The Story of Signal Zero: Esports and Crypto
This is Part 2. Go back and read Part 1 if you haven’t.
In early 2017 I was looking for a match. At this point, I had spent millions of dollars on proprietary software development that would detect and stop cheaters. I had a rewards platform that supplied users with hundreds of gift card options. I didn’t owe any investors. I had (somewhat) significant revenue. I had millions of users on TokenWall. What could I flip this into?
At the time Esports was all over the news and in mobile Esports meant Skillz. With Skillz, each player would wager their cash on a skill based game and the winner would take most, leaving some for the house. The company was growing quickly and it seemed had found a product-market fit.
All the moving pieces of what we already had was close. We needed some differentiation and it seemed getting a product to market would take no time at all. When it came to differentiation, I remembered playing games at Chuck E. Cheese as a kid. Dave and Busters has a similar system in place now. On the surface, its a simple simple system. Pay money to play a game and the higher your score, the more tickets you’d get. You could trade those tickets for prizes (stuffed animals, toys, electronics etc). We thought to ourselves how we might simulate this experience digitally as a way to differentiate from Skillz and offer a new flavor to the market place.
Ultimately, we landed on a competitive gaming system that tracked and averaged player scores in “real-time”. The system would update itself frequently (minutes) to accommodate new players and changes in skill based on day-of-the-week and even time-of-day. This created a sort of “living average”. Based on the set of scores and its average(s), the system created performance “buckets” that determined how many tickets the players would get (which could be exchanged for cash or cash value).
This created an experience where a player playing a mobile game by themselves, could opt to “wager” $5, but instead of playing against another player, they were playing against all players and trying to beat the average. Because of this, there were no queues to wait for an opponent, and every player always won something, even if it was often less than what you wagered. This also made it (hypothetically) easier to keep wagering. You were never at zero. We named the app TapRivals.
Once we had our mobile web app and systems in place, we knew we’d need to lawyer up. Gambling is illegal in the USA without a license, and we wanted to make sure that our app and platform didn’t end up on the wrong side of the law. We hired some of the best attorneys in the space for the US market. I am not a lawyer and you should not use me or this post as a source for legal advice, but in summary the lawyers explained that our operation should be legal in most (but not all) states as long as the games were skill based. The slippery slope is that skill vs luck is not black vs white and opinions may vary from case-to-case and court room to court room. We put some safe guards in place (legal and technical) and decided we were confident enough to launch. We weren’t confident we would be approved on Apple’s or Google’s stores, so the first version of Tap Rivals was a mobile website. The last thing we had to do was find a payment processor.
PayPal immediately denied. It was a compliance nightmare. This denial was quickly followed by Stripe and a handful of others. Eventually, I was put in touch with some folks on the payment team at Amazon and we were quickly approved (!!!). This was especially exciting because the hunt for a payment processor had been going on for a few months.
We put TapRivals through a beta launch and the results were moderate but promising. Its always hard to get people to pay money. The platform had 6 classic casual games to start. We saw players playing the free mode where they were unable to win money sometimes hundreds of times per day per player, but the conversion rate to paid was low. My concern had been that it wasn’t always clear to the player how much they would be able to win when they wagered their money. With Skillz, players knew exactly how much they’d win or lose each time they played. With our system based on moving averages, it was clear that higher scores won more money, but it was a lot of text to dig through to see specifically what your prize would be for each score on each game. Since this was all based on moving averages, it could change every few minutes.
We were marketing the platform on Facebook and Google and while we were unable to find an LTV that exceeded our CAC, we had high retention and sign-up rates. I decided to continue to work on the conversion to paid (wagering) users with in-app store optimizations and trying to make the reward amounts for players clearer and easier to understand. By now it was Q3 in 2017, and Bitcoin’s price was exploding.
Crypto Crazy: Proof-of-Skill (Q3 2017 through Q3 2018)
Signal Zero had always had a “toe-in” with Crypto. In 2014 TokenWall was featured on Fox Business (Risk and Reward) because its users could redeem points earned from trying new apps and games for Bitcoin and a few other crypto currencies. I’d been reading about all of the ICO madness in 2017 that seemed to be driving the price increase for Bitcoin and other crypto “thingies” and the amount of money being raised by unproven products and first time entrepreneurs seemed absurd (it was!). I’ve learned over the years that cynicism can inhibit one’s ability and potential to make money. Markets and various industry trends are often irrational. Why scoff when you can join in the fun.
TapRivals was a fully built product with users and at least fledgling revenue. Not to mention that TokenWall (while declining) was still a potent revenue driving annuity with millions of users. Each had their own virtual currencies already (points, tokens, tickets etc), so the use case was already there. I’d given a lot of thought about my company’s various virtual currencies could all be unified into a crypto-asset. I wasn’t a complete noob with crypto, but I wanted to reach to my network to see what the experts thought.
Early on I spoke to a prominent entrepreneur in the Esports space that was finalizing his ~$30MM ICO raise. I wanted to hear from someone that had gone through this what it was like and if it was worth it. “Its insane”, he said. “I never dreamed raising so much money would be so easy. Its crazy town”. But I will never forget what he also told me. “This isn’t like the normal startup industry. When people hear you have a real business and are going to do an ICO, every crypto-cockroach in the world is going to scurry its way to your doorstep trying to hustle something. Be wary.” Point taken.
I was eventually introduced to an engineer that had already created two of his own crypto-currencies with live main-nets and tokens being traded actively on a few exchanges. I shared with him my plans and he seemed relieved that I already had a business with products that had users and revenue. Most people in the space at the time, he claimed, were scammers with “shit coins” trying to get some easy money, but with no real plan. Sounded familiar. I need to make sure I keep my guard up for sure This guy was my technical expert that I could rely on to help deliver our asset. I made him an advisor.
Next, I managed to get an introduction to one of the most prominent Esports advisory firms in the space, whose Co-Founder was also a well known sports agent that was deep in crypto himself. They loved the plan, put a small investment in and signed an advisory agreement to help bring in more investors and eventual adopters. I’d also managed to sign up a second “ICO Advisor” that had been through a few high profile ICOs already. This individual had a background with Goldman Sachs and a few prominent VCs in the bay area.
Working through the White Paper was a great way to solve my way through the details of functionality and utility of our crypto asset. Bitcoin had the classic proof-of-work consensus mechanism, but many of the contemporary crypto assets were using proof-of-stake models. TapRivals seemed to have a perfect system already in place. If we could leverage our skill tracking algorithm from TapRivals that was used to determine how much money a player would win to instead be leveraged as the system used to “mine new units of our crypto” then we could literally turn any game into a crypto-minting-machine. More relative skill, more crypto. The more crypto that has been generated, the more and more skill it takes to make more, until a horizon is reached. We started to attract serious attention from game pubs.
By this time, I had probably a large amount of capital verbally committed and circling our raise, with significant portions coming from Singapore and China. Now for everyone’s favorite part, talk with the lawyers. I selected one of the most prominent and well respected securities law firms in the USA that was deeply involved in crypto and its related law and regulation.
(AGAIN DON’T USE THIS POST AS LEGAL ADVICE, GET A REAL LAWYER)
Lawyers are . . . well they are lawyers. My team of highly competent lawyers told me in many words what could have been told to me in just a few, “We have no idea if this is legal, its super high risk”. LOL.
Their advice was clever. Don’t have an ICO. Instead, use a sort-of convertible note (SAFE-T) which can later be converted to equity or your crypto-asset depending on various conditions, essentially kicking the can down the road. The exact way all of this was worded made everyone somewhat comfortable, but along with it came the need for a few things: Investor Accreditation for each individual or entity investing, along with KYC (Know Your Customer) and AML (Anti-Money Laundering) checks. I spoke with my crypto advisors and they told me this was a “new trend” of legal advice, and not something groups raising money via ICOs were doing in 2017 and before. OKAAAAAY.
I wasn’t too concerned, most of my soft-circling seemed to be legit crypto funds or individuals. I ended up working with Verify Investor for accreditation and Identity Mind in San Francisco for the KYC and AML checks. We built a nice portal for all of our investors with links, instructions and contact information.
At this point, the project had been covered by IGN, Coin Desk, Games Beat and plenty of others. We had a telegram room with over 30,000 people in it, asking questions, getting involved with a lot of excitement, but something started to change. Now it was May and the Crypto markets had been “correcting” for a few months. It was starting to look like a crash and sentiments were changing. Many ICOs weren’t filling their rounds when just a few months prior they were all over-subscribing.
I was at E3 in 2018 talking with game publishers and journalists about the project. It was about midway through June and there are a few moments I clearly remember. I was talking with one of my advisors at a happy hour, showing him the price of Ether of my phone and how much it had fallen. I looked directly at him and told him, “We have to understand the party is over, the longer we hang on the harder its going to be to accept”.
He’d reluctantly agreed. TokenWall’s revenues had fallen significantly since 2016 and I was worried that the soft circled investment would fall out. At this point, I had raised around ~$500k either to boost TapRivals in 2017 and from early advisors for the crypto project in 2018, but to pull all of this off with declining revenue, I’d need more.
I had heavy doubts, but I proceeded with my close. Almost no one invested. Instead of getting the $10-$15MM we’d counted on, we had a few investors that ultimately backed out when we told them no one else was coming in. At the time, this was par-for-the-course. High profile ICOs were folding left and right as the market crashed and a number of crypto related projects were coming under high scrutiny. I‘d quieted my initial cynicism by telling myself markets are often irrational, but we just didn’t time it right and missed the boat. WTF now.
This concludes Part 2. Click to continue to Part 3.