Can the pioneer of blockchain gaming survive the crypto winter?

Yat Siu is no stranger to controversy. Over the years, the serial technology entrepreneur has been kicked off the App Store, delisted from a stock exchange and has clashed with his auditors.

But Siu, through his Hong Kong-based Animoca Brands vehicle, has become the pre-eminent investor in the world of blockchain-based gaming, presented by its promoters as the next big thing in the global games industry.

He has sold his backers a vision of digital property rights in video games, where players can own their in-game items as non-fungible tokens (NFTs) recorded via blockchain, earn as they play, and profit from trading with other players. The collision of crypto and gaming has been one of the most-hyped potential uses for blockchain technology.

As crypto boomed in 2021, the 49-year-old rode the speculative wave as Animoca sold NFTs linked to a portfolio of investments in almost 400 start-ups. A funding round in 2022 featured a $5.9bn valuation and the backing of some of the leading names in the investment world.

But as a “crypto winter” set in over the industry following a string of corporate disasters and a collapse in asset prices last year, Siu still faces serious questions over Animoca’s business model, regulatory compliance and governance.

The company has become a test case for whether any of the potential innovations from blockchain will survive the crypto sell-off. If it stumbles, so too may the industry that Siu has helped will into existence .

“When the predominant business is issuing tokens from zero and selling them to retail, it’s not an easy business to sustain long term,” says Antonas Guoga, a former Animoca investor. “Probably 99 per cent of the tokens are going to zero.”

But if Siu proves his sceptics wrong, Animoca’s hundreds of investments could put it at the centre of what some think will be a revolution in gaming that proponents claim will take power away from distributors and put it in the hands of players.

“He’s proven again and again to be the guy who can get out of any situation,” says another associate more bullish about Siu’s prospects.

The story so far

When the pandemic hit in 2020, Siu was at the helm of a little-known Hong Kong app developer that had just been delisted from the Australian Securities Exchange.

Animoca, perennially lossmaking, had meagre revenues and a record of churning out largely forgettable mobile games, along with a grab-bag of investments in unloved blockchain ventures.

Its mainstay for years had been mobile games based on well-known franchises like Garfield or Thomas the Tank Engine. Animoca would license the intellectual property rights and package them into free-to-play games.

Siu, cheerful and self-deprecating, has been a fixture of the Hong Kong start-up scene for decades. He was born and raised in Austria, trained as a musician before becoming a programmer and then began launching companies after moving to Hong Kong in 1996. One former employee calls him down-to-earth. “A lot of people in crypto buy Lambos . . . he goes hiking with his wife.”

As dotcom mania ramped up he launched an online messaging service called Outblaze, later described by BusinessWeek as a venture that had “outlasted the bubble”. Siu sold the messaging assets to IBM in 2009 and along with a core of Outblaze lieutenants, pivoted to mobile games.

Animoca punched above its weight partly by playing the App Store’s rankings. “What we figured out is that if we launch an app every week, and cross promote, we’ll always be the top,” he says. The games often appeared to users under different publisher names.

Apple viewed the tactics as manipulation and removed the company’s apps in 2012. Even though Animoca was allowed back in by 2013, the reputational effects lingered. “We actually became, a little bit, pariahs,” he says.

The following year, he listed Animoca by reversing into a listed shell company in Australia and by late 2017 was experimenting with investments in AI and crypto tokens. Siu was an early investor in the company behind the original NFT bubble, CryptoKitties, which involved trading virtual cats.

He describes his investing strategy as ecosystem building — the more blockchain-based businesses he backs, the more likely it is that the market as a whole will grow. He acquired one start-up, Leade.rs, in an all-share deal in part to evangelise about digital property rights to its backers, who included LinkedIn founder Reid Hoffman.

Besides the CryptoKitties supernova, Siu’s esoteric investments seemed unlikely to ever pay off. Animoca lost money and was constantly fundraising small amounts. To preserve cash, Siu generally structured investments as share swaps or threw in crypto tokens as consideration. “He’s incredibly creative and flexible in his ability to make deals,” says Mikhael Naayem, the co-founder of Dapper Labs, the company behind CryptoKitties.

But when Covid-19 arrived, prompting governments and central banks to inject trillions of dollars into the global economy, crypto speculation boomed and suddenly Animoca had hit the big time.

The boom, and bust

In the seven months to April 2022, the company reported $721mn in income from NFT sales and gains on investments. It valued its start-up portfolio at $1.5bn and said it had a further $4.2bn of “digital asset reserves” not counted on its balance sheet.

“Was it smart? . . . We were just lucky,” says Siu. “We were just executing the business, and it just happened. I would love to take credit.”

The bonanza was largely down to a few bets that Animoca made back in the doldrums of 2018 and 2019. These included OpenSea, an NFT trading platform, the SandBox, a virtual world where players can buy “land” and build their own games, and Axie Infinity, the token-based game that critics claim is akin to a pyramid scheme.

Siu had been among a handful of backers of start-ups that were suddenly popular with investors. For founders, funding from Animoca was a sign of credibility, that “you’re tuned into the ecosystem”, as one mobile gaming executive puts it.

Animoca further boosted its revenues by issuing new tokens or acquiring tokens issued by its portfolio companies cheaply and then selling them at high prices.

“If you got into crypto with some sort of dollars behind you in 2017 and 2018 . . . you did insanely well by no fault of your own,” notes one banker who works with crypto companies. “You could have thrown a dart at a token and gotten 20x.”

Siu raised hundreds of millions of dollars from high-profile investors on the back of that dart throwing. Multiple funding rounds culminated with the two-tranche deal in 2022 that valued the group at $5.9bn and was backed by Sequoia China, Winklevoss Capital, London’s Kingsway Capital and Soros Fund Management.

Animoca also created NFTs from traditional franchises and brands, a skill Siu had been “honing . . . for many years in free to play [gaming]”, the mobile gaming executive says.

One project involved Formula 1 NFTs tied to a game called Delta Time launched in 2019. Players could buy their own virtual cars. A big buyer was Guoga, a poker player and Lithuanian politician who spent an in-game token worth $77,000 on a single car in December 2020.

But the collapse in the crypto market was as dramatic as its rise, and the impact has been clear in the token markets on which Animoca built its success. Delta Time closed last year after Formula 1 declined to renew the rights. The virtual cars are all “worthless” now, says Guoga, adding that he sold his own Animoca shares “at the top” last year. “The market seemed to be very inflated”.

Cryptocurrencies may have rallied so far this year, but of the 13 tokens Animoca lists on its website as those it issued, 11 are down by more than 90 per cent since their peak. The other two have fallen at least 30 per cent. OpenSea, one of the jewels in Animoca’s portfolio and valued at $13bn in January 2022, saw its NFT trading volumes also plummet 85 per cent last year.

Animoca shares, which had peaked in January 2022 at around A$4.60 a share on a secondary market for private companies, PrimaryMarkets, last traded at A$1.40.

The retreat of money from the speculative fringes of the technology sector also focused attention on how few people were actually participating in crypto. Sandbox, considered Animoca’s best shot at a breakout hit, said in December it had 30,000 daily users. Top mainstream games typically count their daily users in the millions.

Sandbox’s chief operating officer Sebastien Borget says the company has kept growing despite the crypto downturn. “The activity of the metaverse is not dependent on the cycle of the cryptocurrency markets,” he says.

Sandeep Nailwal, the co-founder of blockchain platform Polygon, says his industry is still “very very small, minuscule”, especially relative to valuations being secured in 2021 and 2022. “The valuations are way off . . . orders of magnitude overvalued,” he says.

In September, Siu announced a $110mn funding round that reflected new realities. Investors led by Singaporean sovereign wealth fund Temasek stumped up a convertible loan note rather than straight equity.

“Everyone basically got pretty terrified,” he says of last year’s crypto collapse. The note is a three-year loan at 10 per cent, according to Siu. “It’s not cheap, but it’s not crazy.”

Sailing close to the wind

But Siu’s enthusiasm for crypto and his freewheeling investment approach has also been a source of trouble for Animoca over the years.

In March 2020, the Australian Securities Exchange terminated Animoca’s listing. At the time, the company cited a letter from the exchange complaining of governance failings, novel financing contracts, and its heavy involvement in crypto.

But the letter, seen by the Financial Times, said Animoca’s disclosures and crypto investments had violated no fewer than 17 of ASX’s listing rules. The exchange accused the company of having a “wilful disregard” for its regulations, and expressed “serious concerns that [Animoca] does not have adequate systems and controls in place to manage its reporting and disclosure obligations”.

Siu says the ASX just “didn’t like crypto” and that “when they decided to go after us, they just threw the book at us”. He adds that a detailed response to its criticisms was met with a cursory reply. The exchange did not respond to a request for comment.

Though delisted, Animoca still has thousands of shareholders and is obliged to file public accounts in Australia. Its last set of numbers ran to the end of 2019 and it only filed them last year — shortly after being convicted and fined A$50,000 by the Australian Securities and Investments Commission for failing to do so previously.

Animoca had failed to respond to Asic’s complaint; Siu calls the oversight “a bit of a shitshow”. He says the Asic notice had not been collected from a service address because of Covid-related travel restrictions. The company has received an extension to the end of March for its 2020 accounts and says it will file its 2021 and 2022 figures “this year”.

The delays in filing stem in part from tussles with its auditors, disagreements that Siu blames on novel questions about accounting for crypto assets. Complaints from Animoca’s former auditors, Grant Thornton, appeared more prosaic, according to a March 2020 letter seen by the Financial Times, which was triggered by Animoca not “providing quality information in a timely manner” relating to the 2019 accounts

The accountancy firm, which had audited Animoca since it listed, painted a picture of undocumented and opaque dealings, including with related parties, and said there was “little if any documentary evidence available [to] support the investments made” by Animoca.

“Our audit procedures to date have indicated significant risks of management override of controls, potential for undisclosed related party transactions and undisclosed commitments for expenditure,” it added.

Animoca said it addressed the points to Grant Thornton’s satisfaction and that the Covid pandemic caused problems and delays with audits at many companies. But it still replaced Grant Thornton with DFK Collins, a smaller Australian accountant, at the end of 2021. “GT struggled with our business . . . they didn’t really understand it,” Siu says.

He acknowledges that Animoca didn’t have all the documentation the auditors wanted, but says that was to be expected given the nature and size of the investments he was making.

“It is not like we go through three months due diligence on a half a million dollar investment,” he says, arguing it’s natural that there’s no formal valuation report on such deals. “I don’t think if we were in America, dealing with a tech auditor, that we would have had these issues.”

But former employees, people who have run Animoca portfolio companies, and others with knowledge of the company gave similar accounts of a business with chaotic internal processes and weak governance, where decisions were made largely on the basis of Siu’s gut feeling.

Historically, Animoca has been staffed by long-time associates of Siu, they said. The company was incubated by Outblaze, where Siu’s wife had been head of HR. Its head of venture investing is James Ho, Siu’s brother-in-law, whose personal fund was among the co-investors in a start-up that Animoca backed in 2021. Animoca said such co-investments were common industry practice

In September, Animoca hired a new chief financial officer, group HR director and head of legal. Evan Auyang, who joined as group president of Animoca in 2021, says the company has significantly expanded its finance and legal capacity and professionalised its operations.

He says that when he joined, he asked Siu whether he was “ready to have a team around you who would challenge him, and he welcomed that.”

Confident in the future

Animoca is in the midst of trying to raise a venture fund as big as $1bn, though it’s unclear if there is enough demand. Siu says the fund could act as a follow-on investor in the deals that the company has already backed.

In November, after the FTX collapse, Siu released fresh financial details to reassure shareholders his company was solid. He said Animoca had $214mn in cash, digital assets of $940mn and “off-balance sheet digital reserves” of $3bn. He says it has no debt, is “cash flow positive” and is generating revenue from a range of activities.

In the coming 18 to 24 months, he claims Animoca’s blockchain-gaming bets will be vindicated by mass adoption.

Meanwhile, he is already pursuing new lines of business around his “big northstar” of digital property rights. One new push is NFTs created by teachers. “We’re trying to create a financial asset class out of content created by teachers so that they can participate in capital formation,” he says. Last month, Animoca also led a seed investment into the relaunched MoviePass, the cinema ticket service that collapsed in 2020.

Siu attributes his fascination with true digital property rights in part to his experiences with Apple back in 2012. “It’s definitely made me feel much more stronger about the risk of centralised platforms,” he says.

And despite the chaos in crypto markets, he’s outwardly unfazed. “It’s pretty chilly, but it’s not as cold as it was four years ago.”

Data visualisation by Cleve Jones

This article has been updated with the correct title for Sebastien Borget