18
Liquid Venture
We all seem to enjoy the benefits of new technology – from mobile phones to health trackers, video games to social media, the list goes on and on. Many of these programs and products are so ubiquitous that we can't seem to live without them, but it's important to note that, at some point, every technology that you use now was just an idea in someone's head, brought to fruition – generally, via a young, underfunded startup. Enter venture capital. Very simply, venture capital is money directly invested into private companies with the belief that they will grow and, as such, the investment will yield a return. Technology startups always need capital, and technology investing via venture capital is the main way most technology startups get funded. It's also one of the ways that, for investors, money multiplies. Silicon Valley loves a “unicorn”: a company that grows to a billion‐dollar valuation. Unicorn hunting by placing direct investments into early‐stage startups or injecting capital into private companies as they grow has been a proven formula for decades. We've seen it with Amazon and Google, Twitter, and Facebook. We've romanticized these investments as seen in the series Super Pumped, which chronicles the rise of Uber. We've celebrated them and then lamented the rise and fall of entrepreneurs and companies like WeWork. We are entertained by the stories of moguls such as Bobby Axelrod on Billions. Let's face it – investment has become entertainment and we're enthralled with it. It's not always glamorous, however.
When we look at the success stories mentioned above, each of these companies had something in common: strong early investment and then continued investment by venture capital companies. That's the glamour group. Yet there is a harsh reality: for every success, there are far more failures. The Wall Street Journal has noted that three out of every four startups fail.1
In addition to this failure rate, it often takes 5 to 13 years for any venture investment to return capital. A very common metric for venture capital is the concept that for every 10 investments seven will fail, two will do okay, and one will win, with a win, in this case, defined as a return that's a multiple of the initial investment and provides enough profitable returns that it makes up for all the other investments. Of course, all investors are searching for the fabled unicorn, a private company with a value that exceeds $1 billion. Venture capital is rarefied air indeed, an environment inhabited by those with the wealth to withstand time and adversity in search of that legendary fabled creature. Importantly, venture capital is the way to get in early on a company and get an outsized return. If you want to invest in private tech, you do it through venture investing.
What if there was another way – a way to invest that was available to everyone and did not require millions of dollars or long‐term holding periods? You guessed it. This is now possible because of the blockchain breakthrough.
A Cautionary Tale
To fully frame this paradigm shift, we need to look at a bit of history. Let's get in the wayback machine and go back to the year 1998. The Internet was growing and so, too, was this concept of search engines. A savvy venture investor may have picked this up and decided to make an investment in the search engine sector, speculating that such companies would be a major force in the Internet world (yes, there was a time before we googled everything).
One of the frontrunners in this developing world of search engines was AltaVista. They controlled the market, were the envy of all, and seemed the apparent homerun play. AltaVista was as sure a thing as a thing could get. Realizing this, our intrepid venture capitalist could invest in AltaVista. In such case, our investor would be betting on the success of that company and, ultimately, time would tell (set the oven to “bake” for 5–13 years) whether it would turn into a success or a failure.
Suddenly, however, a newcomer, Google, shows up and causes a big splash in the search engine world. Our investor may see this and want to invest in Google as well. That's all well and good, as long as the investor has more capital to deploy, because the funds dedicated to AltaVista are locked up; they are not liquid or retrievable. In this case, an additional investment could be made in Google, but the original investment in AltaVista would have to remain. By 1999, AltaVista was valued at around $2.7 billion, and an initial public offering (IPO) was in the cards. By 2001, however, its IPO was canceled, staff were laid off, and investors lost their investment.
By the way, if you're under 30, you probably have no idea about this story or AltaVista, so you'll have to google it. By doing so, you have again proved our point. Google won, AltaVista lost, and their respective investors won or lost accordingly.
Crypto Assets Revolutionize Investing
You see, before crypto assets, this was it. The only way one could invest in a technology company was by directly investing into a technology company, which, as noted earlier, generally requires deep pockets, long holding periods, and a ridiculous risk tolerance. Imagine, however, taking the AltaVista investment and moving it to Google. That would be amazing.
We can do that now via crypto asset investing. We can purchase liquid tokens that fractionally represent a blockchain, with the operative word being liquid. Because of this, we can trade them on public exchanges. Said slightly differently, we can invest directly in technologies we believe in by purchasing tokens associated with the blockchain, but we aren't forced to hold these tokens forever. Notably, one is getting to invest early in the lifecycle of a project, something that could only be done before via direct investment.
This gets very interesting when looking at investing in sectors. If one has conviction in a theme, say, smart contract platforms (or, in our example way back when, search engines), then the theme drives the investment strategy. You don't need to pick the winner out of the gate because, as the players evolve, the investment (our purchase of a token) can be shifted to be in the best performers of the theme since the investment is liquid.
This is what we do in our own fund, by the way – we ensure that we have well‐chosen themes and that we're always in the best expression of that investment theme while also diversifying to minimize/manage risk.
A New Name, a New Game
We call this concept liquid venture and crypto assets, via the blockchain breakthrough, make it possible. It allows all the benefits of technology investments with many additional benefits. Tokens as digital representatives of blockchain offer wonderful liquidity. You can trade them directly or on an exchange. You can purchase tokens in large amounts or with fractions of a dollar. No longer are $1 million investments required – anyone can invest in a blockchain technology at virtually any dollar amount. In addition, it's (generally) easier for you to exit investments.
This liquidity is the difference maker. Imagine, for example, that instead of directly investing in AltaVista, one could purchase AltaVista Token. If AltaVista succeeded and gained more usage, we'd generally expect a properly set‐up token to appreciate, to grow in value. Note that we're overgeneralizing here, but let's run with it for the moment. If, conversely, confidence in the AltaVista investment was lost, AltaVista Token could be sold and that investment placed elsewhere. We think that this concept is grossly underappreciated and has the potential of changing venture investing for good.
Other Advantages
So far, we've seen some great advantages. Investments are not “stuck” either in product or timeline, and investments can be made in almost any amount. There is one more advantage worth mentioning, one that we didn't have back in the Internet Age. We've used the search engine analogy quite a bit so let's revisit it. Back in the day, one could not invest in the Internet. An investor could invest in a company building on Internet protocols, but not the protocol itself. In the case of the Internet, the protocol is the Hypertext Transfer Protocol (HTTP), which serves up web pages and allows web applications to talk to each other. Investing in HTTP was not possible then – protocols were given away for free and entrepreneurs built programs on top of them. You could speculate on which company would build the best application (Amazon or Pets.com), but you would not be able to benefit financially by investing in the HTTP protocol. Imagine, though, that you could have and that when the Internet was being built you invested $5,000 and, in return, every time a page was viewed, your investment returned to you one one‐millionth of one penny ($0.000001). In the early days, with little usage that might have seemed crazy. Today, with approximately five billion Internet users2 and each user viewing an average of 138 pages a day (note that this number is based on the best data we could find and is a little dated; the number may be significantly more than that), your investment would be returning (5,000,000,000 × 138 × $0.000001) = $690 per day. That's $251,850 per year. That's a pretty good ROI for a $5,000 investment. Unfortunately, we couldn't invest in protocols this way back in the day.
Now we can. In blockchain, you can invest directly in the foundational protocols that will build the next generation of technologies by owning their token. A token is a fractional representation of that blockchain. Take, for example, smart contract platforms. We don't know which one will be dominant over time, but we can invest in the platform's token, manage that investment via our concept of liquid venture, and then we don't care whether the platform is Amazon or Pets.com. If someone has built an application and uses the smart contract platform, that platform has greater demand and (in theory and with proper tokenomics) should appreciate over time. This is now possible and is a breakthrough for investors.
Risks Still Exist
Now, before everyone reading this runs off and starts buying crypto willy‐nilly (don't do that), let's discuss some of the downsides. Not every blockchain will succeed. Not every crypto asset is a good investment. In fact, of the universe of crypto assets, we would probably say that between scams and general failure rates, most aren't going to make it.
I'm not saying they are all pump‐and‐dump schemes, although there are plenty of those. Many more, however, will fall victim to the primary challenges of building any business. It's not as if because we have the blockchain breakthrough that the rules of building a successful business go out the window. Just as in the early days of the Internet, most companies fail, especially inside new technology paradigms. (Strangely, many people seem to forget this history.) In order to better understand, let's go back to our Internet example. The Internet has changed our lives; however, the number of companies that didn't make it is staggering. For every Amazon, there were countless copycats, like Buy.com, that most of those reading this will never have heard of. In addition, many entrepreneurs thought they could get rich because they had a great URL such as “Pets.com” but had no viable, differentiated business strategy. Companies like Pets.com, which was founded in 1998 and imploded in 2000, have become a cautionary tale. So, just because something sounds like a good idea doesn't mean it is. Even more so, many great ideas never get fulfilled due to competition, funding, poor implementation or execution, and so on. It's more than we'll go into here; however, note that we do have a guide for asset selection that we follow, discussed in Chapter 19.
Remember, we live in a volatile world. In the world of traditional venture, investors are not generally exposed to day‐to‐day or month‐to‐month volatility. Back to Uber, if the volatility of that company was actually charted, we propose that it would be far, far scarier than an Ethereum chart. Long‐term growth investing, betting on a bull, which is what venture investing is, keeps an eye on the long game and knows that success comes from proper entry and then hanging on.
Get Rich Slow
Liquid venture is a fantastic tool to have in one's investing toolbelt but following this liquid venture approach is not a get‐rich‐quick scheme. The liquid venture approach is the opposite of the “pick a winner” strategy. In our fund, for example, we are rarely searching to find something that's at pennies with the hope it becomes dollars, although every day we get asked about this coin or that token, many of which we've never heard of. This is not market timing, momentum investing, or gambling on the most talked‐about meme coin. Liquid venture strategies are not “one and done.”
Instead, we're looking for well‐thought‐out themes with well‐thought‐out blockchains that will be meaningful over time. Liquid venture allows one to make calculated investments and then move the investment if a better player shows up in the space. Investing of any kind requires researching and understanding the themes that are most likely to be foundational (such as smart contract platforms) and careful evaluation of the blockchains that have the best chances of delivering on that theme. Execution is an art and science in and of itself; this is a more conservative style of investing. It's time‐consuming. Over time, however, this concept of liquid venture allows an investor to greatly increase their chances of success while minimizing the risk of technology investing.
As Warren Buffett has famously stated, “I'd rather be certain of a good result than hopeful of a great one.” From our purview, we now get the best of both worlds, and “we are not uncertain” that liquid venture is a very good thing.