Polygon's $450-mn funding: Is it Flipkart moment for blockchain in India?

The Indian blockchain start-up's massive funding round has many implications for Web3 companies and VCs in the crypto arena

Indian blockchain start-up Polygon does not earn any revenues — and says it does not have any such plans for the future, too. Yet, it has amassed a funding round of $450 million led by Sequoia, SoftBank and Tiger Global at a valuation of around $10 billion.

Founders and VCs alike say it may turn out to be the Flipkart moment for India’s blockchain ecosystem. While Indian crypto exchanges have attracted large funding rounds earlier at unicorn valuations, Polygon’s funding is closer to the ethos of decentralisation of Web3, an idea for a new iteration of the World Wide Web based on blockchain technology, as it involved tokens.

“We all know how Flipkart’s big funding rounds attracted investments in other e-commerce companies in the country. Alth­ough the crypto ecosystem has also bagged big funding rounds, till now it just happened with the exchanges. Polygon’s success will encourage many talented foun­ders to not only build in the Web3 space, but also do it from India — rather than go out to Abu Dhabi, the US or Singapore,” said Ashish Singhal, co-founder and CEO of CoinSwitch Kuber, a crypto exchange valued at $1.9 billion.

Industry insiders said the Polygon deal had already been finalised at the fag-end of last year and word had spread. As a result, investors have been scouting for young blockchain start-ups in India. For instance, a source close to the developments said home-grown blockchain start-up EPNS (Ethereum Push Notification Service) is in talks with Tiger Global to raise around $10 million at a valuation of $140 million.

Harsh Rajat, founder and CEO of EPNS, declined to comment on the company’s funding horizon but conceded that the $450-million funding round might turn out to be an inflection point for India’s blockchain start-ups. “These funds will give Polygon the wherewithal to attract the best talent globally. In a couple of months, we will also be deploying our product on Polygon’s network,” he said.

But that still does not answer how it got to a $10 billion valuation with no revenue to show. To begin with, it is important to understand what Polygon does. The block­chain start-up has built a layer-2 scaling network on top of the Ethereum blockchain. In a rough analogy, while the Ethereum blockchain can be imagined as a massive highway with speed and cost issues for transactions, Polygon offers a flyover that is more efficient.

For this reason, the Indian start-up’s platform has become one of the most popular pieces of blockchain infrastructure in the world, experts said. It allows developers to build and scale Ethereum blockchain-based applications for projects related to decentralised finance, Web3 and the metaverse, among others. The company says it has over 7,000 decentralised apps (DApps) built on its platform and more than two million daily active users.

What does Polygon do?

• The blockchain start-up does not earn revenues
• It has built a layer-2 scaling network on the top of the Ethereum blockchain. While the Ethereum blockchain can be imagined as a massive highway with speed and cost issues for transactions, Polygon offers a flyover that is more efficient.
• It allows developers to build and scale Ethereum blockchain-based applications for projects related to decentralised finance, Web3 and the metaverse, among others. The company says it has over 7,000 decentralised apps (DApps) built on its platform and more than two million daily active users.

How did it attract funding of $450 million?

• As more and more metaverse and Web3 apps use the network to build their products, the value of Matic – Polygon’s native crypto token – rises in the crypto market. This, in turn, incentivises the holders of the Matic token such as the founders and big investors to make the platform bigger and better.
• The valuation is determined by Matic’s price

So, as more and more metaverse and Web3 apps use the network to build their products, the value of Matic — Polygon’s native crypto token — rises in the crypto market. This in turn incentivises the holders of the Matic token, such as the founders and big investors, to make the platform bigger and better.

“The valuation was mostly determined by Matic’s price. In a sense, Polygon has been a listed company for a while and Matic is like equity shares. With the public market having decided a certain price, VCs would not have much choice but to follow suit,” said Anurag Ramadasan, partner at VC firm 3One4 Capital.

Matic, which is sold on most top crypto exchanges, had a market capitalisation of around $13 billion on the day the funding was announced.

Polygon’s funding round also shows that the relationship between a VC investor and an investee company in the Web3 world is very different from the Web2 world that we inhabit currently.

Sandeep Nailwal, co-founder and CEO of Polygon, said although it will receive the $450 million at one go, the VC investors will not receive their equity — in the form of tokens — in a single tranche. Their tokens will vest over a period of three years, which means they will receive 30 per cent of the tokens every year.

“This is a common structure in the Web3 world to protect retail investors. For VCs, the aim is to make a specific multiple of returns on an investment. Given that crypto prices can move up very fast, the concern is that institutional investors might dump their tokens once they hit their goal,” he explained.

Another thing is that VCs are never all­owed to have so big an equity stake that they can unilaterally call the shots in a blockchain project — so as to maintain the ethos of decentralisation of Web3. At the beginning, a certain amount of equity is kept aside for institutional investors for funding and that helps cap their influence in the company.

But are VC investors comfortable in such a set-up? Experts said VCs investing in Web3 will have to rethink their perspective in a world without IPOs and the shifting of corporate governance away from a company’s closed boardroom.

“In the Web3 world, things change dramatically. Even large funds may not have more than 1-2 per cent of the token cap table in a project. Some VCs will be able to adapt to the decentralisation of the Web3 world whereas others won’t,” said Nitin Sharma, a partner at VC firm Antler India.

However, he cautions that token-based communities are still a work in progress and no one really knows where exactly the future is headed. “Many more Web3 funding rounds are in the pipeline, but Polygon is a special case of a global market leader,” he said. “We are still early, and yet to see mass adoption of a real-world application on the consumer side in India. So, that ‘Flipkart moment’ hasn’t happened yet.”