How the Venture Studio model, borrowed from Hollywood, may finance the Blockchain Economy, replacing the current Fund centric model that drives Silicon Valley.

Hollywood.001

TLDR Hollywood & Silicon Valley both have proven models for harnessing ideas & talent to big profits. As we move from rock stars to film stars to code stars, the model from down south in LA is moving north to Silicon Valley and all places where tech ventures are created. This paradigm shift reduces the primacy of Finance in the Silicon Valley model, a trend accentuated by tokenized early stage equity. Two leaders in this paradigm shift are Consensys and Andreessen Horowitz. The emerging name is Venture Studio, replacing the names Incubator, Accelerator and Skunkworks from earlier waves of innovation

This update to The Blockchain Economy digital book covers:

  • How the Hollywood Film Producer model could apply to Venture Production
  • Venture creation is both a creative and a repeatable process
  • How Venture Studios reduce the primacy of passive capital
  • The role of talent in both models
  • From Incubator to Accelerator and Skunkworks to Studio
  • How Consensys created an early version of the Venture Studio
  • How Andreessen Horowitz is creating their version of the Venture Studio
  • Other Famous Venture Producers
  • Tokenised early stage equity is the game-changer that enable the Venture Studio
  • Why The Blockchain Economy requires creative non-conformists
  • Context & References

How the Hollywood Film Producer model could apply to Venture Production

The Hollywood Producer works from start to finish (aka full lifecycle in tech speak):

  • develops an idea (aka script). The Producer often own the rights to a book or story idea. Translation to Venture = develops a concept for a new venture. This period is often lengthy, with many ideas/concepts dormant for a long time until conditions are right – timing is everything. The idea that there is a tradeoff between concept/idea and execution is silly. You must have both and a Producer oversees both. 

 

  • Once a script is completed, the producer will lead a pitch to secure the financial backing usually about 25% of the budget; this is the “green light”that allows production to begin. Translation to Venture = find lead investor.

 

  • secures the necessary rights (for script, music etc). Translation to Venture = patents, trademarks or existing code (being careful that the open source is not restrictive).

 

  • hires the director. Producers rarely have creative or technical involvement. Translation to Venture = hires the CEO. The closest parallel to Producer in Tech Ventures is Chairman, in the sense that Chairman can hire/fire CEOs, but independent Chairman is unusual in early stage tech ventures. 

 

  • supervises casting. Translation to Venture = involved in talent hunting.

 

  • assembles a crew. Translation to Venture = involved in talent hunting.

 

  • oversees the budget. Translation to Venture = formal Board role.

 

  • coordinates the post production work (e.g editing, commissioning music, encouraging the film’s stars to plug the movie on talk shows). Translation to Venture = informal Board role (leveraging board director’s network).

 

  • The Producer often multi-tasks across several projects at once. Translation to Venture = those people listed as Co-Founder on multiple ventures.

In Hollywood, Producer is such a critical role that the credits often show many variants such as:

co-executive producers: executives or distributors who have a limited financial stake in the project.

  co-producer: works under the executive producer on casting, financing, or postproduction

line producer:  on the set at all times to supervise the budget but has little or no creative input.

Venture creation is both a creative and a repeatable process

That statement defies conventional wisdom in two ways:

– building a business is a creative act. We think of building a business as something requiring hard work, grit and lots of boring tasks – totally unlike the creative arts. I am indebted for the insight that this conventional wisdom is wrong to a post from the great VC, Fred Wilson of Union Square Ventures. As he recorded on his wonderful blog (AVC), he was on holiday in Paris, standing in front of an iconic painting and realized that venture founders are like painters, standing in front of a blank canvas and envisioning what should be there.

– the creative process is repeatable. Creative work require hard work, grit and lots of boring tasks  – and is a repeatable process. Let one of the most consistently creative (and funny) people on the planet tells us how in this video. John Cleese is unusual – a scientist  turned comedian and educational content entrepreneur who is obsessed with figuring out where creativity comes from. Watch the video to learn the difference between open mode and closed mode creativity. Open mode creativity is that flash of inspiration. Closed mode creativity is the hard work we call execution. Entrepreneurs and artists  know that creativity is also needed in closed mode. The plot or character idea may come in a flash of open mode creativity, but realising that idea requires further creativity and hard work in closed mode. It is the same in venture creation, where an execution step, such as improving funnel metrics, requires creativity as well.  The Hollywood Producer ensures that both open and closed mode creativity are done right.

How Venture Studios reduce the primacy of passive capital

Look at the credits at the end of the next film/movie you watch. You will see credits to all kinds of people, some with mysterious titles such as key grip, but you will be hard pressed to see or remember who financed the film/movie.

Now look at the tech venture success stories; they will often start with something along the lines of “XYZ BrilliantUnicorn, the HotABC Funded venture….” In the tech venture role, the VC Funds (“HotABC Fund”) have the starring role.

The role of Talent in both models

Talent is a word that made the leap from Hollywood to Silicon Valley, but the roles of talent are different:

  • in Hollywood, talent includes actors but also behind the camera folks such as director, writers, camera crew, set designers etc. Talent are free agents who contract for a specific film/movie. Talent employ agents to help them with this.
  • In Silicon Valley, talent  includes engineers but also marketing, sales, design, HR, finance, etc. The difference is that talent in the Silicon Valley model have to sign on for long periods as employees to get their equity upside. While increasingly free agent in reality, talent in tech ventures have to pretend that it is a 1950s  jobs for life world.

The other big difference for talent is that upside participation in Silicon Valley means equity which means exit via either trade sale or IPO. This makes talent vulnerable to financial engineering by Funds that are harmful to the interests of talent. In Hollywood, upside participation is primarily revenue share. That revenue share is variable and tied to the success of the venture/movie, which makes the upside a bit like equity, but it is not dependent on exit – only on value creation.

Big powerful interests in both models can give a raw deal to talent, but Hollywood has a longer tradition of talent being able to negotiate good deals.

From Incubator to Accelerator and Skunkworks to Studio

Incubator was the venture creation model popular during the Dot Com era.

Accelerator is the current model, as investors of all types ran away from the early stage risk of incubators, with hundreds of accelerators attempting to copy the Y Combinator success.

Skunkworks is a proven model of innovation within big companies aka intrapreneurship. This model pre-dates incubators and accelerators. Skunkworks usually operate with a small elite team removed from the normal working environment and given freedom from management constraints. The term originated during World War II by Lockheed Martin, but the most famous skunkworks was how Steve Jobs developed the Macintosh computer; other examples include Google X Lab and Microsoft Research.

The model for both incubators and accelerators have a graduation event, when the incubator and accelerator role is finished.

Hollywood Studios operate more like the skunkworks, taking responsibility until the product has delivered its value.

How Consensys created an early version of the Venture Studio

When Joseph Lubin made a fortune from Ethereum, he could have done anything. He chose to put a lot of his capital and energy into Consensys. I had the great pleasure of meeting him and his early team very early in the history of Consensys.  My impressions at the time (recorded here on Daily Fintech) were that I was seeing something radically new that I did not really understand:

“Last week I left the smart Manhattan offices to head to northern Brooklyn to visit Consensys. This was not a colorful developer pampering office. Yes, we sat around a conference table that doubled as a ping-pong table; but this was clearly a bootstrapped operation full of bright people fired up by changing the world not by the trappings of success. I had trouble finding the office because there was no logo on the door; I went through a coffee shop to get to their offices. This neighborhood was still in the early stages of gentrification.

Around the ping-pong table (ahem, conference table), developers were as comfortable talking about the finer points of derivatives clearing and compliance as they were discussing developer tools. Big Wall Street firms could feel comfortable here despite the decor.

Yet they were also developing consumer-facing applications.

It is hard to put a label on Consensys. All of these fit:

Consumer app developers

Enterprise IT developers

Core Ethereum developers.

Venture production studio.

Custom solution vendor.

Consultants.”

That same “how do we label you” issue hit the early Hollywood Production Studios, as they moved from a few creative people to a big business with lots of employees. It is easy to write off Consensys; after the fall in ETH price that meant some reassessing of the business model many headlines talk about the rise and fall of Consensys. Pioneers get arrows in their back.  I suspect that future headlines will talk about the rise and fall and rise again of Consensys. Even if not, Joe Lubin will have changed the course of history by creating a new model and a new type of company at the heart of a new protocol based ecosystem.

How Andreessen Horowitz (A16V) is creating their version of the Venture Studio

Andreessen Horowitz (A16Z) is massive force in the global Silicon Valley ecosystem. They are one of the few new Funds to break into the Top Tier in the last decade. Yet they still act like outsiders, making big bold moves that disrupt the game that they are already masters of. “Disrupt your own game before somebody else does” is easy to say, but very hard to do and A16Z is actually doing it.  A16Z has made two prescient moves that position them well for this new model that is emerging:

  • Full execution team means they are active not passive investors. They have the resources, not just cash, to help ensure that the ventures they invest in are a success. This is like the Hollywood Studio.
  • A16Z recently became an SEC registered RIA, giving them the ability to invest in cryptocurrency assets. This means A16V can win in the Blockchain Economy. A later section of this chapter describes why tokenised early stage equity is the game-changer that enables the Venture Studio. A16Z has signalled their determination to ride the next wave of innovation even if if disrupts the Fund model that makes them money today. 

Other Famous Venture Producers

  • Peter Thiel – co-founder of multiple huge ventures from PayPal to Palentir.
  • Richard Branson – using his insight, personality and brand to take on massive broken markets, with external financiers along for the ride. Branson is the closest to the Hollywood model.
  • Steve Jobs – most famous for Apple but also NeXT and Pixar.
  • Jack Dorsey – both Twitter and Square. 
  • Elon Musk – most famous for PayPal, Tesla & SpaceX, but also Neuralink, The Boring Company & OpenAI.

Some are CEOs of the ventures they help to create, others are content with a big % of equity and a corresponding Board role. What they all have in common is a brilliant entrepreneur who attracts capital like bears to a honey jar. Some may put in their own capital, but their signalling/brand value is far more important than their cash. Many have Hollywood connections, most notably Peter Thiel moving to LA and Steve Jobs with Pixar and now Elon Musk aiming to bring Silicon Valley and LA physically closer with The Boring Company.

The institutional stage is coming. This is like the early Hollywood history, when a few big swashbuckling  personalities created institutional studios.

The Silicon Valley model is already institutional with a few Top Tier VC Funds, most notably Sequoia Capital, managing the leadership succession across multiple generations. The Sequoia Capital WhatsApp deal, where they financed all the rounds themselves from an $8m investment in 2011 to a $19,000m exit in 2014, is like a Hollywood Studio that takes all the risk & reward. 

Tokenised early stage equity is the game-changer that enables the Venture Studio

Imagine a movie that took 10 years to get to the box office. Yes there are some outliers like this (Avatar took 10 years), but they are exceptions that prove the rule. This does not count what can be decades, when an idea lies dormant (ie not spending any money) because the timing is wrong or some key piece is missing. Yet, early stage venture investors typically have to wait over 10 years before getting a return. Tokenised early stage equity, whether IEO or STO, is the game-changer that enables the Venture Studio model to flourish. The time to liquidity is now much closer to the time to create a movie/film.

Why The Blockchain Economy requires creative non-conformists

The book called Originals: How Non-Conformists Move the World describes  how leaders champion new ideas and fight groupthink. The Blockchain Economy will be a bigger shift than even the disruptions that drove Hollywood and Silicon Valley. Every market is up for grabs in the Blockchain Economy. Entrepreneurs are restricted only by their imagination. Capital is far less of a constraint. There is plenty of capital in the world and Blockchain ventures require less capital for 3 reasons:

  • the crashing cost of building technology thanks to open source, APIs. offshoring etc. This well documented mega shift pre-dated Blockchain.
  • there is no need to invest in massive centralised data centers, because the users provide the servers in a decentralised network.
  • marketing costs are reduced because early users are motivated to evangelise because they bought Tokens (either Utility or Security or both).

Context & References

Why the Blockchain Economy won’t be financed by ye olde artisanal VC funds.

The 4 wrenching leadership pivot gates that entrepreneurs face.

 

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

$100 Billion++ , is Softbank’s Vision fund blinding the market?

The tech IPO market is having a bonanza year so far and NASDAQ hit an all time high in April. However, confidence in the tech giants and their ethics in dealing with consumer data is perhaps at rock bottom. Cheap money is causing ballooning valuations. With Zoom, Pinterest, Lyft, Slack, Uber, WeWork all going for the big day at the market, are we witnessing a repeat of the dot com boom and bust?

Image Source

The other question to ask is “Is Technology the new Banking?”. As they say, “Follow the money” to catch the bad guys in crime stories. The other way to look at it is, when people make good money, they are often portrayed as the bad guys. The world loves to see them fall. Behavioural and philosophical points aside, several market trends are shouting out for caution.

Analytics company Intensity’s April prediction puts the chances of a recession happening in the next 18 months at 98.9% and in the next 24 months at 99.9%. They are expecting a recession to happen in October 2019. Out of curiosity, I went through all their previous months’ predictions, to check for consistency. The confidence levels had increased steeply between Aug-Sep 2018, and have stayed high since.

Irrational exuberance in the markets is on display yet again. The Crypto bubble burst two years ago, but didn’t cause much of a pain as the market cap was not big enough. But with tech stocks driven by late stage VCs like Softbank, we have more to lose.

Global debt levels are at an all time high at $244 Trillion, and almost everyday economists are writing about a crisis triggered by debt markets.

One of the key trends over the last two years in the VC industry is the rise of late stage venture funds. Softbank led the boom, with Sequioa and others following up with relatively modest sized funds to catch “Unicorns” before their big day in the public markets. The strategy is to get in, pump the firms with steroids and fatten them up for the markets to consume. In the process, make some huge multiples.

Softbank’s investment timeline: Source, Crunchbase

Some stats around the Softbank fund

  • $100 Billion to invest
  • ~$70 Billion deployed so far in about two years,
  • $15 Billion more
  • $10 Billion in Uber and $5 Billion in WeWork
  • Improbable, NVidia, Grab, Kabbage, Flipkart, Oyo, Slack, PingAn, Alibaba and more recently OakNorth are some big names in the porftfolio
  • $45 Billion from Saudi’s Sovereign Wealth Fund represents the biggest investor in the Softbank Vision Fund.

However, both Uber and WeWork have struggled to demonstrate a sustainable business model inspite of their rise. The Growth vs Profitability conundrum remains, and these two might well be case studies on how not to spend VC money, if (when?) their “Going-Public” goes sour.

The Softbank Vision fund could also be a case study of “How not to do Venture Capital”. As a late stage Venture Capital investor, they have an opportunity to look for firms with robust business models and help them go public.

One bright spot is their investment into OakNorth, a UK based Fintech, who tripled their profits in 2018.

The strategy with firms like WeWork or Uber should have been to identify where the business model needed tweaking and pivoting. That could be achieved with $100 Billion in the bank. As a fund with so much capital, they have a responsibility to make healthy VC investment decisions. Not just for their investors, but also for the markets.

I am sure Softbank will make handsome multiples when some of these shaky businesses go public. However, the success these firms managed with private money, would be hard to replicate in the stock market. If a few of them fail, that would trigger pain.

There is enough negative PR about the tech industry’s lack of ethics, diversity and how they manage data monopoly. Creating a bubble, riding it and exiting it before a market crash might just make Tech the New Banking. Softbank might have accelerated that process.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on “Sustainable Deeptech Investments” and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Unravelling the Unicorn Madness – as the Silicon Valley bug bites London

A Unicorn is a tech startup that has grown past $1 Billion in valuation. The term “Unicorn” to refer to these firms was first coined by Aileen Lee, a Silicon Valley investor, in 2013. Since then the count of Unicorns has increased to about 300 at the start of the year. Silicon Valley has boasted 9 of the 29 Fintech Unicorns across the world.

Image Source

This week, the news on the streets is that London would go past Silicon Valley in the Fintech Unicorns tally. London already has 7, and there are a good few companies in the pipeline raising funding to get past Silicon Valley’s 9. Let us look at the irrational exuberance of the London Fintech market and the funding it received.

London received 39% of European Venture Capital funding. The revenues of Fintech firms in London increased from $100 Million to about $230 Million in the last 12 months. Fintech in London is also the fastest growing job sector. Monzo and Tandem got headlines earlier this week due to their new funding rounds. Monzo is receiving capital from Y Combinator and a few other Silicon Valley investors, and Tandem has closed an £80 Million funding round.

However, this is just how growth has manifested itself. There are some fundamental changes to the Venture capital mindset that has caused this Unicorn madness. There are abundant sources of funding these days. The number of platforms that a tech startup can leverage to get funding is increasing on daily basis.

Incubator and accelerator programs inspired by the successes of Y Combinator, Seedcamp etc., are numerous. There are several entrepreneurs who have exited and started to give back to budding start ups as Angels. This used to be the case in Silicon Valley, and London’s entrepreneurs are no different. Over the last 12 months, I have come across atleast 20 firms that have received angel funding from founders of more established or exited tech firms.

Family Offices and even Pension funds these days make direct investments into the tech startup world. Many of them shy away from traditional Venture capital model due to the fees involved.

That has increased the flow of capital directly into private tech firms. Also, the size of late stage funds like Softbank’s fund, and Sequioa’s $8 Billion fund means, firms are adequately funded at a later stage too.

If all these options weren’t enough, in the UK, we have the EIS/SEIS schemes that offer very attractive tax benefits for investors into tech startups. Most HNIs and UHNIs are keen to ensure they utilize these tax schemes. Crowdfunding platforms help, and more recently, the ICO and STO methods of raising capital globally have had their effect as well.

Apart from these financing options, the monopoly that some of the Silicon Valley start ups have taken in their markets, is now used as a model of growth. Once the product market fit is identified, firms these days throw money at growth – crazy growth. This results in market dominance, and that itself becomes the barrier to entry for competitors.

Gone are the days where technology, business models, and even operational excellence differentiated the great from the good.

This growth often means, firms have no respect for operational excellence, or very little intent on achieving a viable business model. They only focus on growing fast, raising more at higher valuations and achieving a Unicorn status. Even VCs these days are judged based on the Unicorns in their portfolios.

This growth at any cost and irrational valuation models had caused the dot com bubble to burst about 20 years ago. And this is definitely not another “the recession is coming” post. But it is important to understand that Unicorn status doesn’t mean much anymore. For an early stage angel investor, an increase in valuation from say $2 Million pounds (when they invest) to when the firm hits $1 Billion in valuation, makes a big difference. But in the broad scheme of things, this is just an artificially created tag often used for branding.

Investors and firms riding this wave of irrational exuberance need to time their exit right. If the correction blindsides them, it may be another financial crisis. It’s sad that London’s Fintech has gone down this path that Silicon Valley firms have traveled for years. It’s superficial and doesn’t feel right.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

How Family Offices aka “muppets on steroids” are writing the future of Fintech & Blockchain & Wealth Management.

Muppet.png

This is an update to the chapter on investing in The Blockchain Economy digital book.

“Muppets” is the derogatory term coined by Wall Street for the “dumb” retail investors. The people who invested early in Bitcoin and Ethereum are retail in the sense of being individuals and not part of the Legacy Finance world. Yet they are now (even at these bear market prices), seen as smart wealthy investors.

This is a huge inversion. It now looks like “dumb money” from retail muppets has become “smart money” (which used to come from institutions). The reality is that Bitcoin & Ethereum “investors” could evaluate tech and market risk. They might have known nothing about investing but they did know that the technology was feasible, the team was good and if the team developed something that worked it would change the world and make a lot of money. That is normally the job description of VCs, but after Sand Hill Road became more like Wall Street, VCs ran from such early stage risk, leaving the field open for technology oriented investors who put money into Bitcoin and Ethereum in the early days.

Warren Buffet in his early days was another dumb retail muppet – who made a fortune. There are many other famous examples; these were all from an earlier era; for some reason it is viewed as impossible today. Here is an interview on Daily Fintech with a recent example who is not famous (and made money lending not equity investing).

What all of these dumb retail muppets share is that they have no explanation risk. If a “smart money” intermediary makes a bet that goes wrong they have to explain themselves to their investors. If a retail investor makes a bet that goes wrong they have to learn from their mistake and move on; mistakes are part of the learning process.

Family Offices are like retail investors in that they make their own decisions and have no explanation risk. The difference is obviously that Family Offices invest far bigger sums than classic retail investors. Family Offices are Retail investors with clout. Watch what Family Office do in Blockchain Finance to see the future.

Let’s look at a recent example – the pre IPO round for Silvergate Bank.

We wrote about Silvergate Bank when they first filed for IPO at end November 2018.

The recent news is a pre IPO round. Forget the usual roster of Big VC Funds. This deal was done by a Family Office:

The Witter Family Offices announces its investment in Silvergate Bank, in advance of the bank’s Initial Public Offering announcement. Silvergate is a provider of innovative financial infrastructure solutions and services to participants in the nascent and expanding digital currency industry. The Company filed documentation for an initial public offering on November 16, 2018, to raise up to $50 million.

Sherry Pryor Witter, Managing Partner, Co-founder and CIO of the Witter Family Offices, welcomed the opportunity to partner with Silvergate. Given the explosion of digital currencies and blockchain technology in recent years, Sherry was aware that the space was ripe for opportunity.Taking an equity stake in Silvergate was a way to invest in digital currency with less risk of the volatility often associated with the emerging technology. “We believe that finance-related technology and solutions need to continue to advance to support future economic, demographic and global changes,” Sherry said. “One area that we are looking at is crypto, not only the asset itself, but the supporting infrastructure to increase its velocity and application. We believe that Silvergate saw an opportunity to bank cryptocurrencies by providing technology solutions to exchanges and crypto companies when others only saw risk.”

Getting into the Pre IPO round of a leader in Blockchain Finance is not easy

Big VC sell their access to deal flow as a USP. Getting access to quality deal flow in Blockchain Finance is a big deal because Blockchain Finance is Version 3 of Finance:

  • Version 1 was Analog Legacy Finance. This was the era of investors such as Warren Buffet and Peter Lynch, when stockholders painstakingly researched the fundamentals of individual companies and held those stocks for a long time.
  • Version 2 was  Digital Legacy Finance. This is what is often called Fintech; our definition at Daily Fintech includes Version 3.  Digital Legacy Finance was when computers took over trading and long term hold meant more than a second. In this market, the individual retail investors were derided as muppets and individuals invested through institutions rather than directly. Due to Buybacks and Mega Private rounds, there were fewer individual companies to invest in and the whole game moved to trading indices based on reading Central Bank tea leaves or front-running retail investors using High Frequency Trading.
  • Version 3 is Blockchain Finance. One key difference is that in Version 2, everything changed except the business of investing, trading and value exchange. In Version 3 Blockchain Finance, the Funds themselves are having to deal with disruptive change to their own business. This is when we will see tokenised assets go mainstream and when the old fund intermediary model (first raise funds, then invest) will be disrupted by an inverted model (first invest, then get passive investors to follow you for a fee).

Family Offices feel no threat from this disruption because they invest direct and are not trying to make money as intermediaries.

Image Source.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

Check out our advisory services (how we pay for this free original research).

To schedule an hour of Bernard’s time for CHF380 please click here to send an email.

Bitcoin Maximalism is deeply threatening to Wall Street

Intermediaries

What if somebody around 1995 had given you a simple way to invest in the Internet? All we had around 1995 to 2000 was the option to invest in the ventures being sold by the Wealth Intermediation business. Today, if you want to invest in the Blockchain Economy, there is one incredibly simple way to do so – you just buy some Bitcoin. I just gave you a strategy, so where do I send my invoice for x% of AUM and y% of Carry/Profit Share? “Thanks, but I don’t need you to buy Bitcoin on my behalf, so your invoice will go in the round filing tray”.

I am using “Wall Street” as short hand for the global business of Wealth Intermediation ie getting a risk free return connecting users of capital with investors of capital. Wall Street can today be located in any major city, just like Silicon Valley has gone global. Global Wall Street aka Wealth Intermediation is a massive business (for more, go to this chapter of The Bitcoin Economy digital book entitled Blockchain Bits Of Destruction Hit Wall Street 

Aha, saying “just buy some Bitcoin” must mean that I am a Bitcoin Maximalist. Guilty as charged your honor. Let me explain why I am a Bitcoin Maximalist

5 reasons Why I am an economic Bitcoin Maximalist

Not a moral Bitcoin Maximalist – just economic. I don’t say that buying Bitcoin is any better for the world than buying an Altcoin. I am just saying that Bitcoin will be better than Altcoins as an investment. I said investment, meaning over the long term (there are plenty of short term trading opportunities in Altcoins).

Here are 5 reasons Why I am an economic Bitcoin Maximalist:

  • One. Brand and network effects. Step outside the cryptoverse for a moment. Do you have any trouble explaining Bitcoin to a normal person? Try Ethereum. Try hundreds of Altcoins. Building a crypto product/service? Building for Bitcoin is a no-brainer. Which Altcoin do you invest your R&D budget into?
  • Two. Not making any more of it. People who are fed up with money printing tend to like investing in land, gold…and Bitcoin. A big  question for the mainstream user is, but how can we believe “they” won’t make more Bitcoin? Now ask that question of every Altcoin.
  • Three. Copy that. Sidechains and other technology allows entrepreneurs to copy most feature of a cool Altcoin. Like Smart Contracts? Use Rootstock/RSK. Like privacy? Use MimbleWimble/Grin.  Altcoins as a sandbox for experiments are a “good thing”. As a donation to the community that experimentation is cool, as an investment thesis less so.
  • Four. Lightning Network. This crushes the BCH pitch that the only way to scale Bitcoin into a currency for daily spending is to increase the block size. The “will Lightning Network work in practice?” objection is looking less credible with each passing day.
  • Five. Flight to safety from both directions. Coming from Fiat, Bitcoin is an Antifragile bet against central bank money printing. Coming from Altcoins, Bitcoin is safe haven while still believing in Cryptocurrency. 

Ethereum is a wonderful technology innovation. If Proof of Stake really works in Ethereum, Ethereum could become a true public alternative currency because Proof Of Work is expensive. But that is like saying that if we can easily transport solar energy we can get off fossil fuels – easier said than done. Watch this space, this is a wild card. If you are convinced of Ethereum, maybe your crypto asset allocation is 80% Bitcoin and 20% Ethereum. Well that sounds a bit more complex, so where do I send my invoice for x% of AUM and y% of Carry/Profit Share? Yep, thought so.

The Bitcoin is Bad, Blockchain is Good idiocy

People who made a fortune in Legacy Finance, tend to trash talk Bitcoin. To show that they are hip to new technology, they often spout the line that Bitcoin is bad, but Blockchain is good.

Even Warren Buffet is saying this. Another famous, super smart Legacy Finance titan (I am being polite by not naming him) was heard on CNBC trash-talking Bitcoin but lauding the underlying Bitchain technology. These Legacy Finance titans are super smart about Legacy Finance and super dumb about Blockchain Finance.

When they learn that Blockchain can be both Permissioned and Permissionless, they come down on the Permissioned side and trash-talk the Permissionless solutions. Then when Oracle proposes a distributed database version of their RDBMS that they call a Permissioned Blockchain solution, the Legacy Finance titan can sagely nod their assent in the board meeting.

The Crypto Fund Products you will be pitched soon

These Crypto Fund Products all justify an intermediation fee, but not all are worth paying for:

  • Bitcoin Killers.  This could be like trying to find Facebook killers in the social media era. Even if there is a Bitcoin killer out there, your chances of finding it (or finding the Fund that will find it) is statistically tiny.

 

  • Index of all Altcoins. If you agree that finding the Bitcoin killer is too high risk, the lower risk approach could be to take a passive index approach and invest in all Altcoins. The problem is that the analogy with an S&P Index Fund is flawed. Altcoins are early stage ventures where 1 winner can make up for 99 losers. Compare that to the S&P 500 Index where all 500 companies are viable. What if the 1 winner does not do a Token but raises conventional early stage equity capital? You have 99 losers and no winner.

 

  • Filling in the blanks for Bitcoin. Bitcoin is the protocol level and the world needs exchanges, wallets, custodians, sidechains, offchain networks  and a load of application level/user facing ventures.  This makes sense as an investment thesis, even if it does not sound super exciting. This strategy requires classic early stage investing skills. The problem is that backing a first time fund is high risk and the top tier funds are not open to new investors.

Watch what Family Offices do in Blockchain investing

Family Offices are like retail investors in that they make their own decisions and have no explanation risk. The difference is obviously that Family Offices invest far bigger sums than classic retail investors. Family Offices are Retail investors with clout. Watch what Family Office do in Blockchain Finance to see the future.

Image Source.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

Check out our advisory services (how we pay for this free original research).

To schedule an hour of Bernard’s time for CHF380 please click here to send an email.

The To Do List for Security Token Platform operators

checklist

Sheldon Freedman will return next week with the last of his 4-parter on Security Tokens. Today’s post is stepping back and looking at the motivations on both sides of the table. What do entrepreneurs and investors want and how do their needs offer a To Do List to Security Token platform operators?

Innovation comes from deep pain meeting disruptive technology. Security Tokens can tokenise just about any asset. Our thesis is that the early adoption traction will happen in early stage stock, because that is a big broken market where there is deep pain on both sides of the table.

The deep pain of entrepreneurs raising money from Legacy VC has been detailed many times, including here in our first take on ICOs in March 2017. During the ICO bubble of 2017, the pendulum swung too far in the other direction (evidenced by raising $100m+  in hours without even a working product). Now the pendulum needs to swing back a bit towards investors (but not as far as it used to be before the Token revolution started).

Investor Pain

The other side of the table – the investors – also suffer pain based on having a lousy set of options:

  • Public Equity Markets. Investors have an ugly choice of IPO valuations of tech growth stocks at nosebleed valuations or more conservatively valued old companies that are badly impacted by disruption (e.g do you invest in AirBnB at high valuation at IPO or in conservatively valued Hotel stocks that will be disrupted by AirBnB?).
  • VC Funds. Investors who want equity much earlier than IPO have the option of buying into sub par VC funds, when the lion’s share of returns goes to a few top tier funds that are not accepting new investors.
  • Direct Angel Investing. investing in early stage deals directly is risky when there is almost no price discovery, liquidity, or portfolio construction ability and a lot of Due Diligence overhead.

To Do List for Security Token platform operators

These are the 5 things that Investors want from a good Security Token platform. This the To Do List for Security Token platform operators:

  • Basic quality filtering to create a short list for investors. 
  • Price discovery & liquidity. 
  • Portfolio construction ability. 
  • Co-Investors.
  • A network of service providers.

Basic quality filtering to create a short list for investors.

It is NOT hard to get Security Token issuers (aka entrepreneurs). They will be lining up at the doors of Security Token platform operators. Within the crowd of entrepreneurs lining up at the door will be a mix of:

  • Really great ventures in their early days (what every investor wants).
  • Ventures that do OK, make some money for investors but not a lot 
  • Ventures that go smash with money back for investors from something like an Acquire Hire deal
  • Honest Ventures that go smash with zero back.
  • Scam Ventures that go smash with zero back.

The last two are similar in terms of returns but the last one is relatively easy in most cases to get via a fairly crude filter (but not all, think big public market failures like Enron and Worldcom). Basic quality filtering should deliver a short list to Investors and the platform needs to ensure that the ecosystem of investors, advisers and service providers are compensated well to do that filtering job.

Basic quality filtering only delivers a short list to investors. Then the hard work starts. Without that basic filtering the job is well nigh impossible – meaning investors ignore the platform and eventually entrepreneurs desert the platform. That is why basic quality filtering is Job No 1.

Price discovery & liquidity.

The public equity markets are excellent at delivering price discovery & liquidity. Private markets (where all early stage deals are done) are totally opaque. Valuation/price is set in bilateral negotiations behind closed doors. There is no price discovery via shorting (which explains the historically bizarre inversion where private stock has higher valuations than public stock).  The hope for Security Tokens is that markets develop that bring price discovery & liquidity to these opaque private markets for early stage equity. The question is how that price discovery & liquidity will come about. I can only see two scenarios:

  1. Centralised exchange dominance. We get something similar to the NYSE/NASDAQ duopoly plus a lot of second tier regional exchanges.
  2. A more decentralised data feed driven ecosystem, where aggregation can be done by whoever takes the data feed.

I reckon that two is more likely for one simple reason. In the Legacy Finance era we had one dominant geographic market (USA) and so it was natural for NYSE/NASDAQ to rise to dominance. We now live in a multipolar world and the Token market is naturally global. The promise of the Token market is that a great team anywhere can raise capital. That requires a decentralised data feed driven ecosystem. This means that aggregation can happen by whoever takes the data feed. So there will be competition to add value at this level. 

This data feed is also what enables a portfolio construction ability. 

Portfolio construction ability 

Classic portfolio diversity means getting ventures that are diversified across geography, domain, stage and business model.

Investors in early stage stock have two options if they want to follow prudential norms for risk management through portfolio diversity:

  • Delegate portfolio construction to a Fund and pay them 2 and 20. You accept their model for  portfolio construction.
  • Use a data feed to construct your own portfolio.

That is relatively easy to do if we get a decentralised data feed driven ecosystem. All the platform operator needs to do is make sure that Security Token issuers fill in a basic form detailing geography, domain, stage and  business model and make that data available in a data feed.

A more sophisticated form of risk management will be enabled by a platform operator that insists that entrepreneurs report financials using XBRL (see this post for more). Imagine, for example, being able to see total cash position and cash burn across a portfolio of early stage stock.

Geographic diversity is a particular issue for early stage equity. It is an axiom of early stage equity that entrepreneurs and investors must be close enough to meet regularly (the  famous “one tank of gas in a Ferrari” for Silicon Valley VC). That problem is solved by having co-investors who trust each other. 

Co-Investors.

This is where the interests of entrepreneurs and investors align. The biggest fear of both is the venture running out of cash – that is how ventures fail in practice.

If you are limited to investing in local ventures, your pool of investors is small (unless you are in Silicon Valley). This is where investors need to build relationships with co-investors in other locations. For example, lets say you are in London but you see a good deal in Dubai. If you know a good investor in Dubai, you bring that deal to him/her. He/she does the same for you if they see a deal in London. The same can happen by domain and business model. In some deals you are a Lead, in others you Follow.

A network of service providers 

Investors need Lawyers, Accountants, Domain Experts and other experts. Due Diligence is a critical step in investing. A winning platform will have a good  network of service providers who are vetted and rated.

What entrepreneurs want from a Security Token platform

Entrepreneurs raising money are always in a hurry. They see a window of opportunity and want some cash in the bank so that they can execute on a plan. Investor conviction needs to take time – it should be hard. It is the next bit that should be easy. The mantra is schmooze offline, transact online. Once you have a lead investor it should be easy to close the round. It is not easy today. This is a deep pain point for entrepreneurs. These entrepreneurs will be highly enthusiastic early adopters of Security Token platforms that will make the step from finding a lead investor to closing the round and getting cash in bank. What entrepreneurs want is a simple way for everybody who wants to invest to do it online.  Execution of what we all want should be easy. You know, all those boring bits from “yes I want to invest, to money in the bank”. Shaving say 10% off a boring process like that is…boring. Taking a 90% axe to processes like that is exciting and game-changing. Security Tokens can enable that. This is win/win for investors and entrepreneurs – nobody likes this cost/delay.

If we get Security Token platforms that deliver on this To Do List, it will be great for entrepreneurs and investors and for everybody else who benefit from good jobs and wealth creation from the increase in innovation. I am an optimist because a) none of the things on that To Do List is rocket science and b) the prize for a platform operator who gets it right is very big. 

Image Source

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech. 

Check out our advisory services.

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.