Investment memo – Sandbox
Company description and business model The Sandbox is an Ethereum-based metaverse and gaming ecosystem where users have absolute ownership over their in-world creations and can move assets freely across platforms, creating a decentralized UCG ecosystem that incubates potential for large valuation creation and different monetization.
Business Model / Revenue Stream • LAND sales o Primary sale: Sell land by batches in land auction Average land price is ~$3000 and there are a total of 166K lands – among which they sold ~70% so far Revenue for land sales in 2022 is ~$40M according to Opensea and Delphi Digital o Secondary sale: sandbox charges 5% transaction fee for secondary land sales Secondary LAND price has seen inflation over 3x vs primary Resell ratio is roughly 40% of total accumulated sold LAND • NFT experience o Brands or individuals that have purchased LANDs, will build gaming or shopping experience on top o For any in-game purchases or whatever GMV generated in these experiences, Sandbox take 5% of it Except that for Tier 1 brands eg. Nike/HSBC – take rate is 50% as Sandbox co-build the experiences o Similarly, virtual goods purchased in these experience can also be resold and Sandbox takes 5% transaction fees on these resells in its built-in market place o This part of business is still in early shape as the whole metaverse is not fully opened to all o Revenue in 2022 is ~$7M according to public information and CEO/COO sharings on Twitter • Reserve sales o At launch, sandbox reserve 20% total uncirculated token – SAND (which is 600M out of 3B according to its Whitepaper) o SAND at its highest was worth 4 USD and now 0.6 USD o Sandbox makes revenue by selling its reserve at appropriate time – and made $100M in 2022 according to public news o Currently there are still 400M+ unsold SAND in its reserve • Potential Future Monetization o monetization potentially through ads, creator tool under SaaS model and data services o Ongoing royalties fee through transactions that happen on each land such as "Game-in-Game", Billboards, ticketing, online stores, live-streaming and etc., which will grow to be the key driver in the long term
Investment thesis • Best positioned as leading decentralized metaverse with expanding TAM and deeper wallet share o Ture digital property ownership is a paradigm shift of traditional gaming experience, unlocking huge runway for value creation, leading to creation of many new business and services
It is expected that digital consumption will reach the same level of physical consumption
From rental to ownership, business model change from monetizing on MAU data to transaction fee
o Sandbox being a gaming-first, no-code platform, with play-to-earn elements, make the user experience the most appealing amongst competitors. With a MAU ~350k, Sandbox has 900k+ followers on Twitter and 280k+ members in Discord, boasting one of the largest communities in Web3 (compare to Decentraland 560k/160k Twitter/Discord)
o Land sales have generated ~$200M of cumulative revenue which is a testament to the ecosystem’s belief in management execution and platform potential, strong demand for land plots
• UGC ecosystem fosters a long-lasting game lifecycle as new “Game-in-Game” experience evolve
o Sandbox offers game developer tools (VoxEdit, Game Maker) which is leading to strong ecosystem development, giving creators more earnings potential (receive 95% of money spent when playing UGC games comparing to 28% on Roblox) o Sustainable content with enduring lifecycle: Given the open source and UGC nature, it is less predicated on Sandbox management to create hit game but rather their ability to foster a budding ecosystem of third-party developers. “Game within a game” creates sustainable and lasting lifecycle
o Ever-growing community of players and creators, with more and more renowned names joining. Virtual land owners include high profile crypto companies and communities, and continue building the pipeline of AAA talent, brands, IP and companies
165+ partners: i.e. Walking Dead, Atari, Deadmau5, Dapper
Virtual land owners: Binance, OpenSea, Bored Ape, MakerDAO, etc
• Imaginary monetization methods and compounding royalties fee from value creation
o Sandbox monetizes today by selling LAND in its metaverse, as well as selling NFTs with IP partners (~50% share) and marketplace fees from secondary sales. Now still majority is from LAND sale o Future monetization potential through ads, creator tool under SaaS model and data services
o Ongoing royalties fee through transactions that happen on each land such as "Game-in-Game", Billboards, ticketing, online stores, live-streaming and etc., which will grow to be the key driver in the long term
• Highly scalable business model and high margin financial profile
o Better margin profile as the economics bypass the 30% take rate from platform like google/APP Store o Instead of heavily rely on advertisement, Sandbox incentivize user acquisition through NFT airdrop and Seasonal Passes, user can benefit from value creation by engaging in the community, which is a win-win solution for both the platform and the players/creators
o Once get to a point where land owners can build little metaverse of their own on LANDs, the business can be scaled at an exponential speed, making it a highly scalable and profitable business model
Investment risk and considerations
• User acquisition less than expectation: LAND tokens are way out of the price range for the average person and so are ASSETs. It still feels like a pay-to-win game
• Lack of active recurring users and extremely over valued compare to Web2 games
• Diversified Paths to Monetization is TBD
o User engagement does not reach levels required to incentivize businesses to develop experiences and goods on the Sandbox platform
o DD revealed limited NFT market activities and transactions for UGC NFTs o Editor functionality falls back than Roblox and Unity
• Revenue highly related to token value and potentially highly volatile
o Regulation risk: Government regulations on cryptocurrencies would have material impact on monetization
o SAND price drop: if token price keeps dropping into a death spiral, players will lose confidence
• Competitors risk: Centralized players may open up crypto capabilities stifling decentralized metaverse adoption, those gaming studio with 3A capabilities will attract whales once they enter into web3
• Landowners’ issue
o Landowners become middlemen between creators and players – create barrier to creation and friction to the experience
o Economic allocation to landowners(early ecosystem players) is too much
Appendix – Potential risk & mitigants and Future DD areas
Industry
· Competitive landscape of the metaverse industry, what is Sandbox key competitive advantage comparing to Decentraland, Axie Infinity, Upland, Illuvium, Metahero, Star Atlas, Bloktopia, Otherside, and potential new metaverse incomer from Centralized platform?
o How do your in-game mechanics and builder tool (VoxEdit) compare to these platforms?
o How do you continue to compete for user engagement as more and more metaverses enter the scene with their own economy and game play
· Industry expert view on Gamefi/Crypto industry short-term trend and potential risks? What is the outlook for crypto market and how will the volatility affect company’s sustainability
· Expected floor price/trend of LAND and SAND in the next 3 years? How does company cope with market volatility and retain user confidence?
Business
· Latest strategy on company roadmap, please briefly describe potential events in the pipeline
· User/creator acquisition plan and marketing budget, expected growth of MAU?
· While user engagement has increased from Season 1 to Season 3 (600% increase in total hours played and 789% increase in total experiences visited), we see that based on on-chain data total transaction volume has declined (decreased 67.8% in SAND terms and 94.3% in USD terms) as a result of decline in DAU-to-Payer conversion ratio (decrease from 6.7% to 4.3%)
As a comparison, Roblox’ DAU-to-Payer conversion ratio has been around 20-25%. Do you have a target in mind and what are some of the levers to achieve that?
How is user engagement translating into ARPU? What were ARPUs for the 3 seasons?
· The current NFT marketplace has little to no activity / transactions – what needs to happen to improve user engagement?
· Potential revenue stream rollout plan including subscriptions, 2B services, Ads and etc.
Financial
· How many SAND is sitting on company’s balance sheet? What’s company’s plan each year in partial sell of the reserve?
· What’s the accounting treatment for LAND/SAND/NFT (similar to Roblox – should adopt a deferred schedule to recognize revenue for these durable assets)
· Current cap table and are investors granted warrants/options on tokens?
· Does company has any debt on balance sheet? What are the instruments and cost of debt?
· Future Use of Proceeds plan and expected R&D investment in next 3 years
· What’s the key cost driver? Revenue split with Partners on primary NFT/ASSET sales? What are incentives from creator fund?
Technology
· How vulnerable is the underlying code? What audit and test process has company went through?
· How NFT connect to crypto and if the bridge is hackable?
Legal and regulation
· What is the expectation for major end market roll out regulation on crypto activities?
· What is the contract with Partners/creators on IP right authorization?