Investing in Blockchain Technology Startups

Outlook on the blockchain industry, opportunities, and investment potential.

Obsessing over the future is one of the more exciting parts of working in VC. Over the years, it has become clear that understanding, predicting, and investing in waves of consumer behavior is what sets the men from the boys.

With that in mind, I tend to view VC investments through the lens of the corporate mantra “innovate or die”. When looking at a startup I ask, “is this something that will out-innovate those that control the narrative?” Or, “is this something that most people are unaware of because of disbelief, laziness, or lack of desire to change?” Essentially, this is the Airbnb thesis. When Airbnb started, they disrupted social norms while changing the narrative of the travel industry and sharing economy. Using history as an indicator for the future success, blockchain is another industry that embodies similar basic ingredients.

What is Blockchain?

Blockchain is a technology platform whose fundamental principles bring the democratic value system to the Internet and changes the way users interact with the digital world. Blockchain as an industry allows for the evolution of commerce, community, communication, and centralized corporations.

Commerce

The world of commerce took a major step forward in the 1990s with the digital banking revolution, allowing users to perform banking transactions over the Internet. As banks and brokerages offered more services online, it became possible to trade stocks, view market data, and transfer money throughout the world, all in (semi) real time. But as far as digital commerce has come within the past decade, the industry is still known for its archaic practices in the age of technology and innovation.

As blockchain enters the scene, commerce will take a major leap forward, as the technology significantly reduces wait time and fees associated with common banking transactions. We’ll begin to see applications built on blockchain that program smart contracts to automate digital transactions. For example, imagine buying stocks with smart contracts built in that trigger buy/sell orders based on the recent news, earnings, market sentiment, or any other measurable metric that comes to mind. Similarly, imagine a VC fund that performs investments run on smart contracts. As the startup hits specific milestones, more capital gets deployed into the company. If the company doesn’t hit any milestones within a specific timeframe, the contract expires and the capital is sent back to the fund’s account.

A handful of exciting blockchain startups in this space include Coinbase (1st blockchain unicorn), Humaniq (delivering financial solutions to the ~4 billion unbanked/underbanked globally), Etherisc (decentralized insurance & token model), and crypto hedge funds like MetaStable.

Creation

Another major innovation for blockchain is the creation of products, services, digital content and more. Whenever you have a service that connects the supply and demand, the provider takes a cut of action, which can be disrupted by the blockchain. One way in particular is through the token economy. Tokenizing products will be a major game changer. Marketplaces, retail chains, etc. will create tokens for consumers to purchase products and invest in the business’ future economy.

The token economy opens doors for businesses to monetize their very existence. The token revolution can be seen as a major evolution of gift cards. Instead of pre-purchasing the right to buy a product for a set monetary value, tokens allow users to invest in their own personal economy. For example, a blue polo shirt at Gap costs $12.99. I can go to my local Gap Store a purchase a gift card for that amount and then anyone can exchange the value of that card for the blue polo shirt. The token economy allows the price of the value of the token (or store card credit value) to fluctuate depending on the supply and demand of the token. This essentially allows me to invest in Gap and their specific demand economy, while having the ability to redeem the token for merchandise.

While we’re years away from this, it will completely change the way we do business and invest. The token economy lets anyone invest in their future, without maintaining an equity stake or voting rights, and ride out the game in hopes of appreciation of the company’s dedicated currency. We’ll see hundreds of thousands of cryptocurrencies surface in the next five years making this an exciting investment opportunity for the cryptocurrency marketplace and turnkey solutions.

A few exciting blockchain startups in this space include Ethlance (Fiverr on smart contracts), TokenHub (turnkey token solution), Filecoin (incentive based storage network and cryptocurrency), and Golem (decentralized sharing economy of computing power).

Community

The next pillar of blockchain innovation is community. The way humans interact is based on hundreds of years of practice. For some reason, our brains are wired to trust brands. We trust Google with our data, PayPal with our money, and WebMD with our wellbeing. The whole concept of trust will be flipped with blockchain. Blockchain will pave the way for a new social norm where you can trust in a network of unseen faces and trust in the math that powers the network. This drips into many industries such as news, media, social networks, the P2P economy, voting, and more. To give an example: #fakenews will be a problem of the past. Media networks will run on the community’s input and verification. The more users who verify a story the greater visibility it receives and thus fake news is silenced. I’m excited for companies that will use the power of the crowd for market prediction. While the Power of the Crowd has been widely researched, we’re on the cusp of seeing the true wisdom of the crowd through crowdsourcing data, information, and reliability.

A few exciting blockchain startups in this space include Basic Attention Token (blockchain rewarded advertising), Civil (rewiring journalism), and Augur (market prediction).

Centralized Enterprise Applications

By far the most exciting piece of the blockchain puzzle is how centralized corporations will respond. The problem with the blockchain community today is that most people obsess over the fact that it’s decentralized, meaning taking power from the hands of the few to the many. While I’m all for that, we can’t honestly believe that blockchain will scale to adoption without the backing, blessing, and adoption of our beloved corporations. Google, Apple, Facebook, Twitter, PayPal, eBay, Airbnb, Uber, Dropbox, and the rest of them will all race towards understanding how blockchain can automate their business functions in an encrypted, transparent way.

A few exciting blockchain startups in this space include Chain (enterprise infrastructure to build better financial services), Ripple (enterprise global payments), and Hashed Health (healthcare on blockchain).

Taken together, this is how I see blockchain evolving. Of course, we are still years away from mass adoption and these concepts are subject to interpretation, which is what makes this whole thing so exciting to watch and invest in.

If you’re building a blockchain startup, get in touch.

Hi! I’m Jordan, and I work for a global VC based in Israel. There’s a lot happening in the VC/startup scene and I figured I’d post my observations here. All opinions are my own. Feel free to follow and get in touch on Twitter @jordanodinsky.