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General VC Questions

How to determine markup valuation as an equity investment takes on token investors?

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Dec 28, 2023
We have a portco that we invested in as an equity investor when they were an online experience platform. That business turned out not to be venture scalable. They team pivoted and raised another equity round... then they pivoted again into a blockchain gaming company. That company is doing very well now and they are the leaders in their space and with non-trivial revenue. 

They have now raised $3M more in two subsequent funding rounds from blockchain-first investors who invest on a valuation basis of the fully diluted token value. This is good for company given that it is how their space commonly works. The fully diluted value of the token is substantial and (coupled with the progress for the company) certainly represents a mark up for our equity investment. As early equity investors, we will be receiving a token allocation as well. But determining a reasonable markup value is uncharted territory for us. I'm looking for advice from GPs who are familiar with the blockchain space on how to approach this.

For context, we are entering fundraising mode for Fund II and capturing markups is an important element of the track record we have established. If this situation occurred in year one of deployment, marking the deal at cost would be fine. And that may be the right thing to do in the end. But given that the company has made material revenue traction sufficient to attract several million in additional capital investment, it seems worthwhile to take a minute to understand the implications of what amounts to two "priced rounds" from token-based investors. 
1 answer
Accepted Answer
Dec 28, 2023
TL'DR - leave your valuation policy in-tact and manage these LP communications at the newsletter/report summary level rather then at the financial level. Each quarterly/yearly report where you include financial statements should be accompanied by a newsletter that summarizes the information. In the newsletter, you can discuss this investment.

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Tokens are considered non-qualified investments in VC funds. Each VC fund can allocate up to 20% of the capital to non-qualified investments. Because of this, as well as several other factors, it's unusual for VC funds to have a valuation policy that also manages tokens. Crypto/Blockchain/Web3 funds generally keep the tokens and the equity separate. The equity gets managed via a traditional valuation policy, financials approach and fund structure. The tokens are often managed by a different valuation policy, custodial policy and often a separate hedge-fund like structure. 

So, you have 2 options here:

1. Setup the infrastructure to handle crypto which is expensive and complicated given that your Fund 1 is operational.
2. Manage the communications with current LPs via your newsletter/report summary and leave everything else in-tact. 

I recommend approach 2. Unless you plan launching a blockchain/crypo/web3 focused fund 2, it's just not worth the hassle to research all this so you can come to the same conclusion.
Thanks, Mike. That's helpful.
Community Member
Jan 09, 2024 8:23pm
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