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The State of Blockchains Q3 2018:
The Empire Strikes Back
Lead Analyst: Joel John
Head of Research: Lawrence Lundy-Bryan
Contents • About Outlier Ventures
• Executive Summary
o Blockchains & Startups
o Blockchains & Corporates
o Blockchains & Government
o OV View: The Tech Lab
o OV View: Crypto-economics
• Q3 in the Blockchain Ecosystem
• Key Takeaways
• Outlier Ventures Proprietary Information
• Disclaimer
2
About Outlier Ventures
Outlier Ventures is a venture platform focused on building the infrastructure for the next phase of the Web. As the first
European venture firm dedicated to blockchain technology, we’ve developed an industry-leading investment thesis,
based on the convergence of decentralised technologies such as blockchains and distributed ledgers, with ‘deep
tech’ such as artificial intelligence, robotics, the Internet of Things, and 3D printing.
We focus on early stage, seed and pre-seed projects where direct support to investee founders and creating value
post-investment is integral to our business model. We have consistently proved our ability to identify exceptional
projects, allowing us to constantly expand. Our team is 30 people strong, with a presence in London, Toronto,
Chicago and Amsterdam. With specialists in crypto-economics, research, legal, marketing, and tech, we bring a
powerhouse of support to founders.
Investing in both equity and crypto-tokens we have invested and partnered with some of the most impressive projects
in the decentralised space including, IOTA, Ocean Protocol, Fetch.AI, SEED, Sovrin and most recently Haja Networks.
Executive Summary
Blockchains &
Startups
1. The Empire Strikes Back
2. Crypto Winter Bites
3. Consolidation of Private and Public Investing
1. The empire strikes back. VC investments in the space at all time high as
professionalization of the industry continues. The drastic reduction in the frequency and
size of token sales have created a gap that is now being filled by venture capital. VC
financing is moving earlier in the funding cycle at Seed or Series A instead of the later
stage, pre-ICO rounds we witnessed in Q2. Legal expenses, marketing costs and
community building efforts are part of the reason why startups that don't necessarily
require a network or token have been avoiding token generation events completely.
Until we see a recovery in Bitcoin’s price, it is likely that the model of token generation
events that took center stage in 2017 would never return.
2. Crypto Winter bites. Total ICO raised in the quarter down nearly 74% as speculators
flee. Although number and size of public token fundraises has reduced, startups,
corporates and regulators continue to believe that tokens are foundational to Web 3.0
infrastructure and represent the opportunity for new business models. This quarter has
witnessed a considerable improvement in both the amount of traction and complexity of
token design by startups before they approach private capital or public capital markets.
There is a shift in thinking in the industry in the role of tokens not just as fundraising
mechanism but also as a business model innovation. Large, venture funded businesses
will begin using tokens as a way to engage, retain and attract users. We are witnessing
this shift already with chat apps like Kik, Telegram and Line implementing tokens.
3. The consolidation of private and public investing. The prolonged bear market have
provided an opportunity for larger funds looking to enter the space to engage directly
with network foundations and take a stake in the network. Notable token based
investments this quarter involved Dfinity and Maker DAO. If token prices continue to
remain suppressed, it is likely that teams turn to more traditional forms of
venture investors to seek liquidity for their tokens and expertise to help scale
their projects.
Blockchains &
Corporates
1. Banking still driving the blockchain wheel
2. Blockchains coming to a phone near you
3. The new hotness is zero knowledge
1. Banking still driving the blockchain wheel. Financial organisations continue to
dominate the blockchain ecosystem in terms of interest and active traction. The quarter
was instrumental for the setting up of infrastructure that enables the custody and trade of
token based assets. Notably, Bakkt (owned by NYSE’s parent company Inter-continental
Exchange) and Fidelity announced plans to provide trading instruments for clients. ING,
MasterCard and JP Morgan released more information on projects that enable payments
settlements, compliance and scaling of token based transactions. It is safe to say,
FinTech innovation in large financial organisations is now spilling over to the blockchain
ecosystem as enterprise embrace and contribute to open source projects.
2. Blockchains coming to a phone near you. Blockchain-based hardware are now
evolving beyond merely wallets and miners. The quarter saw HTC announce the launch
of their blockchain-based smartphone. The use of blockchains in mobile devices is
anticipated to reduce the leak of personal data from phones and combine secure
enclave security with blockchain-based verification and authentication systems. While
these devices are currently far from ready for mass markets, it is likely that future
iterations of retail mobile devices integrate blockchains as a mechanism to authenticate
third parties accessing private data of individuals.
3. The new hotness is zero knowledge. Enterprises seem to be taking an increasing
amount of interest in zero knowledge proofs (ZKP). Notably, the quarter had ING and EY
release more information on their work in the space. EY launched the prototype of a
system that enables private transactions on the Ethereum public network. Named Ops
Chain Public Edition, it uses ZKP for authentication of entries on the ledger. ING open-
sourced a tool that allows enterprise to use ZKPs to verify a claim without necessarily
requiring access to the data itself. Public implementations of both developments remain
pending.
Blockchains &
Government
1. Nations that ship together, blockchain together
2. Governments wake up to regulatory arbitrage
3. But are kicking the can down the road
1. Nations that ship together, blockchain together. A number of large ports around the
world have been embracing blockchains as a mechanism to reduce the time needed for
shipments to process. The largest port in Europe, the Port of Rotterdam has partnered
with Dutch bank ABN Amro and one of Samsung’s subsidiaries to test blockchain
solutions. It will use Nexledger from Samsung and Corda for the purpose of tracking
logistics data. In a similar move, Abu Dhabi’s port partnered with Belgium’s Antwerp Port
for a project named Silsal for accelerating document verification. Although the trend is
increasing in count, past initiatives by Maersk and IBM have reported challenges in on-
boarding partners.
2. Governments wake up to regulatory arbitrage. The sentiment used by regulators
towards token generation events have largely switched from one of concern to intrigue.
The quarter saw a number of countries take proactive measures to ensure regional
companies do not move abroad in search of faster access to capital. The French Ministry
of Economy and Finance announced a legislative framework for token sales. It would
allow the regional regulator (AMF) to issue permits to companies that intend to conduct
token sales. Banking regulators in Switzerland and Singapore recently came forward to
ensure that token based startups in their jurisdiction have access to banking services.
3. But are kicking the can down the road. Governments in both the United Kingdom and
United States published reports exploring crypto-assets. There has not been much
progress with regards to the ETFs in the United States. The New York Attorney General’s
office published their ‘Virtual Markets Integrity Report’. It explored how exchanges
around the globe tackled challenges with AML/KYC and policies around trading
internally. The UK’s House of Lords published a report on crypto-assets for their digital
currencies inquiry. It suggested that the current state of the industry is one that’s similar
to the “wild west’. It called for the urgent regulation of the space to position the
UK for DLT-related innovation.
OV View – The Tech Lab
Aron van Ammers, Founding Partner
“The credo ‘be your own
bank’ signifies the power of
the participants in tokenised
crypto networks. But many
investors have neither the
technical capacity nor the
organisational structure to
"be their own bank", and
that's the opportunity that
new fee-based businesses
now jump onto.”
• As we see the focus of early stage investment into tokens
shift away from tech-savvy retail investors toward to VCs,
hedge funds and ultimately larger institutional investors, in
this quarter we saw a large growth in new businesses and
services enabling the larger institutional investors to invest
in the space.
• Self-sovereignty means self-responsibility, and when your
private keys are lost or stolen there is no broker to call.
Institutional investors have a need to reduce that technical
complexity and risk. New players solve that problem; from
institutional-grade custody providers, to trading platforms
offered by the financial incumbents, to staking services for
proof of stake networks.
• These enabling services extend beyond investors - they are
vital for large scale adoption by individuals and
corporations alike, with each having a choice over the level
of control and responsibility they want. At Outlier Ventures
we are exploring these new services both as investment
opportunities and as partners for us and our portfolio.
OV View – Crypto-economics
Eden Dhaliwal, Partner
• This quarter saw a significant negative sentiment around utility
tokens from an investment standpoint. Many investors have
grown frustrated over regulation and exasperated over
valuation of tokenized networks. This represents a new cycle
back towards equity based blockchain investments until the
crypto community makes advances in validating tokens as a
new asset class with viable business models. That said, projects
with well designed token economies are still finding support in
the community and our Token Ecosystem Creation
methodology should help facilitate groundbreaking work.
• Interestingly, this quarter saw Airbnb recognize the power of
incentive systems with their desire to give homeowners who
power their service a stake in their company. “We (Airbnb)
believe that enabling private companies to grant hosts and
other sharing economy participants equity in the company
from an earlier stage would further align incentives between
such companies and their sharing economy participants to the
benefit of both.” We will certainly see more crypto-economic
principles validated in the near future.
“The downturn is driving
increasing rigor. We’re seeing
the community respond by
shifting focus from crypto-
economic design to token
engineering methods to help
validate and optimize token
ecosystems for success.”
Q3 in The Blockchain Ecosystem
Markets collapsed from high of $829bn in early January
settling around $200bn
• Bitcoin stayed steadily at a little over $6000 and showed very little volatility. The
ecosystem’s market-cap hovered around $200 billion.
• The lack of volatility in the space may be a result of accumulation of tokens by
larger more established players and retail investors no longer panic selling.
• The choppy nature of the markets currently make it very unattractive for traders
to make a profit from actively trading the space.
Daily volumes are also down by nearly 50%
• Daily volume dipped from being over $20 billion to slightly over $10
billion this quarter.
• The drastic dip in volume in the markets are a direct result of the lack of
volatility of tokens.
• Altcoins witnessed considerable dip in volume over the course of the
quarter as traders are likely to have moved to Bitcoin or stable tokens
• The considerable dip in equity markets may have contributed to capital
seeking higher levels of risk from entering the space over the quarter.
Bitcoin futures are also dwindling in volume as
markets appear to lose interest
0
20
40
60
80
100
120
140
Jan
Feb
M
arch
April
M
ay
June
July
AugustSeptem
ber
Volume
CBOE Btc Futures Volume
• The launch of CBOE’s Bitcoin futures
has not necessarily done much to
positively impact the price of the
token. The volume of contracts
associated to the futures has steadily
declined over the course of the year.
• CBOE and CME combined trade
only around 9000 futures on an
average day currently. The rise of
alternative investment instruments
such as DARs from Citi Bank could
further reduce this volume.
• Part of the challenge associated with
the instrument is the heavy expenses
involved in taking and maintaining
positions. Bloomberg reports that
collateral requirements are at 40%
for the instrument. In comparison,
CME’s S&P futures require only
4% in collateral.
Source: Investing.com, Bloomberg
Despite the ‘Crypto Winter’, trading infrastructure
is being improved drastically
• 72 year old financial services firm, Fidelity announced plans of launching a
custodian and trading services aimed at institutions. The organisation
currently provides financial services for $7.2 trillion in customer assets and
provides clearing, custody and investment services for 13,000 institutional
clients according to Forbes. The company has also been incubating startups
leveraging both public and private blockchains internally. The token oriented
subsidiary of the organisation will have a little over 100 employees and is
scheduled for launch in early 2019.
• Citi Bank announced the launch of Digital Asset Receipts (DAR). They are
designed to act as financial instruments that will track the price of digital
assets without buyers necessarily holding the asset themselves. This moves
risks associated with tracking, storage, transfers and custodianship from
institutions to the bank. It is also believed to enable institutional clients to
trade digital assets within the regulatory environment in USA.
• Intercontinental exchange, the parent company of NYSE in collaboration with
Microsoft, Starbucks and Boston Consulting Group among others
announced Bakkt. It will be a startup aimed at enabling large organisations
such as pension funds, ETFs and mutual funds to acquire exposure to the
space.
Winter bites hard as ICOs raise just $1bn in Q3
compared to $3.8bn in Q1, a decline of nearly 74%
• Many of the large raises between Q2
2017 and Q1 2018 have failed to
produce substantial returns for
investors. This combined with the dip
in Bitcoin’s prices are the key reasons
for the lack of retail interest in token
generation events.
• Tokens have also risen to be an
“illiquid asset’ much like equity in
many cases due to the challenges
involved in listing a token at a large
enough exchange. A report from
Diar.co suggests that over 324 tokens
that did their ICO in 2017-2018 to
raise a collective $2.3 billion are yet to
be listed on exchanges.
• TGEs have had their worst quarter
since Q3 2017. Startups have begun
moving to SAFTs and secondary raises
as an alternative to ICOs.
29
950
1890
2900
3867
2161
1031
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018
FundsRaisedIn$Millions
Quarter
VCs are replacing retail, piling in with
nearly $3bn this year, up 316% from 2017
• The quarter continued the
ongoing uptrend in VC funding for
the ecosystem. At close to $3
billion, the year has seen more
venture capital inflow than all
previous years combined.
• Bitmain raised an additional $422
million this quarter, bringing their
total raise to $872 million. One of
the highest raises in terms of
equity in the space.
• There has been a dip in $100+
million raises with only Seba and
Dfinity announcing raises in the
range. There is an uptick in series
A and series B sized firms taking
the equity route as ICOs struggle
to close raises.
$500.00
$600.00 $580.00
$900.00
$2,850.00
$-
$500.00
$1,000.00
$1,500.00
$2,000.00
$2,500.00
$3,000.00
2014 2015 2016 2017 2018 (YTD)
Source: Crunchbase
VCs are active across all funding stages
with 119 deals disclosed this quarter the most ever
• Seed stage investments in
blockchain continue to set
new highs each quarter as the
ecosystem evolves with 119
in the last quarter up from
102.
• Late stage raises beyond $25
million have become far
more common in Q1 and Q2
2018 when compared to the
same period last year as
organisations have begun
finding product-market fit
and have begun competing
for market share.
• Capital raises in the late
stages are usually used for
acquisitions (e.g. Circle) or a
geographic expansions.
17
15
19
22
53
56
5 6
3
27
35
47
3 4 4 4
7 8
0 1
5
1
4 5
0 0
5
0
3 3
0
10
20
30
40
50
60
Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018
FrequencyOfDeals
Upto $1 Million $1 Million - $10 Million $10 Million - $25 Million $25 Million-$50 Million $50 Million+
Source: Crunchbase
Source: TokenData
8
12
45
47
15
10
6
27
48
90
62
49
78
0
8
13
30
46
29
0
3
5
9
7
3
0
10
20
30
40
50
60
70
80
90
100
Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018
FrequencyOfDeal
Upto $1 Million $1 Million - $10 Million $10 Million - $25 Million $25 Million-$50 Million $50 Million+
ICOs are no longer just “whitepaper” projects, instead
money is moving to later-stage projects • Token sales have evolved
from communities
backing seed stage
projects to investors
battling for a piece of the
next big raise
• The dip in appetite for
token sales have become
evident from Q2 2018 as
seed stage raises reduce
to ten from a high of 47
and late stage raises
reduce to a third of what it
was in Q4 2017
• Seed stage deals may
have reduced due to the
capital expenses involved
in doing a token sale.
Large capital raises have
moved to private raises
due to lack of public
appetite
Public token sales are being replaced by private sales
at the beginning of the funding cycle
• The current state of the token markets have affected projects that
earlier intended to do public token sales. More projects have
switched to doing private SAFT rounds instead of going through a
public raise initially.
• Lock-in periods enforced in the SAFT ensures the project’s token
does not witness heavy sell offs right after listing.
• It is likely that we see more projects choose to raise solely from
private investors and incentivise developers in the network through
tokens.
• This is a positive signal more broadly in the maturation of the
industry reflecting how the equity markets developed over time.
We expect private investors to increasingly dominate the earlier
stages of a projects funding lifecycle when risk is highest, and for
projects to only offer tokens to the public markets when the
network if more developed and risk has been reduced significantly
for retail investors.
Source: Diar.co
Period Project Token Raised ($)
Apr-18 Telegram 1.7 billion
Aug-18 Hedera Hashgraph 100 million
Apr-18 Basecoin 125 million
Aug-18 t0 134 million
Oct-17 Polkadot 144 million
Sep-17 Filecoin 200 million
Dec-17 Blockstack 52 million
Feb-18 DFinity 61 million
Just as ICOs didn’t replace VCs, they also didn’t
replace the US as the dominant investor
• We studied 850 deals since
Jan 2017 to make a map of
venture capital activity based
on frequency of deals.
• The United States lead with
over 306 deals from the
region. China followed a
distant second with 96 deals.
• Over 60% of the organisations
in the space continue to be at
seed stages. Frequency of
follow on rounds have only
recently begun increasing
Source: Crunchbase. Note: Activity map only an indicator of frequency of deals. Follow on rounds in the ecosystem typically involve investors from different countries. Map would
look different if accounted for deal sizes in each region
As the market matures M&A is thriving
with 50 already this year focusing mainly on acquihires
• At a little over 50 acquisitions for the
year, the sector seems to be in an
accumulation phase. Large
organisations have been on an
‘acquihire’ spree to solve scaling related
challenges at speed instead of solving
them in-house.
• Huobi acquired Pantronics Holding Ltd
for $70 million. Similarly, Binance
acquired Trust wallet over the course of
the year. Exchanges have been actively
deploying capital into acquisitions as
they seek to both build out their
technology but also increase the number
of channels they engage with users.
• The bulk of the mergers in the market
remain for small scale organisations. We
may witness exchanges merging in the
future to maintain market share and
geographic distribution.
Source: Crunchbase
7
19
22
30
50
0
10
20
30
40
50
60
2014 2015 2016 2017 2018 (YTD)
NumberofAcquisitions
Regardless of the market or startup fundraising,
corporate blockchain activity continues apace
• MasterCard was granted two blockchain related patents this quarter. One focuses on a scaling
solution that combines a cryptocurrency transaction with traditional payments infrastructure for the
purpose of speeding up transaction validation. The second is a mechanism to combine information
from multiple blockchains into a single system without necessarily requiring the maintenance of
multiple blockchains.
• JPMorgan has built a blockchain-powered cross-border payment product: the Interbank Information
Network (IIN). The info-sharing program is built on their own blockchain platform called Quorum. 75
banks including Santander and SocGen have now signed up to test it. IIN is a shared ledger for cross-
border payments that allows banks to quickly add correct info necessary for payments between
banks.
• ING announced further developments in their zero knowledge proofs solution. The organisation
open-sourced a tool for enterprises to verify a piece of data belongs to a specific set without verifying
its full characteristics. The code is currently open-sourced, allowing anyone to contribute.
• Sony announced the launch of a Digital Rights management system aimed at helping content
creators lay claims to their work without the involvement of third parties. The system launched by
Sony will be used for authenticating, sharing and rights management.
• HTC announced the launch of a blockchain-enabled smartphone called Exodus One. It will ship with a
wallet named Zion allowing users to securely store tokens. HTC will only be accepting Bitcoin and
Ethereum for the phone expected to ship in December 2018.
It’s not just corporates; Governments and regulators
also smell opportunity
The ecosystem has evolved from struggling to find banking partners to governments becoming increasingly sensitive of the possibility of regional startups
moving abroad in search of more friendly environments. Forward looking nations have begun engaging with regional banking entities to create a friendly
environment.
• The United Kingdom. The UK Crypto Assets Taskforce published a report on crypto-assets. It identified concerns around volatility of token prices, the
lack of consumer protection and the possibility of money laundering through tokens. The report also suggested however that regulations could work in
the best interest of customers and enable sustainable growth. Currently, token sales are not within the scope of the Financial Conduct Authority (FCA)
and as such pose as a heavy risk asset for investors. The report suggested that regulating the space could enable the UK to become a global centre for
blockchain related innovation.
• Switzerland. The Swiss Bankers Association recently issued guidelines for members looking to engage with token-backed startups. It categorises
companies depending on the nature of how an organisation uses blockchains. If the entity does not intent to do a token sale, it would be treated the
same as any small or medium enterprise looking to open a bank account. In the event that a token sale is anticipated, strict requirements for AML/KYC
will be enforced. The organization will also be required to follow the FINMA ICO guidelines in order to describe their tokens.
• France. A bill exploring the possibility of providing a legal framework for the sale of tokens is in active discussion in France. It would make the regional
stock market regulator the body responsible for regulating the space. Organisations looking to hold a token sale could optionally verify themselves and
make necessary disclosures through the government. This would lend legitimacy to startups looking to conduct a token sale.
• United States. The New York Attorney General’s office looked at the operations of ten of the largest token oriented exchanges over the quarter. They
explored exchange policies regarding insider trading and possible market manipulation. The report found that a number of leading exchanges did not
have the requisite frameworks in place to avoid money laundering and did not collect necessary information on their users. The report was aimed
at finding the inner procedures exchanges followed before listing a token too. Although not much may come of it, it is becoming evident that the
United States government is closely monitoring the exchange ecosystem closely.
China isn’t being left behind, with capital flight on its
mind
• China’s government has its eyes set on monitoring blockchain-enabled
products. A draft regulation that would require users to provide real
names and national ID card numbers when registered get for blockchain
enabled services has been introduced in the region. This is in addition to
a complete ban on exchanges enabling token exchanges in fear of
concerns about capital flight from the country.
• Service providers are also expected to to monitor on-chain transactions,
censor content and allow user data to be inspected by authorities on
demand.
• The move may have risen due to concerns about the censorship resistant
nature of p2p, public blockchains. In April 2018, the Ethereum
Blockchain was used to publish information about alleged sexual
misconduct at Peking University. Public blockchains are emerging as a
censorship resistant alternative that ensures a permanent record.
• Although China had previously issued a ban on token generation events
and token exchanges, the region has been at the forefront of (private)
blockchain innovation. The Public Bank of China has filed 40+
blockchain related patents.
Key Takeaways
Key Takeaways
1. The empire strikes back: VC investments in the space at all time high as
professionalization of the industry continues. The drastic reduction in the frequency and size
of token sales have created a gap that is now being filled by venture capital. VC financing is
moving earlier in the funding cycle at Seed or Series A instead of the later stage, pre-ICO
rounds we witnessed in Q2. Legal expenses, marketing costs and community building
efforts are part of the reason why startups that don't necessarily require a network or token
have been avoiding token generation events completely. Until we see a recovery in Bitcoin’s
price, it is likely that the model of token generation events that took center stage in 2017
would never return.
2. Crypto Winter bites. Total ICO raised in the quarter down nearly 74% as speculators flee.
Although number and size of public token fundraises has reduced, startups, corporates and
regulators continue to believe that tokens are foundational to Web 3.0 infrastructure and
represent the opportunity for new business models. This quarter has witnessed a
considerable improvement in both the amount of traction and complexity of token design
by startups before they approach private capital or public capital markets. There is a shift in
thinking in the industry in the role of tokens not just as fundraising mechanism but also as a
business model innovation. Large, venture funded businesses will begin using tokens as a
way to engage, retain and attract users.
3. Regulators catching FOMO. There is a key difference between the bear markets of 2014
and 2018. The former witnessed governments around the world rushing to issue bans on
tokens. The latter has regulators around the world pushing their jurisdictions to explore
blockchains as a means to maintain their edge as innovation and commercial hubs. France,
Thailand, Singapore, Switzerland and Thailand have pushed for the creation of ecosystems
that enable token issuance this past quarter. Japan’s Financial Services Agency has enabled
self-regulation by the token ecosystem in the region through the setting up of a
‘Virtual Currency Exchange Association” consisting of industry leaders in the region.
Outlier Ventures Proprietary Information
This research is private and confidential and has been provided to you to help build knowledge and understanding in
the emerging blockchain and DLT space. This information is provided ‘off the record’ and we would appreciate it if this
content is not quoted directly. We would be glad to prepare comment for publication, please contact using the details
below.
Research enquiries
research@outlierventures.io
For marketing or event speaking enquiries
marketing@outlierventures.io
Partnership enquiries
partnership@outlierventures.io
Disclaimer
This document (the “Document”) has been prepared by Outlier Ventures Operations Limited (“Outlier Ventures”). Outlier Ventures Operations Ltd is registered in
England and Wales, company registration number 10722638. Outlier Ventures Operations Ltd is an appointed representative of Sapia Partners LLP (“Sapia”) which is
authorised and regulated by the Financial Conduct Authority (Firm Reference Number 550103).
No undertaking, warranty or other assurance is given, and none should be implied, as to, and no reliance should be placed on, the accuracy, completeness or
fairness of the information or opinions contained in this Document. The information contained in the Document is not subject to completion, alteration and
verification nor should it be assumed that the information in the Document will be updated. The information contained in the Document has not been verified by
Sapia, Outlier Ventures or any of its associates or affiliates.
The Document should not be considered a recommendation by Sapia, Outlier Ventures or any of its directors, officers, employees, agents or advisers in connection
with any purchase of or subscription for securities. Recipients should not construe the contents of this Document as legal, tax, regulatory, financial or accounting
advice and are urged to consult with their own advisers in relation to such matters. The information contained in the Document has been prepared purely for
informational purposes. In all cases persons should conduct their own investigation and analysis of the data in the Document. The information contained in the
Document has not been approved by the Financial Conduct Authority. This Document does not constitute, or form part of, any offer of, or invitation to apply for,
securities nor shall it, or the fact of its distribution, form the basis of or be relied upon in connection with any contract or commitment to acquire any securities.
Any forecasts, opinions, estimates and projections contained in the Document constitute the judgement of Outlier Ventures and are provided for illustrative
purposes only. Such forecasts, opinions, estimates and projections involve known and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forecasts,
opinions, estimates and projections. Accordingly no warrant (express or implied) is or will be made or given in relation to, and (except in the case of wilful fraud) no
responsibility or liability is or will be accepted by Sapia, Outlier Ventures or any of its directors, officers, employees, agents or advisers in respect of, such forecasts,
opinions, estimates and projections or their achievement or reasonableness. Recipients of the Document must determine for themselves the reliance (if any) that
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Information contained in the Document may not be distributed, published or reproduced in whole or in part or disclosed to any other person. The distribution of
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Outlier Ventures State of Blockchain Q3 2018

  • 1. The State of Blockchains Q3 2018: The Empire Strikes Back Lead Analyst: Joel John Head of Research: Lawrence Lundy-Bryan
  • 2. Contents • About Outlier Ventures • Executive Summary o Blockchains & Startups o Blockchains & Corporates o Blockchains & Government o OV View: The Tech Lab o OV View: Crypto-economics • Q3 in the Blockchain Ecosystem • Key Takeaways • Outlier Ventures Proprietary Information • Disclaimer 2
  • 3. About Outlier Ventures Outlier Ventures is a venture platform focused on building the infrastructure for the next phase of the Web. As the first European venture firm dedicated to blockchain technology, we’ve developed an industry-leading investment thesis, based on the convergence of decentralised technologies such as blockchains and distributed ledgers, with ‘deep tech’ such as artificial intelligence, robotics, the Internet of Things, and 3D printing. We focus on early stage, seed and pre-seed projects where direct support to investee founders and creating value post-investment is integral to our business model. We have consistently proved our ability to identify exceptional projects, allowing us to constantly expand. Our team is 30 people strong, with a presence in London, Toronto, Chicago and Amsterdam. With specialists in crypto-economics, research, legal, marketing, and tech, we bring a powerhouse of support to founders. Investing in both equity and crypto-tokens we have invested and partnered with some of the most impressive projects in the decentralised space including, IOTA, Ocean Protocol, Fetch.AI, SEED, Sovrin and most recently Haja Networks.
  • 5. Blockchains & Startups 1. The Empire Strikes Back 2. Crypto Winter Bites 3. Consolidation of Private and Public Investing 1. The empire strikes back. VC investments in the space at all time high as professionalization of the industry continues. The drastic reduction in the frequency and size of token sales have created a gap that is now being filled by venture capital. VC financing is moving earlier in the funding cycle at Seed or Series A instead of the later stage, pre-ICO rounds we witnessed in Q2. Legal expenses, marketing costs and community building efforts are part of the reason why startups that don't necessarily require a network or token have been avoiding token generation events completely. Until we see a recovery in Bitcoin’s price, it is likely that the model of token generation events that took center stage in 2017 would never return. 2. Crypto Winter bites. Total ICO raised in the quarter down nearly 74% as speculators flee. Although number and size of public token fundraises has reduced, startups, corporates and regulators continue to believe that tokens are foundational to Web 3.0 infrastructure and represent the opportunity for new business models. This quarter has witnessed a considerable improvement in both the amount of traction and complexity of token design by startups before they approach private capital or public capital markets. There is a shift in thinking in the industry in the role of tokens not just as fundraising mechanism but also as a business model innovation. Large, venture funded businesses will begin using tokens as a way to engage, retain and attract users. We are witnessing this shift already with chat apps like Kik, Telegram and Line implementing tokens. 3. The consolidation of private and public investing. The prolonged bear market have provided an opportunity for larger funds looking to enter the space to engage directly with network foundations and take a stake in the network. Notable token based investments this quarter involved Dfinity and Maker DAO. If token prices continue to remain suppressed, it is likely that teams turn to more traditional forms of venture investors to seek liquidity for their tokens and expertise to help scale their projects.
  • 6. Blockchains & Corporates 1. Banking still driving the blockchain wheel 2. Blockchains coming to a phone near you 3. The new hotness is zero knowledge 1. Banking still driving the blockchain wheel. Financial organisations continue to dominate the blockchain ecosystem in terms of interest and active traction. The quarter was instrumental for the setting up of infrastructure that enables the custody and trade of token based assets. Notably, Bakkt (owned by NYSE’s parent company Inter-continental Exchange) and Fidelity announced plans to provide trading instruments for clients. ING, MasterCard and JP Morgan released more information on projects that enable payments settlements, compliance and scaling of token based transactions. It is safe to say, FinTech innovation in large financial organisations is now spilling over to the blockchain ecosystem as enterprise embrace and contribute to open source projects. 2. Blockchains coming to a phone near you. Blockchain-based hardware are now evolving beyond merely wallets and miners. The quarter saw HTC announce the launch of their blockchain-based smartphone. The use of blockchains in mobile devices is anticipated to reduce the leak of personal data from phones and combine secure enclave security with blockchain-based verification and authentication systems. While these devices are currently far from ready for mass markets, it is likely that future iterations of retail mobile devices integrate blockchains as a mechanism to authenticate third parties accessing private data of individuals. 3. The new hotness is zero knowledge. Enterprises seem to be taking an increasing amount of interest in zero knowledge proofs (ZKP). Notably, the quarter had ING and EY release more information on their work in the space. EY launched the prototype of a system that enables private transactions on the Ethereum public network. Named Ops Chain Public Edition, it uses ZKP for authentication of entries on the ledger. ING open- sourced a tool that allows enterprise to use ZKPs to verify a claim without necessarily requiring access to the data itself. Public implementations of both developments remain pending.
  • 7. Blockchains & Government 1. Nations that ship together, blockchain together 2. Governments wake up to regulatory arbitrage 3. But are kicking the can down the road 1. Nations that ship together, blockchain together. A number of large ports around the world have been embracing blockchains as a mechanism to reduce the time needed for shipments to process. The largest port in Europe, the Port of Rotterdam has partnered with Dutch bank ABN Amro and one of Samsung’s subsidiaries to test blockchain solutions. It will use Nexledger from Samsung and Corda for the purpose of tracking logistics data. In a similar move, Abu Dhabi’s port partnered with Belgium’s Antwerp Port for a project named Silsal for accelerating document verification. Although the trend is increasing in count, past initiatives by Maersk and IBM have reported challenges in on- boarding partners. 2. Governments wake up to regulatory arbitrage. The sentiment used by regulators towards token generation events have largely switched from one of concern to intrigue. The quarter saw a number of countries take proactive measures to ensure regional companies do not move abroad in search of faster access to capital. The French Ministry of Economy and Finance announced a legislative framework for token sales. It would allow the regional regulator (AMF) to issue permits to companies that intend to conduct token sales. Banking regulators in Switzerland and Singapore recently came forward to ensure that token based startups in their jurisdiction have access to banking services. 3. But are kicking the can down the road. Governments in both the United Kingdom and United States published reports exploring crypto-assets. There has not been much progress with regards to the ETFs in the United States. The New York Attorney General’s office published their ‘Virtual Markets Integrity Report’. It explored how exchanges around the globe tackled challenges with AML/KYC and policies around trading internally. The UK’s House of Lords published a report on crypto-assets for their digital currencies inquiry. It suggested that the current state of the industry is one that’s similar to the “wild west’. It called for the urgent regulation of the space to position the UK for DLT-related innovation.
  • 8. OV View – The Tech Lab Aron van Ammers, Founding Partner “The credo ‘be your own bank’ signifies the power of the participants in tokenised crypto networks. But many investors have neither the technical capacity nor the organisational structure to "be their own bank", and that's the opportunity that new fee-based businesses now jump onto.” • As we see the focus of early stage investment into tokens shift away from tech-savvy retail investors toward to VCs, hedge funds and ultimately larger institutional investors, in this quarter we saw a large growth in new businesses and services enabling the larger institutional investors to invest in the space. • Self-sovereignty means self-responsibility, and when your private keys are lost or stolen there is no broker to call. Institutional investors have a need to reduce that technical complexity and risk. New players solve that problem; from institutional-grade custody providers, to trading platforms offered by the financial incumbents, to staking services for proof of stake networks. • These enabling services extend beyond investors - they are vital for large scale adoption by individuals and corporations alike, with each having a choice over the level of control and responsibility they want. At Outlier Ventures we are exploring these new services both as investment opportunities and as partners for us and our portfolio.
  • 9. OV View – Crypto-economics Eden Dhaliwal, Partner • This quarter saw a significant negative sentiment around utility tokens from an investment standpoint. Many investors have grown frustrated over regulation and exasperated over valuation of tokenized networks. This represents a new cycle back towards equity based blockchain investments until the crypto community makes advances in validating tokens as a new asset class with viable business models. That said, projects with well designed token economies are still finding support in the community and our Token Ecosystem Creation methodology should help facilitate groundbreaking work. • Interestingly, this quarter saw Airbnb recognize the power of incentive systems with their desire to give homeowners who power their service a stake in their company. “We (Airbnb) believe that enabling private companies to grant hosts and other sharing economy participants equity in the company from an earlier stage would further align incentives between such companies and their sharing economy participants to the benefit of both.” We will certainly see more crypto-economic principles validated in the near future. “The downturn is driving increasing rigor. We’re seeing the community respond by shifting focus from crypto- economic design to token engineering methods to help validate and optimize token ecosystems for success.”
  • 10. Q3 in The Blockchain Ecosystem
  • 11. Markets collapsed from high of $829bn in early January settling around $200bn • Bitcoin stayed steadily at a little over $6000 and showed very little volatility. The ecosystem’s market-cap hovered around $200 billion. • The lack of volatility in the space may be a result of accumulation of tokens by larger more established players and retail investors no longer panic selling. • The choppy nature of the markets currently make it very unattractive for traders to make a profit from actively trading the space.
  • 12. Daily volumes are also down by nearly 50% • Daily volume dipped from being over $20 billion to slightly over $10 billion this quarter. • The drastic dip in volume in the markets are a direct result of the lack of volatility of tokens. • Altcoins witnessed considerable dip in volume over the course of the quarter as traders are likely to have moved to Bitcoin or stable tokens • The considerable dip in equity markets may have contributed to capital seeking higher levels of risk from entering the space over the quarter.
  • 13. Bitcoin futures are also dwindling in volume as markets appear to lose interest 0 20 40 60 80 100 120 140 Jan Feb M arch April M ay June July AugustSeptem ber Volume CBOE Btc Futures Volume • The launch of CBOE’s Bitcoin futures has not necessarily done much to positively impact the price of the token. The volume of contracts associated to the futures has steadily declined over the course of the year. • CBOE and CME combined trade only around 9000 futures on an average day currently. The rise of alternative investment instruments such as DARs from Citi Bank could further reduce this volume. • Part of the challenge associated with the instrument is the heavy expenses involved in taking and maintaining positions. Bloomberg reports that collateral requirements are at 40% for the instrument. In comparison, CME’s S&P futures require only 4% in collateral. Source: Investing.com, Bloomberg
  • 14. Despite the ‘Crypto Winter’, trading infrastructure is being improved drastically • 72 year old financial services firm, Fidelity announced plans of launching a custodian and trading services aimed at institutions. The organisation currently provides financial services for $7.2 trillion in customer assets and provides clearing, custody and investment services for 13,000 institutional clients according to Forbes. The company has also been incubating startups leveraging both public and private blockchains internally. The token oriented subsidiary of the organisation will have a little over 100 employees and is scheduled for launch in early 2019. • Citi Bank announced the launch of Digital Asset Receipts (DAR). They are designed to act as financial instruments that will track the price of digital assets without buyers necessarily holding the asset themselves. This moves risks associated with tracking, storage, transfers and custodianship from institutions to the bank. It is also believed to enable institutional clients to trade digital assets within the regulatory environment in USA. • Intercontinental exchange, the parent company of NYSE in collaboration with Microsoft, Starbucks and Boston Consulting Group among others announced Bakkt. It will be a startup aimed at enabling large organisations such as pension funds, ETFs and mutual funds to acquire exposure to the space.
  • 15. Winter bites hard as ICOs raise just $1bn in Q3 compared to $3.8bn in Q1, a decline of nearly 74% • Many of the large raises between Q2 2017 and Q1 2018 have failed to produce substantial returns for investors. This combined with the dip in Bitcoin’s prices are the key reasons for the lack of retail interest in token generation events. • Tokens have also risen to be an “illiquid asset’ much like equity in many cases due to the challenges involved in listing a token at a large enough exchange. A report from Diar.co suggests that over 324 tokens that did their ICO in 2017-2018 to raise a collective $2.3 billion are yet to be listed on exchanges. • TGEs have had their worst quarter since Q3 2017. Startups have begun moving to SAFTs and secondary raises as an alternative to ICOs. 29 950 1890 2900 3867 2161 1031 0 500 1000 1500 2000 2500 3000 3500 4000 4500 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 FundsRaisedIn$Millions Quarter
  • 16. VCs are replacing retail, piling in with nearly $3bn this year, up 316% from 2017 • The quarter continued the ongoing uptrend in VC funding for the ecosystem. At close to $3 billion, the year has seen more venture capital inflow than all previous years combined. • Bitmain raised an additional $422 million this quarter, bringing their total raise to $872 million. One of the highest raises in terms of equity in the space. • There has been a dip in $100+ million raises with only Seba and Dfinity announcing raises in the range. There is an uptick in series A and series B sized firms taking the equity route as ICOs struggle to close raises. $500.00 $600.00 $580.00 $900.00 $2,850.00 $- $500.00 $1,000.00 $1,500.00 $2,000.00 $2,500.00 $3,000.00 2014 2015 2016 2017 2018 (YTD) Source: Crunchbase
  • 17. VCs are active across all funding stages with 119 deals disclosed this quarter the most ever • Seed stage investments in blockchain continue to set new highs each quarter as the ecosystem evolves with 119 in the last quarter up from 102. • Late stage raises beyond $25 million have become far more common in Q1 and Q2 2018 when compared to the same period last year as organisations have begun finding product-market fit and have begun competing for market share. • Capital raises in the late stages are usually used for acquisitions (e.g. Circle) or a geographic expansions. 17 15 19 22 53 56 5 6 3 27 35 47 3 4 4 4 7 8 0 1 5 1 4 5 0 0 5 0 3 3 0 10 20 30 40 50 60 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 FrequencyOfDeals Upto $1 Million $1 Million - $10 Million $10 Million - $25 Million $25 Million-$50 Million $50 Million+ Source: Crunchbase
  • 18. Source: TokenData 8 12 45 47 15 10 6 27 48 90 62 49 78 0 8 13 30 46 29 0 3 5 9 7 3 0 10 20 30 40 50 60 70 80 90 100 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 FrequencyOfDeal Upto $1 Million $1 Million - $10 Million $10 Million - $25 Million $25 Million-$50 Million $50 Million+ ICOs are no longer just “whitepaper” projects, instead money is moving to later-stage projects • Token sales have evolved from communities backing seed stage projects to investors battling for a piece of the next big raise • The dip in appetite for token sales have become evident from Q2 2018 as seed stage raises reduce to ten from a high of 47 and late stage raises reduce to a third of what it was in Q4 2017 • Seed stage deals may have reduced due to the capital expenses involved in doing a token sale. Large capital raises have moved to private raises due to lack of public appetite
  • 19. Public token sales are being replaced by private sales at the beginning of the funding cycle • The current state of the token markets have affected projects that earlier intended to do public token sales. More projects have switched to doing private SAFT rounds instead of going through a public raise initially. • Lock-in periods enforced in the SAFT ensures the project’s token does not witness heavy sell offs right after listing. • It is likely that we see more projects choose to raise solely from private investors and incentivise developers in the network through tokens. • This is a positive signal more broadly in the maturation of the industry reflecting how the equity markets developed over time. We expect private investors to increasingly dominate the earlier stages of a projects funding lifecycle when risk is highest, and for projects to only offer tokens to the public markets when the network if more developed and risk has been reduced significantly for retail investors. Source: Diar.co Period Project Token Raised ($) Apr-18 Telegram 1.7 billion Aug-18 Hedera Hashgraph 100 million Apr-18 Basecoin 125 million Aug-18 t0 134 million Oct-17 Polkadot 144 million Sep-17 Filecoin 200 million Dec-17 Blockstack 52 million Feb-18 DFinity 61 million
  • 20. Just as ICOs didn’t replace VCs, they also didn’t replace the US as the dominant investor • We studied 850 deals since Jan 2017 to make a map of venture capital activity based on frequency of deals. • The United States lead with over 306 deals from the region. China followed a distant second with 96 deals. • Over 60% of the organisations in the space continue to be at seed stages. Frequency of follow on rounds have only recently begun increasing Source: Crunchbase. Note: Activity map only an indicator of frequency of deals. Follow on rounds in the ecosystem typically involve investors from different countries. Map would look different if accounted for deal sizes in each region
  • 21. As the market matures M&A is thriving with 50 already this year focusing mainly on acquihires • At a little over 50 acquisitions for the year, the sector seems to be in an accumulation phase. Large organisations have been on an ‘acquihire’ spree to solve scaling related challenges at speed instead of solving them in-house. • Huobi acquired Pantronics Holding Ltd for $70 million. Similarly, Binance acquired Trust wallet over the course of the year. Exchanges have been actively deploying capital into acquisitions as they seek to both build out their technology but also increase the number of channels they engage with users. • The bulk of the mergers in the market remain for small scale organisations. We may witness exchanges merging in the future to maintain market share and geographic distribution. Source: Crunchbase 7 19 22 30 50 0 10 20 30 40 50 60 2014 2015 2016 2017 2018 (YTD) NumberofAcquisitions
  • 22. Regardless of the market or startup fundraising, corporate blockchain activity continues apace • MasterCard was granted two blockchain related patents this quarter. One focuses on a scaling solution that combines a cryptocurrency transaction with traditional payments infrastructure for the purpose of speeding up transaction validation. The second is a mechanism to combine information from multiple blockchains into a single system without necessarily requiring the maintenance of multiple blockchains. • JPMorgan has built a blockchain-powered cross-border payment product: the Interbank Information Network (IIN). The info-sharing program is built on their own blockchain platform called Quorum. 75 banks including Santander and SocGen have now signed up to test it. IIN is a shared ledger for cross- border payments that allows banks to quickly add correct info necessary for payments between banks. • ING announced further developments in their zero knowledge proofs solution. The organisation open-sourced a tool for enterprises to verify a piece of data belongs to a specific set without verifying its full characteristics. The code is currently open-sourced, allowing anyone to contribute. • Sony announced the launch of a Digital Rights management system aimed at helping content creators lay claims to their work without the involvement of third parties. The system launched by Sony will be used for authenticating, sharing and rights management. • HTC announced the launch of a blockchain-enabled smartphone called Exodus One. It will ship with a wallet named Zion allowing users to securely store tokens. HTC will only be accepting Bitcoin and Ethereum for the phone expected to ship in December 2018.
  • 23. It’s not just corporates; Governments and regulators also smell opportunity The ecosystem has evolved from struggling to find banking partners to governments becoming increasingly sensitive of the possibility of regional startups moving abroad in search of more friendly environments. Forward looking nations have begun engaging with regional banking entities to create a friendly environment. • The United Kingdom. The UK Crypto Assets Taskforce published a report on crypto-assets. It identified concerns around volatility of token prices, the lack of consumer protection and the possibility of money laundering through tokens. The report also suggested however that regulations could work in the best interest of customers and enable sustainable growth. Currently, token sales are not within the scope of the Financial Conduct Authority (FCA) and as such pose as a heavy risk asset for investors. The report suggested that regulating the space could enable the UK to become a global centre for blockchain related innovation. • Switzerland. The Swiss Bankers Association recently issued guidelines for members looking to engage with token-backed startups. It categorises companies depending on the nature of how an organisation uses blockchains. If the entity does not intent to do a token sale, it would be treated the same as any small or medium enterprise looking to open a bank account. In the event that a token sale is anticipated, strict requirements for AML/KYC will be enforced. The organization will also be required to follow the FINMA ICO guidelines in order to describe their tokens. • France. A bill exploring the possibility of providing a legal framework for the sale of tokens is in active discussion in France. It would make the regional stock market regulator the body responsible for regulating the space. Organisations looking to hold a token sale could optionally verify themselves and make necessary disclosures through the government. This would lend legitimacy to startups looking to conduct a token sale. • United States. The New York Attorney General’s office looked at the operations of ten of the largest token oriented exchanges over the quarter. They explored exchange policies regarding insider trading and possible market manipulation. The report found that a number of leading exchanges did not have the requisite frameworks in place to avoid money laundering and did not collect necessary information on their users. The report was aimed at finding the inner procedures exchanges followed before listing a token too. Although not much may come of it, it is becoming evident that the United States government is closely monitoring the exchange ecosystem closely.
  • 24. China isn’t being left behind, with capital flight on its mind • China’s government has its eyes set on monitoring blockchain-enabled products. A draft regulation that would require users to provide real names and national ID card numbers when registered get for blockchain enabled services has been introduced in the region. This is in addition to a complete ban on exchanges enabling token exchanges in fear of concerns about capital flight from the country. • Service providers are also expected to to monitor on-chain transactions, censor content and allow user data to be inspected by authorities on demand. • The move may have risen due to concerns about the censorship resistant nature of p2p, public blockchains. In April 2018, the Ethereum Blockchain was used to publish information about alleged sexual misconduct at Peking University. Public blockchains are emerging as a censorship resistant alternative that ensures a permanent record. • Although China had previously issued a ban on token generation events and token exchanges, the region has been at the forefront of (private) blockchain innovation. The Public Bank of China has filed 40+ blockchain related patents.
  • 26. Key Takeaways 1. The empire strikes back: VC investments in the space at all time high as professionalization of the industry continues. The drastic reduction in the frequency and size of token sales have created a gap that is now being filled by venture capital. VC financing is moving earlier in the funding cycle at Seed or Series A instead of the later stage, pre-ICO rounds we witnessed in Q2. Legal expenses, marketing costs and community building efforts are part of the reason why startups that don't necessarily require a network or token have been avoiding token generation events completely. Until we see a recovery in Bitcoin’s price, it is likely that the model of token generation events that took center stage in 2017 would never return. 2. Crypto Winter bites. Total ICO raised in the quarter down nearly 74% as speculators flee. Although number and size of public token fundraises has reduced, startups, corporates and regulators continue to believe that tokens are foundational to Web 3.0 infrastructure and represent the opportunity for new business models. This quarter has witnessed a considerable improvement in both the amount of traction and complexity of token design by startups before they approach private capital or public capital markets. There is a shift in thinking in the industry in the role of tokens not just as fundraising mechanism but also as a business model innovation. Large, venture funded businesses will begin using tokens as a way to engage, retain and attract users. 3. Regulators catching FOMO. There is a key difference between the bear markets of 2014 and 2018. The former witnessed governments around the world rushing to issue bans on tokens. The latter has regulators around the world pushing their jurisdictions to explore blockchains as a means to maintain their edge as innovation and commercial hubs. France, Thailand, Singapore, Switzerland and Thailand have pushed for the creation of ecosystems that enable token issuance this past quarter. Japan’s Financial Services Agency has enabled self-regulation by the token ecosystem in the region through the setting up of a ‘Virtual Currency Exchange Association” consisting of industry leaders in the region.
  • 27. Outlier Ventures Proprietary Information This research is private and confidential and has been provided to you to help build knowledge and understanding in the emerging blockchain and DLT space. This information is provided ‘off the record’ and we would appreciate it if this content is not quoted directly. We would be glad to prepare comment for publication, please contact using the details below. Research enquiries research@outlierventures.io For marketing or event speaking enquiries marketing@outlierventures.io Partnership enquiries partnership@outlierventures.io
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