Investment Memo on Rarible
I got a glock in my $RARI. A tribute to Fetty Wap + NFT Marketplaces. Sorry, dad jokes.
Today’s writing is a bit shorter. It also has a bit different structure.
As some of you might know, I recently joined Bloomberg Beta to try my hand at institutional venture capital after a history of angel investing. In the nature of building in public, I feel like it’s worthwhile to share that I am now in the process to interviewing at a few firms finding my permanent home in venture capital! A common ask throughout the interview process in venture capital is to write an investment memo on a company you’re excited about. I was recently asked to do this for a firm with a very specific thesis (with a focus on early stage). I was asked to keep it under 4 hours (check) and to under one page (total fail). Anyway, I had such a great time doing it, I figured I would re-jigger it a little bit and share with you!
I chose to focus on the NFT space (non-fungible tokens) out of selfish interest. I find the metaverse fascinating. If you are in need of some background on what that means, I suggest this article. From a 10,000 foot perspective, I was attracted to understanding the NFT marketplace opportunity. Upon doing some digging and running into 10+ opportunities, I narrowed the focus to OpenSea, Rarible or Mintable, ultimately landing on Rarible. Based in Los Angeles and launched in 2020, Rarible is the largest NFT marketplace. If I’m being totally honest, I think the market is big enough for there to be more than one winner. And truly to pick one horse I would need to speak to the founders. I just didn’t have time to do that, yet. ;)
Product: Rarible is an open peer-to-peer marketplace for NFT’s including art, games, metaverses, domains, DeFi, memes and NSFW. Rarible is run on Ethereum and brands itself as the world’s first “community-owned NFT marketplace”. Rarible leverages its $RARI token - which is the world’s first governance token in the NFT field - to power this community-run platform model.
Why this is interesting:
Diversified Digital Assets: The rise of NBA TopShot has proven the demand for digital assets. While there has been a huge rise in NFT marketplaces for art, I think Rarible is interesting as they’ve positioned themselves as a platform for all the different NFT types- domain names, insurance, photography, 3D models, you name it. They are just getting started. While it’s hard to say what the application of digital assets will be in the future (as purely another form of portfolio asset in a frothy market with limited options for the retail trader? in application in the metaverse?) the demand is clear and the opportunity for a seamless marketplace is ripe.
Supply Acquisition Moat: Rarible users are rewarded with $RARI tokens for buying and selling digital collectibles. $RARI cannot be purchased, only earned through active participation. Half of RARI’s total supply is reserved for sellers and buyers on the Rarible marketplace, who will receive RARI through weekly distribution according to weekly purchases and sales volumes. Thus, when you get $RARI you become a partial owner of the platform. This gives you a right to vote in the governance process resulting in a fully Decentralized Autonomous Organization. As a result, creators and buyers on Rarible are not only creating content, music, collectibles, you name it but they are also creating a diversified asset portfolio. As the $RARI value increases, so does their portfolio. Rarible is the only marketplace that allocates tokens to their users which is a unique incentive proposition which would lead any creator to list of Rarible before other marketplaces. This is a big deal.
Community: The Rarible community is popping with a Discord group of over 8k members and over 57k Twitter followers. All throughout Reddit and Twitter you can find stories of how the Rarible community has been a unique value add for creators during the pandemic. Says one artist, Yeli, who earns her primary income from selling artistic NFTs since her restaurant job shuttered in March, “The transition itself was pretty sharp, in the sense of going from a full-time job and making art every once in a while, to having all the time to create and brainstorm and collaborate with other artists.”
Questions on hand:
Application in the metaverse: As we study further the application of visual data in the metaverse, it is easy to see that we are on the cusp of a Web 3.0 where not only is finance democratized but so is buying and selling. These digital assets will have a digital home down the road. Right now, they live in asset portfolios or in gaming universes. What is next?
Visual data analysis: At the end of the day, these assets are visual, not tangible. It’s really interesting to think that you can now put a tangible price on a visual good. What makes a visual asset worth what it is? How can we account for this?
Competitive Landscape: There are a boatload of NFT marketplaces out there. A majority are focused exclusively on art, which is interesting, but the art market is only one part of the potential market opportunity within DeFi blockchain. As you can see, very little funding has been done in this arena.
OpenSea was the leading NFT marketplace for a long time seeing around 500k monthly site traffic, however, Rarible’s incentive program has helped the dapp steal first place. OpenSea is still the #2 marketplace seeing around $3M in monthly trading volume. It is backed by credible investors like Founders Fund and Foundation Capital.
Market (TAM): Fortunately, there are a lot of websites out there that are tracking dapp metrics which leads to full transparency on market demand i.e. Non Fungible, Dapp Radar and even OpenSea Rankings. Some quick metrics to pick out as indicators, in the past 30 days there have been over $150M NFT transactions over all marketplaces. My assumption is that this market is going to grow by 30% in the next 6 months, and 50% in the next 12 months. I think with appropriate execution, Rarible will be able to take up 20% of this market cap in the next 12 months.
Business model/monetization: OpenSea takes 2.5% from the price of a successful sale. I wasn’t able to find Rarible’s revenue cut on their website (and didn’t want to go through the process of listing) but I would imagine it is competitive. On top of taking revenue share, Rarible has other future monetization opportunities like 1) running auctions in order to drive up AOV’s 2) building out an ad platform/model 3) initiating brand/creator partnerships.
Supply: Rarible is self service for anyone looking to sell their own digital assets. They are currently boasting over 20,000 creators and collectors. In order to succeed, they must rely on talented creators that are offering differentiated products i.e. unique art, specialized collectibles and really hilarious memes. They also need to rely on a unique differentiated category offering- expanding to music, tweets and copy content. In order to build the supply side, they must have a referral flywheel that motivates creators to get their creator friends on the platform. Right now the leading incentive in joining Rarible as a creator is the distribution of $RARI tokens on a weekly basis.
Demand: In regards to current traction, Rarible is currently seeing 750k in monthly site traffic. The average person spends over seven minutes on the site and looks at eight pages, which is 2x longer than the OpenSea viewer. The actual revenue metrics for the last thirty days can be seen below.
From my understanding, all sales to date have been without any paid spend (Similarweb as source). This is really impressive. Due to celebrity focused drops and the nature of creator networks, there is a lot of opportunity to grow organically. However, there will be a wall hit at some point where organic traffic and word of mouth begins to falter, in which case they will need to bring on a kick butt growth marketing lead.
Raised to date: As mentioned, they have raised $1.8M to date. But given it is a marketplace, which are risky, it’s good to see traction. Their current lead investors are Coinbase, 1kx and Coinfund. I am assuming their next round (series A) will be highly competitive. Given all current firms are crypto focused, I think the angle to take as a non crypto fund in order to get on the cap table would be to promote diversification and offer to bring a different lense and perspective to the table as Rarible grows.
Goal fundraising: I would guess their next round could be anywhere from a $3-8m raise with a $8-16M pre valuation, which I know is pretty broad. A fund evaluating this opportunity should very obviously consider what sort of exit is needed to return the fund and, as a result, what sort of ownership they would want from this round. This will help determine how much they would put in now as well as allocate for later follow ons.
Risks: I think the obvious question is- what happens when other dapp’s introduce their own coins? I don’t have an answer, but this is something I would want to dig into with the founders. Since they were the market leaders in introducing coin, I would imagine they have a follow up plan in how to continue to build their moat and remain differentiated. I often think about how Tribe Capital speaks to companies that like Carta and n-1, I could see a similar opportunity here.
What do you have to believe: You have to believe this is just the beginning of the NFT marketplace movement. You have to believe that the NFT movement is much larger than NBA TopShots and buying basketball trading cards. You have to believe that people in the next fifty years are going to want to buy digital assets and that this market is going to continue to grow. You have to believe that there is going to be a use case for these digital assets in modern society. This is a really big bet that is just now starting to show support through Beeple art sale, Travis Scott’s Fortnite concert and, arguably, the revenue that Roblox is clearing. I’ll say it’s worth digging into further.