A16z Crypto Leads $14M Betting on Rye, New Web3 Trading Startup From Justin Kan

Twitch co-founder Justin Kan is launching a new startup in the world of web3. Kan and four co-founders have raised $14 million for Rye, a trading platform that will look to use crypto tokens to try to build a cheaper Spotify for e-commerce.

Kan will serve as chief sales officer for the new startup, which is led by CEO Arjun Bhargava, a former Reddit engineer turned repeat entrepreneur. The company is launching with $14 million in venture capital funding led by a16z crypto.

In an interview, Bhargava said Forbes that Rye will offer a one-click application programming interface, or API, to allow sellers to list some or all of their products on Rye’s own marketplace. Rye will offer that catalog on its site to developers, to build into their own websites and apps. And by offering a crypto token, also called Rye, to participants, Rye believes it can do so at a lower cost than e-commerce companies like Amazon and Shopify.

While Shopify charges 2.4% to 2.9% per online transaction, in addition to subscription and per-transaction fees, and Etsy takes 6.5% of transactions, as well as a listing fee, Rye’s founders argued that by structuring as a token protocol , I will eventually be able to make money despite them offering far lower fees in the fraction of a percent (to keep the servers running, they said).

That’s because Rye and its long-term venture capital backers hope their Rye token will become a popular — and valuable — cryptocurrency in its own right, used to provide participants with redeemable rewards similar to the industry’s already popular cashback programs.

“Vendors and brands that sell products, especially DTC (direct-to-consumer) brands, they’re essentially being ripped off,” Bhargava said. “We don’t get a percentage of the fees, we’re not going to increase the fees over time, because we don’t have the ability to.”

Bhargava and Kan, who will also serve as an “evangelist” at Rye, are joined by co-founders Tikhon Bernstam, Jamie Quint, Saurabh Sharma and Robin Chan. Bernstam, the former co-founder of Parse and Scribd, will serve as chief product officer. Quint, formerly head of growth at Notion and head of advertising for Reddit, will serve as head of tokenomics. Sharma, another former Reddit engineer, will serve as chief technology officer. And Robin Chan, an early Zynga employee and the founder of startups Operator and Aiden — and who works with Kan on investments in his fund, Goat Capital — will serve as Rye’s head of business development.

Kan and Chan’s other web3 venture, Fractal, a gaming NFT that raised $35 million from Paradigm and Multicoin Capital, as well as Rye backers a16z crypto and Solana Labs, will be run by a different team, Kan said. He and Chan will continue to invest from Goat Capital, which backed Rye, along with other investors Solana Ventures, Electric Feel Capital, Ventures, L Catterton, former Tilt founder James Beshara and NBA veterans Andre Iguodala and JaVale McGee.

Rye’s API doesn’t look that different from those offered by payment and payment platforms that don’t use crypto or web3. A month ago, the company launched a store-building tool on app discovery platform Product Hunt centered around affiliate revenue. But in the long term, Bhargava said Rye Protocol will provide more opportunities to provide rewards to all stakeholders — merchants, app makers and buyers — while giving them governance rights to vote on its strategic direction.

At a16z crypto, general partner Sriram Krishnan said Rye will give merchants “a better chance” to exert influence over decisions made by that network — clout they lack with platforms like Amazon, which he argued can make unilateral platform changes that affect merchants’ sales with impunity. With everyone involved receiving Rye tokens, “the idea here is that you have pure incentive alignment,” Krishnan argued, for a more collaborative approach.

Such a “real-world” application of crypto, in this case helping merchants sell more inventory at no extra cost, is part of what attracted Kan to the venture, he said. A self-proclaimed “long-time crypto skeptic,” Kan said conversations with fellow entrepreneurs like Adam Jackson, co-founder of “decentralized talent network” Braintrust, warmed him to the idea that tokenized ownership of the network — even a tiny bit — could improve on the status quo.

Braintrust, it should be noted, held a token sale in September 2021, peaking at nearly $48; it now trades at around $2, down 96%, raising questions about how much the freelancer token holders have benefited to date. And for a self-described skeptic, Kan has experimented with crypto more than many. In addition to Fractal, Kan launched an NFT collection based on his YouTube channel last year, what he called akin to “an autographed version” of each video. The first sold for around 6 ETH, then the equivalent of $9,000, in March 2021; Kan stopped minting new ones that June, when the collection sold for 0.1 ETH, or about $260 at the time. (ETH now trades at about half the value of the US dollar today.)

Just how much benefit a merchant will truly receive from their share of tokens also remains to be seen. Other announced relevant real-world token projects, such as the decentralized Wi-Fi network Helium, another a16z investment, have come under scrutiny as insiders—early employees and their friends, family, and investors—received much of the revenue from the tokens spread, detailed in a Forbes investigation. At Rye, Bhargava said the startup would publish an updated white paper before the token launch, detailing its insider ownership plan; he expected them to eventually hold around 50%.

When asked about merchant appetite for a crypto token, Kan and Bhargava said they expected merchants to become more interested in the rewards over time, but would take advantage of Rye’s platform to increase sales in the meantime. In an effort to ensure that Rye isn’t building a solution in search of a problem, Kan needs to look no further than his previous startup, legal tech company Atrium, which raised a $65 million funding round led (again) by a16z in 2018 .The company raised and hired too quickly, without a clearly differentiated product and customer, Kan later wrote in an autopsy of what went wrong at Substack. Atrium was closed in March 2020.

He and Bhargava are confident that Rye will not tilt at the same illusory windmills in the pursuit of product market fit. The startup’s API has been in tests with some merchants; it is expected to launch soon. The company plans to hire in engineering, business development and marketing with the funds, which will also provide initial liquidity for the eventual token launch.

As long as merchants want to sell more products and entrepreneurs look for new ways to showcase their wares, Rye’s founders insisted that their technology should prove useful, apart from crypto. “This is a bet that there will be continuous new e-commerce innovation, and that merchants will want to use an API that is super simple,” Kan said.