1confirmation Investment Note: Why Did We Lead the Investment in OpenSea in 2018?

Recently, the NFT trading platform OpenSea announced that it has raised $23 million in funding led by a16z, with participation from AngelList co-founder Naval Ravikant, former Coinbase CTO Balaji Srinivasan, among others, making it one of the most watched platforms in the NFT market. This also means that early investors in OpenSea have received substantial capital returns.
On March 19, Nick Tomaino, founder of 1confirmation, the lead investor in OpenSea's seed round, published investment notes on Twitter regarding the decision to invest in OpenSea in April 2018, which included scores on the project's product, team, and community, as well as risk assessments that now appear quite prescient. Therefore, Chain Catcher translated the document and made adjustments that do not affect the intent for readers' reference.
OpenSea is a leading decentralized NFT trading market that enables people to discover, buy, and sell digital collectibles.
Digital collectibles are scarce representations of digital goods on the blockchain. In the past four months, digital collectibles have rapidly developed due to the influence of the ERC721 token standard and global ETH liquidity. Cryptokitties was the first project to attract people's attention to this concept, and since then, there has 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 behind the explosion, we believe there has been meaningful progress in how people evaluate and utilize scarce digital goods. OpenSea is building a leading brand to provide discovery and buying/selling functionalities, ultimately helping to bring digital collectibles to the masses.
1confirmation is leading OpenSea's seed round financing, and here are our main assumptions regarding this investment:
1.) We are on the brink of a massive rise of non-fungible tokens (NFTs), and this category will experience significant fragmentation. Cryptokitties is the first NFT-based project to gain attention (currently over 95% of the market share is Cryptokitties), but we see millions of interesting NFT-based projects around the world, and there is a strong need for an aggregator to provide users with discovery and easy buying/selling functionalities.
2.) The OpenSea team will continue to remain agile and be the first to add new NFTs and new features that the crypto community wants to the market, building a strong brand around discovery and buying/selling functionalities. The team was the first to launch an NFT marketplace and has gained a certain market share and appeal in this emerging market (which has been around for less than four months). Devin and Alex are ambitious and have a good sense of the cryptocurrency community, so they must maintain this status among well-funded and competitive rivals.
3.) This is a highly defensive long-term business model. The nature of NFTs has a relatively low barrier to entry. The team will need to build a strong brand to gain the attention and trust of consumers and developers, thereby achieving strong network effects and ultimately generating revenue from fees in the long run.
Team (8/10):
OpenSea co-founders Devin Finzer (CEO) and Alex Atallah (CTO) have accomplished a lot and have proven to be agile in this nascent and rapidly evolving market. They entered YC with different ideas but quickly pivoted to OpenSea when they saw the NFT market beginning to take shape. They have been pioneers in product features and adding new NFTs to the market, and they are also refining their own NFT-based game (see Ethmoji).
Devin is an engineer and founded a company called Claimdog (acquired by Creditkarma), and has also worked at Creditkarma and Pinterest. Former colleagues have highly praised his work ethic and intelligence. Alex is also an engineer who has worked at Palantir and several startups. Former classmates and colleagues have also highly praised his intelligence.
Product (8/10):
OpenSea now addresses a clear need in the crypto community: how to discover and buy/sell NFTs. In a category with only four months of history, there is still a long way to go in improving the product, and there are many different directions to use the product in the future, but it has now addressed a clear need for a small but growing niche of users (including myself).
Community (8/10):
The crowd interested in NFTs is small but growing, and OpenSea has begun to build a strong brand around them. We can do a lot of work to drive this development.
Token Mechanism (N/A):
This is an equity investment. Although the team could explore angles for revenue through NFTs or tokens (pre-sales of digital goods), the company will raise funds through equity rather than tokens, and the primary business model may be fees rather than token appreciation.
Key Risks:
● Competition: There are two other well-funded and experienced teams also competing in the digital collectibles market, namely Cryptokitties (which raised $12 million from a16z and USV) and Rarebits (which raised $8 million from Spark). Cryptokitties is not directly competing at the moment but may do so in the future and could be vying for talent in the field. Rarebits is a direct competitor. Devin and Alex are ambitious and agile, and they were the first to enter the trading market, currently outperforming them significantly, but this situation may change.
● Defensive Capability of Trading Platforms: Unlike Coinbase, which has regulatory moats, NFT trading platforms have almost no defensive capabilities. More competitors may enter the space, and we need to figure out how to build a sustainable long-term moat.
Rarebits is ambitious and agile, and they were the first to enter the trading market, currently outperforming them significantly, but this situation may change.
Overview (Team + Product + Community + Token Mechanism): 8
Overall, we believe OpenSea is building the right product at the right time, and if the team can execute and the category grows as we believe it will, the potential outcomes are enormous.
While there are two other well-capitalized teams competing for talent, market share, and potential customers, we believe that by staying flexible and acting quickly in this emerging market, OpenSea can build a strong consumer brand and a defensible moat, ultimately becoming a winner in this field.