Posts from hacking finance

I’ve written about New York Fintech Innovation Lab here at AVC a bunch of times. It’s a great three month long program where entrepreneurs get mentoring on their businesses from executives at 25 large financial services companies including teams from the insurance, hedge fund, money management, and payments sectors, as well as teams from the 10 original money center banks who helped to found this program.

If you are starting or building a company that is focused on the fintech sector and would like some help on strategy, product market fit, and business development, this is a great program to consider.

The 2016 program application deadline is December 3rd, three weeks from today. You can apply here.

And there is an information session this evening at 5:30pm downtown at 1 Battery Place. Details and sign up are here.

I saw this statement in the Economist piece on Blockchains:

Bitcoin itself may never be more than a curiosity. However blockchains have a host of other uses because they meet the need for a trustworthy record, something vital for transactions of every sort. Dozens of startups now hope to capitalise on the blockchain technology, either by doing clever things with the bitcoin blockchain or by creating new blockchains of their own.

Obviously Bitcoin could become “nothing more than a curiosity” if all the action moves to other blockchains. But right now the Bitcoin blockchain has an order of magnitude more hashing power and market cap, so we are certainly not seeing any other blockchains developing the kind of network effects that Bitcoin has. Of course, that could change. It is something I check on at least once a week and will continue to do so.

But if we see “a host of other uses” materialize “by doing clever things with the bitcoin blockchain”, I have always assumed that would be a catalyst for Bitcoin itself, both in terms of value, but also liquidity and importance of the currency.

Is that a flawed assumption?

Samir Desai, founder and CEO of our portfolio company Funding Circle, which is the global leader in small business lending marketplaces, gave a great talk at Lendit this past week. It starts with a bit of an advertisement for Funding Circle, but Samir quickly gets into an explanation of why marketplace lending is a better way to do the loan business. If you want to understand why marketplace lending is growing massively around the world and why it is the future of the lending business, watch this video. It’s about 25mins long.

AVC community member William Mougayar published a Bitcoin market map yesterday.

Putting together something like this is a major pain in the butt, but it is incredibly useful for people (like VCs and other investors) who are trying to make sense of an emerging market. It’s a great way to get your name and reputation out there. It reminds me of what Terry Kawaja did with ad:tech five or six years ago.

I could critique some of William’s placements (for example Coinbase is one of the top five exchanges in the world and yet is not included in that category), and I’m sure that countless companies are now reaching out to William saying “why are we not on your map?”  So this will get picked apart and it will evolve. But the act of taking the time to put something like this together and publish it is incredibly useful for everyone. Kudos to William for doing that.

One of Bitcoin’s strongest voices is Jerry Brito, the Executive Director of Coin Center. This short (~6 min) interview he did with Foreign Affairs is a good example of his balanced and clear and crisp voice on Bitcoin.

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.

They are providing 50 “diversity scholarships” to Coindesk’s Consensus 2015 conference in NYC on September 10th. Details are here.

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.