Posts from August 2017

Store Of Value vs Payment System

One of the debates that has raged inside and outside of the Bitcoin community since I got involved back in 2012 is whether Bitcoin was a store of value vs a means of payment.

When I first started buying and owning Bitcoin, I would use it as a means of payment all the time.

I would whip out my phone and send Bitcoin to people instead of paying cash.

This was a Bitcoin t-shirt I bought in the summer of 2013:

At today’s prices, that t-shirt cost me $830. I love that t-shirt.

 

This was a payment I made that same summer for a golf caddie:

 

And this was a gift I made to the Bitcoin foundation in the spring of 2013:

That gift is almost $700k at today’s prices.

 

I share these three transactions with all of you to make a point.

And that point is that you can’t keep spending something that goes up as much as Bitcoin has.

So I don’t spend Bitcoin anymore.

I hold it.

It’s a store of value now.

That much is clear.

Monetizing A Free App

A number of our portfolio companies that have free web/mobile apps that are monetized by advertising have offered a low-priced subscription offering that removes the ads and, often, offers offline sync on the mobile apps.

Here are some examples:

I am sure there are other examples in our portfolio but those are the ones I am most familiar with.

I like this model a lot. As Duolingo said in their Duolingo Plus launch communications, it allows a free service to remain free for those who can’t pay for it.

It also allows those who don’t want the ads to remove them. And other value added features, like offline sync, make the subscription offering compelling for power users.

Pandora’s Plus offering is a good example of this approach and, because it is a public company, we can take a look at the numbers.

In Q4 2016, Pandora had roughly 4.4mm paying subscribers out of roughly 80mm total users, only about 5% of its user base.

But if all of those 4.4mm subscribers are to the low priced ($5) plan, then they would generate $265mm on an annualized basis. I assume that the subs revenue number is a bit larger because there is also a $10/month plan. So let’s say subs revenue is $300mm.

Pandora’s total revenue is about $1.4bn a year so subs represents over 20% of the revenue even though only 5% of the users take the subs offering.

So if you have a free ad supported service with a lot of regular power users, you should really consider adding a low priced subscription offering.

It will diversify your revenue mix and gives your users the ability to opt out of the ads if they want to.

Flood Damage

I got an email from a friend last night. He said that his friend was flooded in Texas and had lost many family mementos and valuable items.

Obviously this is a terrible thing to have to go through.

We went through it during Hurricane Sandy when the Hudson came over its banks and flooded our building’s basement and first floor.

All of our building systems were destroyed and all of the families had to vacate our building for what turned out to be almost four months.

We also lost everything in our storage unit in our basement, including many family mementos and valuable items.

We fought with the insurance companies for almost a year and recouped maybe 50 cents on the dollar.

The mementos were and are irreplaceable. Gone forever.

But as I am typing this, I must say that although it was a terrible experience for us, nobody in our family was hurt and we have fullly recovered from it

Thankfully we have the means to absorb the financial losses and I realize that many people don’t.

We should have better federal flood insurance for this reason. The federal flood insurance system doesn’t cover many things that it should and sadly many people in Texas will suffer significant financial losses that they will not be able to fully recover from their insurers.

At this time, it seems that the death toll for Harvey will be in the range of Sandy, which took 117 lives, mostly in NY and NJ.

To lose so few when so many are impacted is a testament to the outpouring of assistance that we saw in both Sandy and Harvey. There are many heroes in both of these disaster stories.

So first and foremost, we should all be thankful that so many were saved from harm. And we should seek out ways to help those who don’t have the means to sustain the financial losses they have taken. That is where I want to focus our support right now.

Floods are terrible. But once the waters recede and recovery begins, many will recover quickly, as we did, and move on. Some will struggle. They will need our help and hopefully we can all come together to provide that.

How To Value Crypto Assets

Given the explosive increase in the prices of crypto assets this year, there is a growing discussion on how to value them.

This is a very good thing.

Andy Kessler weighs in on the topic in this WSJ piece which was published over the weekend.

You should go read the piece as it does a good job of dissecting the economics of the transaction processing system that underlies Bitcoin (aka the Bitcoin Mining Network).

Andy finishes his post with the following statement:

at some point the market will wake up and apply rational valuation techniques. That price—$4,361—implies a lot of belief in Bitcoin as a long-term store of value well beyond the economic value of the transaction platform. 

Like Andy, I hope and expect that the market will apply rational valuation techniques to crypto assets. There are a number of people trying to do that. I think the work of Chris Burniske is very solid.

My issue with Andy’s analysis is that he’s conflating the market value of the Bitcoin Mining Network with the value of Bitcoin, the crypto token.

My partner Albert says it well in this tweet:

Blockchain technology upends many of our traditional notions of what networked applications look like.

Our former colleague Joel captured this “upending” well in his seminal post on Fat Protocols, in which he says:

What’s significant about this dynamic is the effect it has on how value is distributed along the stack: the market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer. And again, increasing value at the protocol layer attracts and incentivises competition at the application layer. Together with a shared data layer, which dramatically lowers the barriers to entry, the end result is a vibrant and competitive ecosystem of applications and the bulk value distributed to a widespread pool of shareholders. This is how tokenized protocols become “fat” and its applications “thin

Networked applications that run on top of the shared data layer of blockchains will be forced into commodity pricing and rent seeking will be nearly impossible. Those who build the Visas and Mastercard networks on top of Bitcoin will never achieve the economics of Visa and Mastercard. But that is the point. The Bitcoin protocol will capture those economics and the only way you can participate in that is by earning or buying and owning the crypto token (ie Bitcoin).

And so that is what we must model, analyze, and understand. We cannot use EBITDA multiples to do this work. We need to turn to other tools and that is what Chris and others are doing.

I applaud Andy for putting this critical issue on the table and hope that he and other serious market analysts and observers will take the time to understand what is really going on here and help us all figure out how to properly value it.

Speculation is rampant right now and without the proper valuation tools, we lack the ability to arbitrage and profit from that speculation. We need that.

Pay Per View Poll

I stayed up until 1am ET last night to watch the Mayweather McGregor fight.

We used the Showtime Pay Per View app on AppleTV to watch the fight.

We paid $99 to watch the four fights, including the main event.

I heard that many were able to watch the fight for free using Twitter’s Periscope feature.

So I ran this Twitter poll this morning. If you haven’t voted, you can here.

It seems like paying $99 to watch at home, as we did, was not the dominant way that folks watched the fight.

“Some Other Way” includes going to a bar to watch it, which may have been the most popular way of all.

Video Of The Week: The NYS DFS Virtual Currency Hearings

Apparently there is a Netflix documentary on Bitcoin that recently came out.

I’ve been hearing from a lot of friends that my NYS DFS testimony from almost four years ago is featured in that documentary.

This took place in January 2014 and it’s worth going back and seeing what the questions were at that time and which of them have been resolved and which have not.

My statement (unprepared) starts at 21mins in.

The Hashtag

Ten years ago yesterday, August 23, 2007, Chris Messina suggested that using the # sign in a tweet could be used to group tweets about a thing (his example was barcamp).

Here is the tweet in which he made that suggestion.

There is so much I like about this story.

  1. A user suggestion became a feature simply by other users adopting it.
  2. Twitter took it a step further by recognizing the hashtag as a “thing” and making it hyperlinked in the service.
  3. The hashtag feature took off as Twitter users thought it was cool and started using it actively.
  4. Users showed that hashtags could be used for many more things than groups.
  5. The hashtag moved beyond Twitter into most popular social media applications (ie Instagram) and now has become the standard way for users to “tag” something.
  6. The hashtag has moved beyond software into our language and media.

I was an investor and board member in Twitter at the time and the Company was tiny, not more than twenty employees and probably a fair bit less. The engineering team was maybe half of that, led by Blaine Cook. They were struggling to keep up with all of the growth of the service and yet they had the foresight that the # and @ symbols that users had adopted organically were important. They prioritized recognizing them in their software. That was a big deal.

Biz Stone, now back at Twitter, blogged about how this happened yesterday and it is a short and good read.

The Twitter story is a complicated one, with lots of ups and downs, but I believe it has been and remains one of the most important services ever built on the Internet and hashtags is one of the many reasons that is so.

Resource Constraints

Most of the companies I work with tell me that they are resource constrained and do not have enough capital and engineers to do everything they want to do.

I tell them that is a blessing not a curse.

They look at me like I am crazy and rationalize it as me being an investor and not an operator.

I will plead guilty to both (being crazy and being an investor) but I am extremely confident that being resource constrained is a blessing in the hands of a great operator.

I have seen companies do amazing things with no money and tiny teams.

I have seen companies do absolutely nothing with all the money in the world and hundreds of engineers.

This experience, built up over thirty plus years in tech and startups, has convinced me that resources are never the limiting factor to doing great things.

The limiting factors are;

  1. having great management that can make the right decisions and drive exection
  2. knowing what to do and what not to do
  3. playing your game and not someone else’s

Resources, measured in available capital and headcount, often make #2 and #3 more challenging.

Organizations start to feel that they can do more than they can and should.

They start looking around enviously and counting the size of the fundraises and engineering teams of their competitors.

They stop knowing who they are. And that is death.

I believe that excess capital makes companies weak and unfocused.

I believe limited capital makes companies strong and focused.

And I don’t believe capital has ever helped a company win a market. Many have tried that approach and it always ends badly.

So I encourage all of you entrepreneurs out there to embrace being resource constrained and learn to love operating with less.

It will serve you well.

Go Back To School With Quizlet

If you or someone in your family is going back to school in the next few weeks, I strongly suggest putting the Quizlet mobile app on your/their phone as part of the back to school preparation process.

Quizlet (a USV portfolio company) has a bunch of new stuff for its existing and new users this back to school season:

  1. Diagramming – an entirely new way to make and use study sets using visuals instead of or in addition to text
  2. Learn Mode – personalized, time based, adaptive study mode with reminders and notifications
  3. Quizlet Go – a new low priced subscription that provides ad free studying and customized themes

Quizlet is the largest user powered study tool in the world with over 185mm study sets created and available for learning pretty much anything.

You really don’t want to go back to school without it.