A friend sent me this Kickstarter project earlier this week. I took a look and thought “wow, that’s so great. a digital piggybank for kids with its own cryptocurrency, a mobile app, and educational games teaching them to earn and save.” I backed it this morning and though I don’t normally take the rewards on Kickstarter, I did this time. I can’t wait to give this to a kid when I get it this summer.
For most companies and projects in the crypto sector, a big issue has been how to design their token and how to get it in the hands of users, validators/miners, and investors. As Joel explained in this post, you need all three stakeholders to create a well functioning crypto-token.
There is the Bitcoin approach, which is to allow anyone to mine the protocol and earn tokens.
There is the Ethereum approach, which is to do a pre-sale.
And there are many other approaches. The last time I looked there were over 2,000 crypto-tokens that are trading on various exchanges around the world and many more that are not yet trading.
There are plenty of considerations when you design a crypto-token but certainly one of them is figuring out how to avoid having it deemed to be a security in the US. Securities are highly regulated in the US, can only be traded on regulated exchanges, come with significant disclosure requirements (many of which make no sense for an open source project), and there are limits to whom you can sell them to and how.
Most token projects and companies look at Bitcoin and Ethereum and say “we want to be like them.”
So when William Hinman, director of the SEC’s Division of Corporation Finance gave a speech at the Yahoo Finance All Markets Summit on June 14, 2018 suggesting that Bitcoin and Ethereum were not securities and laid out an argument that they were sufficiently decentralized, it got a lot of people’s attention in the crypto sector.
The basic reasoning behind the decentralization framework is that if a project is truly decentralized and there is no central actor or actors, then there really is no “issuer” and there is no possibility that the central actor(s) can act on insider information or otherwise have information asymmetry.
The crypto industry has been pressing the SEC to codify this logic in a set of rules that projects and companies can follow. But the SEC has to date been unwilling to do so.
So the Blockchain Association has stepped in and taken a stab at codifying the Hinman Test. In a post they published today, they have laid out the basic arguments of Hinman’s Framework and then outlined how one could determine if a token project was sufficiently decentralized.
This is not as helpful as an SEC published set of guidelines, but until we get that (soon I hope), this will have to suffice.
Those are the two words that come to mind when I looked at the Q4 2018 PWC/CB Insights Money Tree Report.
2018 saw the venture capital business moving to larger and larger deals. There were roughly 200 deals around the globe in 2018 where $100mm or more was raised.
And yet the number of total transactions declined slightly from 2017.
This trend is much more obvious if you look at the six years from 2013 to 2018. Total deal activity has increased less than 10% while total capital investment has almost tripled.
These trends are unsustainable. It is certainly attractive to de-risk by moving upstream to invest in more mature companies, larger rounds, etc. But if we don’t reseed our fields there won’t be as many of those mature companies in the future.
And that is why USV remains a small fund/firm which allows us to invest in Seed, Srs A, and Srs B rounds. It may not be fashionable to do that right now, but I am certain that it is and will continue to be profitable.
Aesop has some great fables but my favorite is The Tortoise and The Hare. I was reminded of it yesterday when I saw this chart in my colleague Nick‘s deck for a talk he is giving this week in Hong Kong:
That is the installed base of iOS phones vs Android phones globally over the last decade.
I have been a long and loud fan of Android’s open (or at least more open) model and an equally long and loud detractor of Apple’s closed model.
I’ve taken a lot of heat and ridicule for it over the years and still do.
But to me, there is no way to win long term with a closed model.
It is a lot like The Tortoise and The Hare.
Closed allows you to build a better user experience and get out of the gate quickly. Open takes longer, the user experience is poor initially and for quite a while, but when open gets going, it is unstoppable.
The Gotham Gal and I went through our (actually her) angel investments yesterday and figured out which ones went under in 2018 so we could take the tax write-offs on our 2018 returns.
It is an odd exercise. Kind of like reading the obituaries.
But it is an important exercise for several reasons.
First, taking the write-offs against the gains shelters the gains so they can be re-invested in full. Over her first six years of investing (2007-2012), she has realized a bit more than she invested and the losses have sheltered the gains so all of that capital can be reinvested. And the investments that remain unrealized from that cohort are all solid now and will likely produce another 2-3x on invested capital.
But it also a nice “post mortem” process to go through the ones that didn’t work and think a bit about what went wrong. We don’t obsess about the losses, but taking some time to run through them is helpful.
Sometimes failed investments turn into the “living dead” in which you end up a tiny investor in another company by virtue of an acqui-hire, a distressed sale, or some other such transaction. It is generally a smart idea to sell your stock back to the company or another shareholder or abandon your interest and take the loss on those kinds of investments. The tax loss is often worth more than the stock you own. A regular process of going through the losses will surface opportunities like that too.
The bottom line is that angel investing is risky business. Super early stage investing, like the kind the Gotham Gal does (she is most often the first check into the company), will produce loss ratios of 50% or higher. The winners eventually bail you out and super early stage investing ought to produce 3x on capital or better (or you shouldn’t be doing it). One nice advantage of this model is the losses come early and the wins come much later. Taking your losses, getting the write-offs, and sheltering your gains is an important part of the model and it is best to have a regular process to make sure you are taking the losses when you can.
Joel Monegro, who is one of the Partners at Placeholder and a former USV analyst, has written an important post that outlines the relationships between the three primary stakeholders in a cryptonetwork; users, miners/validators, and investors.
Joel calls it the Cryptoeconomic Circle, although it sure looks like a triangle to me 🙂
The most important “aha” that this post generated for me was the role of capital/investors in a cryptonetwork.
Maybe because I come from the world of venture capital, where the role of capital is to fund the cost of developing the technology and business, I had always seen the role of capital in a cryptonetwork similarly.
But as Joel points out in his post, that is one of two roles of capital in a cryptonetwork. The other role is to support and sustain the network by supplying financial capital to the validators who do the work in the system.
As Joel explains in his post:
There are short-term investors (traders), and long term investors (holders). Traders create liquidity for the token so miners can cover operational costs, while holders capitalize the network for growth by supporting token prices. The former is a direct form of value transfer where miners sell earned tokens in the open market to cover their costs and reinvest profits, and the latter is an indirect transfer of value that shows up in miners’ balance sheets rather than their income statements.
Like Joel’s post on Fat Protocols two and a half years ago, I think this will be an important post in helping people understand how these networks actually operate and exchange/capture value. As Joel says at the end of the post:
it helped me see cryptonetworks as systems for exchanging labor for capital (vs. currency), the fundamental concepts of network capital, and what the different roles are for investors like us in the development of these new economies
Flip is a USV portfolio company. They provide a suite of services to renters that allow them to easily flip out of leases and move when they need to with the cooperation of landlords.
Before Flip was a USV portfolio company, it was angel funded by the Gotham Gal and Flip’s founder Susannah Vila went on the Gotham Gal’s podcast last month to talk about how she got the idea to start Flip and how she has gone about building the company. It is a great listen.
I saw this project this morning and backed it instantly. It checks a lot of boxes for me.
As many of you know, I have been spending a fair bit of my time on K12 Computer Science Education over the last decade. The good news is that over that time period, there has been massive progress in getting computer science into our K12 schools in the US.
And if I had to pick one single thing that has been the biggest catalyst for that, I’d point to Scratch, the brainchild of Mitchel Resnick and his Lifelong Kindergarten lab at MIT’s Media Lab.
Yesterday was a big day for Scratch, and therefore, for K12 CS Education around the world. The Scratch team launched Scratch 3, a major release which brings a number of important new features and functions to Scratch. Here is the Scratch Team’s blog post on Scratch 3.
The three big improvements to Scratch in this new release are:
1/ Scratch everywhere. It used to be that you could only run Scratch in a browser. Now you can run it on touch devices like tablets. This is a big deal as many early elementary school classrooms tend to use tablets not computers.
2/ Extensions. The Scratch team has made Scratch extensible via a new element called Extensions. Examples of Extensions are the Lego Mindstorms Extension, or the Google Translate Extension, or the Amazon Text to Speech Extension. I am excited to see all of the amazing Extensions that will get built using this new feature.
3/ New characters, sounds, and backgrounds. Most kids use Scratch to build games, animations, and other fun experiences. Scratch is fun!!! So Scratch 3 brings a massive expansion of creative elements that kids can use to create the things they want to make.
Obviously Scratch can’t and won’t be used to make things like operating systems, machine learning models, transaction processing systems, etc, etc. But the people who will be building those things in the next ten years will have likely gotten into programming via Scratch.
Scratch is the on-ramp to computational thinking, coding, programming, and whatever word you want to describe the essence of computer science education. It makes something that seems so daunting really fun and approachable. And that is why I think it is the single biggest catalyst for K12 Computer Science Education.
And it just got a lot more fun and a lot more powerful.
As is always the case, I got a lot of feedback on yesterday’s predictions post. Most of it was constructive. Some of it was fawning (yuck). And some of it was snickering.
That’s how it goes when you stick your neck out and take a stance, make a bet. I am used to it.
I am surprised at how few people are willing to do this sort of thing. They have opinions, for sure, but they don’t put them out there and get the reactions that help shape those views going forward.
I would encourage everyone to share your views, opinions, and predictions publicly. It is a practice that produces great value for me and I think would produce similar value for others.
Speaking of predictions, this one on crypto from Arjun Balaji is quite good (and quotes me too 🙂
Today is a back to work day, so I am going end this now and do that.
