Messari Daily Newsletter - ConsenSys Good

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The ConsenSys layoffs announced earlier this week seem like short-term bad, long-term healthy news for the company and for the ETH ecosystem.

I continue to think the ETH venture production studio / infrastructure development / enterprise blockchain company is among the most misunderstood in crypto, and I’ve got some intel regarding the restructuring and coming fundraise.

1) Will the slow bleed cripple ConsenSys?

Remarkably, maybe not.

Ben Horowitz tells an anecdote in his new book (I recommend) about how his previous company, Opsware, survived multiple series of layoffs and still managed a billion dollar exit. To put it mildly, that’s a rarity. It’s tough to recover culturally - and financially - when your best people think the company is losing momentum and bleeding out. The A players tend to leave, and you get stuck in the ugly no man’s land of managing B talent, which eventually turns you into an also-ran.

This is ConsenSys’s second high-profile layoff, and I’ve heard a consistent murmur from most everyone I’ve spoken with from the company - current and former. That is, the company is messily structured, but there have been methodical efforts to streamline operations since the initial layoffs were announced in the bear market nadir in late 2018.

I’m inclined to believe ConsenSys could be one of those rare Opsware exceptions, and come out the other side of this much healthier. Two reasons. First, ConsenSys has always been a “mesh” of not-so-related experimental projects, so its public conversion to an infrastructure and tools company (and its spin out of the venture bets business), is healthy. The writing has also been on the wall for the past 18 months, so few internally should be surprised by this. Second, ConsenSys is still the most important company in the ETH ecosystem, and will continue to attract talent that sticks around as missionaries vs. mercenaries. The billion dollar question is whether that’s A talent or B+ talent.

2) The true layoffs are higher.

The headline number that was reported - a reduction of 14% of staff - almost certainly sells short the net effective layoffs at ConsenSys since end of 2018.

I’m hearing there was monthly net attrition throughout 2019 as well. In addition, the positioning of this restructuring as a “split” between a product and investment business, belies what’s likely to happen on the investment side. Venture bets will - sooner rather than later - be forced to raise money, quickly, from outside investors if they are themselves to avoid more layoffs.

This dynamic is more of a black box, but the forced “graduation” from the mesh could look like a continuation of what had been done in early 2019 with many of the existing “spokes." This would probably be net neutral (startups have a natural failure rate), but for the fact jettisoned “other bets” could very suddenly have a much shorter runway. Lots of ETH talent might be coming to market worldwide from ConsenSys spokes unable to attract additional funding.

This isn’t alarming to me. But I do find it hard to believe the investments business is going to be a powerhouse investing vehicle vs. a distressed asset investment bank that works to ensure its non-core underwritten projects raise outside capital.

3) It’s likely ConsenSys closes a $200 million round, but the company is not a unicorn.

The company’s stated goal is to raise $200 million, but that’s probably going to come in at between $400-600 million pre-money ($600-800 million post). This would be the company’s first outside capital raise, but it doesn’t come from the 2017 position of strength they might otherwise have enjoyed. ConsenSys is apparently doing something like mid-$40s million in revenue, with the vast majority coming from consulting contracts through its solutions group (lots of Enterprise Ethereum Alliance customers) vs. the software businesses.

The company's goal is to gradually shift consulting contracts to software solutions, but that’s easier said than done, takes a long time to pull off, and investors don't give you credit for that on valuation. The company isn't getting a 20x revenue multiple off of that type of revenue.

An interesting quirk here is that founder Joe Lubin has otherwise been funding the ~1000 person operation (maybe slightly smaller now) out of his own pocket via ETH *loans* to the company. The company’s net burn (and thus, net sales) has been somewhere in the $100 million range annually. As part of any outside investment, I’d have to imagine all of Joe’s ETH loans to the company are forgiven, and ongoing opex is paid for in good 'ole USD via what will look like a more traditional balance sheet.

4) Good for decentralization, good for net selling pressure in ETH.

A cynical way to look at ConsenSys’s company structure (and ETH treasury black box), is it’s a liquidation of Lubin’s ETH margin position, and a democratization of his personal ETH war chest. Those coffers were previously rumored to be in the 5-10% range of total ETH supply, which would be $1-2 billion of tappable capital. Perhaps the balance is now on the lower end.

At $100 million annual burn, ConsenSys related ETH sales (assuming most funding is in fact coming from those liquidations, which is a big unknown) could have tacked on an additional 15% selling pressure to the PoW related new supply issuance in 2019.

The good news is that even with no closed fundraise, or a delayed close, ConsenSys could still fund operations via additional ETH loans for years. If you zoom out, this is all pretty good news for the Ethereum ecosystem.

Talent is decentralizing from ConsenSys. One man’s massive personal stake is likely declining. The most critical infrastructure components of ConsenSys are safely funded. And outside capital could swoop in to reduce net weekly selling pressure in ETH at the same time we know a healthy chunk of supply is about to get locked in the ETH 2.0 Beacon chain.

Any reports of ETH's, ConsenSys's, or Joe Lubin's demise would be greatly exaggerated.

-TBI