Opensea Venture Capital Investment Memo by 1Confirmation

Tl;dr: 1Confirmation invested $2m in Opensea at the seed round in 2018. They shared their investment memorandum on Twitter. Read to understand how a venture capital investor thinks about investing in a company and how they communicate it to their partners and potentially their limited partners.

About the VC investment memo

In April 2018 1Confirmation wrote an investment memo on OpenSea and then shared it on Twitter in March 2021.

About OpenSea

OpenSea is a peer-to-peer marketplace for crypto collectibles and non-fungible tokens. It includes collectibles, gaming items, and other virtual goods backed by a blockchain. On OpenSea, anyone can buy or sell these items through a smart contract.

About VC

Founded by Nick Tomaino and backed by individuals like Peter Thiel, Marc Andreessen, and Mark Cuban and institutions like Horsley Bridge and Runa Capital, 1confirmation is a venture fund that supports exceptional founders fueling the decentralization of the web and society.

Usual caveats

No investment memo made voluntarily public will ever be 100% as it was. The pressure is just too high for VCs to look smarter, and not make founders uncomfortable, etc. I highly praise the VCs that share their thought leadership so we can all learn.

If you’re learning to make a VC investment memo, don’t assume the memos are what you exactly need to do. Information will be redacted. Assume anything “delicate” or sensitive is not in the memos.

The only memo that is 1 to 1 is the Youtube memo because it was in a lawsuit.

OpenSeaVenture Capital Investment Memo

Summary:

 OpenSea is the leading decentralized marketplace that allows people to discover, buy, and sell digital collectibles.

A digital collectible is a scarce representation of a digital good on a blockchain. In the past four months, there has been a boom in digital collectibles as a result of the ERC721 token standard and global ETH liquidity. Cryptokitties was the first project to capture mindshare around this concept and there’s since been an explosion of Cryptokitties variants (see Cryptohorse, Cryptocities, Cryptocelebrities) and other NFT-based games (see Etherbots, Ethercraft). Most of these projects have questionable long-term prospects, but underlying this explosion we think there is something meaningful going on in how people value and utilize scarce digital goods.

OpenSea is building the leading brand to provide discovery and buy/sell functionality and ultimately help bring digital collectibles to the masses.

1confirmation is leading a seed round of [redacted] at a [redacted].

Key assumptions for our OpenSea investment:

 1.) We’re on the precipice of a massive boom in non-fungible tokens (NFTs) and the category will emerge with significant fragmentation. Cryptokitties was the first NFT-based project to gain mindshare (and right now 95%+ of the market volume is Cryptokitties), but we see a world where there are millions of interesting NFT-based projects and a strong need for an aggregator to provide discovery and easy buy/sell functionality for users.

2.) The OpenSea team will continue to be nimble and first to market on adding new NFTs and new features that the crypto community wants and builds a strong brand around discovery and buy/sell functionality. The team was first to market in launching a NFT marketplace and has some mindshare and traction in this nascent market (which is still less than 4 months old). Devin and Alex are scrappy and have a good feel for the crypto community and will have to maintain that in a highly competitive market with well-funded competitors.

3.) There’s a defensible long-term business model here. The nature of NFTs is that there’s relatively low barrier to entry. The team will have to build a strong brand to gain the mindshare and trust of consumers and developers to gain strong network effects and ultimately revenues from fees in the long-term.

Team (8/10):

Co-founders Devin Finzer (CEO) and Alex Atallah (CTO) have done a lot with a little and have proven to be scrappy and nimble in the nascent and fast-moving market. They went into YC with a different idea (Wificoin), but relatively quickly pivoted to OpenSea as they saw the NFT market starting to take shape. They’ve been first-to market in product features and adding new NFTs and are also tinkering with their own NFT-based games (see Ethmoji).

Devin is an engineer and founded a company called Claimdog (acquired by Creditkarma) and also worked at Creditkarma and Pinterest. Former colleagues spoke highly about his work ethic and intelligence. Alex is also an engineer and worked at various startups as well as Palantir.

Former classmates and colleagues also spoke very highly about his intelligence and hustle.

Product (8/10):

 The product solves a clear need for the crypto community right now: how do you discover and buy/sell NFTs. In a category that is 4 months old, there is a long way to go improving the product and a lot of different directions to take the product in the future, but the product solves a clear need now for a small but growing niche of users (myself included).

Community (8/10):

There’s a small but growing community of people interested in NFTs and OpenSea has started to build a strong brand around it. There’s a lot that we can do to push that forward.

Token mechanics (NA):

This is an equity investment. While there is an NFT or token angle which the team could explore for revenue (presales of digital goods), the company will be funded by equity rather than tokens and the primary business model is likely to be fees rather than token appreciation.

Key Risks:

 Competition: There are two more well-capitalized and experienced teams who are also playing in the digital collectibles market Cryptokitties (raised $12M from a16z and USV) and Rarebits (raised $8M from Spark). Cryptokitties is not directly competitive, but could be in the future and is probably competing for talent in the space Rarebits is directly competitive. Devin and Alex are scrappy and nimble, were first to market on the exchange side and are beating them by a significant margin to date, but that could change.

• Defensibility of the exchange: Unlike Coinbase, which has a regulatory moat, there’s not nearly as much defensibility when it comes to NFT-exchange. It’s likely more competitors will enter and we’ll need to figure out how to build a sustainable long-term

Recap (Team + Product + Community + Token mechanics): 8

Overall, we believe that OpenSea is building the right product at the right time, and if the team executes and the category grows like we think it can, the outcome potential is massive.

While there are two other well-capitalized teams that will be competing for talent, mindshare, and potentially customers, we think that by staying nimble and fast-moving in this nascent market, OpenSea can create a strong consumer brand and defensible moat and ultimately bet the winner in the category.

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