Why the Blockchain is so disruptive for venture capital

By boris, September 12, 2017

These days not a single meeting with a fellow VC goes by without talking about Blockchain and how to invest in this space. We are all a bit puzzled by how quickly this market has evolved. With a combined market cap of all crypto currencies now topping $170b, crypto has become more than a third of an Amazon or a Facebook. It has 10 times the market cap of SNAP, the most prominent IPO of 2017.

At the same time, ICOs have emerged as a new way for projects to raise money globally in a frictionless way. And so, we keep hearing how venture capital is about to be disrupted.

We’ve all heard this song before. The disruption of VC has been predicted many times – the last time we heard it was with the emergence of AngelList.

There are many good reasons to argue that ICOs won’t completely disrupt the VC industry… from the fact that many projects raise VC money to fund their ICO to the idea that many VC-backed start-ups might use ICOs to augment their fundraise, like Kik is doing with their Kin ICO. And most importantly, most companies cannot and should not do an ICO as their business model is not decentralized and hence their token has no utility value,

Yet, with all that said, I still believe that this wave of decentralized platforms will be the biggest disruptor to hit the VC industry over the next decade. Here’s why:

1. New investment thesis

Decentralized platforms are a mix of a new technology and a new business model. The idea of fat protocols (“value accruing at the infrastructure layer instead of the app layer”) is fundamentally different to how a majority of VCs have invested over the past two decades. It will take some serious re-juggling of mental models to become successful in this new era.

2. New way of investing

VCs usually invest in privately negotiated rounds: you can usually only invest when a start-up does a funding round and you often have to win the deal against other VCs. Then, if you win the deal, you have major influence on the development of the start-up through negotiated governance mechanisms like board seats, information rights, anti-dilution rights, etc.

But the tokenization of decentralized business models makes these projects immediately liquid assets: you can buy and sell at any stage (assuming enough liquidity). But you also have almost no influence on the project in terms of governance. Suddenly, the VC game might look much more like a small-cap hedge fund

3. New way of running your VC business

Blockchain and ICOs are giving VCs new ways to run their own businesses – from changing agreements with limited partners to allow the fund to buy tokens and currencies directly to figuring out how to safely store token and currencies. Or you might even think about a tokenization of your own fund (so that LP shares are liquid).

I, for one, am incredibly excited about what is to come. Angela and I will need to partly re-invent ourselves and our fund over the next few years to get ready for these changes. Since the beginning of the year, we have gone hard into crypto opportunities and now have five investments in this space (Citizen Hex, Blockstack, Coinbase, Metastable, and Polychain). But this still only feels like the beginning.

The good news is that the breathtaking speed at which the crypto space is moving right now will slow down once the current ICO bubble bursts. Decentralized platforms will not take over all available investment opportunities, but this is the start of a new era for VC investing.

  • Amr Shady

    Would be interesting if you share your methodology or criteria in evaluating ICOs or blockchain startups. Do you think there are specific ‘infrastructure’ startups needed before others? I guess my question is more on timing of investments in the different blockchain opportunities.

  • bwertz

    I think this is the toughest part right now – what are projects that can turn int stand-alone platform versus what projects will be subsumed by the underlying protocols. Overall, we are very bullish on platforms that creates strong network effects around a specific function / vertical (e.g. Filecoin for storage, Golem for computing, Augur for prediction markets).

  • In honor of today’s launch of KINcoin by Kik Interactive, please check out my post on:

    “Why Kik Interactive is the Next $100 billion Company”:

    https://jobcoin.com/blogs/jobcoin-white-paper/why-kik-interactive-inc-is-the-next-100-billion-company

    in the post, I explain what the following pictures have to do with one another:

    https://uploads.disquscdn.com/images/10d58f3ab909732471a41b202a23a739f527ed11b56a90a0938d48b862343f39.jpg

    I’m looking forward to my prediction coming true that Kik Interactive Inc. will be the Next $100 Billion Company — just like my last such prediction in 2007 about Facebook which came true when they became a $100 Billion Company at the time of their IPO in 2012.

  • Michael Sidgmore

    Thanks Boris. Interesting post and agree that VC may have to recalibrate the way it evaluates investment opportunities and works with companies as a result. You mention that Version One, as a VC fund, invests into token funds (i.e. Polychain, MetaStable). How do you do this as a VC fund? Did you have to change your LPA? And how do you think about double layered fees (I assume Version One has to pay 2/20 fees to Polychain, MetaStable) from both the GP perspective and from the perspective of LPs in your fund?

  • bwertz

    I think investing in crypto through other funds is not a permanent strategy but rather a short-term work-around given that most VC funds are not able to invest in tokens & currencies under their current LPA’s – but I expect this to change for Version One for our next fund.

  • Michael Sidgmore

    Thanks Boris, appreciate the response. It’s interesting to think about whether or not VC fund structure will change as a result of token / cryptocurrency investments (and how their liquidity profiles may change corresponding VC fund structure and liquidity profiles).

  • Well written, though I’m not sure I agree with all this. I agree that blockchain is interesting and will likely have some effect on VC, but not sure it will really be as disruptive to the startup financing world as some think.

    Point by point:

    1. VCs have been thinking about and investing in infrastructure forever. Juniper Networks is one of hundreds or thousands of examples. Though I agree that blockchain/crypto is another interesting realm to consider re: supporting infra. It’s the place I think most VCs are looking re crypto investments.

    2. Private company stock isn’t illiquid because we don’t have the technical means to make it liquid. It’s illiquid because that’s how laws are written. We could easily create a liquid market for startup stocks with non crypto tech.

    VCs and founders also (sometimes) have incentive to keep their stock illiquid to preserve information asymmetry. I think it’s likely that tokens will get regulated as securities and fall into the same place. And even if they don’t, I’m not sure the bulk of startups / VCs would be interested in raising via tradable tokens. I could be wrong, but just my gut. I do like the idea of democratization of access to startup investing that ICOs brings — though I bet most investors will lose their shirts in the initial ICO hype that’s happening now and the trend will relax over time. I’m just not sure the underlying value or shareholder protection is sufficient in the majority of IPOs.

    3. Same as #2 but one level up. I’m not sure VCs want stakes in their funds to be liquid and tradable. Again, we already have the technical means to make this possible without crypto/tokens…. so why does this change the game? I do like democratization of access to LP investing, though securities law may put a damper on it.

    Having said that, perhaps I’m jaded and biased. Maybe a fund will go raise from the crowd and kill it and prove the model. But I see this as more of an avenue into venture for those who would otherwise not have access, rather than a force that will fundamentally change the structure of the bulk of mainstream venture investing. Though that does sound exactly like a thing that a person who’s about to get disrupted *would* say 😉

    Will be fun to see how this plays out. Hope you guys do great!

  • bwertz

    Great points, Mike – agree that there are some similarities between investing in infrastructure and investing in the blockchain but different value creation rules plus the fact that a decentralized platform is very different in terms of management / governance might be more fundamental changes than they look like on first glance – in any case, we will know more in the next 5-10 years 🙂

  • I really like that line of thinking. I like the question “If TechnologyX is going to live up to all it’s promises at the application layer, what will be the necessary building blocks to make that happen?”

    it’s hard for me to feel confident about making a venture (series a) bet in blockchain because a) I’m not smart enough about it — particularly I’m not yet confident I understand the underlying value / advantages of blockchain in the economy, and also don’t have a good bead on where issues like regulation are going … and b) the most interesting cos may just ICO anyway and I can’t / wouldnt do one of those so why spend too much time on it. I’m sure I’ll start to feel increased pressure to be smarter as the space matures and we start to see real, big, money-making companies with blockchain / crypto at their core.

  • Very controversial, but if true, it could be disruptive. Recent SEC push against this (along with the UK, Canada, and others) I’m doubtful if it gains momentum in the short-term. Met with a couple of thought-leaders in this space today, so I’m still forming my thoughts around this.

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