Posts from hacking finance

Innovation In Capital Markets

A few years ago, maybe in 2016, we held a discussion of blockchain and crypto technologies at the annual meeting of our limited partners. I recall someone in the audience suggesting that the NYSE and Nasdaq could rebuild their markets on top of these technologies. I replied that I thought it was more likely that new markets built on blockchains and existing for crypto assets would emerge to compete with them.

And here we are, with a 24×7 global marketplace for crypto assets that has a market capitalization of over half a trillion and daily volumes in the hundreds of billions. This pales in comparison to the legacy capital markets, but that is always the case with a new entrant on the scene.

The legacy capital markets are not sitting still. There is real innovation happening in the IPO process for example.

But if you want to see the world we are headed into, I think it is better to look at the crypto markets. They operate day and night, they are global, and anyone can buy, sell, hold, and send these assets as long as they have a crypto wallet and a browser or a phone. You don’t have to be wealthy to invest in crypto startups. Anyone can do it.

The crypto markets are also innovating in areas like lockups, vesting, and governance. In a traditional IPO, the existing shareholders are typically locked up for 180 days and then the lockups come off entirely. In the crypto markets, we see all sorts of different forms of vesting and lockups being tried. What is emerging are lockups for existing holders that are much longer, but with small amounts of early and regular liquidity.

We are also seeing a lot of innovation around governance, with crypto projects working on ways to allow the community of token holders to have real say in the way a crypto project operates. We have seen a number of communities make very significant changes in things like total supply of tokens, inflation rates, and technology roadmaps in recent months. I cannot think of a public company that allows its shareholders that level of impact on their direction.

Right now these markets are operating as parallel universes, but I don’t think that will be the case forever. It is fairly simple to tokenize equity securities and trade the tokenized version in the crypto markets. That is not really happening just yet, but I expect that it will in the not too distant future. Then we will have the opportunity to see two identical assets trade in the traditional and emerging markets. There will be arbitrage opportunities and more when this happens and the new markets will put pressure on the traditional markets to adapt and change and evolve as fast as they can. That will be hard, if not impossible.

The global nature of the crypto markets is also a challenge for regulators, who have stood in the way of innovation and continue to do so. Why, for example, does one have to be wealthy to invest in startups in the US? That’s simply a way to keep the wealthy rich and everyone else not rich. If you trade crypto assets and something is not available in the US, you can trade or lend or stake elsewhere. And many/most do that. This allows innovation to happen in crypto even when some jurisdictions, like the US, are slow to embrace and hostile toward innovation in capital markets.

So if you want to see the future of capital markets look here, not there. That’s where all of the innovation, experimentation, and new stuff is happening.

#blockchain#crypto#hacking finance#stocks

Some Thoughts On SPACs

As many of you know, Special Purpose Acquisition Companies (SPACs) are all the rage on wall street right now. SPACs are publicly traded “shell companies” that raise capital in an IPO process and then use that capital to merge with a privately held business.

SPACs have been around for at least thirty years and I have always thought of them as a “liquidity path of last resort” for our portfolio companies. The thinking was that if you could not go public in a traditional IPO, and if you could not find a traditional M&A buyer, then you would consider a SPAC.

But my thinking on SPACs has changed in this latest SPAC frenzy. I now see them as part of the continued “assault” on the traditional IPO process and largely a good thing.

For most of my career as a VC, the IPO has been the holy grail. Our very best portfolio companies would be offered an opportunity to go public by the top investment banks on wall street. And I have been involved in several dozen IPOs in my career.

The terms of an IPO are fairly locked down and are largely a great business for the top wall street banks and their buy side clients. I don’t take as much offense to this situation as others in the VC business have. I have viewed it as a mutually beneficial relationship between the top banks, VC firms, and the founders and CEOs who lead our portfolio companies.

However, in the last few years, competition has emerged for IPOs. On the left has come direct listings. And on the right, we have SPACs. Now founders and CEOs and Boards have a plethora of options for moving from a privately held business to a publicly held business.

Competition and choice is good. That is deeply held belief of mine across all aspects of life and business. And so the deluge of SPAC money coming to market right now is a good thing for the founders and CEOs who lead our portfolio companies. It offers them a wider array of options for going public than they had before. I am certain that will be a good thing for the tech sector and the VC sector.

All of that said, I do think SPACs have positives and negatives relative to IPOs and Direct Listings. What is right for your company will depend on the circumstances you find yourself in, including whether or not you need to raise primary capital, whether or not you need a lot of secondary liquidity, whether or not your “story” will be exciting to public market investors right out of the gate, how quickly you need to transact, and a host of other factors.

It is also the case that a number of VC firms and growth investors are raising their own SPACs. That too reflects the changing dynamics of the investment business and how fund managers like USV access capital and deploy it. I have always been a traditionalist when it comes to raising capital and deploying it. I like the small VC firm model, a close and long standing relationship with our investors (called LPs), and the rhythm of raising funds and sending the money back again and again. But I appreciate that others don’t see things that way and they may be on to something important with the VC SPAC model. We will see. I like that people are experimenting with the model. It will be revealing to all of us in time.

#hacking finance#stocks#VC & Technology

Subscription Agreements

I just finished completing a thirty page form for an investment my wife and I are making in a limited partnership. This form is called a subscription agreement. I wrote about the frustration of having to complete this identical form again and again six and a half years ago here on AVC.

One great thing has happened on this issue in those six and a half years. Many/most subscription agreements are now sent digitally via Docusign or Adobe. That’s great. It is certainly a bit easier to complete them online and once you have done that, there is no need to scan and email.

But I remain confounded by the fact that we complete the exact same form time and time again, answering the exact same questions. One would expect that there would be registries/registrars that would onboard an entity (a person, an investment fund, etc) and then when that entity planed to subscribe to an investment, it would just authenticate with the registry and that would be that.

That’s what I was hoping we would see emerge when I wrote that blog post six and a half years ago and we still have not seen it happen. That is kind of amazing to me given how much innovation we have seen in and around financial and investing services in the last decade.

#hacking finance

Accelerating Working Capital

As policy makers around the world seek to mitigate the economic shock from this pandemic, one less obvious but powerful place to look are working capital flows.

Yes we do need direct relief for small businesses like the forgivable PPP loans. We also need things like payroll tax deferrals and other relief from the CARES Act. We also need our capital markets to work so actions like the Fed is taking are necessary and important.

As Sandy Kemper, founder and CEO of our portfolio company C2FO puts it in this blog post:

The greatest financial relief we can give small and mid-sized businesses in this economic crisis is faster payment of their outstanding invoices — liquidity. The lending programs being launched by the world’s governments and central banks and directed to small and mid-sized businesses are extraordinary, needed and laudatory, but will fall short not just in terms of dollars, but more critically, they will not arrive soon enough for tens of millions of the world’s small and mid-sized businesses in dire need.

https://c2fo.com/resources/vendor/how-to-solve-the-16-trillion-small-business-liquidity-trap/

Sandy goes on to calculate that the world’s “150 million small and mid-sized businesses, employing 60% of the world’s working population and generating nearly 50% of the world’s GDP, are owed more than $16 trillion by their customers, half of which are large companies.” Sandy calls that the $16 trillion liquidity trap.

His proposed solution is:

low-cost funding specifically for larger companies to pay their small and mid-sized suppliers immediately

You can read the entire proposal here. It makes a lot of sense.

#hacking finance

What Will Happen In The 2020s

It’s 2020. Time to look forward to the decade that is upon us.

One of my favorite quotes, attributed to Bill Gates, is that people overestimate what will happen in a year and underestimate what will happen in a decade.

This is an important decade for mankind. It is a decade in which we will need to find answers to questions that hang over us like last night’s celebrations.

I am an optimist and believe in society’s ability to find the will to face our challenges and the intelligence to find solutions to them.

So, I am starting out 2020 in an optimistic mood and here are some predictions for the decade that we are now in.

1/ The looming climate crisis will be to this century what the two world wars were to the previous one. It will require countries and institutions to re-allocate capital from other endeavors to fight against a warming planet. This is the decade we will begin to see this re-allocation of capital. We will see carbon taxed like the vice that it is in most countries around the world this decade, including in the US. We will see real estate values collapse in some of the most affected regions and we will see real estate values increase in regions that benefit from the warming climate. We will see massive capital investments made in protecting critical regions and infrastructure. We will see nuclear power make a resurgence around the world, particularly smaller reactors that are easier to build and safer to operate. We will see installed solar power worldwide go from ~650GW currently to over 20,000GW by the end of this decade. All of these things and many more will cause the capital markets to focus on and fund the climate issue to the detriment of many other sectors.

2/ Automation will continue to take costs out of operating many of the services and systems that we rely on to live and be productive. The fight for who should have access to this massive consumer surplus will define the politics of the 2020s. We will see capitalism come under increasing scrutiny and experiments to reallocate wealth and income more equitably will produce a new generation of world leaders who ride this wave to popularity.

3/ China will emerge as the world’s dominant global superpower leveraging its technical prowess and ability to adapt quickly to changing priorities (see #1). Conversely the US becomes increasingly internally focused and isolationist in its world view.

4/ Countries will create and promote digital/crypto versions of their fiat currencies, led by China who moves first and benefits the most from this move. The US will be hamstrung by regulatory restraints and will be slow to move, allowing other countries and regions to lead the crypto sector. Asian crypto exchanges, unchecked by cumbersome regulatory restraints in Europe and the US and leveraging decentralized finance technologies, will become the dominant capital markets for all types of financial instruments.

5/ A decentralized internet will emerge, led initially by decentralized infrastructure services like storage, bandwidth, compute, etc. The emergence of decentralized consumer applications will be slow to take hold and a killer decentralized consumer app will not emerge until the latter part of the decade.

6/ Plant based diets will dominate the world by the end of the decade. Eating meat will become a delicacy, much like eating caviar is today. Much of the world’s food production will move from farms to laboratories.

7/ The exploration and commercialization of space will be dominated by private companies as governments increasingly step back from these investments. The early years of this decade will produce a wave of hype and investment in the space business but returns will be slow to come and we will be in a trough of disillusionment on the space business as the decade comes to an end.

8/ Mass surveillance by governments and corporations will become normal and expected this decade and people will increasingly turn to new products and services to protect themselves from surveillance. The biggest consumer technology successes of this decade will be in the area of privacy.

9/ We will finally move on from the Baby Boomers dominating the conversation in the US and around the world and Millennials and Gen-Z will be running many institutions by the end of the decade. Age and experience will be less valued by shareholders, voters, and other stakeholders and vision and courage will be valued more.

10/ Continued advancements in genetics will produce massive wins this decade as cancer and other terminal illnesses become well understood and treatable. Fertility and reproduction will be profoundly changed. Genetics will also create new diseases and moral/ethical issues that will confound and confuse society. Balancing the gains and losses that come from genetics will be our greatest challenge in this decade.

That’s ten predictions, enough for now and enough for me. I hope I made you think as much as I made myself think writing this. That’s the goal. It is impossible to be right about all of this. But it is important to be thinking about it.

I know that comments here at AVC are broken at the moment and so I look forward to the conversation on email and Twitter and elsewhere.

#climate crisis#crypto#economics#employment#entrepreneurship#Food and Drink#hacking energy#hacking finance#policy#Politics#Science#VC & Technology

Decentralized Finance

While we wait for the blockchain/crypto technology to scale to the point where it can be the foundation of mainstream consumer applications (games, social media, e-commerce, etc), there is a sector where scalability is a little less important and where blockchain/crypto is starting to show some real signs of life.

In the crypto space, it is called Decentralized Finance, or DeFi for short. It includes, of course, all of the ICO activity largely built on top of Ethereum and the ERC-20 token. But it also includes thinks like Maker which is both a stable coin and a collateralized lending sytem. The collateral for the loans is what stablizes the Maker stablecoin. We also are seeing other lending offerings develop in the DeFi world and we are seeing things like hedging, shorting, derivatives, and more, all built on a decentralized platform where there are no intermediaries, no clearinghouses, and the need for trusted third parties is much less, sometimes not at all.

This makes sense for a number of reasons. While the transaction requirements of financial services applications are not trivial, they are also not as demanding as mainstream consumer applications where millions of users are transacting with each other and the system in real-time.

It is also the case that, unlike many of the new architectures that emerged over the years (mainframe, mini, client-server, web), the blockchain/crypto space has always had money at its core and making money, transacting in money, and everyting that goes along with that has been an early use case and for most people, the driving use case for this technology.

All technologies need early use cases. I do not think DeFi will be the only thing that blockchain/crypto is good for. I think we will see blockchains scale in the next few years to allow mainstream consumer applcations to be built.

But until then, DeFi is a good place to hang out. It uses all of the same technologies, architectures, and value systems that we have come to know and love in crypto. You can learn to build applications, use applications, and generally come up to speed on the sector while serving real customers, building a business, and, hopefully, making money.

#blockchain#crypto#hacking finance

Credit Bureau Blues

Like many of you, I had an incredibly frustrating experience with a credit agency today. It was TransUnion but I’ve had equally frustrating experiences with Equifax and others since locking down our credit information in the wake of the Equifax data breach last fall.

What is particularly galling about this place we all find ourselves in is that none of us chose to be customers of these credit bureaus. They simply collected the info on us from third parties, built up credit info on us, which they sell to banks and other lenders, and now, because they are unable to protect our data, we need to be customers of their lock and lift services.

TransUnion charged me $5 today to put a temporary lift on my credit report lock. It’s not really the money that bugs me, it’s the entire absurdity of how we got here that galls me.

And, of course, the UI on the online service was so poor that I ended up talking to a customer service agent who struggled to communicate with me in my native language.

Why was I even dealing with this nonsense? Because I want to lease a car instead of purchase one and, even though I’m willing to pay the entire lease upfront, someone still needs to check my credit.

And I’ve got it good. Good credit. The means to avoid this nonsense most of the time. Etc. Etc.

But think about so many of us that need access to these basic financial services and are hostage to these terrible companies! It is a mess.

And an opportunity for entrepreneurs. I’m rooting for all of you.

#hacking finance