Business Blog: Telegram's crypto cliffhanger

Pavel Durov proved he could make it without VCs—but it may be a footnote in a cautionary tale

August 28, 2024

Outside of libertarian-inclined Silicon Valley VCs, Ukraine War obsessives, and crypto enthusiasts, Telegram was not on most Americans' radars before this weekend. That changed on Saturday when French authorities arrested its Russian-born founder, Pavel Durov, sending the internet aflutter with debates of content moderation and the meddling of superpowers.

Even if you weren't paying attention to Telegram before Durov was detained upon deboarding from his private plane in Paris, the messaging app company is one of the most fascinating tech stories of the past decade. For one, it has managed to attract more than 900 million users, and—according to Durov at least—approach profitability without selling equity in the company to VCs. Instead, Telegram has relied on billions of dollars in debt financing from players like Abu Dhabi sovereign wealth fund Mubadala and Russia's state-run investment fund.

Durov is an ideologue, committed to principles of free speech and privacy, who was forced by Russian authorities to divest from his previous venture founding VKontakte, Russia's biggest social media network, and continues to have a contentious relationship with the Russian government. He started Telegram outside his home country to serve as a "neutral platform," as he put it, and one where he directed its future. One former employee told me that Durov avoided raising money through equity because of his experience with VK and the "need for control."

Which brings us to the second curiosity surrounding Telegram. By some evaluations, it has succeeded as the first mainstream crypto app. That, of course, comes with some caveats, and a brief history lesson. In 2018, amid the hype cycle around ICOs, Telegram raised $1.7 billion with the promise of launching a blockchain and token—a strategy for raising capital without doling out equity. The SEC forced the company to abandon its plans and repay the funds it hadn't spent yet (one of the reasons Telegram subsequently needed to raise debt), but a closely linked group of software developers continued with the plans.

The result was TON, a layer-1 blockchain with an eponymous crypto token that is technically independent from Telegram, but inextricably linked to the messaging app (to the point where many crypto advocates complain about centralization). Unlike competing blockchains such as Ethereum or Solana, TON has a captive audience of actual people in the form of Telegram users, and Telegram has begun to integrate TON into the app, including as payments in an advertisement network, as well as wildly popular point-and-click games like Hamster Kombat. In response, TON's market cap topped $25 billion.

Buying TON tokens has become a popular play among crypto VCs who are bullish on the growth of the ecosystem; that it provides exposure to Telegram's upside in the absence of traditional equity certainly doesn't hurt.

Prior to his arrest, Durov talked about his desire to bring Telegram public, but many investors I spoke with argued that TON could offer an alternative revenue stream that precludes the need for an IPO. "We talked about that a lot internally," Matthew Graham, the founder and CEO of the VC firm Ryze Labs, told me. "How realistic is it that they would actually IPO, and to what extent might they be thinking about [TON] as the path to monetize."

But what happens now? As Durov awaits formal charges, his future—and Telegram's—remain uncertain. With a core staff of just around 60, according to the former employee, Durov's influence over the company is undeniable, and he may be forced to finally implement moderation and know-your-customer policies that fundamentally change the platform's main appeal (and profit margins).

And while TON backers might like to argue that it is separate from Telegram, the success of the two ecosystems is intertwined. For now, at least, the blockchain is dependent on Telegram—as reflected by the token's 25% drop over the weekend.

If you want to read more, you can check out my feature with Jessica Mathews on the uncertain financial prospects for the world's renegade social media platform.

Leo Schwartz
Twitter: @leomschwartz
Email: leo.schwartz@fortune.com
Submit a deal for the Term Sheet newsletter here.

Nina Ajemian curated the deals section of today's newsletter.

VENTURE DEALS

- Cribl, a San Francisco, Calif.-based IT and security data engine, raised $319 million in Series E funding. Google Ventures led the round and was joined by GIC, Capital G, IVP, and CRV.

- OpusClip, a Sunnyvale, Calif.-based AI video clip editing tool, raised $30 million in funding. Millennium New Horizons led the round and was joined by Samsung Next, GTMfund, DCM Ventures, and Jason Lemkin.

- Supio, a Seattle, Wash.-based AI platform for law firms, raised $25 million in Series A funding. Sapphire Ventures led the round and was joined by existing investors Bonfire Ventures and Foothill Ventures.

- Planera, a San Jose, Calif.-based CPM-based scheduling and planning platform for the construction industry, raised $13.5 million in Series A funding. Sierra Ventures led the round and was joined by Sorenson Capital, Brick and Mortar Ventures, Prudence VC, and Firebolt Ventures.

- ZBiotics, a San Francisco, Calif.-based probiotic drink company, raised $12 million in Series A funding. Spring Tide Capital led the round and was joined by Access Capital, Seamless Capital, Goat Rodeo Capital, and Seaside Ventures.

- MOXY, a Las Vegas, Nev.-based wood and plant fiber mineralization technology company, raised $11 million in funding. At One Ventures led the round and was joined by others.

- Rep AI Technologies, a New York City-based AI concierge platform, raised $8.2 million in funding. Osage Venture Partners led the round and was joined by Flashpoint Venture Capital and Oryzn Capital.

- Aerflo, a Riverhead, N.Y.-based portable carbonation device, raised $5.3 million in funding. Lerer Hippeau and Torch Capital led the round and were joined by Closed Loop Ventures Group, Good Friends, SWAT Equity Partners, and others.

- Inventive AI, a Mountain View, Calif.-based AI platform for RFP workflow, raised $4 million in seed funding. Sierra Ventures led the round and was joined by YCombinator, SOMA Capital, and General Catalyst.

- Moveo.AI, a New Milford, N.J.-based conversational AI platform, raised $2.6 million in seed funding. Eleven Ventures led the round and was joined by Uni.Fund and Charge.vc.

- Katara, a Dover, Del.-based AI-agent workflow automation platform, raised $2.2 million in seed funding. Diagram Ventures and Sparkle Ventures led the round and were joined by StreamingFast and angel investors.

Recommended Newsletter

Sign up for the CEO Daily newsletter

CEO Daily provides key context for the news leaders need to know from across the world of business. Every weekday morning, more than 125,000 readers trust CEO Daily for insights about-and from inside-the C-suite.

Subscribe now

PRIVATE EQUITY

- Citation Capital acquired a majority stake in Aptive Environmental, a Provo, Utah-based pest control company. Financial terms were not disclosed.

- PrecisionX, a portfolio company of CORE Industrial Partners, acquired MSK Precision Products, a Tamarac, Fla.-based pr

EXITS

- GHK Capital Partners acquired Horizon Air Freight, a New York City-based marine logistics provider, from ICV Partners.

IPOs

- Ceribell, a Sunnyvale, Calif.-based medical technology for neurological conditions company, filed to go public on the Nasdaq. The company posted $54 million in revenue for the year ending June 30, 2024. The Rise Fund Clearthought, The Global Value Investment Portfolio Management, Longitude Venture Partners IV, ABG WTT-Ceribell, Red Tree Venture Fund, and Optimas Capital Partners Fund back the company.

FUNDS + FUNDS OF FUNDS

- LS Power Group, a New York City-based investment firm, raised $2.7 billion for its fifth fund focused on the power and energy infrastructure sector.

PEOPLE

- Geodesic Capital, a Foster City, Calif.-based growth capital firm, hired Neb Mela as partner. Formerly, he was with Tishman Speyer.