OpenSea illustrates the perils of growing too fast

February 11, 2022, 4:44 PM UTC

Hi Term Sheet readers. Fortune finance editor Lee Clifford here filling for in Jessica Mathews today.

OpenSea, which was founded in 2017 and serves as something akin to eBay, allowing users to create, buy, and sell NFTs, or non-fungible tokens, is known for being at the red hot intersection of the art and tech worlds. But the company’s recent struggles also illustrate the perils of being a little too hot. In a recent deep dive for Fortune, Anne Sraders dug into reports of problems with the company, which says it saw a 600-fold increase in transaction volume last year. She reports that in January, OpenSea logged roughly $5 billion in volume on the platform—around double that in December, and a massive increase from its volume of about $8 million in January 2021, according to Dune Analytics.

A user going by the pseudonym Kodiak, who said he is a product designer at Microsoft and the cofounder of NFT project Two Bit Bears based in Brooklyn, said he originally listed a Bored Ape NFT months ago for 57 Ethereum (ETH), or, at early February levels, around $154,000. But as of early February, its market value had risen to what would have been worth well over $320,000. Though he later transferred the Ape to his hardware wallet and then back again, and OpenSea no longer showed it for sale, a buyer was able to snap it up for below its market value. As of Feb. 2, OpenSea and Kodiak were negotiating a reimbursement, but Kodiak said the experience felt like a nightmare. Other users echoed claims that what they believed to be dormant listings were mistakenly sold, in addition to reports of NFT fraud and issues “from numerous outages, plagiarism, and bugs to an insider trading scandal” in recent months. As of Feb. 2, OpenSea had reimbursed users over 1,000 ETH, or roughly $2.7 million at the time, according to the company. OpenSea also took several other actions to help fix the issues.

Sraders writes that: “Even in OpenSea’s earlier days, the company had an ‘extremely fast paced’ environment where ‘everyone was like, grinding, grinding, grinding,’ according to Taylor Dawson, a software engineer at blockchain monitoring platform Blocknative who worked at OpenSea as an engineer from February to June of 2020. Dawson told Fortune that during his time at the company, it was a ‘very small team’ of roughly seven employees, adding that the culture was ‘one of excellence,’ and he felt there was ‘camaraderie, and it was actually a really fun environment.’”

Now, “Less than two years later, the company has grown to more than 150 employees, according to OpenSea. The company is flush with cash, thanks to a $300 million Series C funding round in early January, co-led by Paradigm and Coatue, that pushed the platform’s valuation to a lofty $13.3 billion (up from a $1.5 billion valuation in a July round). But that increase in staff seemingly hasn’t been enough to keep pace.” She adds that in August of last year OpenSea’s former head of product Nate Chastain tweeted, “We need to ramp up hiring at OpenSea. We are 37 people handling 98% of all NFT volume.”

Of course growing pains are hardly unique to startups. Once a company enters the public markets, the scrutiny only intensifies. Writing for Fortune, Ben Carlson argues that the pandemic may actually have been a bad thing for companies like Peloton and Netflix. “So even though Peloton has more than four times the sales and three times the number of users, the market cap is right back to where it was at the end of 2019.” The stock price has crashed back to essentially where it was in December 2019 before any of the pandemic-related growth took place.

The culprit, of course, in all these cases, is expectations. Kodiak expected his OpenSea experience would be seamless. Peloton investors expected the company’s cycling cult would keep multiplying forever. Expectations can inflate quickly. And when they do, there’s usually a reckoning.

Jessica will be back in your inboxes on Monday. Have a great weekend!

Lee Clifford

Anne Sraders helped curate today’s Term Sheet.


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