A New Meta: M&A in Crypto

Transcript

Hey everybody, I'm Cavin from the Coin Fund  Venture team and really appreciate you all making out today. We're going to talk about crypto  M&A trends over the last 18 months or so. Um, I'll be brief on my background. I work on the  venture team at Coin Fund. We do seed through early growth investing. And I'll toss it over to  these guys to introduce themselves. Evan. Sure. My name is uh Evan Coleman. I'm the CEO of Cloudburst  Technologies, which is a coin fund uhbacked company. Uh I am previously founded another uh  startup known as uh Flashpoint which is now a major cyber intelligence provider and uh I'm based  in New York. My name is Jeffrey Uba. I am the head of US corporate development at a digital asset  prime brokerage called Falcon X and I've been there for about seven months. I was previously  at Galaxy Digital on the banking side and then

before that I was a traditional investment banker  covering frontier technologies and gaming. My name is Petra Moran. I'm the director of crypto at  Shift for Payments. We're a global payments infrastructure company uh public here in the US  for 26 years. Previously director of crypto at a company called the Giving Block which was and is  the world's largest uh crypto donations platform for nonprofits to accept crypto donations.  Yeah. So, we've got an awesome panel here, a lot of M&A experience. Jeeoff, maybe we could  start off with your role at Falcon X and you could maybe highlight a recent acquisition that  you guys have gone through. Yeah, for sure. So, I mentioned I started about uh 7 months ago at  Falcon X for the express purpose of working on a lot of larger scale transformational M&A  opportunities. Um, we recently uh acquired a derivative shop called Arbalos Markets. And so  one of our thesis is that there's going to be an

increasing convergence of different types of uh  services consolidated within a single platform allow the traditional prime brokerage model. And  so we wanted to beef up our talent on the crypto derivative side as well as the option side. And  so we hired a very strong team in arbolos markets over a pretty long process and they've been doing  quite well uh in this market especially. Terrific. And Evan, you have a unique experience with M&A  as well. Um, your previous company, Flashoint, was acquired. Could you maybe tell us a little  bit about that experience? Uh, sure. Um, I we founded Flashoint back in 2010 and you know, I it  was my first company. I didn't really think much about the exit path to be honest with you. When we  started off, the idea was to build a company. Uh,

nonetheless, at around in about 10 years into  it, we started getting interest from potential acquirers. Uh, there were a number of different  things I learned along the way. Number one, uh you have to plan well in advance for an,  you know, an exit path. Uh some people get lucky and they get exit paths that that come  across their, you know, their desk randomly, but you should really be thinking about this kind  of stuff well into your journey because of the fact that unless you're planning on going public,  you know, the the other option is going to be M&A and you have to be thinking about who would be a  potential acquirer and what the dynamics of that would be. Number two, you have to look carefully  at what the options are that are in front of you.

And what do I mean by that? Uh there are  different types of acquirers. Uh my last company was acquired by private equity. Um that  is different than a strategic acquisition. It's different than than other types of acquisitions.  Uh you have to be very careful with private equity folks. Uh no offense to anyone. You have to  be this is something you have to think about, you know, very carefully because of the fact that  their expectations may not be the same as yours. Um, and if you get acquired by someone  that's looking to take your business and is looking to supercharge it, is looking to  put money into it, is looking to do something, you have to have a plan for what comes next. Um,  a lot of people, they get acquired by folks in private equity and then, you know, they get all  this cash and they don't know what to do, right?

Uh part of that is understanding well in advance  if you had money what could you do with it. Um and part of that a big part of that is partnerships.  Uh partnerships are one of the hardest things in you know startups to organize. It's very hard to  get going. It's very hard to be successful with. But if and when you get to the point of being  acquired by somebody and if they are interested in flooding your business with cash in order to  try to make it something bigger, you have to know what you can do. And part of that is knowing what  other potential acquisitions are there out there and having pre-existing relationships to know  what is going to be profitable, what is going to sync well with your current product, etc.,  etc. Uh, these are all sort of essential things and and you should think about them well well in  advance. That's great advice. And Peter, you were

on the other end of the spectrum at the Giving  Block, which got acquired by Shipfor, which is a public company. Maybe you could take us through  that experience. Yeah, 100%. uh you know Jeff and Evans comments resonate a lot with um kind of the  experience that I had which is Giving Block was I would say you know cash flow positive company in  crypto which maybe in and of itself is a bit of an outlier at least back when we got acquired. Um but  the experience was really interesting because as a strategic you know acquisition for shifur which  is a payments company you know donations were an interesting I would say lane for them but then  kind of to what Evan said the cross and upsell synergies from what we could add value to in shift  which didn't have a crypto business or wasn't serving a crypto clientele previously was actually  very illuminating for me because you know I

thought we were just going to stay in our lane and  then the M&A team said hey actually why don't we build and pivot slightly, you know, to to create  an entirely new, you know, profile of revenue for the business, which I think is something that a  lot of people in the crypto space need to consider as they're thinking ahead of what the kind of  terminal valuation andor like success criteria is for their business. Um, so we were acquired  three and a half years ago. Um, built a book of business that's now servicing like, you know, on  and off ramps, exchanges and the like globally, which didn't exist previously. And you know when  we were going into the discussions around M&A like I would say it was an it was a known unknown. It  was like we can try this but then when you apply the scale of a large public institution to you  know just the tech that we had kind of built and

the knowhow and acumen that we had um it worked  out quite well. So it's been really great and Shiffhore is a very acquisitive company. I would  say in the payment space we're probably in the top five most like acquisitionhungry companies. So  we buy a lot. that is like our growth strategy and the street respects our intelligent use  of capital. Thankfully the the bet that shift for took in crypto was a success or at least I  like to think it was. Um so we can keep trying to do more of that because at least for payments  the intersection of stable coins and this trend that we've probably all been watching unfold for  the last you know 18 months really aggressively but really since anybody who's thought about  stable coins and their potential like maybe had the intuition to see. Um, I think that's  really been heating up and I'm sure in your

business you've seen comps and everything start to  rerate. So, it's a very hot sector for once. Um, three and a half years ago we felt like we caught  the last boat before the bull bare market. But, uh, it's nice to see the pendulum swing back.  Maybe I can add to that please. So, I I've seen it on both sides on the corporate development  side as well as on the sell side. So, the buy side and the sell side. And one of the things  that I've noticed is that revenue synergies are extremely hard to calculate prior to the actual  acquisition, signing, acquisition closing. And the more work that you can do upfront, obviously  as the buyer, but in addition as the seller to try to crystallize what those revenue synergies could  look like, the higher the p the potential purchase

price could be for your for your business.  And it's a it's an old adage that I'm always familiar with from you know my old banking days  is that 70 to 80% of M&A transactions end up being uh economic failures and part of the reason why is  because that synergy realization is not actually fulfilled because there's so much friction in  combining two companies and trying to figure out cultures and not really doing sufficient diligence  prior to entering into that kind of merger or that acquisition in the first place. And so I think  getting the synergy part right up front sets you up with an excellent foundation to be able to  build a lot of equity value for your organization, the combined organization in the future. That's  an awesome point, Jeeoff. I I've heard like three

times from people saying, "Oh, this this is going  to be so easy. We're going to be able to merge these people in within a year, no problem."  Like, and then like six years down the line, it's it's still a catastrophe. So I I I actually  have rarely ever seen anything done successfully. Um, usually it's all so if you're planning on  this, assume it's going to take twice as long as you as you think and it's going to be twice as  hard and things you never counted on are going to come up along the way. Awesome. And so the last  18 months have been a tremendous time in crypto M&A. Before July 2024, we had no acquisitions over  600 million and now there's been 10 billion over the last 18 months. I'm curious what you guys  think changed in the market that enabled this like huge uptick in M&A. And maybe we can start  with you Pedro. What do I think changed? I mean,

I think people finally, at least from my point of  view, like I think people finally understood how to take and monetize the trends and the technology  within crypto that we've known about maybe for a cycle, a cycle and a half. Like it wasn't very  hard to predict that stable coins were going to be transformative. I think it was very difficult  to realize what the business model would actually be to then generate these outcomes for M&A, for  exits, for you know, real revenue recognition. If you think and I'll speak just about shift four,  right? The discipline on the revenue side and the operational side of the business that being part  of a large public company actually like forces on you as a startup that can be a little more  fast and loose is like pretty significant and those expectations are real. I think that it's  really a part uh you know it's partially the

industry growing up. I think we all kind of took  our licks in the last bare market and said we're going to build and we're going to build things  that actually generate revenue which ultimately is the arbiter for a lot of success in many of  these outcomes or at least gets you on the radar for potential acquisition. Um I think the other  component is that we had a different regulatory regime. I think that is you know paramount. I  mean I think even the traditional IPO window you look at things like just the full cycle of you  know capital markets was not really converting. And so now that some of that liquidity is turning  over, we're seeing more interest from traditional markets. And I think inside the crypto markets,  we're seeing a lot of consolidation because now the board is set to like figure out who the  players will be for the next decade, two decades,

etc. Um, and I'm sure you have a ton of these.  We were talking at dinner last night about Derbit acquisition from Coinbase. I mean, a lot of the  stuff that's going on right now is just who is trying to get the right puzzle pieces that you  know maybe somewhat undervalued because they're startups or didn't get respected last market and  now we have the chance to intelligently allocate capital and actually reap the benefit. I think  there's a lot of companies that saw crypto as a very high potential industry, but the businesses  weren't mature enough to buy um or at least not exciting enough to buy because, you know, $5  million AR company is great, but that doesn't get, you know, a large public company who's trying to  move the needle on a multi-billion dollar equity, you know, uh or market cap to jump in necessarily.  And and may I totally agree with that and maybe

I'll jump in with a couple of other points.  So on on one hand, I think that there is a huge FOMO effect as well, right? And there's  a recognition that you need to be able to do at least one of three things. Acquire licenses,  acquire distribution, or acquire rails. And if you're able to do that, you can compress massively  the amount of time it takes for you to get to market across various subsectors within crypto.  So that's kind of one thing that a lot of folks were feeling the pressure from a lack of premium  assets. And so there's asset scarcity of top tier quality businesses that are out there in crypto  that have achieved the license stack, achieved the tech stack, the distribution stack, the user base  that would generate meaningful revenue in the long

term. Another kind of boring uh factor is specific  kind of accounting changes that have happened. So, for example, I think there's SAB 121 uh made it  such that you no longer had to uh mark to market to the downside your your crypto. And so, before  I think what ended up happening was if there you had crypto on your balance sheet and those tokens  uh depreciated in price, you had to reflect that on your financial statements, but you didn't  reflect the, you know, symmetrical appreciation on the flip side. So it was an asymmetrical  negative impact having any type of uh token or crypto asset on your balance sheet. That's  changed so that you are reaping the benefit in

both directions. So if there is price depreciation  that's reflected on a marktomarket basis. If there is price appreciation, that's also reflected. And  so there's less of a of a negative impetus and it's actually encouraging more, you know, chief  strategy officers, more chief financial officers to consider eminent transactions because there's  less of a yo-yo negative yo-yo effect on your balance sheet. There's still a yo-yo effect, but  it's not as pronounced to the downside. I mean, things have matured a lot in the last few  years. Uh, I remember going to ECC back in 2023 along with DeFi Security Summit and if  you compare it to like this year, you know, two years ago, it really kind of felt like a Star  Wars convention. Um, you know, I I think if you there's been obviously some significant changes in  the in the political and regulatory environment,

uh, both here in the United States as well as in  Europe. Uh, different things have happened, but the bottom line is is that I think some of this  stuff has become more mainstream. uh investors are more willing to put money into it. I remember  when I was raising my seed round back god now three years ago and people look like at me like  I was nuts. Um so things have changed a lot. I think it's become much more mainstream. Uh there's  much more they're more profitable applications. Um yeah it's just it's much easier to get investors  mainstream investors to take take you seriously as well as as well as potential customers. So, so  far the market's been dominated by payments and like trading info infra M&A. Is that a trend you  guys expect to continue? Maybe Jeff you can kick it off. I think so. And the reason why is because  you you see immediate scale on the distribution

side. Obviously, you see more immediate revenues  and I think that there is a weariness now from the previous cycle in just buying pure play  excellent technology. right there there was a sentiment back in 2019 to 2022 let's say that  if you build it they will come as in if you build it the developers will come or the end customers  either institutional or retail will come I think what's proven out is that that's not actually  the case and so I think the focus going forward is going to be on are you generating real revenue  are you burning cash are you a real business that has cross cycle resiliency and so yeah Everyone  potentially can do very well in a bull market, but how do you stand? What is your performance  during a bare market that is really kind of the

test of, hey, the emperor is wearing no clothes or  hey, this business is extraordinarily robust and durable despite what the current crypto or macro  market conditions are today. That's terrific. Pedro, do you have something to add? I mean, I'm  going to talk my own book here because I work in the payment space, right? But I I think it is a  trend that will continue. I mean, historically, a lot of crypto revenue is like extremely  procyclical, right? You'll go and have a 500x year in terms of, you know, year-over-year  growth and then you'll go down 90%. And you see that in the on-ramping space, you see that in  the exchange space historically, you see it in, you know, a lot of trading infrastructure or  related products, I would say. Um, because everybody rushes in during a bull market and they  want access to these products and services. Retail

is coming back in and they're generating a lot  of the revenue. if you're on the trading side or the on-ramping side. I think now we have a little  bit more of a and I think you hit the nail on the head, Jeeoff. It's like a more resilient revenue  profile of an industry where it's not like, hey, we're buying something and maybe we get a  2x next year, but then it goes down 80%, we still have to justify spending money.  And if we're talking about M&A specifically, I think it's a trend that will continue because I  think we need to bifrocate the market. where like you work on the VC side on the private side. You  set the market, you set the price, and I think we're finally starting to work more in lock step  where now the actual natural acquirers of these companies are starting to understand maybe the  underwriting and like validate the underwriting

that you do. Whereas historically, I'd say private  markets were overvalued and then you try to sell that company to a strategic or have an exit and  they're like, well, we can't justify that price tag. And I think now it's like okay maybe we're  a little less stareyed and we're more rational on the valuation side to begin with so that you  can have these exits. So to actually answer the question I think infrastructure payments  definitely going to be a major trend because a lot of these crypto companies are form fitted for from  a tech and talent density standpoint to fit into like payments companies. We have the distribution  our moat is the the customers that we already have. It's such a steep hill to climb to go and  try to sell payments or cryptonnative payments to the whole market all over again. Like might  as well kind of just take the exit route because

you can apply that and recognize your vision as a  company faster. That's terrific. Evan, anything on your side? No, I mean I just think infrastructure  and security are just sort of two obvious areas where there hasn't been a lot of investment.  historically security very little um and now those areas are are ripe for for development  especially because many of these things are profitable. Absolutely. Maybe I I would love to  understand um from your perspective working with PE. Is there a play when it comes to rolling up  a lot of onchain analytics, blockchain analytics, KYC AML companies into a very powerful risk tech  platform? Yeah, I mean definitely because right now the market is very bifrocated and you have  uh some different small players that are running

around and I think some of these folks are making  are finding it difficult to make enough money on their own. So I think it sort of makes sense that  you take one two or three of them kind of kind of package them up into something that Yeah. I mean  absolutely I mean we we see that like my company we focus on off-chain intelligence and we work  with onchain intelligence companies like chain analysis TRM labs and others and we frequently get  questions from prospective customers. Can I just buy all this together as one product? Why does  it have to be sold as two separate products even as a partnership? This just would make sense more  all as one product. We love to hear that because then I I go to these other companies. I'm like,  "Hey, you guys want to buy us?" Um uh but yeah,

I mean it it it makes a lot of sense and we've  seen the same sort of trend also in um in sort of cyber intelligence and cyber security more broadly  where you've seen PE come in and try to wrap up a bunch of different players and kind of fit  everything into to one thing to make it much more profitable. Yeah, that was a great call. Jeeoff, I  don't know if people have seen Inversion Capital, but they're trying to bring P roll-ups onchain.  Um and there's a couple other products that are doing that in Stealth now that will come out soon.  Had no idea. I'll send it to you after this. Um, but so, you know, obviously payments and infra  M&A makes a lot of sense. What are some sectors in crypto you think we could see M&A start to pick  up? And and maybe I'll go first. I think gaming is

like really ripe for that. Um, a lot of the gaming  tokens are trading like in the gutters right now and that was something that is actually had the  most capital invested in crypto since I've been in the space in 2022. Um, but I'm curious what's  top of mind for you guys. Yeah, I'll start. I So, I used to be a gaming banker. um my perspective  may diverge on on the gaming piece but I won't touch on that. So I think credit intermediation  could be really interesting and you know the the model that traditionally was the focus in in  Trafi was hey we want trading execution services we want clearing we want custody we want you  know credit and financing services we want to be able to do this from one venue and then not  have to worry about having you know having to

collateralize different accounts across different  you know businesses. I think in this case when it comes to crypto I think there's the same impetus  to have a full institutional stack of services that cuts across you know trading execution  derivatives options but also credit which I think is a good potential synthesis or convergence  between you know crypto and tradi on the private credit side where they're looking for a lot of  opportunities and they've also raised a ton of capital um on that front. So, I totally agree  on that example. I think we can't let the crowd not hear your your take on M&A and gaming. If you  wouldn't mind just like maybe two sentences. So, I I'm a lifelong gamer and I think I've always  been long long-term bullish on blockchain and

crypto gaming. Short and medium-term bearish. And  the reason why is because there's there's the same bifurcation when it comes to who is actually the  end player or the end customer or the end retail um party, right? You have the players of the game  that are doing it for community or for status or to just have fun. And then you have the more let's  say economic animals who are there to extract as much value from a specific ecosystem in gaming  as possible and then move on to the next. What ends up happening is that that very small party in  most cases significantly degrades the experience of everybody else to the point that nobody wants  to play the game. Right. That's a great point.

So that for me whenever I see a you know web  3 or blockchain or crypto gaming opportunity the first question that I ask is okay is the is  the game actually fun by itself? Does it need any of these blockchain or web 3 capabilities or  is that the main draw and then the game piece of it is an afterthought. Terrific. Evan, what about  you? And you can't say security. I was just going to say security. Uh I I would just first of all  echo that which is that the the things that are going to make money are the things that are not  gimmicks where it's not like I'm just slapping on blockchain technology onto this or that where it's  you know a genuine use. I I I you know and again I do have a very narrow perspective here but  and and forgive me on for this but yeah I mean

security is is a look FTX didn't invest any money  at all into cyber security or into any security or really compliance either and if you talk with any  of the exchanges or the stable coin issuers you'll see that there's been a huge sea change in terms  of their perspective over the last year or so uh they went from being very very risk pro very  prorisk and very willing to go very far out in a limb to where all of a sudden now issues like  compliance uh uh regulation etc. These are coming becoming very very serious issues for them. Uh  you know you can argue about why it happened. Um obviously the CEO of Binance going to jail is is  one possible incentive. Um but we are starting to see where you know some of the stable coin issuers  that were like literally two years ago if you told

them hey listen your your system is beset by money  laundering and terrorist financing and everything else like that they would have tried looking in  the other direction and running away from you like like on TV like like a TV show they would have  like literally tried running away from you whereas now all of a sudden these issues are something  that they I think they realize they can't run away from and then on the other side of it if you  look at the big players in the market. Most of the security players in the market, most of them when  it comes to uh web 3 and crypto, basically what they are are blockchain tracing companies, right?  And number one, that's not really a solution.

That's more like consulting work. Number two, it's  not really scalable. Um number three, you know, there's only so much that block tracing can really  tell you about what's gone on in terms of elicit transaction or whatnot. and it doesn't do it in  real time. Which means that if someone is trying to go through live transactions at a very high  rate and determine is this poss is this person possibly in a sanctioned region is this person  possibly trying to break into my system. There's just not enough time to be doing those kind of  things. So there's a lot of room right there for I think for development in that area and because of  the amount of money that's flowing in the market.

I I've been saying this for a long time. People  sometimes stress about the cost of security or the cost of compliance and whatnot. What people have  to put into perspective is that there's a massive massive number of people that are not currently  bought into crypto or web 3. And many of those people, if not most of them, the reason is because  of the fact that there are not the traditional kind of protections associated with normal banking  that apply to crypto. And if you can bring that sense of security and stability to the market,  there's a huge number of customers that are just waiting out there to dive into the market. So it's  this is like yeah, there's a cost associated with it, but it's also like that's the key to unlocking  this market. And I think again, I think a lot of

the key players here, the stable coin issuers,  the exchanges, they h are have either realized this or they're on the precipice of of making that  recognition. So like I said, it's it's a you know in that's why infrastructure and security is just  a good market right now. Terrific. Peter, do you have a dark horsehorse M&A sector? So if I want to  be optimistic, I think it's challenging because I think a lot of cryptonative companies, especially  ones that issue a token, have a natural barrier to M&A on the basis of competing against other peer  group like others in their peer group with this sort of pseudo equity offering that's already live  in the market. And I think anybody who's been in the space long enough understands it's like very  hard to deprecate a token or change your token or roll up into some other organization. I would  say though like once we cross that Rubicon and

somebody figures out a model that actually works.  I could see like DeFi that's fitting into some sort of like a regulated sleeve of a traditional  banking offering being very exciting for folks to go and grab those assets or that onchain infra or  tech stack or smart contract stack that could then apply within the again like the same distribution  economics of say like buying a stable coin related payments company and applying it to hundreds  of thousands of customers do the same thing for banking I think would be my dark horse but I think  the hill's a little steep to climb just because of the the tokens already out there and it's hard to  do M&A around that. Yeah, that's a great segue to our final question, which is a little bit divisive  in the investment community, which is if you have a listed token, can you be acquired by a public  company for your equity? I'd love to get um Jeff

and Evan your guys' thoughts on that. I think  it's very challenging unless it's it's properly structured. And I think part of the reason why  is that touching anything that has an impact on retail investors is automatically going to get you  within the target targeting reticule of FINRA and the SEC, right? And so the structuring component  needs to think through, okay, the foundation or the DAO is one entity that at best we would  have an armslength relationship. What we're really trying to acquire is the let's call it the  devco, right? The development company, the team, some of the tech that's not open source. Figuring  out what is and isn't open source is going to be

a big question. um some of the service contracts  or some of the existing commercial agreements that um the Devco has with you know ex Foundation  entities is going to be really important and then establishing or understanding what is the  long-term uh contractual relationship between the Devco and the foundation right because  that's going to drive a lot of the revenue generation and a lot of the equity enterprise  value for the company in the first place So unless that distinction is made, and there's a lot  of different distinctions to to get to that point, I think it actually is very very challenging. But  if you're able to do that, you can slowly accrete more value from the token ecosystem. Maybe there's  some type of structure where you're saying,

"All right, over the course of, you know, x number  of years, if there are these types of technology developments and we hit our milestones, there's an  earnout that's reflected in a larger like chunk of unlock for uh vested tokens, right? So that that  could be a structure. Uh I think at the end of the day the best thing to do would be to avoid  ever demonstrating like ownership and control of the you know the ecosystem the the governance  of the ecosystem and kind of the overall market um of that particular token. Awesome. Evan,  anything to add? Uh I mean yeah I was talking with a colleague uh at ECC a few months ago and  uh he's affiliated with Ton uh Toncoin and he was complaining bitterly that he had just been  debbanked by a European financial institution

just on the basis of the fact that he worked for  Ton. Um so you know the reality is is that I've spoken with any number of VCs over the last uh  three years uh who the moment you mention anything about tokens or about anything like that they run  um the only people that that are cool with that are really cryptonative uh VCs like Coin Fund. Um  I think you know because a couple different times people had asked me why don't why don't you guys  issue uh a token sort of like or do something like Arkham or whatnot and the reason is because of  the fact that dealing with anyone in Tradfi at that point becomes just absolutely impossible. it  just becomes incredibly impossible. And for anyone here who has had to try to apply uh for permission  to hold a wallet in like Coinbase for instance,

um I'm my company Cloud Burst is a Coinbase  uh ventures portfolio company and I can tell you flat out that and we work with US government  agencies and whatnot. We were not able to pass the uh the the compliance process to get a  corporate account on Coinbase Coinbase uh for our company. So I think the reality is is  that public companies anything tradfi are very at this point any anything tokenized they are very  reluctant to touch unless you're coming across people that are very forward thinking that have  a background in crypto have some knowledge in crypto. It's a it's a uh yeah it's a it's I  think it'd be a hard sell. Yeah at coin fund we definitely believe it's the entrepreneurs's  decision. You know if you're going to acrew value

to the token or the equity it's your choice.  I'm personally of the mind. You only have one to pick from today, but I'm excited for the day  that someone proved me wrong. Thank you guys so much for the time and really appreciate you all  flying out for this panel. Thank you. Thank you.