Pros

· Significant adoption. Telegram is one of the most popular encrypted messaging platforms, with 200M MAUs. This is significantly below WhatsApp and Facebook Messenger (both at ~1.3B MAUs), but sizable for a standalone messaging platform launched in 2013. The platform has become critical for many communities in the crypto space — according to ICO Whitelists, 99% of ICOs use Telegram to communicate with prospective investors.

· Ability to be a transactional currency. Bitcoin was initially envisioned as a medium of exchange. However, given price volatility, high fees, and difficulty in processing BTC, it has primarily been used as a store of value. The Telegram team argues that TON will be used for real transactions, allowing micropayments between users (and businesses) worldwide. If this does happen, it could be a huge business. WeChat, a Chinese messaging platform with a payment service (users can buy things, pay for rides, tip friends, etc. in-app), was reportedly valued at $83.5B in 2015.

· Strong team. The founders of Telegram, Pavel and Nikolai Durov, are experienced entrepreneurs — the brothers previously co-founded VKontakte (VK), Russia’s largest social network. VK was acquired by Mail.RU in 2014 in a deal that valued the company at ~$3B. It’s rare to find a team in consumer technology that has experience building and scaling another successful consumer platform, and speaks well to the founders’ ability to navigate obstacles and capitalize on opportunities.

· Liquidity. Unlike a typical venture investment, where capital is locked up for 5–10+ years, Telegram investors will receive tokens in December 2018. Depending on the round in which the tokens were purchased, investors will be subject to a lock-up period that will reportedly range from 3–18 months. Even at the longest end of this range, investors will have the opportunity to liquidate their stake significantly earlier than a normal venture investment. Some investors are even taking advantage of the opportunity to flip their ICO allocation early, locking in a gain — with some selling coins for $0.60 that they purchased at ~$0.30.

· Unique form of crypto exposure. We’ve heard from many venture investors that they are looking to get exposure to the cryptocurrency space without having to hand-select specific coins. While TON itself is a coin, investors also get broader exposure to the general crypto market, as Telegram is one of the community’s main forms of communication. This exposure is fairly diverse, as almost every coin has a Telegram channel — we would expect TON’s price to be somewhat correlated with a crypto market index.

Via Telegram’s leaked whitepaper — as of October 2017, Telegram was by far the most popular official discussion platform for current and upcoming ICOs, with 75%+ of these projects utilizing it.

Cons

· Size of fundraise. Telegram will reportedly raise $2.6B through token sales — a significant amount of funding to raise in an extremely short period of time. As The New York Times mentioned, this is incredibly fast compared to some of the fastest growing consumer companies — it took Facebook and Uber seven and five years, respectively, to raise $1B. Even in the crypto space, Telegram dwarfs the second and third largest ICOs, Filecoin (which raised $257M) and Tezos (which raised $232M). Critics have questioned whether the size of this raise is necessary.

· Pre-revenue & largely pre-product. The size of this fundraise is particularly notable given that the company is not yet generating revenue and is still developing the product. Though Telegram’s core messaging feature has significant traction, the blockchain platform that will power micropayments and other decentralized apps is in development. Some crypto experts, including the team at Pantera Capital, have questioned whether the platform will be successfully developed, and argue that the whitepaper is unsatisfactorily vague in explaining the underlying tech. While Telegram promised via investor documents to refund capital if the blockchain platform is not completed by year-end 2019, they later clarified that they may not have all (or any) of this money left to return.

· Significant burn. Telegram reportedly burned $70M last year on server expenses, user verification, security, and employee salaries. This number is projected to increase as the team and infrastructure scale to accommodate the new blockchain platform. According to the leaked whitepaper, Telegram plans to spend $620M in the next four years. If Telegram isn’t able to start generating revenue and spend continues to increase, the company could eventually risk bankruptcy or be forced to raise additional capital at unfavorable terms.

Leaked Telegram data shows the company’s historical MAUs and budget (through 2017) as well as projections for 2018–2021.

· Limited crypto experience. As we mentioned previously, the Telegram founders have twice demonstrated an impressive ability to build and scale a social/messaging platform. However, they don’t have experience building blockchain platforms and haven’t yet hired any high-profile blockchain developers to lead the charge. As far as we can tell from Telegram employee profiles on LinkedIn, none have blockchain-related experience. Telegram will likely need to bring in new talent.

*It almost goes without saying, but another huge concern is regulation — in recent weeks, the U.S. government has been hotly debating further regulation of ICOs and blockchain-related startups, and Facebook and Google have moved to boot ICO content off of their platforms. Team is therefore especially important as Telegram will need the expertise to navigate a minefield of uncertainty.

· Lack of governance. The structure of a token sale is fundamentally different than a traditional venture investment — investors will not receive equity in the company, won’t take board seats, and won’t have the control rights that they typically receive. Investors must therefore feel confident enough about the team and vision to give up many of the provisions that protect them from bad actors and ill-advised decisions.

On the point of ownership, it’s worth noting that owning tokens (versus owning an equity ownership stake) could be positive or negative. It’s possible to imagine a scenario where the platform’s public or private market valuation doesn’t fully capture the value to users. Twitter is often cited as an example of this — though it is incredibly valuable as a network, the company has struggled to monetize successfully and the stock has suffered as a result. In this case, a token that reflects how much users value the platform might be worth more than the comparable equity ownership.

However, it’s equally possible to consider a scenario in which an equity stake would be significantly more valuable than tokens. For example, if the velocity of usage of TON slows significantly, the token could drop dramatically in value. However, outside investors might place more value an equity stake in the company if the underlying technology is still strong or the business has other valuable assets. Even if the value of the token drops to zero, equity owners could sell the business and recoup some of their investment.

Comparables

In the last year, we’ve seen other social and messaging platforms announce the launch of their own crypto coins. Here are two ICOs we’ve seen from more established companies, and how they compare to Telegram:

Kik

Instant messaging platform Kik, which was founded in 2009 and has raised upwards of $200M in venture funding, held an ICO in fall 2017 to raise $98M for a new currency called Kin. This included a $50M institutional pre-sale round, and ~$48M from almost 10k other investors. Similar to TON, Kin can be used for in-app transactions. At the time of the ICO, Kik had approximately 15M monthly users according to TechCrunch — falling significantly short of Telegram’s 100M+ MAUs.

Kin now has a market cap of $167M, with an ICO token price of $0.0001, and a current price (as of 3/9) of $0.00022. Kin has seen appreciation of ~120% since the token sale ended on 9/25/2017. It’s difficult to compare this to overall crypto market performance as many new coins have been spawned since then — but the current top ten coins (eight of which were also in the top ten as of 9/25) saw an average return of 595% (median of 320%) since 9/25.

In terms of the actual crypto implementation post-ICO — Kin is still not available for use inside of Kik, though the company’s website says it is doing a “very early, limited integration” of Kin with a small group of users. The initial whitepaper said Kik would integrate Kin “over time” but gave no specific timeline. Additionally, the company’s founder recently announced that they planned to shift the Kin network from Ethereum to Stellar for scalability.

In their whitepaper, the Kik team suggested a variety of implementations for Kin — including joining VIP groups, tipping friends, placing orders via bot, and getting rewarded by brands for posting about their products.

YouNow (Rize)

Livestreaming app YouNow launched their own crypto platform last fall, with an app called Rize where users can pay each other for creating content in coins called PROPS. YouNow was founded in 2011, and had raised $26M in venture funding before raising $25M in an ICO for the new PROPS platform. At the time of the ICO, Rize (the first PROPS-powered app) was pre-launch, but YouNow had 40M registered users, an average of 60k in-app purchases daily, and $5M+ in quarterly virtual goods sales.

Though distribution of the PROPS coins were slated to take place in Q1 2018, the company recently announced that they were delaying distribution due to regulatory comments to “allow sufficient time for further growth of utility and value” within the ecosystem — so the coin has not yet started trading on any exchanges. However, the Rize app (ex-PROPS token) launched in public beta in February 2018, and the company has three other apps that operate on the PROPS platform already in development. In contrast to YouNow, where one user live broadcasts to an audience, on the current version of Rize all users are live on camera and can join group chats led by a host.

In their whitepaper, the Rize team suggested a variety of implementations for PROPS — including live auctions, social games, singing contests, and viewing parties for big events.

Comparison to Telegram

Kik, YouNow, and Telegram are similar in many ways — all three have the following characteristics:

· Established messaging platform available worldwide

· Didn’t fully develop crypto platform or build out a crypto team pre-ICO

· Plan to integrate the coin for in-platform transactions

· Don’t need a crypto coin to power transactions — Kik and YouNow have both previously experimented with non-crypto digital coins that could be converted to fiat or used for brand partner purchases

In our opinion, Telegram has a few advantages over Kik and YouNow as an ICO candidate:

· Usage of the platform is on an upward instead of downward trend — while Kik and YouNow weren’t dead, usage of and buzz around both has dropped somewhat significantly in the last few years (as illustrated by Google Trends graph below).

· While Kik and YouNow’s core demographic are teenagers, Telegram has a large base of adult users, particularly crypto enthusiasts who are more likely to be comfortable with usage of a crypto coin.

· In the case of YouNow, it’s somewhat confusing to have two independent but similar apps — YouNow and Rize — that are both livestream-focused and feature different in-app currencies. Users may just default to the tried-and-true YouNow if they aren’t able to grasp the crypto framework of Rize.

Conclusion

Our conclusion? We aren’t convinced that Telegram will deliver significant upside beyond the ICO valuation.

If the team is successful, the Telegram platform could power a multi-billion dollar business that facilitates millions of micro-transactions daily. This would be attractive for an early stage venture bet, where we could see the path to a potential 100x return. However, given that Telegram is raising $2B, we have too many outstanding questions around the development of the platform to believe that these tokens will yield a similar return. Telegram has yet to recruit the team and build the platform necessary to launch the TON coin, and as we observed with Kik and YouNow, this can be a many month (or even many year) process. In addition, the team has not clearly outlined these recruiting and product development milestones.

— Justine and Olivia Moore