Justifying Token Equity Multiples using GDP Data
Tomasz TunguzVenture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. Justifying Token Equity Multiples using GDP Data
When investing in a crypto startup that will issue a token, an investor considers two prices - the price of the equity and the price of the token. There’s a rule of thumb used today that states the token should be worth 3-5x the equity. A founder informed me the rationale is that a share in a company has a lien on the future dividend streams, but a token has a lien on profit share of the GDP around an economy and that economies tend to be 3-5x larger. Walking home from a meeting with a crypto team in Brooklyn, my colleague, Alex, I played around with this idea. Is 4x the right number? We tried to calculate the GDP of Salesforce’s ecosystem and the Google economy, but we were guessing. Where could we find analogous data? The best data I found is the economies of countries. Each country charts a GDP figure and publishes a tax rate. With those two numbers, we can derive the token valuation equivalent for countries. It’s not a perfect analogy but good enough for a thought experiment. Here’s the analogy in a visual form. Google creates an economy around itself. Google taxes that economy by charging for ads on search pages and captures a portion of that GDP. A country develops an economy and captures revenue as taxes. If we can compute the GDP/Tax Revenue multiple for countries, we could make some observations about whether they might hold for crypto companies. Let’s call this number the Economy/Tax Revenue Ratio or ETR.
I pulled data from the OECD and found some interesting things when analyzing all countries' data. There is no relationship between size of economy and tax rate. Nor is there any relationship between the GDP and the ETR multiple. We can observe the median ETR multiple is 4.9x. If we examine G10, the 10 largest economies, median ETR is 3.5x and the 75th percentile is 5.2x. The chart orders the countries by GDP, largest on the bottom. Those figures are consistent with the crypto rule of thumb. The correlation between the growth rate of the economy (using 2019 data and the ETR) is 0.8. This is surprising and may say something about the efficiency of markets even at global scale. Ok, that was a lot. Let’s recapitulate.
How does that map to crypto? If we use our analogy of country::economy as crypto-company::economy, then the multiples resemble each other. But, the growth rates and tax rates of countries and crypto companies couldn’t be more different. The major differences are that crypto economies are growing orders of magnitude faster than most developed economies. Ethereum generated as much revenue last month as all last year, for example. No crypto token collects 24% of revenue, as the median country does. In summary, if you assume the significantly greater growth rates of crypto companies offset the meaningfully lower tax rates, then you might be able to pencil out a 3-5x token:equity multiple. But, at least using this data set, the conclusion remains quite a leap, and my hunt for a better proxy data set continues. |
Older messages
The Need for Two Types of Payback Period Calculations
Monday, November 8, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. The Need for Two Types of Payback Period
The 100x ARR Multiple
Thursday, November 4, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. The 100x ARR Multiple The 100x ARR multiple might
Hex - The Best Product for the Technical Analyst
Wednesday, October 20, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. Hex - The Best Product for the Technical Analyst
Using the Reversal Mental Model to Invest Better
Tuesday, October 19, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. Using the Reversal Mental Model to Invest Better
Spot.ai - The Future of Video Intelligence
Friday, October 15, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. Spot.ai - The Future of Video Intelligence co-
You Might Also Like
Last call for cohort 4
Thursday, April 18, 2024
Enrollment ends at Midnight tonight It's the final countdown Hey Un-Ignorable folks! Quick note: Enrollment for the April 22nd cohort of UNIGNORABLE closes tonight at Midnight Pacific. The
Lessons from 1,000+ YC startups: Pivoting, resilience, avoiding tar pit ideas, more | Dalton Caldwell (Y Combinato…
Thursday, April 18, 2024
Dalton is Managing Director and Group Partner at Y Combinator. He's advised more than 35 YC unicorns, including DoorDash, Amplitude, Webflow, and Retool, and has worked across 21 different YC
‘France’s top incubator’?
Thursday, April 18, 2024
We join France's startup scene for karaoke night, Entrepreneur First's demo day in the US and Doctolib's founder factory. View in browser Notion logo flagship Good morning there, Do you
[CEI] Chrome Extension Ideas #137
Wednesday, April 17, 2024
ideas for Twitter, SVG, YouTube, and Jio Cinemas ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏
62 new Shopify apps for you 🌟
Wednesday, April 17, 2024
New Shopify apps hand-picked for you 🙌 Week 15 Apr 8, 2024 - Apr 15, 2024 New Shopify apps hand-picked for you 🙌 What's New at Shopify? 🌱 Redirect to URL after Form submission in Shopify Forms
Introducing the new Board view
Wednesday, April 17, 2024
Drag and drop your way from "To Do" to "Done" with Buffer's new Board view. Keep track of your ideas with Buffer's new Board view 🎉 If you're a fan of Trello or
The Market Size Mistake
Wednesday, April 17, 2024
Tomasz Tunguz Venture Capitalist If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. The Market Size Mistake Over the weekend, Tobi, the founder
Hyprvisor, StaticHost, Cuppa, SpeakNotes, Breezemail, and more
Wednesday, April 17, 2024
AI Voice Note Summarizer BetaList BetaList Daily Breezemail Exclusive Perk keep your important emails in your inbox and categorizes the rest with AI UserCall AI moderated voice user interviews
the 2 hour rule
Wednesday, April 17, 2024
Read this in 1 min, 17 sec Picture this: It's 7AM in the morning. Everyone's asleep. No cars driving on the streets. Just... quiet. That was me last Saturday morning. Over the weekend, I
Loved the summit? Keep the momentum going 👉
Wednesday, April 17, 2024
This was just the beginning. Special invite inside… , Thank you! It's been incredible having all of you join us for the Start Your E-commerce Business Summit. Whether it was sourcing your products