Crypto-collectibles and Kitties marketplace Rare Bits raises $6M

Rare Bits wants to be eBay for the blockchain, where you buy, sell, and trade non-fungible crypto-goods. After CryptoKitties raised $12 million from Andreessen Horowitz last month for its digital collectibles game, there’s been an explosion of interest in the space. But without a popular marketplace, it’s hard to find the goods you want at the right price. Now a team of former Zynga staffers is building out the Rare Bits crypto-collectible auction and commerce site with a $6 million round led by Nabeel Hyatt at Spark Capital, and joined by First Round Capital, David Sacks’ Craft Ventures, and SVAngel.

“Because of the Ethereum ledger, for the first time, users can truly own their digital items” says co-founder Amitt Mahajan. “Previously in mobile or social games, virtual items earned through play or by spending money were actually owned by the company operating the game. If they shut down their servers, the items would go away and users would be out of luck. We believe this new asset class represents a paradigm shift in digital property whereby centralized assets will be moved onto decentralized systems” For now, Rare Bits isn’t slapping any extra fees on its marketplace, compared to paying 1 percent to 4 percent on other marketplaces like Open Sea and Wyvern Exchange. Instead, if a crypto-item developer charges a fee on secondary sales, say 5 percent, they’ll split that with Rare Bits for arranging the transaction.

Rare Bits lists over 500,000 items from a dozen games, including CryptoPunks, Ether Tulips, CryptoBots, CryptoFighters, Mythereum, and CryptoCelebrities. Users get the benefit of having all their crypto-collectibles in a single wallet. They can see historical pricing before they buy anything thanks to the transparency of the Ethereum ledger, whether they want to “Buy Now” or win an auction. They collectors can also see related items rather than transacting in a vacuum. One item sold for over $10,000, and sales in the 5-10ETH range ($555 each today) aren’t uncommon.

Rare Bits founders from left: Danny Lee, Payom Dousti, Dave Pekar, and Amitt Mahajan.

Mahajan, Danny Le, and Dave Pekar all met after selling their gaming startups to Zynga. [Disclosure: I know Pekar from college] Their fourth co-founder Payom Dousti worked at crypto VC fund 1/0 Capital and sold his sports analytics startup numberFire to FanDuel. With experience across the gaming, virtual good, and crypto space, Mahajan tells me “We thought long and hard about potentially building blockchain-based games ourselves but ultimately decided that there was a larger opportunity in focusing on crypto-based property as a whole.” The Rare Bits exchange launched in February and did over $100,000 in transactions in its first month.

With some CryptoKitties selling elsewhere for as much as $200,000, investors liked the idea of taking a cut of everyone’s transactions rather than just launching another digital trading card. That led Rare Bits to raise a $1 million seed from Macro Ventures and angels like Steve Jang and Robin Chan. As scaling issues threaten to prevent the Bitcoin and Ethereum blockchains from supporting micropayments and mainstream commerce, new use cases like crypto-collectibles are taking the spotlight.

Now with the $6 million Series A, Rare Bits is bringing in some heavyweight angels from the world of gaming. That includes Emmet Shear and Justin Kan, the co-founders of Twitch. Former Dropbox execs and married couple Ruchi Sanghvi and Aditya Agrawal are also in the round, alongside Greenoaks Captial MD Neil Mehta and Channel Factory CEO Tony Chen.

The team hopes the runway will help it secure partnerships with developers and creatives to publish new collectibles for the blockchain that have a home on Rare Bits. “While today most of these items are items from games and collectibles, we envision that we will see licenses, tickets, rights, even tokenized physical goods represented as digital assets” Mahajan tells us. “People are viewing these items as assets that can be invested in instead of liabilities that are one way transfers of value towards the developer, it’s one of the major changes in this ecosystem versus traditional virtual items.”

Rare Bits will have to deal with the inherent scaling troubles of the Ethereum blockchain it operates on. For now, it’s refunding users the “gas” it costs to execute purchases and sales on its marketplace in a timely manner. Thos range from a few cents to a few dollars depending on network congestion. But Rare Bits could be looking at a steep bill or be forced to push those fees onto users if it gets popular enough.

There’s always the danger that CryptoKitties and the like are just the new Beanie Babies — valued today, but worthless when the fad dies. Rare Bits benefits from getting to follow the trend to whatever crypto-collectible is in vogue, and just has to hope the whole concept doesn’t fade.

“Our ultimate goal is to convince millions of new people to begin owning and transacting crypto-based property” says Mahajan. But the founders will probably be okay regardless. “Like anyone crazy enough to start a crypto app company this early, we started buying and HODLing BTC and ETH years ago.”