The booming TON ecosystem, why are most VCs currently only observing and not investing?

Author: flowie, ChainCatcher

Editor: Marco, ChainCatcher

Recently, Donald, the founding partner of the FA agency D2 Capital, has talked to no less than 60 VCs, and he found that not a single one is not looking at the TON ecosystem. "Even if they started late, they began researching it three to four weeks ago."

However, despite the interest, very few have actually invested. Most of the VCs Donald has interacted with are still in a wait-and-see mode. Bruce Lan, managing partner at Bing Ventures, has scanned nearly 100 projects but has yet to make a move.

RootData shows that in the past six months, the number of financing rounds in the TON ecosystem is still in single digits. In contrast, the Bitcoin ecosystem, which is equally hot, has seen almost weekly financing during a booming three-month period.

Investment institutions interviewed by ChainCatcher firmly believe that the TON ecosystem is different from any previous ecosystem or narrative and will not be a flash in the pan. However, the gameplay in the TON ecosystem, which already has a ready-made flow of users, has also changed.

NotCoin, which has been listed on Binance and OKX, did not seek VC financing; Catizen achieved $12 million in revenue before issuing any tokens. More than one investment institution has stated, "In the future, it is not necessary for projects in the TON ecosystem to issue tokens."

If crypto VCs continue to view the TON ecosystem solely through the lens of token investment, it may no longer be effective.

No VC Is Not Looking at the TON Ecosystem

Owen, the founder of PAKA, remarked that a year ago, paying attention to TON was somewhat niche, but now almost everyone around him is focused on TON.

At a private gathering during Hong Kong Blockchain Week at the beginning of 2023, Owen received a small USDT transfer from a friend on Telegram. This was a new feature announced by Telegram a month prior.

With nearly a billion users able to trade directly on-chain, Owen was very surprised, as he has always focused on large-scale applications.

After researching with his team, Owen believes that the TON ecosystem will be different from any other ecosystem in the past. "Other ecosystems propose obscure technologies and ask users if they want to come play, but users are indifferent except for grabbing airdrops. Telegram, on the other hand, has a large number of real users and can use Web3 technology to meet these users' needs, which is clearly more aligned with the path of large-scale applications."

However, when he actually began to scan the TON ecosystem, he found it difficult to get started.

Sensibly, Owen felt that many projects were quite lackluster, describing them as "too good to discard, but tasteless to consume." The liquidity was also poor, with TON's TVL at that time being less than $10 million.

Owen initially looked at a TON ecosystem DEX that had an extremely rough interface and thought, "With the development experience of the PAKA investment team, we could probably do better in a week."

Similarly, Shigeru, a partner at CGV Fund, who also looked at the TON ecosystem at the beginning of 2023, was temporarily discouraged after scanning several projects. Besides the limited number of projects and their generally low quality, he also noticed that the entire market timing was not right, "The infrastructure is too lacking; there isn't even a self-custody crypto wallet."

Owen quickly realized that "due to the new programming language and the corresponding infrastructure's inadequacies, it's not that simple to build a good DEX."

But as the TON ecosystem's infrastructure and other aspects began to improve, in just a few months, the projects Owen had "disdained" already had millions of users.

After Telegram announced its exclusive partnership with TON in September last year, it borrowed from WeChat's commercialization path, integrating payment wallets and other infrastructure, allowing 900 million users to buy and sell tokens and NFTs directly on Telegram and participate in GameFi and other ecosystem projects. In April this year, Tether partnered with TON, and TON also launched its own native stablecoin.

At the same time, TON promoted mini-program applications, with a large number of mini-game applications like Notcoin and Catizen quickly completing tens of millions of user registrations. Many small applications can generate significant revenue without relying on token issuance.

The phased success of mini-games like Notcoin and Catizen has also attracted a batch of "regular troops" from Web2 to enter the market.

An entrepreneur providing technical solutions for the TON blockchain and developers often interacts with developers and project parties through offline salons. He mentioned, "Currently, many Web2 game manufacturers and entrepreneurs from ecosystems like WeChat are targeting Telegram." Because traffic on Web2 social media platforms like WeChat and TikTok has become very expensive, and the business is quite saturated.

Some Web2 entrepreneurs are choosing to go overseas, similar to WeChat, and with nearly a billion monthly active users, Telegram has naturally become an important battleground. "The methodologies honed over years of competition in Web2 can be partially applied on Telegram."

Owen also revealed that Web2 game manufacturers like Glacier, Weiyou, and 37 have already started projects in the TON ecosystem.

However, compared to the internal changes in the ecosystem, the more critical factor driving the attention of all APAC VCs to the TON ecosystem is the increased investment from top Western capital in the application layer and the TON ecosystem.

Both Paradigm and a16z participated in Farcaster's $150 million financing this year. Pantera Capital made a high-profile announcement in the first half of this year about heavily investing in TON, with on-chain analysts estimating the investment amount to exceed $250 million. Before this, the TON ecosystem was primarily funded by Chinese or Russian capital.

Donald has clearly felt that after the entry of Western capital, more VCs are coming to inquire about TON ecosystem projects. "Recently, among the more than 50 VCs I've talked to, not a single one is not looking at the TON ecosystem." Shigeru, who was discouraged by the TON ecosystem last year, has also begun to focus on it this year.

Donald stated, "Many VCs understand that the combined market cap of over 50 VCs is only a few billion dollars; relying solely on the funding capacity of APAC VCs cannot drive the TON ecosystem."

The entry of Western capital also means that it may attract more Western developers and project parties to participate. Currently, most of those building in the TON ecosystem are still Eastern entrepreneurs and developers.

Donald has interacted with both Eastern and Western entrepreneurs or developers in the TON ecosystem, and he has clearly felt that Eastern parties are still anxious for short-term monetization, while Western entrepreneurs are more focused on how to create super applications similar to Web2's Facebook and Snapchat around nearly a billion active users.

"Many VCs may expect that after the West raises the bar and creates some new paradigms, the APAC side can create an APAC version, using its cost advantages in traffic and operational capabilities to break through. Two years later, products with a million DAUs may be split evenly between the East and the West."

Why Do Most VCs Only Look but Not Invest?

Donald understands why most VCs he has interacted with are looking but not taking action. Compared to a year ago, the infrastructure and rapid growth of projects in the TON ecosystem are quite evident, but there are still not many investable targets.

Ton.app shows that the TON ecosystem currently has 910 projects, with 60% of them emerging in the last eight months. Donald has mapped out 300-400 ecosystem projects, "90% are games." Owen also mentioned that there are so many games in the TON ecosystem that he can't keep up.

Most mini-game teams do not rely heavily on VC financing.

Owen was in contact with the team behind Notcoin last year, "They were working on a TON ecosystem Launchpad platform called Tonstarter, and originally wanted to invest in Tonstarter, but the team said their focus was on Notcoin and they didn't plan to take VC money, opting for a purely community-driven approach." In fact, Notcoin has not announced any financing.

Even if they were to raise funds, these mini-game teams might only raise a small round during the cold start phase, and the amounts would be minimal. Donald has interacted with several small game teams and found that "they have strong monetization capabilities." Scarlett, an investor behind Catizen's publisher Pluto, stated that through a paid game item purchase module, Catizen has already achieved over $12 million in revenue, with more than 500,000 paying customers.

Simple mini-games are not worth investing in for VCs; many VCs are more concerned about whether the TON ecosystem can produce more models like the 4399 mini-game mall or WeChat mini-games.

Bruce Lan, managing partner at Bing Ventures, has looked at most of the mini-games in the TON ecosystem and, like WeChat mini-programs such as Yangle Yang, predicts a very short lifecycle, disappearing quickly after rapid monetization. "It's hard for VCs to guarantee a positive ROI; these types of projects are more suited for fair launch participation."

Additionally, many of the mini-games in the TON ecosystem have registered users in the tens of millions or even hundreds of millions, "there's still some inflation in the data." Some important metrics for evaluating game performance, such as real users, user stickiness, and future growth potential, Bruce Lan feels are still in an early or black-box stage.

In a highly competitive gaming environment, Shigeru, a partner at CGV Fund, has chosen to focus more on the infrastructure of the TON ecosystem. He has recently reviewed over 20 projects, and given the limited number of projects, some targets have seen their valuations inflated due to the current boom in the TON ecosystem, making it difficult to invest.

Although the market has high expectations for TON, Donald believes that if more groundbreaking projects do not emerge, the TON ecosystem will be no different from other fleeting narratives, "at most, it's just a different flavor of air." To truly succeed, "it must achieve at least 3 million DAUs."

Many investors Donald has interacted with are still waiting and hoping to see the TON ecosystem attract more top players from Web2 gaming giants like ByteDance, Tencent, and NetEase, as well as Western entrepreneurs, to bring about groundbreaking projects for the TON ecosystem.

Moreover, the liquidity issues within VCs themselves may also constrain investments in the TON ecosystem. Donald noted that VCs across the APAC region have been less active recently. Due to the current ETF bull market, the entire altcoin season has not taken off, "institutions are more anxious about how to sell the chips they hold." No matter how hot the TON ecosystem is, investment decisions may still be passed at the partner level.

In Donald's view, the investment enthusiasm for TON still needs to wait for the next interest rate cut cycle to arrive, allowing traditional Web2 dollar funds and APAC Web3 funds to raise capital, ensuring that the entire Web3 has sufficient funds and liquidity.

Seize Traffic Early

In mid-last year, Scarlett invested in Pluto, the publisher behind Catizen, making him one of the earlier investors in the TON ecosystem.

Scarlett believes that Tap to earn mini-games will eventually be eliminated, but he sees great growth potential for Catizen after acquiring massive traffic through mini-games. After accumulating tens of millions of users, Catizen is also expanding its business boundaries and has launched a Launchpool model, "essentially, it resembles a gamified Pump.fun."

PAKA is one of the few aggressive VCs in the TON ecosystem, having invested in over 10 TON ecosystem projects covering various segments such as Infra, gaming, red envelope applications, DeFi, and DePIN.

Owen wants to quickly invest in all the different segments of the TON ecosystem. In Owen's view, "Getting traffic is more important than anything else." Although TON ecosystem projects may seem simple, uninteresting, or even rough, now is the best time to gather traffic; once you have traffic, you can do anything afterward.

It's like when WeChat first opened its public accounts; even though the content quality and layout were very rough, a slightly unique account could attract millions of users, and monetization was very easy. After the market became saturated, everything became increasingly difficult.

Bruce Lan feels that the TON ecosystem's Tap to earn games are similar to the web games that emerged after 2000, "even though they are very simple, many web games at that time could generate tens of millions of dollars in revenue each month."

He does not expect a blockbuster game like Honor of Kings to emerge from the TON ecosystem in the short term. In his view, most players have only been in for a few months, and figuring out how to combine Web3 will require a long exploration process, and the performance of the TON chain will need to continuously evolve to support high-performance games.

Compared to PAKA's broad investment strategy, Bing Ventures plans to focus on nurturing specific projects.

Bruce Lan does not want to wait to capture a killer application; he plans to actively seek out leading projects or platforms in the market, collaborating with several top VCs to incubate projects in some blank areas of the TON ecosystem.

Bruce Lan stated that besides direct investments, Bing Ventures also has its own parent fund, which has invested in many European and American institutions. Bing Ventures currently advises its invested projects to seek opportunities in the TON ecosystem and hopes to influence more European and American GPs and LPs to increase their focus on large-scale application opportunities in the TON ecosystem.

Although the return of large-scale applications is uncertain, Shigeru, a partner at CGV Fund, believes that the TON ecosystem may end the current situation of "not taking over" in the crypto market.

His feeling is that in the past, there have been some cognitive gaps between the East and West regarding most Web3 narratives. For example, in the Bitcoin ecosystem that surged at the beginning of this year, the first to explode was the inscriptions that shone in the East but not in the West, while the runes were bright in the West but not in the East.

The TON ecosystem can rely less on token economics and has become a consensus path for achieving large-scale applications between the East and West.

However, in an ecosystem that does not completely rely on token investments, as more new models emerge, crypto VCs also need to think about how to change the inertia of past token investments and find more suitable investment methods.