Investigation: Ledger, a giant at a crossroads

With his contacts, be they customers, competitors or journalists, Pascal Gauthier likes to point out that Ledger "is doing well". Especially when he's not asked.

"Some people criticise us because it's easy, because we're one of the big players in the sector, but quite honestly, it's unjustified," explains the man who has been CEO of the French unicorn since 2019.

While some criticisms are indeed far from justified, others are much more so, however, and several episodes from 2023 are there to remind us. Between delays on Stax, serial departures and some questioning of strategy, the world leader in digital asset custody faces a number of challenges to revive momentum, and make the most of 2024, the year of its tenth anniversary!

1/ Releasing and pushing new products

The first of the challenges is obviously on products. Since its creation in 2014, Ledger has been known for its hardware wallets, the famous "Nano", which enable digital assets to be stored and secured.

In just under ten years, the company has sold more than 6 million Nano (S and X), enabling it to become the world leader in hardware wallets far ahead of Trezor and the other players in the sector.

Today, Ledger claims that its products can store and secure 20% of the world's crypto-assets (and 30% of NFTs), representing more than $200 billion in assets. "Ledger is clearly one of the heavyweights of the crypto industry", explains a good connoisseur of the sector.

But the machine has stalled somewhat in 2023, and not just because of the market downturn. One of the main grains of sand was the company's new product: the Stax.

Larger than its predecessors, with a screen the size of a credit card, the Stax, which was presented with great fanfare at the end of 2022 at Ledger's annual product conference, Ledger Op3n, (we were there), is still not available at the beginning of 2024 (it was supposed to be in the spring of 2023), which has caused a fair amount of tension internally and criticism externally.

"It's revolutionary to have a screen of this size with this degree of security," a Ledger manager told us at the time of the Stax presentation.

The criticism is all the stronger given that the Stax was on pre-order for months at the start of 2023 and orders reached tens of thousands of units in the summer; customers tired of waiting and who wanted it have since been refunded.

As we revealed several months ago, the delays to the Stax, which was designed by Tony Fadell (father of the iPhone), are due to problems with the screen, which suppliers have struggled to manufacture in industrial quantities - i.e. hundreds of thousands of units.

"The product is perfect, except for the screen, which cost us a lot of time, but we've solved the problem", explains Pascal Gauthier today, who sees the Stax as the company's new flagship product.

"Our aim has always been to do for the wallet what Apple did for the phone, and the Stax will enable us to move in that direction", he adds.

When will the Stax be available? Sometime in 2024, Ledger assures us. "When the product is released, everyone will realise that we have created a monstrous gap with the competition", stresses its CEO. On this point, it's hard to prove him wrong when you see that most of the options available on the market, Trezor in the lead, haven't released any real new products for years.

Meanwhile, the Stax delays are not neutral since the loss of revenue has prompted Ledger to scale back. In the autumn, the company announced the departure of almost 100 people, bringing the total number of departures to 300 over 2023. Ledger currently employs just under 600 people.

"The problems with Stax have weighed in", confirms a good source, who points to serial product glitches.

Because in addition to the problems with Stax, the French unicorn - valued at more than €1 billion - has also had difficulties with the release of Ledger Recover, which was also an important product-feature for the company.

As a reminder, the aim of "Recover" is to allow Nano users to have a backup in the event of losing their recovery phrase (12 or 24 words that allow them to recover access to their wallet).

Basically, this new feature was supposed to be presented to users in spring 2023, "to educate them about it", except that it was integrated within an update to the Nano's internal software and it was some users who discovered it themselves. Not ideal, especially when we're talking about security and trust!

In just a few hours, Ledger Recover has become one of the main topics of discussion within the crypto community with suspicions about Ledger's ability to access users' recovery phrase.

These doubts have been cleared up by Ledger CTO Charles Guillemet in an interview with The Big Whale. "We really screwed up on communication, even though it's a really good product for new entrants to crypto," reels in a Ledger executive. But the damage is, at least in part, done.

Since then, and to reassure customers, Ledger has made most of the elements on Recover open-source, and even beyond. Recover is available for $9.99 a month for all Nano X owners.

According to our information, sales figures are below expectations. "It's disappointing" confirms a good source, who cites barely a few thousand subscriptions. "But that's normal, you have to give people time to get to grips with the feature", he adds.

The most critical explain that Recover, which has put some of the brand's long-standing fans on edge, "could cost more than it's going to bring in" with subscriptions. While this may be true in the short term, the situation in the medium to long term could be different.

2/ Accelerating on Ledger Enterprise

One of Ledger's other big challenges is to succeed in accelerating on its enterprise side. Not everyone may know this, but since 2021 Ledger has had a dedicated business for start-ups and large groups with its Vault; The Vault is a kind of hardware wallet, but for businesses.

After a very promising start in 2021-2022, largely linked to the bull market in cryptos, Ledger Enterprise has however started to see its growth slow. "In the beginning, we didn't think too much about it and took Ledger because it's Ledger," explains a former customer.

But companies such as Fireblocks, Metaco and Taurus have gradually risen to prominence. "Fireblocks has a simple, competitive product that appeals to mid-market companies, while Metaco and Taurus have managed to make inroads with financial institutions," says one industry insider.

The result is that Ledger Enterprise has gone from being a potential leader to a challenger. "Ledger Enterprise is doing very well. We've lost and gained customers like everyone else, but we've maintained the business," explains Pascal Gauthier. "Ledger Enterprise is a great technology. If it were a company independent of Ledger, it would already have raised on a very significant valuation," he adds.

Today, Ledger Enterprise represents a few dozen people in the company with cross-functional skills, as explained by Sébastien Badault, who joined Ledger in 2022, and is responsible for Ledger Enterprise.

Currently Ledger works with several hundred companies. By way of comparison, Fireblocks, which is now considered the leader, claims more than 1,500 customers. The smallest contracts bring in a few thousand euros, while the largest ones bring in several hundred thousand euros.

In 2024, the aim is to take advantage of the market rebound and grab market share with companies. The launch of Tradelink in 2023 should enable Ledger to win over more customers. Tradelink is Ledger's institutional trading platform.

"We are very optimistic about this segment. Bitcoin Spot ETFs are going to attract even more companies. After the US, there are going to be ETFs in Asia, Hong Kong and Singapore," points out Dušan Stojanović, partner at True Global Ventures, which is one of the investors in Ledger.

The challenge will not be easy, however, since with the recent redundancy plan, Ledger lost part of its sales team on the Enterprise side.

According to our information, the entire sales team in the US has left. "It's complicated in these conditions to be on the offensive," stresses a person close to the company.

3/ Continue to pivot

These tensions over products reflect a real internal debate around Ledger's model. What is its positioning in 2024? Retail or business? Hardware or software? 🤔

For many years, the company, which will celebrate its 10th anniversary this year, has only done hardware. "It's an interesting business, but it's a one shot. When you sell someone a Nano, you don't sell them one every year, there's no recurring revenue", explains the head of a Web3 fund.

It is precisely to create this recurring revenue that, under the impetus of Pascal Gauthier, Ledger has begun to pivot its model from a business based exclusively on "hardware" to a mixed business where there is both hardware AND software. A strategy that finds its inspiration, again, in Apple with the iTunes Store (2003) and AppStore (2008) launched alongside the success of the iPod and iPhone.

The first stone in this pivot was Ledger Live. Launched in 2018, the app has gradually ramped up and is now the foundation for all Ledger's transactional services, which range from buying and selling cryptos to staking.

"By the end of 2023, we have arrived at a business mix where all software services (Ledger Live and others) represent a significant part of our revenues, and above all the margin," explains Pascal Gauthier, who claims 100% growth each year in crypto buying and selling volumes.

What impact do these volumes have on the business? "Revenues are a function of volumes," explains Pascal Gauthier, without giving precise figures. "As soon as the market picks up, revenues increase."

According to our information, while hardware wallet sales are still Ledger's main source of revenue, additional services are steadily growing. "It's now a significant part", stresses a good source.

Staking is also part of this strategy. "Staking is a real line of business for Ledger", confirms an investor in the company.

According to the data available on several aggregators (Solana Beach), Ledger is the second largest validator on Solana (delegating to Figment), behind the American Coinbase.

On Ethereum, Ledger is also one of the big players, but the company goes through Kiln and Lido. According to our information, Ledger has sent almost 1 million ethers in staking via Kiln and Lido, which would make it by delegation the 5th largest validator on the market.

"Ledger's model has completely changed," explains Dušan Stojanović of the True Global Ventures fund. "Today, the company has recurring revenues, particularly with Ledger Live and thanks to businesses. This is what allows it to be much more solid and resilient," he adds.

4/ The culture internally

The fact remains that the company's transition, as well as the cascade of departures over the last twelve months, are raising questions internally, particularly about profiles. A complexity summed up by a former member of the company: "Is Ledger a company of geeks or marketers?"

For years, Ledger was a company of engineers and geeks, but with the transition to software, there is less need for these profiles. The successive arrivals of Ian Rogers (Chief Experience Officer, transferring from LVMH) and Ariel Wengroff (Global Marketing) in 2021 are, from this point of view, a real turning point.

"They are excellent in their field, but they are very marketing and mainstream," explains a good connoisseur of the company. Some point out that the release of Ledger Recover, contested by part of Ledger's fan base, would be the translation of this pivot to attract new users. And that this would obviously be a mistake.

"If we've sold 6 million devices, it's mainly thanks to crypto fans and bitcoin maximalists, it's not thanks to people in the street who would see Ledger ads that don't even exist," sums up a former company employee.

This position is obviously disputed by current management and investors. "What's happening at Ledger is totally normal. They're in the process of creating new lines of business, so that creates tension. Apple and other giants have also experienced this in the past," explains one banker.

A position assumed by Pascal Gauthier: "Between the bear markets of 2018 and 2023, Ledger's overall business has increased fivefold and on top of that we have a more balanced business mix," he boasts.

5/ The financial situation

These good figures have not, however, enabled Ledger to become profitable. Like all start-ups, Ledger loses money every month. In fact, it is precisely for this reason that start-ups raise funds more or less regularly, until they generate enough cash to be financially independent.

In early 2023, Ledger thus closed a new €100 million round, while most companies have failed to raise money. "They took full advantage of their credibility in the market. For an investor, it's reassuring to put your marbles in a company like Ledger", explains a European VC, who is still betting on Ledger going public "within five years".

Notable performance, Ledger has managed to raise funds while maintaining the same valuation as in previous rounds, i.e. in excess of €1 billion.

The issue of cash flow remains a significant one, however. "When you have that many people (600, ed. note) with certain highly qualified profiles, you spend a lot of money," stresses one investor.

How much cash do they have? According to several interviewees, Ledger has just under two years of runway, i.e. money to cover its expenses. When questioned, Pascal Gauthier did not comment on the subject. No private company communicates on this kind of figure.

6/ The spectre of regulation

On the other hand, if there is one subject on which crypto companies are communicating, it is regulation. With the arrival of MiCA, which will gradually come into force (we talked about it last week), a large part of the industry is going to be impacted, particularly with approvals becoming mandatory in 2026.

Until now, Ledger has always slipped through the regulatory cracks because the company simply provides technology. "Ledger is a provider of custody technology and not a company that directly manages its clients' funds," explains one expert.

But with its new services, particularly Tradelink, things could change somewhat. "If they start providing a turnkey tool and move up the value chain, it may be a different story," says one expert. The possibility? That Ledger's activity comes under the PSAN dedicated to storage...

When approached, the French authorities and regulators did not react.