These were the two key reasons why Sandeep Nailwal, co-founder of Ethereum scaling and infrastructure development platform Polygon, decided along with his co-founders to sell its native tokens worth $450 million to 40 marquee venture firms, including the likes of Tiger Global, SoftBank Vision Fund II and Sequoia Capital India.
Startups in the Web3 space typically prefer to take funds from crypto native VCs as they can provide technical knowledge and infrastructure. Capital is a commodity in the space as startups have the ability to go public on day one, multiple experts have told ET. This round signals the growing appetite among traditional funds to invest in crypto and blockchain startups, even if it means opting for non-traditional ways to invest in these companies.
Polygon’s native token, Matic, has in a span of five years reached a market capitalisation of nearly $20 billion on a fully diluted basis—if all of its 10 billion tokens were in circulation— according to market tracker Coinmarketcap.com.
In an exclusive interview with ET, Nailwal said he was contemplating whether to accept institutional funding or not for the last six months. After all, Polygon’s treasury—funds allocated to grow Polygon’s ecosystem which its founders control—prior to the round held almost 20-25% of the total token supply, amounting to roughly $4-5 billion.
“I was in doubt whether I should do it or not. Do we even need the money? I was even questioning whether we need institutions…but looking at some of the other projects from Silicon Valley and the kind of mind space they were getting when they were not even 10X below us by any organic matrix, I realised that this institutional firepower is required,” Nailwal said.
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In the last three months, Nailwal changed his mind as he sought to grow the company from a daily transaction volume of 4 million to 100 million in the next 18 months.
As part of its institutional round, the company sold its native token at a 40% discount to the average market price, which as of writing this article stood at about $2. The investors have a three-year lock-in, such that every year 33% of the investor’s token will vest.
“We are now going to this new leg of our growth and when we are interacting with institutions, banks, and large financial entities, they don’t understand us, but they understand the language of institutions, when people like Sequoia, SoftBank, Tiger Global, these people are investing in us, that gives them a certain amount of legitimacy,” Nailwal said. “Many of them are going to provide us that institutional mind space, which we as a non-Silicon Valley company were not getting. That’s the reason for that more than the money.”
He said with the backing of these top venture capital firms—which have together supported dozens of unicorns—the company is looking to make inroads into the US, Singaporean and British financial ecosystem, helping the institutions’ portfolio’s Web2 startups transition to Web3, and working with Fortune 50 and Fortune 100 enterprises.
Apart from that, the funds raised give each of its eight product offerings a runway of 3-5 years.
Founded by Nailwal, Jaynti Kanani, and Anurag Arjun in 2017, this is the first institutional round raised by Polygon. It onboarded Mihailo Bjelic from Serbia as a cofounder last year. The company raised $750,00 from angel investors in 2018, and did an initial exchange offering in 2019 to raise over $5 million.
Unlike traditional startups that take decades to go public, Web3 platforms can do so on the first day. Compared to when they started, founders in Web3 space in India will find it much easier to raise capital now, Nailwal said. “For anybody from India or an Indian startup, it has now become easy to raise funds.”
Ethereum, a blockchain whose crypto token is the second most valued in the world after Bitcoin, has suffered from high transaction costs and low throughput rates as the adoption has grown globally, which Polygon’s solutions want to solve through its range of scaling options and low transaction rates.
Ethereum has skyrocketed in popularity for building new applications in decentralised finance and non-fungible tokens, which has made the problem worse.
Nailwal said there was a lot of inbound interest from traditional VCs which are trying to get into Web3 investments in what many founders told ET was a hard space to explain to these funds.
In India too, Sequoia Capital India has made over 20 investments last year.
Other VCs like Elevation Capital, Lightspeed and Accel are betting on the space more so now than before. Overall, startups in the crypto and blockchain space
raked in over $500 million in India last year.
“Many of these funds are trying to invest in other protocols and these protocols are all building on our applications. Many investors actually had some idea about us. Explaining to them where we are going and getting that vision across was the only thing that mattered with some of these bigger ones,” said Nailwal.
“With Masa (Masayoshi Son, the chairman and CEO of SoftBank), I think that rung a bell with him that we want to become Amazon Web Services of Web3,” he said.
Indian tax
Tax regulations proposed by Finance Minister Nirmala Sitharaman for the sector in the budget
have raised a lot of questions.
Nailwal said that DeFi and other Web3 startups are building for the globe from day one. So, if the tax regime isn’t favourable, it could continue to erode talent and companies from India.
“DeFi startups or any protocol startup doesn’t really need to be in India… So, that’s why the government needs to have crypto native people in their teams who are devising these taxation strategies for web3 companies. Because, otherwise, it will be either it will be imbalanced in either direction.”
Ecosystem fund and growth ahead
The company has been aggressively hiring as it sets out to grow further. It plans to nearly double its team of 250 this year.
It recently hired YouTube’s head of gaming, Ryan Wyatt, to oversee Polygon Studio. It has also earmarked $100 million for acquisitions from its latest funding.
Last year, the platform acquired Hermez, a decentralised zero-knowledge (ZK) rollup and Mir protocol, for $250 million and $400 million, respectively, as part of its earmarked capital for ZK scaling strategy. Polygon has a $100 million Ecosystem Fund and has already deployed $15 million across 50 global teams.
“The goal of this fund is to basically incubate and promote the teams which are building on Polygon and give them that initial support so that they can go on and raise from other investors and the company,” Nailwal said. “We believe that Ethereum has emerged as the settlement layer of entry and Polygon will be the transaction layer. For example, it is basically the Paytm of banks.”
