Circle’s Acquisition of Poloniex

Concise who, what and why: In layman’s language

ACQUIRES

Transaction Overview

On February 26th 2018, Circle Internet Financial (private), announced an agreement to acquire crypto asset exchange, Poloniex (private) for approximately $400mm in consideration, according to Fortune.

Target Description

Poloniex offers a U.S.-based centralized crypto asset exchange allowing the trading of crypto assets. Poloniex support the trading of an unusually broad array of crypto currency pairs including 65 BTC pairs, 12 Etherium pairs, eight Ripple XRP pairs and 12 U.S Dollar pairs. From a trade volume perspective, most sources suggest Poloniex typically ranks between 10th — 15th with perhaps 1%-2% market share globally.

Poloniex was founded in 2014 by Tristan D’Agosta. Historically Poloniex has been quite secretive about its operations and therefore funding history and employee information not publicly available.

Buyer Description

Circle is one of the most well-known crypto businesses with substantial traditional venture and crypto specialist investor funding. Today, Circle offers two core products, i) a mobile app called Circle Pay which allows consumers to send money to friends and family without fees and ii) Circle Trade which offers institutions and large crypto investors digital asset liquidity as a market maker in the over-the-counter markets. Circle Trade caters to large crypto asset holders with a minimum order size of $250,000 and monthly trading volume over $2 billion. Circle also announced a third project in late 2017 named Circle Invest, which will offer consumers an easy to use app to invest in crypto assets. Circle Invest has not been released to-date.

Competitors of Circle Pay include a broad variety of consumer payment apps such as Venmo, Paypal, Apple Pay, Facebook Messenger Payments and Zelle, among others. Circle Trade competes with institutional trading desks such as Cumberland Mining, Genesis Trading, IBC Group, ItBit and Octagon Trading. Competitors to the newly announced Circle Invest most notably include Coinbase/GDAX and Robinhood.

In October 2017 Circle acquired Trigger Finance which offered a mobile app oriented toward assisting retail investors with non-crypto asset portfolio management.

Circle was founded by Jeremy Allaire and Sean Neville in 2013. Jeremy Allaire has built several previous venture-backed businesses including Allaire and Brightcove. Circle has raised a total of $136mm in capital from Breyer Capital (Jim Breyer, former Accel), Goldman Sachs and IDC Capital Partners as lead investors in several rounds of financing. Other notable investors include General Catalyst, Digital Currency Group, Pantera Capital, Fenbushi Capital, among roughly a dozen others.

Transaction Parameters

Circle is acquiring Poloniex for approximately $400 million in consideration. The specific form of consideration was not disclosed but likely includes a considerable proportion of Circle equity given the size of the transaction. According to Fortune, the current run rate of combined company revenue is over $1 billion.

M&A activity within the crypto marketplace is very early stage with no transactions of this size having been completed. Other, more modest crypto / blockchain M&A transactions have included BitGo’s acquisition of Kingdom Trust in January 2018 which was also partially driven by unmet regulatory compliance requirements within crypto assets.

Strategic Rationale

Circle’s ambition is to build a crypto-era financial services company. They intend to offer both consumers and sophisticated investors applications and services which allow crypto assets to be as easy to use as fiat currency and as easy to invest in as public equities.

Today, essentially all crypto exchanges are secretive, unregulated and suffer significant trust and credibility issues. The strategic opportunity for Circle is to build a set of trusted, fully regulated and professionally managed products and services to serve the rapidly growing crypto asset market. Both consumers and sophisticated institutional investors equally benefit from the “maturation” of crypto from the wild west behavior that has been so prevalent to-date. While taking a slightly different tack, Coinbase is seeking to accomplish similar objectives.

In this situation one can reasonably ask why Poloniex would consider a sale vs. continuing to build itself. As mentioned above, all crypto asset exchanges have experienced scaling and reputational challenges, including Poloniex. Building scalable infrastructure is challenging and it takes persistence, talent and capital. Also, as the SEC places a greater emphasis on regulating the crypto marketplace, it’s clear that they believe exchanges are subject to SEC and FINRA regulations and should be licensed as electronic trading marketplaces (ATS’s). This creates an even larger burden on a business which has been historically rather “freewheeling” in its operations. Circle offers Poloniex an opportunity to continue to build upon their potential as part of an organization with seasoned professionals, an ambitious vision for the future and have the financial resources and institutional credibility to succeed.

Architect Partners’ Observations

As the crypto market begins its maturation process, M&A will become increasingly commonplace. Not only for the traditional drivers of talent and capabilities enhancements but also as a mechanism to rebuild credibility and professionalism. While, Kyle Samani has many valid observations in his recently published perspective on crypto M&A, even projects which have issued tokens in ICOs will participate, both as acquirers and targets.

Notes:

The role of the cypto OTC marketplace is well summarized by Vinny Lingham in this June 2016 Medium post.

Other Selected Sources

Circle Blog Post

Poloniex Press Release

Nathaniel Popper, New York Times, Twitter: @nathanielpopper