Animoca Brands: A crypto winter king wants to reanimate the industry

Animoca Brands, once a small video game studio, is building a portfolio of more than 340 finance, gaming, and social media companies.

The so-called crypto winter has wiped out $2 trillion in digital currency market value since November, and many investors have gone into hibernation. Yat Siu, the head of Hong Kong-based Animoca Brands Corp., is on the offensive.

Animoca, Asia’s biggest investor in blockchain projects, is assembling a vast portfolio of finance, gaming, and social media companies, more than 340 in all. The goal, says Siu, is to give people ownership over their virtual properties and break up the empires of Meta Platforms Inc. and Microsoft Corp., which he describes as “digital dictatorships.”

Siu’s strategy was informed by the digital currency crash of 2018, when he turned his small video game studio into a crypto investor. The startup purchased a stake in the maker of CryptoKitties, a Pokémon-like game with virtual cats that can be bought and sold with digital money, and kept buying. Just four years later, Animoca is one of the crypto industry’s most influential investors, with backing from Sequoia Capital and George Soros.

“If people say this is a crypto winter, then 2018 was the crypto ice age,” Siu says. “Now is the time to deploy more capital, not less.”

If successful, Siu could become a gatekeeper of a different sort. An investment from Animoca, like one from the venture capital firm Andreessen Horowitz or Sam Bankman-Fried’s FTX in the US, is seen as an imprimatur of legitimacy for a crypto startup in Asia, and its absence a sign of concern. Now that Animoca is one of the few organizations left investing, Siu’s checkbook is an even more powerful weapon—and one that could severely backfire if this downturn doesn’t play out like 2018’s.

“Animoca can invest at any stage, any time they want,” says Brian Lu, founding partner at Infinity Ventures Crypto, which counts Animoca as one of its backers. “People are saying, ‘They’re everywhere, so if Animoca is not invested in you, what’s wrong with you?’ ”

Siu’s entrepreneurial career began in the 1990s, when he started several software companies, including one he had to support using his personal credit card. That startup, Outblaze, sold its cloud messaging business to International Business Machines Corp. during the global recession in 2009, enabling Siu to co-found Animoca in 2011 and explore a passion for video games. The studio helped churn out hundreds of mobile games but failed to consistently turn a profit. In the company’s darkest days, Siu dismissed half of his staff and agreed to sell equity at a discount to raise capital.

Cartoon cats offered a lifeline. Animoca’s knowledge of the Chinese gaming market helped it land the distribution rights for CryptoKitties in the region. At the peak in late 2017, some cats traded for more than $100,000 each. When the market chilled the next year, Animoca bought its stake in the game’s creator, Dapper Labs, which turned out to be a winning bet. (Dapper is now valued at $7 billion.) From there, Animoca acquired the developer of a metaverse app called the Sandbox for $5 million and helped persuade SoftBank Group Corp. and other backers to put in $93 million last year, the first crypto deal for SoftBank’s Vision Fund 2. Animoca backed another hit crypto game, Axie Infinity, as well as OpenSea, which would become a popular marketplace for nonfungible tokens, including those from CryptoKitties and Axie.

But the model for these games hasn’t yet proved to be sustainable. In CryptoKitties, ownership of the most valuable cats over time became concentrated in a select few players, and people who weren’t willing to spend money on in-demand breeds became disillusioned and stopped playing. As the game’s popularity faded, Animoca offered some promotional support but ultimately determined the market wasn’t ready, says Siu. The company has largely abandoned the game.

Animoca chases “the biggest startups. I don’t think it’s bad, but it doesn’t make the people who were supported in the past feel good,” says Benny Giang, a creator of CryptoKitties who left to start another blockchain venture. “That’s what Yat is still doing today, making a lot of deals everywhere. Only now it’s even more intense.”

Axie Infinity is showing signs of a similar boom-bust cycle. The game’s economy got so overheated that wealthy players pioneered a channel of online exploitation in which they acquired lucrative assets and rented them out to people in developing countries who spend all day toiling for digital money. The crypto crash hit Axie Infinity hard; its daily user base plunged to 250,000, from more than 2 million at its height late last year.

Even the concept of ownership in the games is questionable. In March, Animoca shut down its three-year-old racing game, F1 Delta Time, after failing to renew a branding license with the organizers of Formula One. Players who’d spent hundreds of dollars on drivers and car parts for the game were suddenly left with worthless blockchain tokens. Animoca gave away assets for other racing games as compensation, and an Animoca-backed studio called 99Starz plans to make a racing game without the Formula One license that will support versions of the old game’s NFTs, Siu says. He says this shows the enduring value of blockchain-based assets.

There’s also a persistent question about whether these are games or simply instruments of financial speculation. In one pitch session with the company’s investment team, the maker of an NFT game was asked to skip past the slides in the presentation that were about the game’s mechanics and instead focus on its token economics, says the presenter, who asked not to be identified because the discussion was private. In another, an Animoca representative asked an entrepreneur to hand over free tokens in exchange for an endorsement and business advice, says a person familiar with the interaction. Ibrahim El-Mouelhy, a spokesman for Animoca, says the company doesn’t comment on individual startups and that “our long-term commitment is best seen through the lens of history.”

As Siu describes it, his ideal world is built around a sort of moralistic free market. “As an organization, we do believe in the capitalist incentive,” he says. “It’s not that everything must be equal in its distribution, but rather, whatever you end up making still has to broadly have a net benefit to everyone else in your community.”

Siu sees investing as a means to an end and considers himself a gamer at heart. His office looks like it was designed for a Twitch streamer, complete with a chair built for playing PC games. Siu, 49, has the wiry frame of a long-distance runner and the athletic attire to match. The headquarters in Cyberport, Hong Kong’s aspiring Silicon Valley, is populated by about 150 of the 800 global employees.

A normal workday for Siu can go until 3 a.m., he says, with two-thirds of his waking hours dedicated to Zoom calls. Over the past few months, the father of three has shuttled between Hong Kong, Japan, San Francisco, and Zurich, meeting with regulators and industry heavyweights while giving his spiel on the path to true digital property rights. “I gain energy from the work that I do, so it doesn’t feel tiring for me,” he says.

It’s mostly paying off for Animoca. The business last year booked almost $300 million in NFT and crypto sales, up from $5 million total revenue in 2017 when it was just a game developer. In July, investors valued the company at $6 billion.

Securing that funding wasn’t easy, though. The talks dragged on for months, Siu says. Bloomberg News reported that some prospective backers, including buyout giant KKR, were scared off by the collapse of TerraUSD, a so-called stablecoin that proved to be anything but. Siu declined to comment on specifics. “Everything in the [crypto] market ended up becoming a little scary,” he says.

Even after the July funding deal, some Animoca shareholders were shopping their stakes at 30% to 50% discounts to the company’s current valuation, people familiar with the offers say. El-Mouelhy, the spokesman, says such secondary transactions are small and not indicative of the company’s prospects.

Animoca’s present focus is on moving everything it touches to a blockchain. That includes a tutoring app called TinyTap that it acquired this summer for $40 million. Meanwhile, an Animoca subsidiary, NWay Inc., is working on a game based on Bored Ape Yacht Club, the most famous NFT art collection. Animoca holds a stake in Bored Ape’s creator, Yuga Labs, and a significant allotment of ApeCoin, tokens that grant voting rights on how the project evolves.

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