Video Startup Can’t Outspend YouTube, So It Created a New Currency to Pay Creators
Adi Sideman, the chief executive officer of the live-streaming startup YouNow, spends his days hawking a new form of digital currency. The tokens are called Props—as in what you’re giving when you offer someone a fist-bump—and Sideman wants people who stream video online to accept them as a form of payment. Creating an economy based on Props is the centerpiece of Sideman’s plan to loosen YouTube’s hold on the internet. It’s a hopelessly audacious idea by any standard—except perhaps by the standards of those who trade in digital currencies, where YouNow’s long-shot makes perfect sense.
The first place the Props economy will exist is within Rize, a new live-streaming app that YouNow is releasing in January. People who use Rize will earn the tokens based on a mathematical formula determining how valuable their contribution to the service is. They can convert them into dollars or hold onto them as a bet that Props will increase in value over time. Sideman is offering Props for free to other developers willing to distribute the currency to the services of their own users. In theory, this will create a flywheel, where demand for Props gets people to use the apps, which further increases demand for Props, until a self-sustaining economy emerges.
YouNow, which will hold onto about a quarter of the total supply of the tokens, stands to profit as the value of the coins appreciate. If Props go to zero, it’s left holding nothing. Or almost nothing. Over the next two months, it will sell off 20 percent of the total supply of Props and expects to raise $25 million doing so. There will be a billion Props in total—a number that won’t change over time—and YouNow is initially valuing each one at about 12.5 cents.
This sort of thing is in the air nowadays. In 2017, investors have poured over $3.6 billion into about 230 initial coin offerings, the term of art for this sort of token sale, according to the website CoinSchedule.com. The ICO boom is the latest incarnation of the fascination that certain tech and finance circles have for the blockchain, the technology enabling the exchange of virtual items without the control of a centralized entity.
Digital tokens based on the blockchain, often referred to as cryptocurrencies, have proved appealing as tools for speculators, since they’ll increase in value if the demand for their use grows. The most prominent is bitcoin, but there’s also ethereum (more flexible than bitcoin), NEO (ethereum for China) litecoin (bitcoin but faster), zcash (more private) and ardor (a blockchain for creating blockchains)—to name a few. A growing roster of entrepreneurs and venture capitalists say the technology could prompt the biggest change in the architecture of the internet since the rise of Facebook Inc. and Google.
That’s the bull case. As happens whenever a new, unregulated way for speculators to make money emerges, the ICO craze also has its share of shadiness, chaos and the threat of government crackdown. Promising projects have descended into infighting; banking regulators recently issued a statement seemingly aimed at Paris Hilton after she hyped a token called Lydian Coin; and Jordan Belfort, the real-life subject of “Wolf of Wall Street,” called ICOs “the biggest scam ever.”
YouNow wants to thread the line between hype and skepticism. Sideman avoided using the term ICO, saying it carries “connotations of speculation.” On Tuesday, the company announced it would sell the first batch of Props—between $13 million and $19 million worth—on Nov. 29 through CoinList, which works only with accredited investors, and handles screening for compliance with money-laundering rules. YouNow will sell the rest of the batch of tokens to the general public in December and January. From that point on, people can acquire Props either by earning them by using services that have adopted them or by buying on exchanges that swap cryptocurrencies.
YouNow’s ICO is hardly huge by current standards; the largest sales have brought in upwards of $200 million. But it’s notable for other reasons. YouNow is already a profitable company with 40 employees, name-brand investors and 40 million registered users, a rarity in a world dominated by brand-new projects. People who work with cryptocurrencies say they’re fielding an increasing number of calls from established companies and predict that’s where the next wave of notable cryptocurrency projects will come from. The Props project is an early illustration of what that process could look like.
Another thing distinguishing Props is that it’ll actually be good for something right away. YouNow is plugging Props into an operation that it has spent six years fine-tuning. The company’s performers make money by convincing viewers to tip them, and YouNow facilitates the exchange of cash into digital money and back again. On Rize, Props will work in much the same way. In October, the research firm Token Report surveyed 226 ICOs. Fewer than 9 percent of the tokens had any use other than to be a way to bet on their value going up over time. “Most everyone has no users, or technology, or product,” said Jake Brukhman, co-founder of CoinFund, a firm that helps companies develop plans for cryptocurrencies and is working with YouNow.
Chris Burniske, an investor in blockchain companies and author of the book Cryptoassets, said YouNow is the rare company set up to integrate its tokens into a business it has already built. It’s also already created a consumer product used by millions of people. “I think it could be the best user experience application we’ve seen in the crypto space,” he said. But he also views companies who develop an interest in cryptocurrencies with skepticism “I think it’s a double edged sword around the established companies,” said Burniske. “Investors need to investigate the motivation. Why now? And why a token?”
There’s a pretty obvious bear case here. YouNow’s growth has slowed in the face of competition from the biggest companies in tech. Any new service competing with YouTube and Facebook has to be seen as a long-shot. But Sideman has bought in to the idea that the blockchain will prove to be the Goliath-slayer that reclaims the internet. While YouNow can’t compete with the behemoths on their own terms, Props lets it offer something unique: a kind of equity stake in this new economy. “We call it asymmetric warfare,” said Sideman. “An unfair advantage, so to speak.”
Sideman, 47, has dedicated the last several decades to developing odd, new ways for people to make and consume media. He built software for DJs in the 1990s, then created an online karaoke business, which he sold to Myspace in 2006. YouNow, which Sideman started in 2011, consists of a website and mobile app designed for people to stream live video of themselves. It’s the rare social media company whose business model isn’t based on advertising, making money instead of transaction fees. YouNow has raised about $30 million from investors like Union Square Ventures and the investment arm of Comcast Corp.
YouNow attracted a stable of young performers, but it began having trouble luring new users several years ago when Facebook, Google, and Twitter Inc. all began focusing on live-streaming. YouNow’s users continued to increase the amount of money they spent on the platform, said Sideman, but it felt like the party was over. “Frankly, a profitable business with a couple million dollars a month in sales is great, but this is not necessarily what I signed up to deliver,” said Sideman.
The company began planning a major pivot about 18 months ago. Andy Weissman, a partner at Union Square Ventures who sits on YouNow’s board, said it hadn’t been seeking new funding, but that any startup with venture investors is reaching treacherous territory when its rate of growth slows. YouNow’s leadership knew it needed to take a big swing if it wanted to be more than middling. When asked whether YouNow was forced into this strategy, Weissman hedged. “‘Forced’ is a strong word,” he said. “But it’s not inaccurate.”
This August, YouNow laid out its plans for Props in a white paper, the first official step in the ICO process. As with other cryptocurrencies, the idea is that the economy will eventually function on its own. The plan is for independent developers to make apps that automatically distribute Props based on how much value video creators add. Rize passes out new tokens daily, giving more to those users whose videos attract more engagement as determined by an elaborate mathematical formula published in the paper. Its business plan rests on its own Props gaining in value. “We’re changing our business model completely,” said Sideman.
This is a deliberate rejection of YouTube’s economy, where people post videos, Google arranges for ads to appear on them and the company splits the revenue with the creators. While everyone seems to have the same incentives, the specifics of the ad splits cause persistent friction. Google retains complete control over the most lucrative part of the system—the data about the viewers that it can use to target ads. Then again, Google has the world’s largest audience and pays its partners in actual money.
Weissman of Union Square Ventures called YouNow’s plan a “grand experiment” that relies on several things going the company’s way. But a brazen gamble beats the alternative. “There were open questions about: How do they compete with Facebook and Google?” he said. “It may be that this is the only way.”
YouNow has been holding a series of parties to drum up excitement for Props. It’s attempting to appeal to two crowds: people who might use a weird new live-streaming app and people who might invest real money into an unproven virtual asset.
The mixture made for an interesting crowd at the most recent event, at YouNow’s office near Times Square. Sideman, sporting a blue track jacket and bright red sneakers, did a presentation with Philip DeFranco, a popular YouTube creator; demoed the new app; and answered questions about liquidity in the Props economy. A handful of YouNow creators were in attendance – one hung out near the food table wearing a trench coat, pink boots and a pink sweatshirt, his hood pulled down low. At the bar, a JPMorgan Chase employee strategized with a friend about when to dump their investments in various cryptocurrencies. A nattily dressed former high school teacher quizzed Brukhman, of CoinFund, about a fine point of blockchain economics.
A regular presence at these parties has been Rob Paone, who appeals to YouNow both as a potential user and cryptocurrency investor. Paone works a day job as an account executive at Oracle Corp. while betting on cryptocurrencies on the side. One weekend a few months ago when his wife was out of town, Paone recorded a video about cryptocurrencies and posted it to YouTube on a whim. His channel, “Crypto Bobby,” now has 37,000 followers. Like any cryptocurrency expert worth his salt, Paone is inundated with get rich quick schemes. He popped his phone out. “ICO, ICO, ICO,” he said, scrolling past countless pitches in his email. As a general rule he turns everything down, but he did accept Sideman’s proposal to sign on as an adviser in exchange for Props.
Another investor is Kunyi Li, an investment analyst at BlockTower Capital, a hedge fund looking to anticipate changes in the value of various cryptocurrencies. He said he hears from multiple venture-backed companies each week who are looking to retool themselves as crypto-economies. “I’m always wary. Everyone thinks crypto-economics are going to save them,” he said. BlockTower generally steers clear of ICOs but decided to put several hundred thousand dollars into the Props ICO, because the white paper was intriguing and YouNow is already running a multi-million-dollar economy. If YouNow can translate that to Props, it’ll be a success—and a first for Li. “I haven’t seen a tokenized economy that actually works,” he said.