A crypto startup backed by legendary VCs Peter Thiel, Alan Howard and Louis Bacon is buying back shares from its seed investors in a round of ‘share buybacks’ that will massively inflate its valuation – at least on paper.
Block.one, a crypto startup that raised $4 billion during one of the most successful ICOs in history, has decided to pay back (some might say pay off) its earliest investors by buying back their shares – initially purchased for about $22.50 – for $1,500. That’s a staggering 6,567% return, spread across two years. By comparison, bitcoin climbed 1,900% between the beginning of 2017 and its peak in December.
While it once promised to build a new ‘secure’ version of the Internet, Block.one hasn’t done much with its massive mountain of capital. Aside from a few venture investments, the company has invested the bulk of its capital in Treasury bonds and a portfolio of cryptocurrencies.
Block’s founders insist that the money is being put to good use. The company is building out its new ‘secure’ version of the Internet, as well as a social media product that the company plans to release in June. The company has also made $174 million in venture investments, a fraction of the $1 billion in investments it has pledged to make.
Still, critics have accused CEO Brendan Blumer of creating a vehicle to ‘hoover up’ investors’ money’.
“They designed a very clever mechanism to hoover up as much capital as possible,” said Richard Burton, San Francisco-based founder of Balance.io, a blockchain company that designs applications for open source financial products. “Bitcoin was started on a shoestring and Ethereum raised just a few million dollars, which goes to show you don’t need anything like the money Block.one raised to launch and scale a successful network. It should be beholden on them to explain why they needed that much and what they are doing with it.”
So as Blumer tries to defend his reputation, he has apparently hit on the strategy of a stock ‘buyback’ that will value the company at $2.3 billion, up from a $40 million valuation from its 2017 seed round.
Block has tried to portray the buyback as a bid for legitimacy, but there are some who aren’t convinced.
“A private buyback of this sort signals to me that the company believes that there are few growth opportunities in sight, or badly wants to consolidate ownership and avoid outside scrutiny,” said Nic Carter, a partner who focuses on blockchain at investment firm Castle Island Ventures in Boston. It has not invested in Block.One or EOS tokens.
We wonder: Will ‘share buybacks’ or ‘token buybacks’ become a sign that high-flying ICOs that raised hundreds of millions, or billions, off the strength of a white paper and a convincing pitch have given up on their ambitions? Unfortunately for those who bought in during the token sales, not everybody can receive a payout at a massive premium. If anyone walks away with a profit, it will be the biggest valley players who bought in on the best terms.