Tag: Venture Capital Page 1 of 4
Last September 2019, I tweeted a prematurely positive position on the overall cryptocurrency sector, with an end-of-year target of $750 Billion for the overall sector.
That tweet was loved and hated by an equal number of people, judging by the 362 comments received, despite an official 1K Likes, but what stuck with me is the fact that I was hammered for being very wrong in this prediction. However, to keep the record straight, it was more of a wish than a prediction.
That wish is driven by my strong beliefs that higher market capitalization as a whole is a good thing for this sector, for several reasons:
Frees-up new investment capital
New pools of capital (from gains) become suddenly available to projects and startups, some of which had been gasping for air in the past two years, stuck in the doldrums of cryptowinter. This also makes capital a bit less discriminating at funding new projects. In early stages, the quality signals are more difficult to find, even to the most discerning and experienced early-stage professional investors. That is why these investors typically choose a portfolio approach to increase their chances that at least ⅓ of that portfolio bears enough fruit to generate sufficient returns to offset the potential write-offs and losses coming from the rest of portofolio. As a side note, individual investors are also well served to follow a similar strategy. It is not easy to precisely pick one or two investments by putting all your eggs in one basket. Unless you are very lucky, you need to spread your bets across several pockets of opportunities, even if it means lowering individual amounts on a per investment basis.
Good for the psychology of markets
The psychology of markets is a known factor and reason for rising or falling stock prices in the public markets, as it pertains to the general mood of the majority of investors. Cryptocurrency markets are not different from that perspective. With a positive mood, more investors (or speculators) believe that prices will move higher in the future, and they enter the trading dynamics, which drives prices higher.
More public awareness
As prices start to go up in a significant manner, media coverage about this development starts to increase not just within the crypto media sector (which is a niche media segment), but it starts to spill over to the general and mainstream media which is a much larger piece of the attention pie.
The total market cap of cryptocurrencies is now flirting with the $300 Billion mark, and that’s another important psychological threshold. Once it crosses that barrier, it will be on its way to pass the most recent high of $371 Billion that was reached at the end of June. At $300 Billion+, that sector will begin to experience more broad media coverage, as it did previously when it reached the over 500 Billion mark. More general awareness about cryptocurrency and the blockchain are a good thing.
More regulatory seriousness
If you follow the logical path of the rolling ball effects, you land squarely in the lap of regulators who tend to be reactionists to market developments. As the cryptocurrency market size swells, regulators (especially in the US) will start to re-prioritize their actions, and many of them will start to move off their sitting ducks positions.
Today, during a Congressional hearing, Federal Reserve Chairman Jerome Powell acknowledged that Libra was an important development to the growth of digital currency. I sensed a streak of progressiveness, as Chairman Powell said “we support responsible innovation…” and followed by saying he believes that “the process for addressing these concerns should be a patient, careful one, and not a sprint to implementation.” Of course, Chairman Powell was taking a jab at the US Congress who seemed hyperactive on wanting to apply quick regulatory handcuffs to Libra. Today, Libra doesn’t figure yet in the total cryptocurrency market cap figures, but they are an important proxy for the development of regulation in this market, especially that the US Congress appears to be obsessed with regulating them one way or the other.
Here is a clip of the Q&A segment that covered cryptocurrency and Libra:
Overall, I’m encouraged that many positive and promising applications of cryptocurrency are entering a second phase of their evolution by building strongly on iterative learnings from the past 2-3 years.
One promising sector that is jolting out of the gate, is stablecoins. Whether government-backed or not, they bring the novelty of programmability to money, a feature that didn’t exist before because we never had truly native digital money. As Fred Wilson pointed out on his blog today, USDC is one such example, citing the Venmo analogy. But let’s take that concept even further.
Imagine that you can use cryptocurrency-based stablecoins to make large transfers much easier, and at the speed and convenience of blockchain transfers. Imagine a smart contract built into a financing round that automatically transfers respective funds in stablecoins when all signatures are in place. And if you take that vision one step further, imagine that we then have widespread stablecoin-to-stablecoin transfers with exchange rates, e.g. from USDC to Libra, or USDC to QCAD (a recently launched Canadian Dollar stablecoin), or any other combination.
I’d love to see the above scenarios play out in practice because all the pieces are already in place today.
There will not be one killer app for crypto or the blockchain, but there will be several of them. While there are undiscovered ones, many are advancing today in unisson, albeit with small market shares and usage numbers, which make them less visible to the naked eye, but with the passage of time, they will become gradually more noticeable.
Follow the rolling ball –> Higher prices, leading to mainstream headlines, leading to more projects being funded, leading to more positive psychology, leading to more regulatory certainty, and culminating in the solidification of a large global market of users, believers, and a solid infrastructure of services and capabilities to make it all happen at a significant scale.
For the blockchain, 2018 is ending with a marked contrast to how it started, no matter how optimistic you care to be. That’s because the largest mindshare has been on the price of tokens and cryptocurrencies. That is an unfortunate frame of reference, because it symbolizes the velocity of hype, more than enlightens on the real measures of progress in the industry.
It would be an interesting experiment if we could ban or hide all media (including social) stories related to crypto trading for the first 3 months of the new year, and only focus on discussing the projects and technologies that are being built, without any references to the price of Bitcoin, Ether, XRP or any others. Not even a word about ICOs. This experiment would give us more clarity about the real work that is actually taking place.
I am fortunate enough about continuously gaining insights from this industry from being constantly exposed to it first-hand, deep in the trenches, interacting with the technologists, entrepreneurs, financiers, lawmakers and regulators across a global geography. As I reflect on where we are, entering the New Year, here is a list of prescriptive thoughts for the various entities in the space focusing on what they can do, or how they can think, in order to give us lot more hope for a prosperous evolution.
Going to market is not easy. Many blockchain startups continue to underestimate what it takes to bring a new product to the market and put it in the hands of users. Refine the value proposition of your offering. How unique is it? What value does it really offer? Why blockchain? Why should a user switch to, or start using your product? Are your user interface and user experiences really intuitive, or are the barriers to entry too high? Have you assessed the size of the potential market and specifically identified and understood the profiles of your target audience?
Whether you are working on (or enhancing) a protocol, infrastructure, middleware technology or applications, delivering what you promised within the deadlines is key. Do not hide under the pretexts that decentralization is messy and open source projects take time to materialize. Yes, the consensus process is key to the base technical layers of the blockchain, but if we applied consensus to all decision-making or to how we manage for results, the world would be in a very bad place, and most businesses would be bankrupt. Cut to the chase, make the tough decisions, and hold people accountable to their deadlines, including yours. If you are not that type of leader, then put someone else in charge that you trust.
Marketers and PR Companies
Clarity in marketing communications is important, but do not go overboard with marketing jargon, hyperbolic statements, non-genuine endorsements, aggressive outreach, and chest pumping. Smart marketing is about finesse, accuracy, credibility, and education. Shouting from the rooftops is like wolf howling. It is not a long-lasting form of communication, and certainly doesn’t stick in the market’s mind. Remember, the key objective of marketing is to get into the minds of the people you want to influence, and there is so much you can do when pushing your way into it. The best results occur when you create the conditions for the market to be pulled towards you.
If you were lucky to have raised funds with an ICO process, count your blessings, because they end there. You are now just like a startup. So, just behave like one, and don’t forget: valuations matter. The price of your token will come back to bite you if you don’t let that token prove its real utility in the hands of users and developers. The token must add real value to the network, and if it doesn’t, then refine your assumptions and find the right token-to-market fit. One last thing, get some real mentors to mentor you, not the advisors you put on your website to fake legitimacy for your projects. Self-accountability is overrated, and it will get discounted.
Don’t kick or stab the wounded while they are down or have not had a chance to stand up. The blockchain, tokens, cryptocurrencies and decentralized trusted p2p networks are a new thing that doesn’t fit the old paradigms you have built your practices on. Put on some new lenses, and show us your creativity in innovation, not in enforcement. Imagine if we had kept the old dirt and gravel roads, and we were fining cars for creating dust in the air, instead of laying asphalt on the roads. If regulators are responsible for consumer safety, then they should lay out some asphalt because the cars are different now. Electronic trading was not as revolutionary as the blockchain, so it was able to adapt to existing frameworks, but the blockchain is more fundamentally different, therefore it needs a new framework.
Wall Street Institutional Investors
Stand back. The crypto markets aren’t totally ready for you. Most valuation correlation metrics are hyperbolic and wishful at best. We know you like quantitative models, but all you can do now is speculate. I wished you would stop pretending you are “investing” because all you want to do is flip. Flipping is not what early technologies need, because it betrays them too early. The mature cryptocurrency instruments are few, maybe Bitcoin, Ether and XRP and another handful, but until there are measured real correlations between real metrics and market caps, institutional firepower might destroy more than build confidence.
Good news. There is less FOMO now (Fear Of Missing Out)! It’s (almost) back to business as usual. Back to finding the startups and companies to invest in, but first, do your homework, and understand the blockchain and its potential from a first principles viewpoint. Form your own and original investment thesis or tact, instead of following others’ who have been thinking about it 5 years longer than you have. By copying someone else’s approach, you are only fooling yourselves and your limited partner investors. Good news though,- the blockchain investment landscape is rich, varied and offers new opportunities.
I wished you didn’t put that 5 or 10K you had painfully saved into some cryptocurrency during 2018, after what your aunt, uncle, cousin, niece, taxi driver or nephew told you it was going to the moon. Unfortunately, the institutional investors and mainstream media headliners fueled the frenzy too early, which spilled over into the mainstream creating a false reality. My advice- take the loss, and keep your day job. There will be new, safer opportunities, as the market matures. In the meantime, use cryptocurrency to understand it, not to trade it. Pick a consumer app that depends on cryptocurrency and become a user. Some examples to pick from: Steemit, OpenBazaar, CryptoKitties, Kik. [Disclosure: I’m an investor or holder in them]
Admit it, you didn’t plan for the blockchain. It just appeared and foiled your strategic plans, but you still haven’t changed your strategic thinking about it. You know you can only disrupt so much of your business, so your initial instinct is to box the blockchain into its own corner, where it can do no harm, while you might have paid some lip service to it, in the meantime. Regardless, the only way you will find the right and best use cases for the blockchain is by allowing your best people to be a part of it. And I challenge you to insert the blockchain lexicon in your strategic planning, even if the exercise is unnatural.
I might have been utopic in my prescriptive wishes, and perhaps my words were rough while making these points, but there is no better medicine than tough words to meet a tough and harsh reality.]]>
In June 2017, the cryptocurrency world got distracted with the flippening prediction, a reference to when Ethereum was going to overtake Bitcoin in terms of market capitalization. That flippening got close, but didn’t happened.
While Ethereum’s chances of closing the gap between its valuation and Bitcoin’s have recently dwindled, there is another significant flippening we are yearning for: the number of token users versus the number of token traders.
Tokens are issued for a specific purpose, typically as the main economic unit of a blockchain protocol, infrastructure, or application. That’s the user view. More user activity in the form of engagement with the platform being provided (infrastructure, protocol or application) is the ultimate goal.
In contrast to the end-user (or developer) view, the investor view is to see the token as a financial instrument whose value appreciates over time.
Currently, there is a divergence of motivation between users and investors. If the bulk of activity is tilted towards investors, that tends to increase the token value, with a risk of over-valuation.
This balance must be achieved on a case by case basis. Each application, protocol or infrastructure must strive to increase its token usage level to counter the natural pressures of investor frenzy that want to push the token price up, without any regard to token-based user engagement. Some investors don’t even understand what the token actually does, let alone have an interest in experiencing its utility. This isn’t unlike the current structure of public capital markets where, for example not all stockholders of Tesla’s stock (TSLA) own a Tesla, but at least they believe in the long term growth of the company, hence buy the stock as a value appreciation proxy.
During my presentations at conferences, my favourite audience question is to ask how many own cryptocurrency versus how many are using the token to actually perform the function it was intended to. While 95-100% typically own cryptocurrency, only 5-10% raise their hands when facing the token usage question.
I’m not sure what the right equilibrium ratio is, or whether knowing it accurately matters. Maybe we can point to Bitcoin and Ethereum as references, since these two networks are mature now with plenty of actual usage. But even then, the volatility in price fluctuations for these two currencies is still high, which points to the fact that speculators still believe that these networks are undervalued, and there is this constant cat-and-mouse chase of value versus valuation.
It is generally accepted that the divergence between value and valuation is more prevalent in the early parts of a token’s life. Until there are tangible metrics for quantifying the real value of a token’s utility, the gap between value and valuation will continue to defy conventional wisdom and conventional valuation methods.
The following chart depicts a theoretical progression for the value vs. valuation gap, over the lifecycle of a token. Note that the depicted gap is relative.
I’ve already written about this in this past article, where I’m re-publishing a relevant passage that is worth re-reading:
In traditional venture investing, we are used to relatively well defined stages: angel, seed, Series A, B, C, D, E, F, then IPO. Each one of these phases has generally accepted stage characteristics pertaining to product evolution (alpha, beta, launch), product-to-market fit, and continued user growth, and resulting market acceptance and share.
In public companies, analysts and investors use metrics such as revenues, net income, EBITDA (earnings before interest, taxes, depreciation and amortization), EPS (earnings per share), P/E ratio (price to earnings ratio), and sales growth in order to correlate market capitalization justifications.
For ICOs and token-based projects, what are the equivalent performance metrics?
In the long term, there is no escaping real metrics, and these are only visible after the market launch stage. Perhaps they will be similar to traditional financial performance metrics, and maybe there will be new ones that emerge.
Ultimately, how do we achieve valuation rationality? What will replace the price to earnings ratio, a key driver to market capitalization values?
Some argue that a decentralized protocol doesn’t need a direct revenue model, because an open protocol is free to use. It is typically driven by an open source community and/or a foundation. However, even non-profit foundations need an operational budget which could come either from donations, or from a percentage of token ownership. Foundations and ICO projects can theoretically continue selling some of their tokens in order to finance their operations indefinitely, as long as the markets continue to give them healthy valuations, based on the strength of their ecosystem, volume of transactions, or real revenues.
However, it is still unsure whether continuously dipping into the publicly crowdsourced markets to finance operations is a long term viable approach.
Not all ICOs are created equal, and not all of them are protocols who can live on the strength of an ecosystem around them, let alone the token that gave them birth. Although all projects have visions of being the next Bitcoin or Ethereum (just as regular startups dream of being the next Google or Facebook), we are seeing many ICOs looking just like applications, marketplace products, or technology solutions. They will need to eventually show real revenues or viable business models in order to strengthen and support the public valuations they will be receiving.
I believe we will eventually return to more palpable metrics to guide us in measuring the valuation characteristics for marketplace, product, and applications-based ICOs because they will have revenue expectations. Protocols are a bit different, and they are still a new beast whose success characteristics may still be unclear. To make things more interesting, not all decentralized applications need a special protocol, and not all protocols necessarily need a special token. Keep in mind that some decentralized applications rely on an underlying protocol that only serves the application itself, which means that the protocol’s market importance could be over-stated.
I’m looking forward to seeing more ICO projects provide increased clarity about the performance metrics expectations they plan to exhibit during their future adult lives, in addition to the assumptive utility of that token they are selling.
This is why I’m a proponent of seeing some visible form of operational token utility prior to allowing the token to trade in the hands of public speculators. Even if the token utility is still not mature or complete, at least seeing its beginnings would give a reality check on where it is going. (Melonport is a very good example of a protocol that can already be used with its token, prior to its final public release)
The speculative hype can live for so long before there is real value. A vision, a white paper, or market advocacy are not tangible value. They are a promise for future value.]]>
Note: In this article, I’m critical of some ICOs practices that aren’t done right, but readers should know that I’m also supportive of the ICO process itself.
1) Asking advisors to promote
I’ve written about the role of advisors, explaining my bias for mentoring value, and not promoting as their key role. However, advisors are routinely asked to explicitly promote their involvement with certain ICOs as part of the agreement they signed in return for free tokens. Such promotions can take the form of a blog post, with a title like “Here’s why I’m advising XYZ ICO.”
Although these blog posts come with degrees of authenticity, the fact that the “promotional ask” is formal implies that the expected role of advisors is to prop up the ICO’s visibility. To further accentuate this, some ICOs will allocate the advisor token shares based on sales milestones, as if the success of the sale depended on the promotional prowess of the advisor.
There is nothing wrong with influencers touting a specific startup once the company starts getting some work done in the marketplace. VCs/Angels do that routinely via a practice often referred to as “pimping”, but they do it by conviction, not coercion.
Yes, I do tout certain companies, whether I’m an investor, advisor, board member or not. But I do it out of conviction about these companies, based on real beliefs in them. And they never ask me to do that. I do it on my own accord, on my own timetable, and as appropriate in the context being presented. I believe that this sort of organic promotion is more effective.
2) Coins that are listed right away
When Ethereum completed their token sale in September 2014, you couldn’t trade Ether for at least another year. Actually, one of the terms of the sale explicitly stated that the tokens would not be distributed until the blockchain genesis was live. Specifically stated as, “Ether will NOT be usable or transferable until the launch of the genesis block. That is to say, when you buy ether and download your wallet, you will not be able to do anything with it until the genesis block launches.”
Logically speaking, there is no good reason (except speculative), why a token should start trading before its underlying network, protocol or application is live. Yet, we are seeing tokens starting to trade, mere days or hours after the initial sale completion, and in many cases for a period that will be 6-18 months prior to a working product launch. That is the sort of thing that can make the whole ICO party crumble down, as some projects will undoubtedly get derailed or delayed further, sending their token price down to levels that will not let them recover.
3) Huge uncapped raises with no product
Some ICOs are citing Ethereum as a reference point, to justify uncapped sales (for background, Ethereum’s token sale was uncapped). But two things are different now. First, we are not in 2014 when ICOs were few and far in-between. The environment today is full of frothiness, resulting in a lack of buyer objectivity. Second, when Ethereum initiated its sale in July 2014, it was after 7 months of work around the globe by teams of developers and supporters that culminated in about 100 Meetups around the world supporting them. So, there was already the beginning of something real and palpable in the making, and it was not the result of sensationalizing a white paper or particular far fetched vision.
Uncapped sales that result in proceeds of over $50 Million set some high expectations and make further increases in value in terms of multiples even harder. They tend to reward early investors/speculators more than serve the interests of the project, while easily allowing valuations to get way ahead of value too quickly, too soon, and with too much disconnection from reality.
Exceptions in uncapped sales would be for protocols or applications that have already achieved user engagement and traction in the marketplace, as these could more easily justify an ICO entry at the $100M+ level, especially if the token is a real usage-token.
4) Loose accountability
The sale terms for most ICOs are fairly loose, by intent. There is little accountability for shipping products, and everything is left under the assumption that self-discipline and self-management will produce results, even if the entrepreneurs have little or no experience in a startup environment. Some terms explicitly state that the team could abandon the project for a variety of reason, with no other recourse.
If things go bad, get delayed excessively, there is no real way to hold the team accountable, except of course to dump their tokens on the market if they were already trading (which is why trading their tokens too early is a risky proposition).
5) Websites that solely hype the ICO
Some ICOs are promoted via websites that are dominated by ICO specifics, and have much less content related to the product, project, technology, and team.
There should be a balance between explaining the project, what has been done to-date, and the ICO itself. A white paper alone is not a product roadmap, as some white papers are looking more like a product blueprint, more than a real visionary idea.
Another related red flag is when ICO websites publish a vanilla project timeline depiction.
6) Undisclosed vesting and lockup periods
In private companies, vesting and lockup periods are private and nobody else’s business. But, public companies disclose management options and their vesting schedules. ICOs are like public companies from Day 1, because they are taking public money, whether they are public-good protocols or bona fide applications or technology. However, most ICOs are choosing to disclose scant (or selective) details about the actual lockup periods and vesting schedules.
7) Surprises and financial engineering black hat tricks
You can’t fault entrepreneurs for being creative. That’s one of their key traits. However, we’re seeing an incredible amount of financial engineering in the actual ICO mechanics. For example, changing the sales rules mid-course during the ICO (citing whatever reason), by manipulating the smart contract is a breach of public trust, and shows the company would be willing to further such abuse in the future, if they chose to.
ICOs that run without a surprise should be the norm.
8) Use of proceeds is a black box
Sure, many ICOs display the proverbial “Use of proceeds” pie chart, and it goes typically like this: % on software development, % marketing, % operational, % legal, etc. That level of disclosure is so gross that it leaves a lot of room for interpretation at the operational level, and it raises many open questions:
But these categories are loosely defined, and can be easily poked at. For example, why isn’t legal part of operational? And does operational include contractors or just employees?
Another part of the black box practices is not revealing the currency conversion plans into actual company reserves. What is the treasury role for the ICO?
All ICOs should have an official audit 30 days prior to the completion of a sale, and results should be communicated.
9) Lack of on-going disclosure information
This is why I created Token Filings, which is a disclosure database focused on what happens after the sale. Companies are living organisms that change over time. Those changes should be communicated via on-going updates via standard, subjective metrics. For example, ICONOMI releases monthly updates and comprehensive quarterly financial reports, not unlike the practice that public companies adhere to.
10) Advisors that vest immediately
Everybody likes to get paid as soon as their services are delivered. But when advisors receive tokens that are instantly liquid, it reinforces the fact that their services have been rendered, and potentially no longer needed, therefore perpetuating the reality that their job was to promote or legitimize the sale. I’ve already harped on the point that ICOs should think of advisors like mentors, not promoters.
If you are VC, you would easily cringe or hold your nose at the above practices. That’s why most VCs are not playing according to these rules, and entrepreneurs are not missing them.
With ICOs, permissionless funding is the norm, and the entrepreneurs are having fun writing new rules, while ignoring some old ones.
Despite these questionable and loose practices, ICOs are not a bad phenomenon. Hopefully, these excesses won’t come back to haunt us too soon.
ICOs are playing the small company games that big companies used to play, but many of them are making mistakes along the way.
I’m all for creativity and challenging the status quo in venture funding, but common sense is not something that is going out of fashion anytime soon.
(Thanks to Fred Wilson for suggesting a couple of these points, after I shared my original list. )]]>
Ever since the Bancor and Gnosis ICOs kicked the door open on creativity and boldness in ICO campaigns, the appetite for ICOs has been steadily increasing during the month of June and continuing into early July.
I sensed that June was a pivotal month that may be setting the tone for the next months to come. So, I spent a good part of the past several days trying to tally-up exactlyhow much what raised during that month, and by whom.
I was surprised (and you should be appalled) to find out that many ICOs were completed, yet the amount raised were not visible on their ICO sites.
To sum it up, 36 companies raised $601.1M in June 2017 alone.
|ICOs June 2017|
|Omise GO||OMG||$19,000,000||June||Presale only|
|Internet of Coins||HYBRID||$1,000,000||June|
|Source: William Mougayar (2017)|
Why is this significant?
I went back and looked at how much traditional venture capital goes into the angel/seed stage. Angel + Seed are an apt comparison because many of these ICO’s are at that stage, and no further. After triangulating from various sources, (mostly PWC’s Money Tree and the Crunchbase Global Venture Capital Report) the total amount of venture capital in Internet related companies stands at $20 Billion per year, ⅓ of which typically goes to Angel/Seed stage rounds. On a monthly basis, that number is $550 Million.Why is this significant?
There you have it. ICO funding has now exceeded Venture funding.And we have more than 1 ICO per day (which wasn’t the case in May 2017).
Will this become a sustainable trend remains to be seen. All we need is to stay above the $550 Million mark on a monthly basis. Already, we have had two big ICOs in July (Tezos and EOS) with a combined $386 Million.
In early February, I predicted that 1,000 ICOs would raise $1 Billion by the end of 2017. $1 Billion sounded outrageous at that time, but we have already eclipsed it on a YTD basis.
I wouldn’t be surprised if we ended the year with 1,000 ICOs.]]>