Posts from crypto

Numeraire

Late last year, USV invested in Numerai, a hedge fund that uses data scientists all around the world to “crowdsource” stock price predictions. I blogged a bit about Numerai then.

If that business model wasn’t cutting edge enough for you, the Numerai team has now gone a step further and issued a crypto-token called Numeraire to incent these data scientists to work together to build the best models instead of just competing with each other.

When I read the Numerai blog post about Numeraire yesterday, I tweeted this out:

This is all pretty out there stuff in a world, hedge funds, that has more or less done things a certain way for the last thirty years. I’m not saying hedge funds haven’t innovated, they certainly have, but I don’t think anyone has attempted to change the behavioral economics that underpin hedge funds in quite the same way that Numerai has. It is, if nothing else, a fascinating experiment that will tell us a lot about crypto-tokens, machine learning, and behavioral science.

I must admit that some of this is over my head. I’ve read the Numerai blog post as well as the Forbes and Wired posts several times now and I am not sure if I could explain all of this perfectly at a dinner party. But I am super excited that USV has invested in this audacious experiment and I look forward to seeing how it all pans out.

What Is Going To Happen In 2017

Happy New Year Everyone. Yesterday we focused on the past, today we are going to focus on the future, specifically this year we are now in. Here’s what I expect to happen this year:

  • Trump will hit the ground running, cutting corporate and personal taxes, and eliminating the preferential treatment of carried interest capital gains. The stock market has already factored in these tax cuts so it won’t be as big of a boon for investors as might be expected, but the seven and half year bull market run will be extended as a result of this tax cut stimulus before being halted by rising rates and/or some boneheaded move by President Trump which seems inevitable. We just don’t know the timing of it. The loss of capital gains treatment on carried interest won’t hurt professional investors too much because the lower personal tax rates will take the sting out of it. In addition, corporations will use the lower tax rates as an excuse to bring back massive amounts of capital that have been locked up overseas, producing a cash surplus that will result in an M&A boom. This will lead to an even more fuel to the fire that is causing “old line” corporations to acquire startups.
  • The IPO market, led by Snapchat, will be white hot. Look for entrepreneurs and the VCs that back them to have IPO fever in 2017. I expect we will see more tech IPOs in 2017 than we have since 2000.
  • The ad:tech market will go the way of search, social, and mobile as investors and entrepreneurs concede that Google and Facebook have won and everyone else has lost. It will be nearly impossible to raise money for an online advertising business in 2017. However, there will be new players, like Snapchat, and existing ones, like Twitter, that succeed by offering advertisers a fundamentally different offering than Facebook and Google do.
  • The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.
  • AI will be the new mobile. Investors will ask management what their “AI strategy” is before investing and will be wary of companies that don’t have one.
  • Tech investors will start to adopt genomics as an additional “information technology” investment category, blurring the distinction between life science and tech investors that has existed in the VC sector for the past thirty years. This will lead to a funding frenzy and many investments will go badly. But there will be big winners to be had in this sector and it will be an important category for VCs for the foreseeable future.
  • Google, Facebook, and to a lesser extent Apple and Amazon will be seen as monopolists by government and individuals in the US (as they have been for years outside the US). Things like the fake news crisis will make clear to everyone how reliant we have become on these tech powerhouses and there will be a backlash. It will be Microsoft redux and the government will seek remedies which will be futile. But as in the Microsoft situation, technology, particularly decentralized applications built on open data platforms (ie blockchain technology), will come to the rescue and reduce our reliance on these monopolies. This scenario will take years to play out, but the seeds have been sown and we will start to see this scenario play out in 2017.
  • Cyberwarfare will be front and center in our lives in the same way that nuclear warfare was during the cold war. Crypto will be the equivalent of bomb shelters and we will all be learning about private keys, how to use them, and how to manage them. A company will make crypto mainstream via an easy to use interface and it will become the next big thing.

These are my big predictions for 2017. If my prior track record is any indication, I will be wrong about more of this than I am right. The beauty of the VC business is you don’t have to be right that often, as long as you are right about something big. Which leads to going out on a limb and taking risks. And I think that strategy will pay dividends in 2017. Here’s to a new year and new challenges to overcome.

What Did And Did Not Happen In 2016

As has become my practice, I will end the year (today) looking back and start the year (tomorrow) looking forward.

As a starting point for looking back on 2016, we can start with my What Is Going To Happen In 2016 post from Jan 1st 2016.

Easy to build content (apps) on a cheap widespread hardware platform (smartphones) beat out sophisticated and high resolution content on purpose built expensive hardware (content on VR headsets). We re-learned an old lesson: PC v. mainframe and Mac; Internet v. ISO; VHS v. Betamax; and Android v. iPhone.

And Fitbit proved that the main thing people want to do with a computer on their wrist is help them stay fit. And yet Fitbit ended the year with its stock near its all time low. Pebble sold itself in a distressed transaction to Fitbit. And Apple’s Watch has not gone mainstream two versions into its roadmap.

  • I thought one of the big four (Apple, Google, Facebook, Amazon) would falter in 2016. All produced positive stock performance in 2016. None appear to have faltered in a huge way in 2016. But Apple certainly seems wobbly. They can’t make laptops that anyone wants to use anymore. It’s no longer a certainty that everyone is going to get a new iPhone when the new one ships. The iPad is a declining product. The watch is a mainstream flop. And Microsoft is making better computers than Apple (and maybe operating systems too) these days. You can’t make that kind of critique of Google, Amazon, or Facebook, who all had great years in my book.
  • I predicted the FAA regulations would be a boon to the commercial drone industry. They have been.
  • I predicted publishing inside of Facebook was going to go badly for some high profile publishers in 2016. That does not appear to have been the case. But the ugly downside of Facebook as a publishing platform revealed itself in the form of a fake news crisis that may (or may not) have impacted the Presidential election.
  • Instead of spinning out HBO into a direct Netflix competitor, Time Warner sold itself to AT&T. This allows AT&T to join Comcast and Verizon in the “carriers becoming content companies” club. It seems that the executives who run these large carriers believe it is better to use their massive profits in the carrier business to move up the stack into content instead of continuing to invest in their communications infrastructure. It makes me want to invest in communications infrastructure honestly.
  • Bitcoin found no killer app in 2016, but did find itself the darling of the trader/speculator crowd, ending the year on a killer run and almost breaking the $1000 USD/BTC level. Maybe Bitcoin’s killer app is its value and/or store of value. That would make it the digital equivalent of gold and the likely reserve currency of the digital asset space. And I think that is what has happened with Bitcoin. And there is nothing wrong with that.
  • Slack had a good year in 2016, solidifying its position as the leading communications tool for enterprises (other than email of course). It did have some growing pains as there was a fair bit of executive turmoil. But I think Slack is here to stay and I think they can withstand the growing competition coming from Microsoft’s Teams product and others.
  • I was right that Donald Trump would get the Republican nomination and that the tech sector (with the exception of Peter Thiel and a few other liked minded people) would line up against him. It did not matter. He won the Presidency without the support of the tech sector, but by using its tools (Twitter and Facebook primarily) brilliantly.
  • I predicted “markdown mania” would hit the tech sector hard and employees would start getting cold feet on startups as they saw the value of their options going down. None of this really happened in a big way in 2016. There was some of that and employees are certainly more attuned to how they can get hurt in a down round or recap, but the tech sector has also used a lot of techniques, including repricing options, reloading option plans, and moving to RSUs, to mitigate this. The truth is that startups, venture capital, and tech growth companies had a pretty good year in 2016 all things considered.

So that’s the rundown on my 2016 predictions. I would give myself about a 50% hit rate. Which is not great but not horrible and about the same as I did last year.

Some other things that happened in 2016 that are important and worth talking about are:

  • The era of cyberwars are upon us. Maybe we have been fighting them silently for years. But we are not fighting them silently any more. We are fighting them out in the open. I suspect there is a lot that the public still doesn’t know about what is actually going on in this area. We know what Russia has done in the Presidential election and since then. But what has the US been doing to Russia? I would assume the same and maybe more. If your enemy has the keys to your castle, you had better have the keys to their castle. And as good as the Russians are at hacking into systems, the US has some great hackers too. I am very sure about that.  And so do the Chinese, the Israelis, the Indians, the British, the Germans, the French, the Japanese, etc, etc.  This feels a bit like the Nuclear era redux. Mutually assured destruction is a deterrent as long as both sides have the same tools.
  • The tech sector is no longer the belle of the ball. It has, on one hand become extremely powerful with monopolies, duopolies, or nearly so in search, social media, ecommerce, online advertising, and mobile operating systems. And it has, on the other hand, proven that it is susceptible to the very kinds of bad behavior that every other large industry is capable of. And we now have an incoming President who doesn’t share the love of the tech sector that our outgoing President showed. It brings to mind that scene in 48 Hours where Eddie Murphy throws the shot glass through the mirror and explains to the rednecks that there is a new sheriff in town. But this time, the tech sector are the rednecks.
  • Google and Facebook now control ~75% of the online advertising market and almost all of its growth in 2016:

  • Artificial Intelligence has inserted itself into our every day lives. Whether its a home speaker system that we can talk to, or a social network that already knows what we are about to go out and purchase, or a car that can park itself and change lanes on the highway automatically, we are seeing AI take over tasks that we used to have to do ourselves. We are in the age of AI. It is not something that is coming. It is here. It may have arrived in 2014, or 2015, but if you ask me, I would put 2016 as the year it had its debut in mainstream life. It is exciting and it is scary. It begs all sorts of questions about where we are all going in the next thirty to fifty years. If you are in your twenties, AI will define your lifetime.

So that’s my rundown on 2016. I wish everyone a happy and healthy new year and we will talk about the future, not the past, tomorrow.

If you are in need of a New Year’s Resolution, I suggest moving to super secure passwords and some sort of tool to manage them for you, using two factor authentication whenever and wherever possible, encrypt as much of your online activities as you reasonably can, and not saying or doing anything online that you would not do in public, because that is where you are doing it.

Happy New Year!

Some Thoughts On Ethereum and The DAO

As many (most, all?) of you know, last week The DAO, a large crowdfunding experiment based on the Ethereum blockchain, was hacked and something like $50mm of Ether was taken from The DAO. That Ether may end up being recovered due to a fork of Ethereum that was done in response to the hack. Much of this was covered in Nathaniel Popper’s post in the New York Times last friday.

I won’t say that I predicted this but I certainly saw something like it coming in my blog post on Experiment and Scandal that I wrote a month ago.

Ethereum is brand new technology. The smart contracts that can be built on Ethereum are an entirely new thing and we are just seeing what works and doesn’t work with this technology. It is safe to say that the contracts that The DAO wrote did not work. The DAO is a failed experiment that suffered from more than poorly written and ill conceived smart contracts. It also suffered from way too much money and hype being invested in it. I was thinking of The DAO when I wrote these words a month ago:

I find myself wishing we could keep the dollars invested and hype down when we do these massively public experiments

It is an open question about what impact the failure of The DAO will have the future of the Ethereum experiment. It certainly shows that pairing a public and open blockchain with a Turing complete programming language and a smart contracts system is a very ambitious and potentially very dangerous idea. The price of Ethereum in dollars has been halved as a result of The DAO failure and it is unclear if the bleeding is over on that price chart. There is a very well articulated debate on Hacker News right now about the future of the Ethereum experiment. If owning Bitcoin is like buying an IPO stock, owning Ethereum right now is like buying into a Series A round. Let’s just make sure we all understand that please.

My partner Albert who is way smarter about the technology here than I am wrote a post on his thoughts on this subject over the weekend. You will see that he and I see things pretty much the same way (shock!). He ends his post with this thought:

Blockchains and smart contracts are amazing new tools in our overall technological toolset. We have to learn how to deploy them to the best uses (many of which have yet to be invented). That will take failures. The DAO is not the first one (e.g., Mt. Gox) and won’t be the last one.

I could not have said it better.

Coin Center Keynote

On Monday night, Coin Center had their annual gala dinner in NYC which coincided with the Consensus Conference. I had the pleasure of giving a keynote which I will post in its entirety.


Hello. My name is Fred Wilson. This is my One Name profile. It is verified and resident on the blockchain at onename.com/fredwilson

one name profile

I have been investing in early stage emerging technologies for thirty years as a venture capitalist. I work at Union Square Ventures and we have been interested in and investing in the blockchain sector since 2011. We have watched this set of emerging technologies develop over the past five years and we remain very excited about the potential of decentralized trust systems.

I would like to talk tonight about resilience. Resilience is a trait we admire in entrepreneurs and it is a trait we look for in technologies and systems.

I remember when I first heard about the Internet, early in my career as a VC. It was described to me as a massively decentralized system designed explicitly to survive an attack that brought down one or more of its core systems. I thought about that and it resonated with me. Here was a system that was explicitly not controlled by a single entity and was designed to be resilient and self healing. A few years later, I left the venture capital firm I was working at and started a new firm dedicated to only investing in Internet based businesses. For me, the Internet was, and is, to use a term I learned from Joi Ito, a “belief system”. I have a deep and fundamental belief in decentralized, open, resilient systems. That belief has informed what I have invested in for most of my career and it has informed what I believe in politically and economically.

So when, back in early 2011, my friend Rikki Tahta told me about Bitcoin, I was immediately smitten. Here was another technology that was designed explicitly to be resilient, decentralized, open, and available to anyone. It fit like a glove into my belief system. So I started writing about it, meeting with people who were working on it, and, eventually, investing in companies built upon this new technology. We now have a handful of portfolio companies that are building businesses on blockchain technology. This is not just my area of interest. Every one of our investment team members works on and is involved in investing in this sector. Our pace of investment in this sector is increasing.

And yet, standing here today, I cannot point to a blockbuster company that has been built on blockchain technology. There has been no lack of trying. There is no lack of funding. I am a true believer and yet I can’t help but admit that despite all the hype, all the effort, all the capital invested, there has not been anything truly transformative to society that has been built on the blockchain, except perhaps Bitcoin itself and likely Ethereum. But these are enablers. What have the enabled other than grey and black market activities?

You know you are in a unloved sector when you start getting hated on for your boosterism on Hacker News. I saw this comment there last week:

After every VC, every founder, just everybody is talking about AI and bots Fred is a bit late to the game but better late than never. Or maybe writing about the Blockchain kept him back.

I don’t approach things that way, moving from one hot sector to another. It is a recipe to be late to everything. And I don’t let the haters get to me either. But I do find it amusing, and telling, to understand the broader mood. Bitcoin, blockchain, and all of the rest of this sector are in this portion of the hype cycle curve:

Gartner_Hype_Cycle.svg circle

Which brings me back to resilience. That is what keeps me excited about the blockchain sector and that is what all of us who are true believers need to have right now.

This is a Bitcoin price chart since Jan 2013.

btc price chart

If you draw a trend line from the start of that chart to the end of that chart, it is steadily up and to the right. And during that same time, we have seen so many things that should have meant the end of Bitcoin. And yet, it just keeps chugging along. That tells you something.

This is a chart of transactions on the Bitcoin blockchain over that exact same period.

bitcoin transactions

Same thing. Up and to the right, day after day, month after month. This is a resilient system.

So just like the set of technologies we are working on developing and commercializing, we need to be resilient in our work. And personal and professional resilience starts with a belief system. We must remind ourselves of why we believe in open, resilient, distributed, and decentralized systems and the power of these systems to produce profound change for businesses, economies, and society at large.

There have been and will continue to be headwinds for blockchain based technologies. Fundamental change doesn’t come easily.

We have seen that open source communities can and do struggle to develop consensus about what changes should be made and when and how. That will continue to be a challenge. I personally believe that multiple projects with multiple open source teams developing things in parallel is the best way to manage this risk. That could be multiple teams working on Bitcoin’s core system. Or it could be multiple blockchains and cryptocurrencies. It is likely to be both.

We have seen that the companies and industries that are most threatened by these technologies will not sit idly by while the market adopts new ways to do things that they do not control. I see the wave of private blockchains and startups that build and sell them as an attempt to coopt these technologies. It may take some time for the market to see this for what it is.

And we know that governments and the elected officials and bureaucrats and regulators who work in them are uncomfortable with these technologies and can be expected to try to rein them in as much as they can. This is where Coin Center comes in and I want to personally thank Jerry and his team for all that they have done, are doing, and will do to navigate the regulatory forces for our sector and find common ground and win/win solutions that move our industry forward in a way that governments can live with. This is hard work, done largely behind the scenes, with very little fanfare. And yet without it, our industry cannot and will not succeed. So thank you Jerry and thank you to everyone who supports Coin Center and works on it.

To bastardize a phrase from Ben Horowitz, the hard thing about hard things is that they are hard. The forces at work to hold back distributed and open trust systems are firing away on all cylinders. And many of our wounds are self inflicted. It is not an easy time to be a believer. It is not an easy time to be an entrepreneur who has decided to focus completely on this sector. It is not an easy time to be an investor in and cheerleader for this sector. I am being made fun of. Maybe you are too.

But let me tell you this. If they aren’t laughing at you, you aren’t working on the right things.

We are working on the right thing. It is taking longer than I thought and than you thought. It still isn’t clear to me how this market will eventually break out. But all the signs that I look at are moving up and to the right, day after day, month after month, year after year. The technology is working. And our breakthroughs will come. Maybe they are right around the corner. Or maybe they are years off. But if we stay resilient, like the systems we are working on, we will prevail.

Thank You.

The Business Blockchain

the business blockchainI’ve been reading The Business Blockchain this weekend. It was written by AVC community member William Mougayar.

This book started out as a Kickstarter project which I blogged about at the time. If you backed that project you will get a copy of this book. If not, you might want to get a copy on Amazon.

I am not done with it yet, but the book makes a complex subject, blockchain technology, accessible for the non-technical. It also lays out some of the more obvious uses cases for the technology and explains how the blockchain technology market is evolving.

If you think you might want to start a business based on blockchain technology or if you think blockchain technology is going to reshape a market you are working in, or if you just want to understand this thing that your son or daughter is obsessed about, then this is a great book to read.

I am also quite proud that the conversations we have had on this blog on this topic over the past five years have shaped William’s work and certainly had something to do with his interest and his growing expertise and reputation in this area.

This blog community is a talented group and we have helped each other grow and develop. This book is just one of many examples of that.

Conversation with General Keith Alexander

I follow Emily Chang’s Studio 1.0 podcast on SoundCloud. It’s very good.

She recently sat down with Former NSA Director General Keith Alexander to discuss privacy vs. security and why there needs to be more collaboration between Washington and Silicon Valley in the on-going encryption debate.

I enjoyed the conversation and you may too.

MIT Digital Currency Initiative

My alma mater is doing some really good work in the area of digital currencies. MIT, via its Media Lab, has built something called the Digital Currency Initiative. The basic idea of the DCI is to bring together researchers and scientists from all over the world and from many different disciplines (cryptography, economics, privacy, distributed systems, etc) to collaborate on research and efforts to promote and develop digital currency and distributed ledger technologies. This is a institute wide initiative at MIT though its center of gravity is in the Media Lab.

Earlier this week, MIT’s DCI announced a $900,000 Bitcoin Developer Fund. The Gotham Gal and I were one of the financial backers of this fund which will pay the salaries of developers who work on the open source codebase that is at the core of the Bitcoin protocol. It is important to note that as a financial backer of this fund, we do not have any influence over these developers. That is true for all of the financial backers. In the true sense of “academic freedom” the Bitcoin Developer Fund has a “hands off” approach to the developers it supports. This quote is from the announcement:

The establishment of this fund enables us to offer positions in a neutral academic environment. This allows developers like Wlad, Cory and Gavin to work on code and develop new ideas that may be controversial, but can do so with the assurance that they won’t be fired for diversity of thought.

I would love to see this fund grow in size over time and be able to support a larger group of computer scientists and developers to work on forks of Bitcoin and other digital currencies like Ethereum. Diversity of thought is badly needed in this important new technology sector and we don’t have enough of it right now.

While I’m on the topic of diversity, DCI also announced $100,000 in “diversity scholarships” this week. Here are the details:

The MIT Digital Currency Initiative (DCI) is excited to announce more than $100,000 in scholarships and support for underrepresented minorities and women to attend Consensus 2016: Making Blockchain Real. In collaboration with CoinDesk, a news site specializing in bitcoin and digital currencies, the DCI will be selecting 50 Consensus Scholars to attend the event on May 2–4 in New York City. This will be our second year collaborating on a scholarship effort for the conference–we are excited to continue to foster a more diverse community of attendees at Consensus. Click here to apply!

If you are a woman or a minority with an interest in Bitcoin, Ethereum, and other blockchain related technologies, you should apply for one of these 50 scholarships at the link above.

I am pleased by and proud of MIT’s efforts in this area. Entrepreneurs and investors are doing a lot to move the state of the blockchain technology sector forward, but there is a big role to be played by the world of academia. And MIT is certainly doing its part.

End To End Encryption

I’ve been trying to figure out what I think about a bunch of things that keep cropping up. Yesterday it was ad blocking. Today it is end to end encryption. This community is really helpful to me. It is like having another set of colleagues to bounce ideas off of. So thank you for that.

Tim Cook wrote a public letter to Apple’s customers yesterday explaining his position on the San Bernadino shooter case.

He correctly states that “This moment calls for public discussion” and so hopefully that’s what we are going to do. I’d like to see our Presidential candidates start talking more about this too. It is one of the single most important issues that our society faces in the coming years.

He goes on to say that:

For many years, we have used encryption to protect our customers’ personal data because we believe it’s the only way to keep their information safe. We have even put that data out of our own reach, because we believe the contents of your iPhone are none of our business.

That is not an open and shut case to me.

Of course I’d like the contents of my iPhone to be out of reach of everyone other than me. But if that means the contents of the iPhones of child pornographers, sex slaverunners, narco gangsters, terrorists, and a host of other bad people are “none of our business” then that gives me pause.

I don’t think we can have it both ways. We have to choose one way or the other.

My partner Albert has written publicly on this issue and he comes out in favor of being public with our data and not going down a crypto “rat hole”. Here are some of his relevant posts on the topic:

Sept 2013

Jan 2014

Aug 2015

But many of the other folks at USV feel very differently and are more supportive of an end to end encryption world.

I lean in Albert’s direction. But I also see logic in the arguments that Tim Cook makes against opening up a back door to the iPhone.

So I am struggling with this issue this morning, and I imagine many others are too.

So let’s talk about it. What is your take on end to end encryption?