How Atomic Loans Raised $2.45M from Initialized & Consensys
What crypto fundraising looks like in 2020
On Tuesday Atomic Loans made an exciting announcement — their protocol for Bitcoin-backed loans is live and they’ve raised a $2.45M seed round led by Initialized. I’ve been using the beta product for the past few months and am super stoked to finally see them launch.
Founders often have a really interesting perspective on fundraising — they’re the ones doing it! — but investor voices tend to be much louder. Over a year ago, I published an interview with Set Protocol’s Felix Feng about his fundraising process, but a lot has changed over the past eighteen months — funds have come and gone and a lot of investors have refined their theses.
Atomic Loans co-founder Tony Cai was generous enough to spend an hour last week hanging out on Zoom and chatting about their fundraising process. Tony and I covered a number of things including:
🧳 Diligence: the topics that different types of funds focus on
💻Proof points: product and marketing landmarks they wanted to hit before fundraising
🏦 Market sentiment: how investors are thinking about BTC and DeFi
🗒️Fundraising Tips: what Tony would do differently next time around
(We didn’t cover COVID or macro-economic impacts on fundraising because Atomic Loans finished their process before the virus had really impacted markets)
RB: Can you give me some background on yourself and Atomic Loans?
TC: I’m Tony, CEO of Atomic Loans. We’re building a protocol for non-custodial Bitcoin backed loans. The story of how we got here is kind of funny. My co-founder and myself were moving to Toronto for our ConsenSys internships. My co-founder Matt was starting an internship at Liquality, which is a Consensys project focused on atomic swaps. I was starting an internship at OpenLaw.
We were shopping around for an apartment to rent and finally found a place, but they needed four months rent upfront. We were just coming out of school and didn’t have much money at the time. We had some Bitcoin but didn’t really have any Canadian dollars, which we needed to make this rent payment. And so we started to look at this market and we saw that on the Ethereum side, decentralized finance was starting to pickup where you’ve got things like Compound, you’ve got things like MakerDAO, and you’re able to collateralize your ETH in a decentralized way to get access to stablecoins.
But on the Bitcoin side, all you really had was centralized gatekeepers like BlockFi or Nexo. These companies have a couple of issues — first, you need to trust them with custody of your Bitcoin. Second, there’s also all sorts of jurisdiction requirements, which as a Canadian, sometimes that’s tricky because some platforms are not made available here. And so we’re thinking, okay, well there’s a bit of a gap between Bitcoin and decentralized finance and there’s not really any solutions that are bridging that gap. And that’s how we started working on Atomic Loans.
RB: That’s super cool. And you guys were both doing CS at Waterloo before this, right?
TC: That’s right.
RB: Coming from that program, I’m sure there were a lot of different internships you could have done. What got you into Ethereum? Why did you want to go work on these projects at Consensys?
TC: My co-founder Matt was my roommate at Waterloo, he was the person who got me into the dark side. He initially actually got into Bitcoin back in 2014, doing some small amounts of trading. It wasn’t until 2017 that Matt got me into it and the main reasons I was really excited about blockchain and crypto and Ethereum, was actually after this talk that I heard [Ethereum Co-Founder] Joe Lubin give. He talked a lot about the power of how there’s lot of centralized institutions who are dominating our financial systems, and how blockchain has the ability to remove a lot of that trust from these central authorities that are in the middle. And that’s how I got really excited about Bitcoin and Ethereum.
RB: What was the journey from you and Matt starting to discuss Atomic Loans to actually incorporating and then raising a small round from Consensys?
TC: During our internship, Consensys had this initiative where it was a company-wide pitch day where they would select seven teams across the company to pitch, and then choose two teams from that to fund. We were really fortunate to be selected as one of the teams who they selected to fund. So we received a $200K pre-seed investment and then started getting to work validating the concept, both from a customer and a technical standpoint.
RB: So what happened after you got this money from Consensys? Did you leave school?
TC: So we pitched Consensys in November 2018 and took a break from school starting in January 2019 and went full time on this after we won their pitch contest. It was a tough discussion because at that point both of us had finished two years of school and the CS program at Waterloo (with the co-op and internship program) is a five year program. So we were kind of far off from graduation — and we thought that if we waited for a couple of years to finish school, the whole space could be completely changed at that point because of how quickly it moves. So we decided to take the opportunity right then and there — I had to do a bit of convincing with my parents to get them behind this, but yeah, that’s how we got started.
RB: So from that point of dropping out to our first conversation, which I think was October 2019, what happened? What did you feel like you had to prove before you went out to raise more money?
TC: We focused a lot on talking to customers and designers, we worked with a couple of advisors in Consensys who are product designers by trade. They helped us a lot in terms of lining up a bunch of early customer interviews, validating the problem that we’re trying to solve, and really learning from them in terms of what their expectations of a product that would solve their problem would be. And so we took those learnings, put it down on paper and started thinking about what would be required as an MVP for the product.
From there, we spent a lot of time building. It was a lot of picking up new roles during that time. So for myself, as someone with a computer science background, it was really the first time I had any exposure to doing things like business development or design. It involved a lot of learning a lot about things I had never really done. Matt was focused on primarily on building product. We know that in order to raise more money we wanted to get the product completed and out there on main-net (and hopefully audited).
So that’s the goal we were working towards. From there obviously we wanted to get some initial validation in terms of customers doing a bit of borrowing and lending activity on the protocol as well. So basically that’s the milestone that we were working towards. We built out the initial MVP, deployed it on main net, got audits from Consensys Diligence and Quantstamp and then onboarded some early customers and then we went around to start a raising process.
RB: So you get to this point where you’re ready to raise a seed round — I imagine you had some goal right? We want to raise X million dollars at this valuation, there’s Y number of funds we think that are relevant to talk to? I’m curious how thought about the fundraising process and how you went about running that.
TC: So I started by doing a bit of reading on a bunch of blogs including some of the material that you’ve published including your previous interview with Felix Feng of Set Protocol. In terms of the process, it really started with building out a list of investors and then prioritizing that list based on who we had seen them invest in previously. So we prioritized folks that had a lot of activity in the DeFi space or had emphasized Bitcoin.
We split our list of investors into three cohorts and basically each cohort had maybe eight to 10 investors. So we prioritized cohort A, the ones that we thought had the highest likelihood in terms of being interested and then kind of went from there.
Initially, we spent a lot of time getting feedback on our deck from some of our closest contacts, whether that was in Consensys or other advisors. And then from there, making sure that we had an introduction for each of the names on our investor list. And then we just asked for intros, sent them the deck. And then we set up the initial meetings from there.
RB: So were those cohorts just ranked based on how relevant you thought that investor was?
TC: Exactly — relevance in terms of what they’ve invested in previously, the typical size of the deals that they’ve done previously, and a bit of research into the thesis and what they like to talk about on Twitter.
RB: In terms of sequencing, was it just we want to talk to people who could lead and price the round first and then we’ll figure out the rest?
TC: Yeah, we definitely prioritized folks who could lead. Basically our idea was that if we’re able to secure a lead that was fairly prominent and well known in the space, then we’d be able to line up the remaining investors in a very short amount of time. And that was the approach we took.
RB: How did you come to meet Initialized? What did their diligence process look like?
TC: So the way we first met them was that we were connected with the founder of Sparkswap, Trey Griffith. He’s a good friend of ours and before their recent pivot, they had very much focused on financial tools around Bitcoin. Initialized had led their seed round last year and so we wanted to make sure that he was confident in what we were building before asking him for an introduction to Initialized. And so once Trey felt comfortable, he made the introduction to Brett Gibson, who is the partner at Initialized mostly responsible for crypto investments. We also had been working with Min Teo from ConsenSys and she knew Brett, and so was able to put in a good word there as well.
In terms of due diligence, Initialized moved fairly fast. We had an hour-long initial meeting with Brett in their office around the time of San Francisco Blockchain Week. We gave him the pitch and he asked a bunch of questions ranging from technical to go-to-market to market-sizing. And then we showed him a quick demo at the end.
At the end of the meeting, I asked Brett if there were any concerns that he had about what we were building or our approach. He had a couple of points that he listed out and so I thought that was a really good opportunity to follow up a couple of days later in an email and really have concrete answers for him on these points. I found this practice really helpful and would definitely suggest anyone fundraising do the same.
Brett then reached out inviting us in for a partner meeting and after that we spent a bunch of time with some of our advisors doing mock partners meetings. Then we basically went into the partners meeting, met the Initialized partnership and then gave the pitch and answered their questions.
RB: Well obviously there’s a happy ending to that story! To switch gears a bit, I’m sure you had some conversations that ended in no’s. Can you walk me through any themes in those rejections?
TC: There were definitely a couple of consistent themes that we saw rejections center around. So a few investors basically said, look there’s a couple of different approaches on bringing DeFi to Bitcoin — you have Keep working on TBTC, you have Ren — it’s unclear to us who’s going to come out on top and so we’re going to pass at this time.
There were also a few funds that were concerned about value capture and monetization. Their feedback was basically that it’s really unclear if there was going to be significant value capture at the protocol level in DeFi, and so they were concerned from a revenue standpoint.
RB: Were there any funds that you got introduced to or saw the deck, and basically immediately passed on market?
TC: Yes. There were a few funds that had previously invested in some of these decentralized finance projects such as decentralized exchanges and hadn’t seen them take off as much as they wanted to, and were now more hesitant on investing in decentralized finance. So there were definitely funds that were like that for sure.
RB: Your initial investor was Consensys, which is all-in on crypto and specifically Ethereum. Initialized is a sector agnostic seed fund — they have bets across a lot of markets. What were some of the differences in approaches between crypto and venture funds?
TC: Something that immediately comes to mind is that when we were talking to crypto-focused funds, the conversations tended to be a lot more solution-focused, in terms of how we’re implementing this, how does this compare to other solutions. Often these conversations would even get into the nitty gritty of how our solution is being implemented technically.
Our conversations with sector agnostic venture funds were every different and focused much more on go-to-market and market size. For example, what have we done so far in order to validate our customer segments and the pain points that we’re addressing? And what’s our vision moving forward?
RB: Let’s talk about your business model. You obviously don’t have a native token, unlike some of the other Bitcoin in DeFi approaches (like Keep and Ren). I’m curious if any funds came to the table with a strong thesis on this value accrual here.
TC: Yeah there are differing opinions on that, there are definitely funds who tend to prefer tokens and prefer investing in tokens. But I think that opinions on this thesis are generally weaker than what they were one or two years ago.
RB: Were there any key themes across your conversations in terms of investor outlook on Bitcoin and DeFi?
TC: I think investor views on Bitcoin are really strengthening, especially the narrative of it being a form of digital gold — that is a common theme that we saw consistently across the investor conversations that we had. And that was something that particularly played well into our hands because it really reinforced the idea of you shouldn’t be selling your Bitcoin. A lot of these investors think that we’re really going to see Bitcoin’s value increase over time, especially with the halvening coming up, and so that was something that played to our strength because it played into our narrative of being able to get liquidity without having to sell your Bitcoin.
There’s also a tremendous amount of investor excitement about DeFi. Most investors that we talked to were trying to enter the space (if they hadn’t already) and start making some bets in this space. There’s a lot of folks who understand that DeFi today still does not address a large part of the cryptocurrency market and that bringing Bitcoin into the equation can really increase the reach of DeFi moving forward. And that was something that played well for us.
RB: Your initial product brings Bitcoin onto Ethereum, where obviously almost all of the activity in DeFi is happening today. Did any investors view Ethereum as a risk to your business? Did any investors have strong opinions on Ethereum competitors potentially upending this market?
TC: We didn’t actually have too many questions regarding Ethereum. Obviously Ethereum is relevant for us as one side of our protocol — the lending side — is on Ethereum. But now that I think about it, it’s pretty interesting that we didn’t get many questions about the Ethereum 2.0 transition or anything like that.
I think Ethereum so far has established itself fairly well as the chain for decentralized finance and the chain for stable coins. Even Tether now has a significant amount of liquidity on Ethereum. And so I think people seem to be pretty confident in Ethereum’s prevalence in the DeFi space moving forward.
Our view on it was that we wanted to build a DeFi solution that makes use of native Bitcoin, and the native Bitcoin chain. This meant that we would we would have access to all of BTC’s liquidity while still being able to preserve the security guarantees of the largest proof-of-work chain in the world. There are certainly differing approaches on ways to bring DeFi to BTC, and unsurprisingly, investors can be split on this as well.
RB: Any final tips for founders going out for a seed round?
TC: Haha I actually wrote down a list after we finished the process! There are certainly things I would do differently the second time around and you can be sure that you’ll learn things as you go. Here are some of those things I picked up along the way:
- Fundraising is really a full time job, so when you’re doing fundraising, I would say go all in. It should be at least one person on the team’s full time job.
- Try to keep the fundraising time as short as possible so you can get back to work.
- Time the fundraise so that you’re talking to all potential leads at the same time
- Focus on getting a lead first — everything will come into place once you get that done
- Make sure you get connected to the right first person at each fund — and really convince that first person
- At end of first meeting, ask — what are the biggest concerns and obstacles you have at this point about our business? Then you have a chance to dispel them early. Don’t wait to hear back with a no
RB: Awesome, thanks for taking the time!
Check out Atomic Loans if you’re interested in learning more about their Bitcoin-back loans.
These are my personal views. This is not legal or investment advice.
