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.