudimentary. It took games to get people addicted to their phones – and comfortable with using them to spend money and interact with strangers.
- For this reason, it may not make sense to ask whether there is an Amazon of the blockchain world. Mehler says comparing blockchain today to the 1990s internet is wrong because it ignores so many dot.com failures. For example, in the 1990s, many startups had great ideas for undercutting brick-and-mortar retail. But they failed to account for the price of oil, which affects jet fuel prices, which affects the price of shipping. The online sellers had to compete by offering free shipping and free returns, and a hike in oil prices wiped them out. Mehler implies (without explicitly saying) that today’s blockchain startups are likely to meet a comparable fate. If there’s an Amazon for blockchain, though, he reckons it’s in data underlying healthcare and drug R&D – but it will take years and very deep pockets to see who wins.