Posts from hacking finance
Our portfolio company CircleUp is a marketplace where consumer goods companies raise equity capital from accredited investors. CircleUp is a registered broker dealer and does all of this in full compliance with securities laws. Over the past few years, CircleUp has helped 113 consumer goods companies raise over $130mm and they are growing quite rapidly now as entrepreneurs who are building consumer goods companies increasingly understand the value of raising in a marketplace model vs the old fashioned “knock on doors” model.
I think the growth rate will accelerate in the coming months as CircleUp launched a secondary market last week they called Rights+. First a bit about the importance of secondary markets and then I’ll talk about what makes Rights+ different from other secondary markets.
One of the big challenges for investors in private markets is the securities we buy are illiquid. That means most of the time we will need to hold the investment until “maturity” whatever that is. And in early stage investing, that can often be 5-10 years (or more). If you suddenly have a need for cash, you can’t easily sell your angel investments. If you think the company is being managed badly, you can’t easily sell your angel investment. So the illiquidity significantly increases the risk of an private investment vs a public market investment. If, on the other hand, you could easily sell your angel investment (at a loss or a gain) if you needed to raise cash or if you lost confidence in the management, I believe the market for angel and early stage investing would grow significantly. Lower the risk of illiquid early stage investing and you will see a lot more people interested in doing it and you will see the ones who are doing it allocate a larger portion of their investment capital to it.
When we invested in CircleUp back in May of 2013, I asked Rory and Ryan “when are you going to launch a secondary market?” I’ve always thought that the key to making a marketplace model work in early stage investing is the ability to easily do secondaries. And now, roughly two years later, they have done it.
Why did they take so long? Well there have been a number of problems with secondaries in the early stage market. First and foremost, the companies themselves don’t generally like the idea that their investors are selling in the secondary market. So they do all sorts of things to prevent it. And second, investors who buy a secondary often get no rights that come along with the securities they buy. In particular, they have no rights to information from the company to ascertain how the investment is doing.
So CircleUp decided to fix those things as part of their secondary market. CircleUp’s CEO Ryan told me this via email last week:
CircleUp Rights+ rights give investors the ability to sell shares early – including through the CircleUp marketplace. We’ve standardized the rights (transfer rights & information rights) to streamline the process. A key difference between this and previous secondary marketplaces is that it is fully integrated with the primary investments. Thus the companies themselves are actively giving these rights, which we think is key to success.
So when you decide to buy in an offering on CircleUp, you can see if the company is offering transfer rights. You can decide, for example, to only buy into offerings where there are transfer rights being offered. And you can sell these securities on CircleUp if you so wish.
This is a great thing for CircleUp, for the entrepreneurs who choose to raise capital on CircleUp, and for the investors who invest capital on CircleUp. And this shows others the path to creating a truly vibrant marketplace for private equity capital.
Broker dealer+accredited investors+marketplace+information rights+transfer rights=a vibrant marketplace for early stage equity capital
It would be nice for the accredited investor requirement to go away for smaller investment amounts so that this model could be opened up for all investors. Then we would really have something transformative. And maybe I would be out of business
There’s a sense that the bitcoin community is a fairly homogenous group, mainly white and mainly male.
And the MIT Media Lab and Coindesk are doing something to try to change that.
The target group for these scholarships are “people of colour and women between 18 and 25 years of age.”
If you fit this profile and want to attend Consenus 2015 for free, you can apply here.
There has been a long standing debate in the past year over the need (or not) to increase the bitcoin block size. The debate has raged most intensely inside the small group of developers who have commit access to the bitcoin core. They are called the “core developers.” These software engineers control the basic architecture of bitcoin. This is how most open source software projects are managed and bitcoin is an open source software project at its core.
I won’t get into the technical arguments for and against the need (or not) to increase the block size. If you want to read up on it, I suggest you read Gavin Andresen’s blog, Mike Hearn’s blog post announcing the Bitcoin XT fork, and Rusty Russell’s blog post on the topic.
What is more interesting to me is that this XT fork showcases a number of interesting things about open source software and how it is governed. It also gets into the issues around trusting an open source system and the people who build it.
A group of open source core developers are a democratic system. They decide what gets “committed” to the code base and what does not. That generally works well but at times it does not. The debate around increasing the block size is an example of where that form of democracy is failing (or succeeding depending on where you sit in the block size debate).
So the developers who most fear a breakdown of bitcoin without a block size increase have taken it upon themselves to “fork” the bitcoin core and produce a new version called “Bitcoin XT.” Bitcoin XT is described here.
That’s where this gets interesting. Bitcoin is a democracy in more ways than its core developer group. The miners who operate the transactional infrastructure of bitcoin are also a democracy. They decide what software they want to run to mine bitcoin. And in doing so, they determine what technology will become the standard. The folks who have produced the Bitcoin XT fork are hoping that the miners will adopt their software. This is from the Bitcoin XT website and explains how this works:
By mining with Bitcoin XT you will produce blocks with a new version number. This indicates to the rest of the network that you support larger blocks. When 75% of the blocks are new-version blocks, a decision has been reached to start building larger blocks that will be rejected by Bitcoin Core nodes. At that point a waiting period of two weeks begins to allow news of the new consensus to spread and allow anyone who hasn’t upgraded yet to do so. During this time, existing Bitcoin Core nodes will be printing a message notifying the operators about the availability of an upgraded version.
If the hard fork occurs and you are still mining with Bitcoin Core, your node will reject the first new block that is larger than one megabyte in size. At that point there is a risk your newly mined coins will not be accepted at major exchanges or merchants.
So now that Bitcoin XT is out in the wild, the “market” will decide which version of bitcoin it wants to exist. And that market is driven by the miners. Of course, miners are not necessarily a representative sample of the entire bitcoin ecosystem. They have particular needs, desires, and are at times ruthless and mercenary. But they are the ones who operate the bitcoin transactional infrastructure and they will ultimately decide if the Bitcoin XT fork works or not.
It will be fascinating to watch this play out. If you are used to big corporations or governmental institutions making decisions behind closed doors about how your financial systems work, then you might enjoy watching a new model of innovation and technology evolution unfold. I believe we will see more and more things like this in the coming years.
For what it is worth, I support a larger block size and think it will be good for bitcoin. A list of supporters and detractors is here.
One of the things about Bitcoin that I’ve always been amazed by is its resilience. It goes up, it gets knocked down, but it hangs in there, and then it goes up again.
It’s happening again now.
It is unclear what is driving this recent move, maybe its Greece, maybe its China, maybe its something else.
But every time this happens, I gain a bit more confidence that Bitcoin is around for the long haul.
There are some who suggest the mini run in the price of Bitcoin this month is related to the crisis in Greece. I wouldn’t know about those sorts of things.
But one thing is clear to me. Photos like this one from the NY Times showing people lined up outside a closed bank do not produce confidence in the banking system.
The hardcore cryptocurrency community wants to control their money themselves, with ownership of the keys to it, and the ability to move it when and where they want.
That’s a comforting thought when the alternative is to trust a bank.
Here in the US, we have FDIC insured deposits, a relatively safe and secure financial system, and even in the depths of the financial crisis of 2008, bank customers could access their money when they needed it. But there were a few scary moments.
In other parts of the world, none of that is the case. Which is why I continue to think that we will see more rapid adoption of bitcoin in the less developed world first.
Maybe in Greece. Who knows?
Our portfolio company Coinbase launched a new feature this week, that when combined with their local currency wallets, basically creates a global Venmo or Mpesa.
It is called Instant Exchange and here is how it works:
Coinbase offers US Dollar, Euro, or Pound accounts. You can keep your funds in your local currency on Coinbase. They have had this feature for some time.
So let’s say that I owe a friend in Berlin money for dinner last night.
I could go to my US Dollar Coinbase account, do an Instant Exchange Send which takes dollars out of my account and sends bitcoins to my friend, he does an Instant Exchange Receive in his Coinbase account which instantly converts them to euros and then keeps those funds in his Coinbase Euro account or transfers them out to his bank account. Coinbase will apply its standard exchange fees to the Instant Exchange transactions.
I believe this kind of thing will be incredibly useful, especially in the Coinbase mobile app. Sending money to and receiving money from friends around the world using Bitcoin as the “rails” for money transfer no longer needs to expose either side to exchange rate risk.
As Coinbase expands its business around the world, and offers Instant Exchange and local currency accounts in every part of the world, it can build a global Venmo or Mpesa using Bitcoin as the underlying money transfer protocol.
The biggest new trend I am seeing in bitcoin/blockchain is the emergence of a number of companies building systems on the blockchain (including the NASDAQ) to handle the backoffice issues that banks and brokerage firms have to manage. The blockchain is an ideal platform to build these sorts of applications (clearing, settlement, etc) on.
One concern I hear, though, is that banks like to know who is managing their infrastructure and they are uncomfortable with miners they don’t know, located in parts of the world that make them nervous, providing the transaction processing infrastructure for these applications being built on the blockchain.
To me, that is the perfect reason for banks and brokerage firms to take a bit of their data processing infrastructure and point it to the blockchain and start mining it. They could even create a mining pool among the large money center banks. And it is relatively simple for a blockchain application to route its transactions to certain miners to process.
If you think of the blockchain as an open source, peer to peer, massively distributed database, then it makes sense for the transaction processing infrastructure for it to evolve from individuals to large global corporations. Some of these miners will be dedicated for profit miners and some of them will be corporations who are mining to insure the integrity of the network and the systems they rely on that are running on it. Banks and brokerage firms are the obvious first movers in the second category.
I wonder if the CIOs of the large money center banks are already doing this. If I was in their jobs, I would be all over this.
Last week we had a discussion at the New York Public Library about Bitcoin. Andrew Ross Sorkin moderated a discussion between Nathaniel Popper, author of Digital Gold, Bitcoin Chief Scientist Gavin Andresen, and me. Here it is:
Nathaniel Popper‘s Digital Gold, a history of the people who built Bitcoin into a global distributed transaction network that is not controlled by any person or any company, is available for purchase today. I’ve been reading it and enjoying it very much. Even though I have been involved in and closely following the sector since 2011, I did not know all the details of the early days and Nathaniel captured them well.
In celebration of the book being out, The New York Public Library is hosting a conversation between Nathaniel, Gavin Andresen, and me tonight. It will be moderated by Andrew Ross Sorkin. The event is sold out and has been for a long time, but the details are here. The livestream for the event tonight is here.
A lot of people ask me “are you still bullish on Bitcoin” and that question irritates me. Because it suggests that Bitcoin is simple. Bitcoin is not simple, it is not going away, and it continues to fascinate me more than almost anything out there in the tech sector. I’m excited to have a chance to talk about it in public with people who understand it better than I do.