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Sep 5, 2017
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Tokens at the Gate: What’s Coming After the ICOs.

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By Noah Jessop

Crypto markets are frothy. Earlier this month, CNBC reported that crypto ICOs (“initial coin offerings” for the uninitiated) have raised more than $1.2B for startups, surpassing venture capital activity for 2017 — and that number is already out of date by at least $500M.

Let’s put aside the hype, the overnight millionaires, and dazzling numbers for a second. There’s a few very important (and troubling things) happening here.

Quietly, these are the kinds of conversations that are happening in Silicon Valley. (Can’t speak for other hubs of crypto activity.)

#1: Venture Capital is facing an existential threat.

From a cushy office (probably on Sand Hill, with fresh flowers in the lobby and a stack of never-touched newspapers) with an endless stream of plausible-looking companies coming in, it’s hard to feel the alarm or urgency. This low-slung office park has captured outsized returns though wave after wave of technology. Why should anything be different now?

Aside from the implications of anonymous money and incredible technological possibilities, crypto has signaled something very important. The market has an insatiable hunger for seamless access to new projects and uncapped upside returns. The ICO craze is the loudest signal imaginable to show this demand.

Venture Capital has historically had very tight control of access to resources — capital and information. When it works, it’s a great partnership — for the entrepreneurs, the VCs, and the VC’s backers.

But when anyone can have access to 10X upside (with liquidity the whole way up) why doesn’t everyone have 1–2% of their investible portfolio in crypto? (As I’ve argued before.) Institutions (endowments, pension funds, etc.) think this way about their VC portfolio — but most of us don’t have enough capital AND the influence to become an investor in the best (and thus chronically oversubscribed) funds.

Crypto offers a way.

[For more factors and background, read Zao Yang’s excellent short form piece, “Why does the ICO opportunity exist at all”]

Are there hurdles with the SEC rulings? Absolutely. Are there bad players, pump-and-dump schemes, and projects that will (often unwittingly) only end in giant craters? Of course. Is the current ICO market sustainable? There has to be a correction of sorts. Whether sharp and sudden like the .com boom or gradual regulation (and exchange delistings of tokens that would follow), the current ICO market can’t last in current form.

But the cat is out of the proverbial bag: access and liquidity, afforded by decentralized technologies, is what could be so disruptive to Sand Hill.

Times change fast around here.

#2: Unlimited resources can bring serious challenges. (Opportunity ≠ Focus)

Fred Wilson wrote a timely piece last week about resource constraints, with all the appropriate caveats. In his words directly:

Resources are never the limiting factor to doing great things.

The limiting factors are;

1. having great management that can make the right decisions and drive execution

2. knowing what to do and what not to do

3. playing your game and not someone else’s.”

He goes on to note that resources tend to make #2 and #3 much harder.

When the war chest is full and the stakes are high, I dare you to find a CEO that won’t look around at what other successful companies are doing. Unfortunately, total funds raised and employee headcount are readily available measuring sticks. One of the more toxic elements of Valley culture is social filtering that happens blatantly in casual gatherings. “What do you do in the city again?” “Oh, didn’t realize you were a founder too…how many people is your team again?”

In product development, the adage goes “don’t copy your competitors; you’ll only copy the product, not the why.

The “why” for your business is why you started it in the first place — before the milestones and success that got you lots of capital. Guard your “why” with everything you have.

Removal of resource constraints does not only make companies unfocused. It changes incentives fundamentally. As Warren Buffet’s business partner Charlie Munger notes:

Never, ever, think about something else when you should be thinking about the power of incentives.

When you feel unresourced, your incentive is to move quickly before the opportunity ahead of you is taken by someone better funded.

When you convince good people to leave their promising career and take a 50% pay cut, your incentive is to not fail their trust.

When the cash balance is running low your incentive is to find a way. Take the first flight out to close a deal. Ask for a higher price from an early customer.

It’s easier to say no and make hard choices when you see The Wall coming fast.

#3: Crypto’s “Day 1”: a lot of work and building remains to be ready for “Real Work”

It’s. Still. Really. Early.

The residue of celebration and champagne lingers, the latter still cloying to the desks and tables. No one has turned on the lights yet. The morning slowly illuminates the office, a cavernous space with only a handful of desk.

This is the day after the ICO. The day after the ensuing celebration (and long nights sleep). The new funds (close to $100M USD) wait silently, waiting for whoever has the private key.

Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1” — Jeff Bezos

Is this Day 2?

Which of the institutions will do the work to stay on Day 1? How will the incentives be set up?

Or will many of the perpetrators take their winnings, leaving behind a complicated incentive structure drawing economically-lesser talent to continue the building they started?

Here in the valley, a number of insiders are less interested in the flash and hype reaping a bounty from the ICO crop. Rather, quiet conversations are underway about what’s next. About what needs to be done to keep crypto momentum in Day 1.

This development can take a number of forms:

  • Many supporting pieces of infrastructure will need to be built (just as the internet has many underlying protocols, the decentralized trust web will need its own)
  • Some of the best builders and thinkers have yet to get the crypto “Red Pill”
  • Core protocol development itself is still early and nascent
  • Current blockchains have problems with scale

To anyone who has spent a bunch of time thinking through some of the implications of crypto, one thing is very clear: we still can’t see some of the most profound uses of this technology.

#4: How much will change about about the hard work of building and selling?

I tend to focus on what the next platforms are… [T]he policies — and the shape of these platform — matters a lot more in the overall course of humanity.” — Reid Hoffman

We have a potentially explosive combination: incredible amounts of capital seeking return, very early fragile platforms, and a little old school know-how around company building.

Many crypto projects — including very important ones — may look more like Linux and Wikipedia than a traditional startup.

This will create opportunities for the next gen “Red Hat.” Startups that tackle problems that have a larger surface area with the real world — a company may still be the best vehicle to unlock value everyone (developers, customers and the company itself) at large. There’s still a lot to build.

ICOs replace the financial aspects If capital is no longer much of a constraint, the other hallmarks of good investors will be very much in demand. Patient stakeholders. Connections to difficult to reach companies or people. Advice that helps to avoid common pitfalls.

Even if the protocols decentralize many things (including collaboration) — centralization will just form at another point in the stack. As an example, how many pitches do you think Coinbase must be receiving to list the thousands of emerging tokens?

(And Coinbase insiders are already calling for more mature, more traditional companies in the crypto space.)

Patient risk capital. Company building. Getting teams right. These aren’t going to change overnight — If it were that easy, wouldn’t we have many different versions of Silicon Valley already?

So to the new challengers, the hungry, the builders — take your marks. The race to build the next generation of the valley is just beginning.

Bitcoin advocate, entrepreneur, author. Working on cryptocurrencies

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Bitcoin advocate, entrepreneur, author. Working on cryptocurrencies