

by Noah Jessop
Crypto markets are frothy. Earlier this month, CNBC reported that crypto ICOs (βinitial coin offeringsβ for the uninitiated) have raised more than $1.2B for startups, surpassing venture capital activity for 2017βββand that number is already out of date by at least $500M.
Letβs put aside the hype, the overnight millionaires, and dazzling numbers for a second. Thereβs a few very important (and troubling things) happening here.
Quietly, these are the kinds of conversations that are happening in Silicon Valley. (Canβt speak for other hubs of crypto activity.)
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, itβs 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 resourcesβββcapital and information. When it works, itβs a great partnershipβββfor the entrepreneurs, the VCs, and the VCβs backers.
But when anyone can have access to 10X upside (with liquidity the whole way up) why doesnβt everyone have 1β2% of their investible portfolio in crypto? (As Iβve argued before.) Institutions (endowments, pension funds, etc.) think this way about their VC portfolioβββbut most of us donβt 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 Yangβs excellent short form piece, βWhy does the ICO opportunity exist at allβ]
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 theΒ .com boom or gradual regulation (and exchange delistings of tokens that would follow), the current ICO market canβt 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.
Fred Wilson wrote a timely piece last week about resource constraints, with all the appropriate caveats. In his words directly:
βResources 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 elseβs.β
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 wonβt 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. βWhat do you do in the city again?β βOh, didnβt realize you were a founder tooβ¦how many people is your team again?β
In product development, the adage goes βdonβt copy your competitors; youβll only copy the product, not the why.β
The βwhyβ for your business is why you started it in the first placeβββbefore the milestones and success that got you lots of capital. Guard your βwhyβ with everything you have.
Removal of resource constraints does not only make companies unfocused. It changes incentives fundamentally. As Warren Buffetβs business partner Charlie Munger notes:
βNever, ever, think about something else when you should be thinking about the power of incentives.β
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.
Itβs easier to say no and make hard choices when you see The Wall coming fast.
Itβs. 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.
βDay 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1ββββJeff 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 whatβs next. About what needs to be done to keep crypto momentum in Day 1.
This development can take a number of forms:
To anyone who has spent a bunch of time thinking through some of the implications of crypto, one thing is very clear: we still canβt see some of the most profound uses of this technology.
βI tend to focus on what the next platforms areβ¦ [T]he policiesβββand the shape of these platformβββmatters a lot more in the overall course of humanity.ββββReid 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 projectsβββincluding very important onesβββmay look more like Linux and Wikipedia than a traditional startup.
This will create opportunities for the next gen βRed Hat.β Startups that tackle problems that have a larger surface area with the real worldβββa company may still be the best vehicle to unlock value everyone (developers, customers and the company itself) at large. Thereβs 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)βββcentralization 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 arenβt going to change overnightβββIf it were that easy, wouldnβt we have many different versions of Silicon Valley already?
So to the new challengers, the hungry, the buildersβββtake your marks. The race to build the next generation of the valley is just beginning.
If you got at least 0.00000001 Bitcoin worth of value from this post, or enjoyed reading this far, go ahead and βClapβ below. And follow me @njess for future writings.
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