Posts from Economic

The Nature Of The Firm and Work Markets

Those who watched the video I posted on Sunday saw me talking about this. But I didn't do it justice so I'm going to do a full post on this.

The brilliant Nobel prize winning economist Ronald Coase (who is still alive!) wrote a seminal essay called The Nature Of The Firm in 1937. This is an important work and something everyone should read. It is short, only 20 pages.

The entire essay

The wikipedia page on the essay

In The Nature Of The Firm, Coase investigates why "individuals choose to form partnerships, companies and other business entities rather than trading bilaterally through contracts on a market."

Coase argues that transaction costs that make "trading bilaterally through contracts" expensive spur the organization of firms. And if those transaction costs could be eliminated, more individuals would choose to trade with each other rather than forming partnerships, companies, and other business entities.

Enter the internet and having a computer in your pocket into this model and things change. Technology has been causing these transaction costs to drop precipitously for years now and the result is we have seen the emergence of work markets in which "individuals trade bilaterally through contracts."

Our firm is seeing these work markets sprout up all around us and if there is a single investment theme that is dominating our deal flow right now, this would be it. Christina touched on this in her recent blog post on the USV blog (the section she titled "work is shifting to a peer to peer model").

We have one investment in this category, appropriately called WorkMarket, and we will certainly make others as long as we can be sure they are not competitive with each other. And we can thank Ronald Coase who laid out this investment thesis for us only 75 years ago!

#VC & Technology


I've mentioned Bitcoin a number of times on this blog. It is something our firm is watching closely. We thought briefly about making a Bitcoin specific investment earlier this year but ended up deciding to sit on the sidelines for now.

We are quite taken with the idea of a currency that is not controlled by governments and central bankers and that is based on faith in an algorithm and a network instead of the "full faith and credit" of a country.

Wired has a good post on the history of Bitcoin. It's a quick read. If you are at all interested in this topic, I suggest you check it out.

The Wired post has this chart in it:


You could take that as a sign that Bitcoin has failed. Or if you put that chart in the context of the Gartner "hype cycle" chart, you could say that we just went through inflated expectations and now we are into the real work.

Hype cycle

The hype cycle model rings so true to me because it maps out what has happened with the commercial Internet over the past fifteen years. In 2002/2003, so many people thought the Internet was "over" as an investment opportunity. And they were wrong.

So it seems to me and my colleagues at USV that an alternative currency with roots in peer to peer networks and based on an algorithm that is transparent to everyone is an idea whose time has come. The question remains if the Bitcoin algorithm or some other algorithm (possibly a derivative of the Bitcoin algorithm that deals with some of Bitcoin's weaknesses?) will ultimately win out. That's an important issue that has a lot to do with when this space becomes investable.

But Bitcoin or something else, I'm confident we'll see the emergence of currencies that are not controlled by nation states in my lifetime. Whether that is a good thing or not remains to be seen. I think it is, but there are significant ramifications that will result from the decoupling of currencies from governments. And one of them is an interesting investment opportunity that we hope to participate in.