“Wait a minute… Make up your mind. This Snow Crash thing—is it a virus, a drug, or a religion?”
Juanita shrugs. “What’s the difference?”
- Snow Crash
Cryptocurrencies will create a fifth protocol layer powering the next generation of the Internet.
Humans don’t *need* math-based cryptocurrencies when dealing with other humans. We walk slowly, talk slowly, and buy big things. Credit cards, cash, wires, checks – the world seems fine.
Machines, on the other hand, are far chattier and quicker to exchange information. The Four Layers of the Internet Protocol Suite are constantly communicating. The Link Layer puts packets on a wire. The Internet Layer routes them across networks. The Transport Layer persists communication across a given conversation. And the Application Layer delivers entire documents and applications.
This chatty, anonymous network treats resources as “too cheap to meter.” It’s a giant grid that transfers data but doesn’t transfer value. DDoS attacks, email spam, and flooded VPNs result. Names and identities are controlled by overlords – ICANN, DNS Servers, Facebook, Twitter, and Certificate “Authorities.”
Where’s the protocol layer for exchanging value, not just data? Where’s the distributed, anonymous, permission-less system for chatty machines to allocate their scarce resources? Where is the “virtual money” to create this “virtual economy?”
Cryptocurrencies like Bitcoin are already trustless – any machine can accept it from any other, securely. They are (nearly) free. They are global – no central bank required, and any machine can speak the language. And they’re one to two steps from being quick, anonymous, and capable of authentication.
Suppose we had a QuickCoin, which cleared transactions nearly instantly, anonymously, and for infinitesimal mining fees. It could use the Bitcoin blockchain for security or for easy trading in and out. SMTP would demand QuickCoin to weed out spam. Routers would exchange QuickCoin to shut down DDoS attacks. Tor Gateways would demand Quickcoin to anonymously route traffic. Machines would bypass centralized DNS and OAuth servers, using Coins to establish ownership.
Why stop at one Coin? Let’s posit a dozen new Appcoins. Using application-specific coins rewards the open-source developers with a pre-mined quantity. A TorCoin can be paid to its developers and gateways and by Tor users, achieving consensus via proof-of-bandwidth. We can allocate any scarce network resource this way – i.e., BoxCoin for Storage, CacheCoin for Caching, etc.
Lets move on to other networks. Can a completely distributed grid of small generators trade power with each other, using a decentralized and trustless cryptocurrency? Can a traffic jam of self-driving cars clear itself as the computerized vehicles bid for right of way? Can a mass of people crossing a street take priority over a single car waiting
Bitcoin is not just a protocol or money, it’s a new business model for Open Source Software. Prior to Bitcoin, you had to raise money, write software, distribute your product, build a business model, and work towards liquidity. Angels, VCs, salespeople and bankers guided you the entire way, through a maze of tolls and controls.
The Bitcoin model for crowdfunding dispenses with everything except the software:
- Write software to power a completely distributed network in which any node can participate anonymously.
- Allocate scarce resources in the network using a scarce token – an “Appcoin”. Users need this Appcoin to use the network. Owners of scarce resources get paid in Appcoins.
- Pre-mine or early-mine Appcoins and keep some non-threatening amount. These are shares of your company, equity that will appreciate in value if the network is adopted.
- Give network operators the ability to collect new Appcoins in proportion to their contribution. Route a small fraction of each transaction output to the developer foundation (Mastercoin does this). These revenues are used to pay for operations, and bounties for ongoing development.
- As network usage increases, so does equity value and revenue.
- Anyone can buy Appcoins, anywhere, anytime, anonymously. Ship your code, ring the IPO bell.
This is true crowdfunding – get funded by your users in proportion to their usage. Reward early adopters, network operators, and developers with upside.
In economics, the artificially scarce token used to allocate scarce resources is called “money.” So Bitcoin is crowdfunded OSS to run an Economic network. Now, a new generation of Appcoins can be created as open source software, crowdfunded into existence, and go public on day one. They can run networks where Bitcoin may not work, or where separate funding and compensation is needed.
The Tor network is slow because it relies on volunteers to relay traffic. Anytime we see a line, the product in question is underpriced. Let’s crowdfund a Torcoin – users of relays will pay in Torcoins and operators of relays will get paid in TorCoins. Founding developers collect equity when TorCoins are first mined and sold. Non-founding developers and network operators are paid revenues from newly mined coins and transaction fees.
Can we just use Bitcoin instead of Torcoin? Isn’t money supposed to be fungible to all use cases? Perhaps not – Bitcoin’s transaction speed is too slow for a dynamic network allocating bandwidth – 10 to 60 minutes is far too long to negotiate with a relay. And payments have to be anonymous. So a fast-clearing (Fastcoin can clear a block in 12 seconds), fully anonymous (likeZerocoin) variant is needed.
What else can we allocate in a network? NameCoin is already working on Distributed DNS. Can we build
There is an opportunity for a new VC Firm to brand itself. Recent brands in Venture Capital arose from transparency and founder-friendliness. YCombinator gives new, young, technical talent an entry into Silicon Valley. 500 Startups does it globally. Fred Wilson blogs the business. Marc Andreessen and Ben Horowitz back Founders to be Public Company CEOs. Ron Conway tirelessly connects his investments to his huge personal network. AngelList gives away investor and talent introductions for free. Founders Fund explicitly cashes out Founders. First Round Capital builds and operates an internal platform. Brad Feld, Mark Suster, Floodgate, Felicis, Freestyle, Softech, Harrison Metal, Baseline all have transparent, founder-friendly philosophies.
That’s not how most VCs work. Imagine if a young entrepreneur were to walk into a VC firm and say:
"We help our customers but don’t tell them exactly how. Our core product is a commodity, yet we don’t disclose pricing. Even when we do, there are substantial hidden costs. It has to be bought in bulk, more than they want. We can take months to onboard a customer. We reject most of them but don’t actually give them a straight answer. They don’t get dedicated support. They don’t get to choose or replace their representative. We don’t commit to serve them in the future. We have hundreds of competitors with the same strategy. Now where’s my check?"
Not even the DMV could get away with this. It’s only possible when the supplier has power over the buyer. As companies get cheaper to build, that power is eroding. Most great VC firms know this, and have built reputations to counter much of the above. That’s what "smart money" means.
But there’s the opening. No one quantifies it or promises it. A few are beginning to – Passion Capital has a Termsheet in Plain English. The accelerators of course do this.
But where’s the venture capital with a strict, quantified promise? A Service Level Agreement?
Imagine this pitch:
"Hello, we’re Founder Friendly Capital. We
• Give you a quick and clear answer. 3 meetings, 2 weeks, yes or no.
• Sign up to a plain-English, Founder-Friendly Termsheet. We pay our own legal costs.
• 1x Liquidation Preference, no veto on Arms Length transactions. Four weeks to decide. No one-way NDAs.
• We’ll always do our pro-rata in the future or sell you back our stake.
• Will never bring in an outside CEO without at least 50% Founder consent.
• You’ll get access to the following resources. X hours of our recruiter time. Access to Y network. Office hours with your Partner.
• Board Seat above $X, Board Observer below that, no Board Control
• No Option Pool Shuffle – the Pre-Money is the
CharityBuzz has gotten a taste of the tech world’s power, and it wants more. Weeks after auctioning off coffee with Apple CEO Tim Cook for a staggering $610,000, CharityBuzz is starting a new auction, this time aimed right down the strike zone of startup company founders.
Bid to pitch your favorite venture capitalist.
The charity is the Leukemia & Lymphoma Society, the world’s largest volunteer health agency dedicated to curing blood cancers, and 21 leading venture capitalists from some of the biggest-name investment firms in the country have donated lunch, dinner, or pitch meetings to hear your best ideas … after you’ve coughed up a
As the year draws to an end, Silicon Valley investors are looking for the next wave of technology after social networking.
VentureBeat spoke to a slew of the top players at well-known West Coast institutions — the founding team at Stanford University’s technology accelerator, StartX, partners at some of Silicon Valley’s most prominent venture capital firms, and others — to help illuminate what the big trends will be in the coming year.
For VCs, it’s not enough to build an addictive mobile app or game: Investors expect to see more, something worth building a venture-funded company around. So in 2013, get ready for mind-blowing,
I started my first company 15 years go, and I still can’t manage. I suspect that very few people can. With AngelList, we want a team of self-managing people who ship code.
Here’s what we do:
- Keep the team small. All doers, no talkers. Absolutely no middle managers. All BD via APIs.
- Outsource everything that isn’t core. Resist the urge to pick up that last dollar. Founders do Customer Service.
- People choose what to work on. Better they ship what they want than not ship what you want.
- No tasks longer than one week. You have to ship something into live production every week – worst case, two weeks. If you just joined, ship something.
- Peer-management. Promise what you’ll do in the coming week on internal Yammer. Deliver – or publicly break your promise – next week.
- One person per project. Get help from others, but you and you alone are accountable.
If they can’t ship, release them. Our environment is wrong for them. They should go find someplace where they can thrive. There’s someplace for everyone.
It’s not perfect. We ship too many features, many half-baked. The product is complex, with many blind alleys. It’s hard to integrate non-engineers – they aren’t valued.
But, we ship.
There isn’t a shortage of developers and designers. There’s a surplus of founders.
The cost of starting a company has collapsed. It’s now just (minimal) salaries. For entrepreneurs, desks are free, hosting is free, marketing is online, and company setup is cheap.
Raising the first $25K for product development is easy – join an incubator. Raising the next $100K is easy – investors are following the incubators with automatic notes. Building a product and launching a product are easy – develop on Open Source Stacks, host on Amazon, launch on Facebook, Android or iOS, get your early traction.*
Getting real traction is hard. Raising millions of dollars is hard. Building a sustainable, long-term company is hard.
Yammer can hire. Square can hire. Twitter can hire. These companies have achieved product / market fit. Your pre-traction company has not, and so it has a hard time hiring.
If the costs of founding a pre-traction company have gone down, then returns to pre-traction founders must go down.
Throw out the old cap tables. A founder doesn’t get 30% and an early engineer shouldn’t get 0.25%. Those are old numbers from when you had to raise VC capital before you could build a product. Before everyone could and did start a company.
Post-traction companies can use the old numbers – you can’t. Your first two engineers? They’re just late founders. Treat them as such. Expect as much.
Your next five designers and developers? Your cap table probably can’t even afford them until you have traction, and the cash that follows it.
Close the equity gap, and hiring will get a lot easier.
* Of course nothing is ever “easy” – but it’s a lot easier than it used to be.
** This is just my opinion, not that of my employer. But you can see what they’re doing to help at AngelList Talent. Coincidentally, the lead hacker on that project put up this related must-read post on his own blog yesterday.
“Give me a lever long enough, and a place to stand, and I will move the earth”
To reduce unemployment, we need to lever up.
Not like Wall Street did, through debt, but like Silicon Valley does, with tools.
Leverage magnifies your actions and increases your productivity. You can get leverage through:
- labor (people work for you)
- capital (money works for you)
- tools (machines work for you)
We’re trying to help labor. We don’t have much capital. We must give tools to the people.
All of the great modern tools for productivity – the printing press, the factory, the movie studio – require capital and coordination to use. The computer is the first tool since maybe the stone axe, that an individual can use to gain massive leverage, without permission from anyone else.
The modern computer can help in every endeavor – even if you don’t use a computer at work, you’ll soon carry a $50 smartphone in your pocket. You’re banking online, learning online, communicating online. The computer, and now the smartphone, make everyone more productive.
This is why Silicon Valley doesn’t have enough people, when the rest of the nation doesn’t have enough jobs.
Now computers are simpler. More ubiquitous. Cheaper. More accessible.
Let’s create the world’s first, completely Digitally Literate Society. Not a nation of programmers (maybe someday) but a nation of people who are comfortable with the most powerful tool ever invented by mankind.
Let’s do it quickly – train them in three months from start to finish. And cheaply – for free.
We can create the program at Stanford, MIT, Berkeley, Harvard, etc. We can teach basic proficiency – use online applications like Google Apps, Search, DropBox, Email, Online Banking, Travel, Ordering supplies, etc. Some basic creation – create your own web-site. Research questions. Solve problems. Learn to learn.
Google, Amazon, and Apple will loan us the tablets. Companies will pay us to have people learn to use their apps. An app marketplace where companies pay society to educate society.
Apple, Square, DropBox, Twitter have created beautiful software interfaces. iPad and Android have made the hardware accessible. Today, it is not just cheap to build a company. It is cheap to re-build a person.
Let’s create the world’s first digitally literate society. The world’s most desirable workforce. If that won’t generate employment, nothing will.
Android’s best weapon against iOS is that it’s a much more open platform. iOS’ elegant user experience comes at a cost – developers have to suffer through approval delays, rejections, private APIs, rules against advertising, and shutdowns. Android, on the other hand is open to carriers, users, and developers.
Facebook developers face two major problems. Firstly, to attract them, Facebook concocted and gave the developers access to artificial virality channels. Then, to prevent spam, they had to take them back. But the enforcement seems capricious and arbitrary to developers, with some (i.e., the offerwall providers) being punished, and some (check a certain game company’s S-1) being rewarded. Secondly, Facebook is still figuring out its own business model, so what’s allowed and what’s not is subject to change – look at the graveyard of social ad companies and payments companies, and the recent introduction and mandates on Facebook credits.
Google should tell developers – “Here’s a simple set of rules that will never change. Here’s a simple API that we will always keep backward compatibility with. Here’s an incentive and a reward for creating an application that brings more users into G+. Here’s a simple and clear way for users to export their information and their social graph. Here’s the standard small cut that we take on everything – it will never go up.”
Right now, the only true open platforms for any startup are email and the web. Android is a close third. Facebook, iOS, SMS, etc., while beautiful and elegant, forget at their peril that there was a time when AOL, Compuserve, WAP, and other walled gardens were beautiful and elegant too.
An army of 100,000 developers is Google’s best chance against Facebook.
A common meme floating around right now is that there is an Angel investing bubble.
In the sense that an enormous amount of capital is being placed at risk, and its popping will have grave macro-economic consequences, No.
The total amount of additional capital flowing through the Silicon Valley early-stage ecosystem, thanks to Super-Angels and newly minted millionaires, is on the order of half-a-billion dollars or so. It’s no more than a middling-sized VC fund. Would the emergence of a new VC fund be considered a bubble? Would the collapse of one signal disaster?
Furthermore, most of this capital is replacing traditional Series A deals. As we say around here, “Seed is the New Series A.” The same companies that needed $3M to launch now need $30K-$300K to launch. So, it’s not surprising that there are many more of them.
Ok, but could that mean that the amount of capital for funding startups in the old environment is too much for the new environment? That the total supply of early-stage funding dollars should come down by a factor of ten rather than the number of companies being funded go up by a factor of ten?
This one is harder to ascertain, but my sense is that if there’s too much capital, it’s not an overwhelming overhang. Most of the small companies being funded will fail, but the ones that hit will generate fantastic returns. And because of their small size and operating costs, a greater percentage will be able to get “ramen profitable” than was traditionally possible. Of course, actual exits might still be rare. The volume of small M&A deals hasn’t scaled with the volume of Angel investments in small companies. I think we’re all going to have to become even more comfortable with failures, re-starts, and the kind of team re-combination that one sees from one Y Combinator Demo Day to the next.
One thing that has been happening is that Angel investment valuations have been climbing very quickly – un-sustainably so. Twenty companies in an Investors’ portfolio carried at a valuation of X might now suddenly be twenty small bubbles at a valuation of 2x. They may not be able to clear their valuation in a micro-acquisition, or lead to a down-round in a VC financing, or just give a sub-par return for what might otherwise have been a hit. Prices on the margin *have* been rising, and that will hurt returns.
Prices have been rising not because of a huge influx of money (no big, macro bubble), but because of a modest influx of price-insensitive money. Prices get set on the margin. On Wall Street, it doesn’t take an influx of $5 Trillion into the
People often mock Super-Angels as being impure because they invest other people’s money. We also often get asked “What are VCs and Seed Funds doing on AngelList?” (They’re clearly marked, by the way, and you can choose who your pitch is visible to.)
I will propose, however, that whose money you’re investing is less relevant than on what terms it comes on. Venture Hacks was created to educate entrepreneurs when the Angel market was much less robust. At the time, if you wanted anything more than $250K, you basically had to go to Venture Capital.
Venture Capital, at the time, was a bundle of three things – Advice, Control, and Money.
The money is obvious – you want money, you go get it. But in the case of VC, it came with control – because the amounts being disbursed were large enough, it made sense that they needed to be actively managed. And finally, because it was actively managed, you cared about how well it was managed, and thus the advice.
Now, thanks to increased dissemination of information on the web, Venture Hacks and many others (Series Seed, A VC, Feld Thoughts, The Funded, etc.) have helped entrepreneurs understand the control layer. Y Combinator and other seed incubators have essentially helped “union-ize” the startup workforce, and via reputation and standardized documents, reduce the control that VCs have over startups. Lower capital requirements have opened up the playing field of investors, and reduced the need or even the ability of early-stage investors to do active portfolio management.
So Angels are investors who leave out the control. They essentially bundle just Advice and Money.
The amount of money invested and whose money it is are factors that play into it, but most Super-Angels eschew control. Similarly, some seed funds (i.e., True Ventures), and some larger funds (i.e., Andreessen-Horowitz) make entrepreneur-friendliness a core part of their ethos, and as such often leave out classic control provisions (M&A vetos) or mechanisms (Board seats). Conversely, you’ll see some Super-Angels or even traditional angels asking for more control if they’re investing a significant portion of their investable capital.
We are also seeing the emergence of Seed Combinators and Pure Money plays. Y Combinator, TechStars, I/O Ventures, AngelPad, Founder Institute, etc., are basically giving advice – if you’re going there for the funding, then you’re not doing the math. DST and later stage funds are pure sources of money.
The net effect is that the Venture Capital is slowly being un-bundled, as mature industries often are.
One side effect of all of this is that reputation matters a lot less. It used to be that VC reputation was built
I co-founded AngelList because I was tired of saying no to entrepreneurs. I wanted to say instead, “yes, we can help you get funded.”
So, it’s especially disappointing when we get promising startups pitching on AngelList from remote locations. Some we’ve managed to get funded – including ones in Canada and Europe. Others are harder – especially in Russia, Latin America, and Asia.
The problem, as I’ve come to realize, is that funding markets develop in reverse.
In any given geographic region, the first companies that get funded are the ones that least need funding. They have strong operating histories, auditable financials, predictable cash flows, etc.. Funding these companies is less risky, and so a secondary, and then a primary, market forms around them. Call these the public markets.
After the public markets come the mezzanine investors, investing just before a company goes public. And because the mezzanines now exist to pick up risk, late stage private investors start forming behind them. And so on and so forth until you end up with Seed incubators and Angel investors.
Essentially, the single biggest risk that you have as an investor is “downstream financing risk.” The risk that the company won’t be able to raise more money once it has spent all of your cash.
This explains the apparent paradox that in less mature innovation cities, you’ll have an easier time finding VCs who will invest $10M in a mature business, than Angels who’ll invest $100K in a raw startup.
It’s a measure of the incredible strength of the Silicon Valley ecosystem that Y Combinator has chosen it as its hometown. YC and its brethren can only exist because of the rich Angel ecosystem. Paul Graham was smart enough to realize that his graduates couldn’t function without a rich Angel ecosystem, and went to great pains (such as AngelConf) to foster it.
Similarly, the true evidence that the NY Angel market has finally blossomed is that TechStars and a number of other seed combinators are choosing to do business there.
As an entrepreneur choosing your base of operations, take a careful look around. If you don’t see many VCs, you’re not likely to find many Angels either. Even though the VCs invest more money, they actually take less risk.
Similarly, Angels should realize how this whole pyramid functions. Investing in companies that won’t have access to Venture is incredibly risky. Investing at Venture valuations in Angel-stage companies means that your portfolio will likely generate negative returns.
Finally, if you are one of these talented entrepreneurs in a “frontier” location where there aren’t enough angels around, you have two choices. You’re either going to have to bootstrap to the point that
All sorts of businesses are being built by violating assumptions about the privacy of data.
Flickr violated the assumption that you wanted your photos private by default. Before Flickr came along, the default photo sharing model, espoused by Shutterfly, Snapfish etc., was that of private photo sharing.
LinkedIn violates the assumption that your resumé is private.
FourSquare violates the assumption that your location is private.
Twitter violates the assumption that some of your thoughts are private.
Instagr.am violates the assumption that your mobile photos are private.
Blippy is testing the assumption that some of your financial transactions are private.
All of these services take your original notion and need for privacy, and trade them off against your need for fame and recognition.