Posts from hacking finance

Video Of The Week: Samir Desai at Slush

One of the most impressive startup executions I have witnessed in the past ten years is what the team at Funding Circle has pulled off. They have gone from a team of friends with an idea to the largest non bank lender in the western world.

In this interview at the Slush Conference, CEO Samir Desai explains how they pulled that off.

The Equifax Data Breach

The news broke late last week that hackers have taken almost 150mm records from Equifax. These records include name, address, social security number, birthdate, and in some cases driver license information.

This is an identity thief’s treasure trove.

So what should we do about it?

I read Ron Lieber’s suggestions in the New York Times yesterday and did all of that for our family this morning.

That includes putting a freeze on our records at the big four credit agencies:

– Equifax

Experian

– TransUnion

Innovis

And putting a fraud alert on file for the next 90 days at the big three:

– Equifax

– Experian

TransUnion

That took the better part of an hour as you need to do each of these things for each social security number you want to “protect.”

I also went ahead and pulled credit reports for our social security numbers to see if any new credit had been taken out in our names. Hackers may have had this information for quite a while.

None of this feels particularly protective to be honest. We’ve made it harder for someone to take out loans in our names, but I don’t think we’ve made it impossible.

Lenders and others are going to have to get more diligent about detecting and protecting themselves (and us) from identity theft in the wake of this and many other data breaches.

Name, address, social security number, and birthdate should not be considered sufficient information to prove identity and access credit or confidential information any more. This has likely been true for some time, but this breach certainly is the nail in the coffin for that approach (and possibly the credit bureau business model).

It’s time for new approaches to security, identity, and the protection of our financial information. Thankfully, there are a lot of them out there, mostly in startup land.

Token Summit

I’ve written a bit here about crypto tokens. How they can be a monetization model for new protocols. How they could be a new monetization model for online media. How they can be a business model for an online “commons.” And why USV invested in a hedge fund that will invest solely in these tokens.

I believe that these crypto-tokens are an important innovation in the world of technology. They allow for the financing and monetization of technology projects that rely on a network of contributors (of software engineers:open source, of contributors:online communities, of computers:p2p systems, etc) to deliver value to the market.

To date, we have mostly seen tokens used as financing vehicles. The last time I looked, over $300mm has been raised in “Initial Coin Offerings” (ICOs) to finance projects like the ones I referenced above. That number continues to rise as more tokens are sold to raise funds to develop these new businesses.

But the longer term implications of tokens have more to do with monetization than financing. And I think its a very elegant and powerful idea that the same “currency” can be used to both finance and monetize a network.

So with that preamble, I am excited that the first ever Token Summit will take place in NYC on May 24th and 25th. This event is being organized by AVC regular William Mougayar and Nick Tomaino, who runs The Control, which I blogged about a few months ago.

William blogged about Token Summit today and says this about the event:

We have identified the following themes that will be debated in a variety of formats, including on-stage interviews and panels.

Token-based Business Models

How do tokens contribute to a business model? When do they make sense? How does an entrepreneur monetize? Where is the real value?

Token Protocols and Platforms

What are the emerging token-based assets? Where/How are we going to trade them? What are the implications for fund managers?

Distribution Mechanics

Lessons and best practices for pre, during and post initial cryptocurrency and token sales, including governance.

Valuation Strategies

How do investors and users value tokens? How does a token transition from a speculative to utilitarian function?

Legal Implications

Legal, regulatory and ethical practices for token creations.

I plan to attend this event and I encourage everyone working in or around this space to attend. It will be an interesting and lively discussion.

If you want to attend the event, you can register here.

Machine Learning For Investing In Consumer Goods Startups

Our portfolio company CircleUp has been building a marketplace for startup investing, by accredited and institutional investors, in consumer goods companies (natural foods, personal care, beverage, home goods and apparel). In four years of operation, over $300mm has been raised on CircleUp by entrepreneurs to scale their consumer goods startups.

But underneath all of this has been a sophisticated data science effort designed to track the entire consumer goods sector (all companies, not just the ones on CircleUp) and determine which companies succeed and why. Yesterday CircleUp took the covers off this data science effort, called Helio, and explained what they are up to with it.

Here are some bits from that blog post:

there’s endless data on consumer product and retail companies. And, much of it is public. A quick Google search of the product in your pantry tells you how many SKUs the brand has, price points for each SKU, where they are sold, product reviews, and a great deal more. In an A16Z podcast in 2016, Marc Andreessen commented that machine learning wouldn’t be helpful for tech VC because there isn’t enough data (40:04 mark). We agree. But in the consumer industry, the opposite is true. Data is broadly available. Business models are uniform. That’s the perfect recipe for machine learning. That makes Helio possible.

Let’s take a look at a few examples:

  • Supergoop! is a sunscreen brand available nationally throughout Sephora, that Helio surfaced due to its quickly growing brand, great distribution and estimated revenue growth. We presented Supergoop! to institutional investors, and shortly after, they raised $3.25 million.
  • REBBL is a line of coconut-milk based beverages made with super herbs known to reduce stress. Aside from being one of the fastest growing products in its category, REBBL donates 2.5% of net sales to initiatives helping eradicate human trafficking. Helio spotted REBBL early and qualified it for investors, showing its compelling brand, team and distribution metrics. Today, REBBL’s lead investors include Powerplant Ventures, led by the ZICO coconut water founder, and Boulder Investment Group Reprise.
  • nutpods plays in the crowded plant-based, dairy alternative category. Helio spotted nutpods for its remarkable product reviews, strong early growth and overall brand, despite it having less than $50,000 in annual sales at the time. After, nutpods got investments from Stray Dog Capital and Melissa Hartwig, founder and CEO of Whole 30, and today is rated #1 on Amazon in its category.
  • Tio Gazpacho is a quickly growing brand in the relatively new category of bottled soups, or more broadly, drinkable meals. Tio Gazpacho was founded in Florida, a place without a robust VC community, but Helio still spotted it, and surfaced it to General Mills, which now is its lead investor.

Helio is currently monitoring over a million brands across natural foods, personal care, beverage, home goods and apparel, and can help find who might be the next Krave Jerky, Seventh Generation or Too Faced. We are talking to likely candidates right now, and not just in the categories above, in all categories we see as promising growth areas in the consumer market.

CircleUp has always taken the view that the entrepreneurs with the best ideas, products and team should win…not the one with the best personal connections. Helio brings us a big step closer towards that ambition.

We are excited to see what happens when entrepreneurs with big ideas meet a capital market that has data science at the core. If you want to participate in that market, visit CircleUp.

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.

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.

The Buy Bitcoin Button

If you have an app that uses Bitcoin for something, like virtual goods in a game, you need to give your users an easy way to buy the Bitcoin.

Our portfolio company Coinbase has a solution for that problem. It is a “Buy Bitcoin” button, powered by the Coinbase API.

There are some limitations to the buy button right now, which Coinbase hopes to remove over time. They are:

The Buy Widget is currently limited to customers in the United States using debit cards. To enable instant buys with limited KYC, the Buy Widget supports buys up to $5 per day. Each user has also a lifetime limit of $50 after which they are asked to set up a full Coinbase account. These limitations are only temporary and we’ll be adjusting them and adding more payment methods over time to increase limits.

I think that virtual currencies, like Bitcoin and Ethereum, are a great way to create “economies” in your app. So if you want to experiment with this idea, try out the Coinbase Buy Bitcoin button. Details for developers are here.

Experiment and Scandal

We are living in a time of great experiments. They are not happening in the lab. They are happening in the real world. And they are being financed by real people. We are witnessing the de-institutionalization of experimentation. We are returning to a time when anyone can be an inventor and innovator. Some of this has happened because of the explosion of venture capital, both in the US and also around the world. Some of this has happened because entertainment and culture has embraced the world of experimentation and innovation (Shark Tank, Silicon Valley). Some of this has happened because the tools for innovation and experimentation have become mainstream and anyone can use them.

I am not thinking of one thing. I am thinking of many things. I am thinking of The DAO. I am thinking of Bitcoin and Ethereum. I am thinking of Oculus getting financed on Kickstarter. I am thinking of the launch of equity crowdfunding for everyone in the US last week. I am even thinking of things like Theranos.

All of these things are great experiments that will produce great benefit to society if they succeed. But by their nature experiments often fail. They need to fail. Or they would not be experiments.

And one of the challenges with the de-institutionalization of experimentation is that some of these failures will be spectacular. Combine that with the idea that these experiments are being funded by real people and the idea that the world of media/entertainment/culture has injected itself right in the middle of this brave new world and you have the recipe for scandal. And scandal will naturally result in efforts to put the genie back in the bottle (Sarbanes Oxley, Dodd Frank). And these regulatory efforts will naturally attempt to re-institutionalize experimentation.

I find myself wishing we could keep the dollars invested and hype down when we do these massively public experiments. But the dollar/hype cycle is a natural part of being human. Some dollars are invested. We get excited about this investment. We talk it up. More people find out about it and more dollars are invested. More of us get excited about this investment and we talk it up more. Rinse, repeat, rinse, repeat and you get unicorns and distributed autonomous funding mechanisms entrusted with hundreds of millions before anything has even been funded. Eventually some of that gets unwound and the tape is full of red.

Don’t get me wrong. I am all for distributed autonomous organizations and the innovation behind them and in front of them. There isn’t much out there that I am more excited about. But I am also very fearful that this could end badly. And even more fearful of what may be foisted on us by well meaning regulators when that happens.

So let’s celebrate this incredible phase of permissionless innovation we are in. And let’s all understand that we will have many failures. Some of them spectacular. Money will be lost. Possibly hundreds of millions or billions. Let’s expect that. Let’s build that into our mental models. So when that happens, we can suck it up, deal with it, and keep moving forward. Because an open permissionless world of innovation that everyone can participate in is utopia in so many ways. The good that will come of it will massively outweigh any bad. But bad there will be. I can assure you of that.

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.

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.