Thoughts on Hexayurt capital

Vinay Gupta, one of the co-founders of Ethereum and resilience Guru, just launched a new VC funds, and I wanted to share my thoughts about this venture.

First, let me introduce myself. I trained at the dev boot camp Simplon, a 6-month training program focused on Ruby on Rails, based in Paris region.

There, I’ve been familiarized with web development and inbound marketing by working on projects. My professional background includes working as a traffic manager/Entrepreneurs’ advisor at the French investment firm, The Family, and a consultant for French incubator, Numa. I worked for the French company, doing a copy-cat version of Silicon Valley venture capital.

I’m a blockchain enthusiast, looking to forward thinking usage of this technology with concept like the internet of agreement

So, let me present to you Hexayurt capital which is an ambitious fund which will be specialized in investing in project specialized in cross over technology.

I will develop in this essay my view on funding the future by sharing my thoughts on Hexayurt Capital ! Mr Gupta published a thesis for his fund that is for me a blueprint on what venture capital is really about. I’ve chosen several quotation so we can start by debunking a few myths about what startup are about and VC therefore.

So, I want to start by thinking about what a startup actually is. Right now most of the perception is that startups are companies, and you’re putting money and time and energy into the company to generate a set of technologies which are used by a set of customers which generate a bunch of cash flow and the cash flow eventually turns into money and capital and all the rest of that. I don’t think that’s remotely what startups actually are. I think that startups are actually factories for producing financial instruments.

A good example of this is medical technology. If you’re going to take a cancer drug to market, the final stage trial costs something along the lines of 700 million dollars and that’s a fixed regulatory cost; there’s no way around that, you have to do huge clinical trials. Financing 700 million dollars has nothing to do with anything that resembles a startup; this requires enormous industrial muscle from vast entities that are going to put in huge amounts of capital, and these are like “the GDP of a small country” kind of numbers.

So, in the drug world you start with an idea, you do a bunch of research, you get some kind of promising leads, you then need 10 times the money or 100 times the money to turn those promising leads into an actual thesis that you want to test, maybe you do some early animal models. Then you have to do another stage, another stage, another stage, and the capital required in each stage is 10–20 times the capital requirement of the stage before it; you’re scaling by orders of magnitude, and therefore completely different kinds of entities are required to absorb those risks. It’s well understood by people in the drug development world that what you’re selling on is a set of potential, wrapped up as essentially a financial instrument which goes through four, five, six completely different kinds of hands before it reaches the general market and the kind of billion-dollar final stage investment. Then it comes on to the market, then whoever is owning the thing at the end of the day has an enormous license to print money.

This is an excellent view on what startups are about. The myth about a startup being company is hard to debunk, because this is a semantic matter. Most people in and outside the ecosystem take the word in the literal sense, literally to “start up a company”. But what Gupta is developing in his thesis is that startups are financial instruments to align the need of capitalistic resources to match their need in research.

If you are doing it the right way — you are trying to explore several paths toward the future:

A- path one — stage 1

B- path two — stage 1

C- path three — stage 1

And whatever paths you are exploring, you are funding research to get to the next stage. Startups are financial tools to finance the research needed to explore those scenarios about the future. VCs are taking other people’s money to invest into research, who will then make the company they are investing in a license to print money. But unlike in the pharmaceutical business, you don’t need 10 times the money or 100 times the money. The scale is much smaller.

their entrepreneurs will get their companies from the initial Y Combinator funding to another round of funding and another round after that, they are not investing in enough crazy stuff because of the fear that they’ll be seen as basically just throwing money up a wall, and as a result they’re leaving an enormous amount of money on the table because they’re investing at too low a level of risk simply for social reasons.

Y Combinators are investing too small for social reasons. So, imagine what kind of conservative limitations you can experience when 1 out of 2 French entrepreneurs are fresh out of business school and when VCs are not geeks who made tons of money with technology but people with a background in finance. They understand money but not technology.

This doesn’t occur as a problem for today’s innovations actors, since they are just adding a computer to their old ways, then they use engineers like factory workers, just in their company to code their ideas. These days, you can hear that developers are the new blue-collar workers. From the investors’ perspective; it really makes no difference for the people putting the money in whether they’re getting 10-to-1 returns or zero returns, because the only thing that makes it worth doing are the 1,000-to-1 returns. But interest is not aligned since the entrepreneur is like a one-shot rocket, like Gupta put it:

The other thing that I want to add about this is that as we’ve seen in the Ethereum ecosystem, going directly to what we call the ICOs, initial crypto offerings, is a way that some classes of companies can raise enormous amounts of money extremely quickly, the sort of “five million dollars on the weekend” levels of funding. There’s also a whole bunch of activity around crowdfunding which I think is worth noting, this notion that you can build things along so far and then you get to a position where you could go down the ICO path, you could go down the crowdfund path, you could take more conventional capital.This is an interesting development, in the crypto ecosystem you can get with initial crypto offerings the fund you need to kick start your research “the sort of “five million dollars on the weekend” levels of funding.

Like we’ve seen with Bitcoins and lately with Ether, selling coins is helping the funding of research on how to improve the blockchain. It’s a self-funding virtuous circle. And at the time I’m writing this article, Pantera Capital is raising $100 Million in Investment for ICO Hedge Fund. This is the biggest capital allowed to ICO ever seen! Pantera Capital got the college dropout Joey Krug on board. Founder of Augur an open-source, decentralized, peer-to-peer prediction market platform built on Ethereum.

So, what I want to talk about next is what it would look like to build something which is explicitly based on the idea that we’re going after the 1,000-to-1 shots in a manner which is very tight, clear and disciplined about what that really means in terms of the social dynamics of the enterprise which is taking those risks, and in terms of the risk and reward landscape that you need for entrepreneurs to be willing to strap themselves to that kind of rocket, rather than to buy out at the SME stage when they’ve got a couple of million dollars of net worth and 30 employees, rather than continuing to double down on their risk until they get to the level where it actually makes a difference to the investors’ bottom lines.

So, you can see that even Silicon Valley’s actors are conservatives about the direction of their company. Most entrepreneurs want to make an exit (selling their company) at the SME stage, rather than doubling down on their risk. Why? This is something Vinay Gupta highlights several times.

Entrepreneurs would rather make an exit so they don’t end up with nothing. Why is it so? Because the startup ecosystem in the valley and everywhere else is trying to copy-cat the formula with 10 times less the capital and the competency. Consider that entrepreneurs are disposable.

This is why the deals they are signing are so unaligned with their interests. And I agree with him and Paul Graham is this matter.

Vinay put it this way:

It’s always possible to find more money in an ecosystem where the world’s net worth is something like 30 quadrillion dollars. There is an astonishing amount of wealth on the planet, and actually most of the companies that we’re talking about cost the same to run for a year as a typical house costs to buy in some not particularly sexy nation — you go to a second city, these are the kind of prices for a year of operation. So it’s not that there isn’t a lot of money in the ecosystem.

I disagree with Gupta on this one, not on the figures, but how they are allocated. This is not a secret for anyone.

The world’s super wealthy are sitting on a pile of cash. For people to enjoy this privilege, you must have blatant inequality and literally families sleeping in the street, while others enjoy “la dolce vita”.

This is part of our daily life in the west. What Gupta forgot to say is that the people stacking tons of money are doing so by doing literally nothing and what could motivate them to do otherwise?

As Steven Shapiro put it in “No Speed Limit: Three Essays on Accelerationism”

The dominating influence of financial institutions, which facilitate transfers of wealth from everybody else to the already extremely wealthy (the “One Percent”or even the top one hundredth of one percent). The privatization and commodification of what used to be common or public goods (resources like water and green space, as well as public services like education, communication, sewage and garbage disposal, and transportation). The extraction, by banks and other large corporations, of a surplus from all social activities: not only from production (as in the classical Marxist model of capitalism) but from circulation and consumption as well. Capital accumulation proceeds not only by direct exploitation but also by rent-seeking, by debt collection, and by outright expropriation (“primitive accumulation”). The subjection of all aspects of life to the so-called discipline of the market. This is equivalent, in more traditional Marxist terms, to the “real subsumption”by capital of all aspects of life: leisure as well as labor. Even our sleep is now organized in accordance with the imperatives of production and capital accumulation.

With this fact in mind, we can doubt: “It’s always possible to find more money in an ecosystem where the world’s net worth is something like 30 quadrillion dollars,” at least for risky things as funding forward thinking organization.

There is a feeling that there’s the potential for crypto to produce such enormous global impacts that it’s more like investing in early-stage governments than it is like investing in companies, and I think that’s true.

I agree and this is what makes crypto interesting. We are talking about total decentralization, with no government intermission and smart contracts you can trust — because everything is signed; there is no need to trust — Every computation executed on the blockchain is by a “signed program.” As all code on the blockchain, the transaction scripts are deployed to the blockchains, and as a result, the chain of all these transactions leads to a current global state that all ethereum clients agree upon to be The Truth, because they all saw the signatures of every element involved- as Henning Diedrich put it —

This is, for me, the end of the lawyer as we knew it. This will not only disrupt the financial system, but also law offices all around the world! If it doesn’t mean the end of the profession period.

And with a few smart contracts linked, you can even create decentralized autonomous organization aka DAO.

There’s a need for entities in the crypto ecosystem that have a full set of business and technical expertise to wrap themselves around the problem and understand whether something has the potential to be a “unicorn” — or I think it would be better to call them dragons in the crypto space — or whether it’s basically just a bad idea that will scale so far and then get clobbered to death by regulators. A lot of them, for example gambling games are the kinds of things where you think, “Wow, that could really work!” until you think about how hard the gambling regulation is to work with, and then you think, “Actually these people can’t do that.”

Now that we’ve got this clear model of phases going from irrational dreams about possible futures, through to the hardcore regulatory grind of bolting these things directly into the existing superstructure, I want to talk a bit about alignment of interests between different players inside of the space of making a transition like that possible. The folks that come in early to these games are by definition somewhat crazy; you have to be somewhat crazy to believe that an idea like this is going to go all the way, but if you don’t have that kind of crazy you’re also not going to dedicate your life to doing it. So finding sane, reasonable, rational players that are willing to assume those kind of risks right now is very difficult, and part of that is because the basic process of venture capital involves throwing away the rocket at the end of the process.

So, we have an instrument for funding innovation, which is dysfunctional, because it doesn’t have the means to support the innovation. By means, I’m talking about the high tolerance to risk needed to embrace cutting edge technology!

The process should be for this venture to get back to what a VC was before financial & business bros took over. People with technical knowledge with a high tolerance to risk.

So let’s take a look back at the core of what the office policy been in startups.

You have this clumsy way of trying to “improve the quality of workplace.” They think that by adding a ping pong table and setting up a corner to rest, in a cluttered noisy open space, which is lowering the productivity of developers by the way — they are improving it — This is for the employees’ part.

But on other hand, you have VCs who have been working in really conservative and dysfunctional work places, like law offices, who think the better way to get the best productivity out of entrepreneurs is to squeeze them like lemons until they are dry — this is the entrepreneurs’ part.

Because this how they learned to do it, and it might work in a law office, where people tolerate horrible work conditions, hoping to get promoted as partner, but it doesn’t translate well in the startup environment. No one will be promoted as a partner of the company because they basically almost killed themselves by working as it’s done in law offices.

They will just get a tap on the back and told they fit in the company culture. You have the entrepreneurs getting pressured by investors; this pressure is transmitted to his employees. They are stressed out; some even burn out. This explains the infernal turnover in startups. Gupta put it this way:

VC as it currently stands is a bit like the space industry pre Elon Musk: the rocket is assumed to be disposable, it doesn’t really get reused, entrepreneurs get strapped on to load and fire themselves into space, and if it works, they’re sitting there on the space station, in their Elysium having quite a good time, and if it doesn’t work they fall back to Earth, crash hard emotionally, take a year to wander around India with a backpack, living on rice and beans, and eventually reinvent themselves as an engineer in somebody else’s company with their dreams smashed around their ears.

And

The first thing is I think that it’s important that we think of entrepreneurs as being a scarce resource rather than an abundant one, and we think about money as being a relatively abundant resource rather than a scarce one. It’s always possible to find more money in an ecosystem where the world’s net worth is something like 30 quadrillion dollars

The first insight that I really had about this was that pulling entrepreneurs out of companies before they’re emotionally destroyed, letting them rest up and then refuelling them to do another enterprise is probably a much saner way of approaching this than creating the entrepreneur as being a disposable one-shot rocket.

Again: The Entrepreneur > Capital

I can expand on this idea, because it reminds me of a side project of mine, called Countryhou.se, A house in the middle of the countryside. Trees, grass, cows. Inside the house is a table by the fire, where people are typing on laptops. One guy is brewing coffee, staring out the window into the park. Inspiration: la villa Lena in Tuscany, but this project was a laidback version of a Hacker Hotel, where you can accelerate on whatever you are working on, then go somewhere to rest.

I’m thinking you can create an infrastructure, which is not an accelerator or an incubator, with a laidback and Zen approach and a focus on design and Feng shui to help entrepreneurs rest and from there, they can meet new people with whom they want to work and go to another place, but not those crowded co-working spaces with no natural light and 10 people sharing a table.

Somewhere in a second-tier city in the west, like a city in the east of Germany, where they will get plenty of room to work in comfort! This may be the structure that could help Hexayurt Capital go full circle on their operation.

The first insight that I really had about this was that pulling entrepreneurs out of companies before they’re emotionally destroyed, letting them rest up and then refuelling them to do another enterprise is probably a much saner way of approaching this than creating the entrepreneur as being a disposable one-shot rocket. I think that we all know from dialogues that we’ve had around founder’s depression how bad the problem is, and that problem is not inherent to the nature of being an entrepreneur; that’s coming out of a combination of Silicon Valley machismo, and investors expecting to drive people until they drop, because they think that the last 2% of the effort in the tank is absolutely likely to make the company succeed. This is exactly the same conceptual error that we get in end-of-life care costs, where we wind up spending something like 40% of the medical budget in the last two months of life for very old people that have zero quality of life and are often unconscious for the entire period.

So, if you think about this as figuring out when to take people off the respirator, if you do it early enough you save the fundamental assets of the company, which are the people’s willingness to work. If we get into a position where we all kind of know that an idea is not going to go anywhere — we have lost the shot of being a unicorn, we’re negotiating for SME, maybe the SME model isn’t useful and we’re just going to crash it — at that point the obvious plan is to take the team, soft land the rocket on its tail, send them somewhere warm and sunny for a month to basically eat vegetarian food, do some yoga and go swimming in the sea, and then come back and see whether anybody’s got an idea of something else they want to do or whether the team wants to disband.

I don’t really understand which kind of structure will support this long-term view in an ecosystem where short-term view has been dominating for ages. It is no secret that our economy must get out of this quarterly way of thinking, so this sounds promising!

You now have cutting edge technologies, like blockchains, that are off radar for the people supposed to fund it by matching old money funds and kids with a crazy vision of the future. You now have nonsense getting funded with a short-term goal to make profits and cutting-edge technology raising funds with this system called ICO. By the time VC gets what is happening in the cryptocurrency, will they still be relevant ? Or they will be replaced entirely by ICOs and new instruments to fund the future? We will see.

You can read more about Hexayurt’s thesis here. I’m interested in knowing your thoughts on the future of funding cutting edge technology. Follow me on twitter to join the conservation on the future of blockchain @JHKabuiku If you are hiring and are in the cryptocurrency field, you can contact me on my linkedIn.