[INVESTMENT] Venture - Exchange.art

We have the opportunity to invest in Exchange.art (https://exchange.art/) round.

Exchange.art is among the leaders of 1/1 NFT art on Solana. They have been live since a couple of months (fall 2021) with very good traction. Furthermore, in terms of market, they are well positioned to capture and capitalise on the medium term development of the NFT ecosystem, which will likely move away from the so called PFP collections (algorithmically generated collections, like “9999 pigs living on Solana”) and give room to unique pieces of art.

Furthermore, they have a tech infrastructure that allows creators / art galleries / brand to setup their own store in a white label mode (and i think that this is really cool and a potential strong source of revenues, especially as more established brands come into the space and they wanna do it “with their own look”). A partnership with a strong player in the Solana ecosystem for NFT minting is also in advanced talks. They have 20k followers on twitter (https://twitter.com/exchgART) with a very active community (they are doing a lot of support and educational content to onboard creators).

I’ve personally met the founding team at the Solana Hacker House. Alex and Andrei are two of the most brilliant guys I’ve met in the last months in the Solana ecosystem.
They have know each other since university time (they graduated in CS at University of Manchester) and they have been working together as Software Developers at JP Morgan in London. They have a several years of work experience in developing and scaling software products, and prior to founding Exchange.art they have been working together at Digitaleyes which is another NFT marketplace on Solana.

They have already closed a founding round in 2021 and are backed by strong investors in the NFT space.

My view:
I am personally very bullish on the team and I believe that investing in the NFT infrastructure would be a good play for us. The team is top notch and extremely professional. in my view NFT as technology is a trend here to stay. We can debate on the NFT market and how it will evolve over time (e.g. will NFTs be the tech for art or will they be utility assets that will bring tech into physical assets, or even something else we can’t imagine now) but investing in a strong team that is agile to navigate the changes will be the edge.

Pitch Deck & confidential numbers will be shared in our private discord channel #governance

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The idea sounds great, but could we please have some additional information on their financials? I see that they have been already operating, so it would be nice to have information on how they have spent their money so far and their tokeneconomics, or the capital structure, which I believe neither is present in the investor deck shared in our discord chat

  • how they have spent their money so far → they launched in November 2021 and they have a team of 7 people. As the vast majority of crypto projects, most of the spend has been on hires. They shared also an excel with a budget for the upcoming 18 months, feel free to dm me on discord and i send it over to you.
  • and their tokenomics → this is an equity raise, so no tokenomics involved. they shared with us the current cap table but since it’s stating names and surname we preferred to keep it confidential.

How many people are on the Cap table? Maybe a breakdown?

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@Keabla adding some more info on your above questions and replying to @PorcoRosso

So this is the first round (no other financing was taken in any form). The investors which are backing them and I was mentioning in the first message in the forum are for the current round (sorry for the misunderstanding).

The team has boostrapped the development of the platform until now (providing support with their own capital and not taking any salary). Starting this month, march, they are starting to pay a nominal salary to the team.

In the cap-table we have 8 core people in the founding team, ranging from 21% to13% of equity.

will also share in discord a sneaky preview of their new UI launching this Sunday. The Exchange.art team is also available for a Q&A with the DAO in case we are interested to.

I think the Q&A is a good idea. I’d like to watch @PorcoRosso grill them and see if other members have good questions for them to gauge their passion, experience, competency and mental characteristics of team.

So I have finally gotten a chance to take a look. Here are my points, in no particular oder:

  • $30m valuation is really quite high from my perspective. As far as I can tell they are not really making much money. (2.5%*10,350SOL Feb Gross = 21134.50 USD) that’s an ARR of around $240k… so a EV/Rev of 12.5x
  • The deck is quite light on details. I don’t really see anything defensible or unique about their business. How do they stand out? attract high quality submissions? What are future milestones?
  • Don’t think Solana is a key selling point as NFTs seem to be a veblen good, the higher the price the more desirable. As you can see with real-life auction houses all the top auction houses are well known because they provide a degree of curation to the listings. As I understand their 1/1 pitch is an attempt to replicate this degree of exclusivity.
  • They claim to focus on 1/1 pieces but I can see there are plenty of “collections” on their site.
  • Didn’t we say that NFTs are all about community? how do 1/1 pieces build any sort of community? I guess minters bring their existing followers there? But then why not on Ethereum at the well established market places?
  • While I like the white-label proposal, can we confirm there is any real market demand for it?
  • Can they prove their volumes? From what I can see on the current site only the first two pages have any bids at all…
  • If they really have so many followers on twitter etc, that’s a nice sign. How did they grow the audience if they have only been on the market for a few months? Can we confirm they are not “aquired” followers?
  • I would like to know more about the founders - I understand you had a good encounter with them and they seem capable, but nothing in the deck, and nothing to go by really. You might just like them because they remind you of yourself, does that necessarily mean they are the right team to execute this business correctly?
  • The termsheet is really basic. Almost no investor protection, no board seats. (and yet they assign a number of seats to their employees after the round) In general the number of directors seems bloated. Why do they need 5 people? how many will they have to give away in Series A to have even representation with investors?
  • Early employees really should not get so much equity without vesting. What if half the team walks away, they will just keep their equity?
  • Is the ESOP (growth shares as they call it) already allocated? I don’t see it on the cap table? We shouldn’t get diluted so they can give away shares to their employees for free. It should normally been done before the round.

Anyway thanks for reading my cynical ramblings. My main concerns are that it’s a high valuation that doesn’t seem to have all that much monetary traction yet, and doesn’t seem particularly unique to me. I do like that you had a good impression of the team and that they have already some following/traction.

I would love to see some more data about their progress - How new listings/artists has evolved week-over-week. What does retention look like of users week-over-week (do people keep using the platform?). I could be convinced if they could show some killer traction and growth, but again not enough info to convince me personally just yet.

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Thanks a lot @PorcoRosso for all the points above. Besides this particular investment, all the points above are really educational as they helped me (and I hope others) to see and learn how the mental model of a professional VC is and the level of knowledge required to take mindful investment decisions.

So once again, THANK YOU a lot for sharing this very educational comment, i think it’s one of the best pieces we have had in the forum so far.

As a side note, I think that (in general) all the points that you have raised are accurate and actually have triggered to me another question which is if we are well positioned to do VC investment at this stage of the DAO and in this environment. More in detail, in an environment with high valuations and super competitive dealflow, I think that we should focus first on building and edge for the DAO (e.g. a strong community, the early adopters to test and support our portfolio companies, etc…) and then once successful focusing on building a pipeline and framework for evaluating deals/allocate resources to do a serious due diligence (dd).

VC looks to be an increasingly competitive market especially in crypto, spray and pray strategies are unlikely to work, portofolio construction is not easy (e.g. how much time / dd should we put on a deal that is <1% of the total portfolio?), I think that the safe side for us is to go step by step and build an edge on what actually now is the scarcest resource in the market (which is dollars which help founders create community and build product that matters, rather than opportunistic dollars which hope in the long upside trend of crypto).

Thanks, but no need to exaggerate my input. The main point is just to ask all the relevant questions, as founders are always hiding or embellishing different aspects of their businesses. Once you get to the truth then you can make an informed decision fitting your future expectations/views.

I’m not particularly negative of this opportunity despite my comments, so much as I would like to push us to be a little more selective. So far a large majority all our proposals have gone through. I’m not so concerned with the farming ones, but I think on the VC side we should be more picky. It might just be that there aren’t too many of us submitting proposals yet, so we are all already mostly in agreement before they are even brought up, but I think we should not get too excited about everything we see. That’s a N00b thing to do :stuck_out_tongue:

I wouldn’t shy away from doing any VC at all though, it’s a good excuse to learn more about what is going on in the ecosystem and build connections. Sometimes I speak to startups just because I am interested in the industry, even when it’s already pretty clear to me I won’t be making an investment.

So my 2 cents is that we should be more picky but keep going if its not too much a time commitment from the core team.