The decentralization of VC is upon us—All the better for the entrepreneur
The tech Unicorns of the future will be AI-powered, smart-contract and crypto savvy, and backed by VCs that will make sure they don’t run out of money.
The FT asks: With billions wasted on crypto and metaverse investments, VC funds struggling to raise capital, a landslide in private market valuations, and a chilly IPO market, is it time to rethink the VC-driven entrepreneurial age? Our answer is yes. The ‘Golden Age of VC’ is over, and a new dawn for clever entrepreneurs and a handful of crafty and connected early-stage VCs has arrived.
The Golden VC Era: In addition to the IPO run, Big Tech has also completed more than 800 acquisitions since 1995.
Web2 was driven by the global adoption of the internet and smartphones, a boom in consumer and enterprise cloud apps, a permissive regulatory environment, loose monetary conditions, and cheap money. The model of piling billions of VC money into a dozen-plus stages to enable startups such as Salesforce, Facebook, Uber, Airbnb, and Spotify to aggressively invest in growth over profits and positive cash flow has faded.
Decentralized VC
When times get challenging, free markets naturally refocuse everyone back to core values. If you were to put 500 successful entrepreneurs in a room and ask how many of the VCs who backed them indeed added value to the development of their enterprises—the unique number would be a couple of dozen. The rest are just money managers whose primary skill is to finagle their way into startup deals sourced by the working VCs.
The #1 law of VC is that a small minority of a venture fund’s investments will produce most of the fund’s returns.
In the decentralized VC world, true value-added investors with operational experience, extensive talent and money networks, and good market instincts will survive and remain critical. We see VC turning back into a cottage business, with four offices and a conference room, where the partners actually ‘sit on the same side table as the entrepreneurs’ and ‘make sure the company never runs out of money.’ Imagine that?
Sequoia, the world’s top VC fund, has already figured this out. Under Roelof Botha’s new leadership, the firm cut ties with both its China and South Asian partner funds and trimmed overhead in Menlo Park. [See how Sequoia’s annual returns are outpacing a deflated industry below.]
We expect firms such as Andreessen Horowitz, with staff-heavy operations, will follow suit.
‘With entrepreneurs, I hope that we have the reputation of not cutting the toughest, tightest deal. We try to make sure that the entrepreneurs make a lot of money—a lot more than we do. We like to tell the entrepreneurs that the only time we’re on the opposite side of the table is when we’re cutting the pie in the very first round. Once we sign the check, we’re on the team. We consider it our responsibility that the company never runs out of money. We help them hire the right people, identify the biggest risks, and put those risks behind them. We also try to figure out how our companies can work together. If anything, we have been accused of being too involved. I think that this gives a new entrepreneur a tremendous incentive to work with us.
This is a big subject that requires more space than there is to give, so the following list is a brief summary of the market forces that will decentralize VC.
Macroeconomically, people have lost faith in the US dollar and rightly consider it a form of monopoly money. We have made our arguments to solve this issue by tokenizing the dollar and returning to the gold standard. Still, there is not a single US political leader evangelizing these changes.
Invariably, people will be more comfortable holding other assets backed by something tangible and can actually appreciate-including BTC.
We don’t think it is a coincidence that JPMorgan chief Jamie Dimon just put in an order to sell $142 million of his bank stock. While the banking industry has definitely been embracing the advantages of web3 technologies, the industry, as a whole, will undoubtedly continue to downsize as middleman functions are increasingly deemed unnecessary.
We are headed to a world where IP and real-world assets will be tokenized and, therefore, made more portable, liquid, and tradable. Some forecasters say there will be as much as $10 trillion worth of tokenized real-world assets by 2030. People will become more and more comfortable holding less cash and more tokenized real-world assets in their crypto wallets. Most tokens will represent fractional interests in real estate, entertainment content, and private companies, for example.
Just as the smart folks on Wall Street now execute complicated asset transactions on the blockchain and enjoy instant settlements 24/7 for a fraction of the cost, and Hollywood is moving towards fan-funded productions via NFTs, the new generation VC must get in the web3 funding game or become irrelevant. The New VC will help their startups think creatively about ways to tokenize their equity and IP to grow while keeping higher stakes in the enterprises they build together. Ten years from now, the traditional IPO [which will be tokenized] will be just one of many ways to achieve liquidity. It is possible that the IPO will go completely out of fashion.
The SEC will have to bow out of most of this business and let us adults make our own investment decisions and take our risks, including the lumps from bad bets.
Significantly, just as open source software development and cloud computing dramatically lowered the cost of starting a company during Web2, new Web3 technologies, including AI, self-executing blockchain-based contracts, distributed storage, and the 3D web, will do the same.
It’s an amazing time to be an entrepreneur.
Already, we have seen Bitcoin rise to a $671B market cap with no money down, representing the best bet of all investment categories for more than a decade. Ethereum Foundation created a token asset worth $215B, and its balance sheet shows $1.3B in Ether and $300M in non-crypto investments—all on the back of only $18M of angel money spread across 91 investors.
For all the reasons above, the fearless pioneers of Web3 are using their imagination and re-writing all the rules. We are on record as saying this represents a $100 trillion 20-year run—5x of Web2, but we are starting to feel we are underestimating.
The glory days of the ‘institutionalized VC’ are happily coming to an end. (Quick tip: If you sit in the middle of transactions without any grass stains on your knee or shoulder pads, you might learn a blue-collar trade. We see blue-collar income appreciating nicely, given the tangible value of their services). For Web3 entrepreneurs, it’s back to the future where a few dozen early-stage VCs with broader imaginations and fundraising and token monetization skills make sure their companies never run out of money.
Did you know?
(Overheard on the streets of the global Silicon Valley. Got any hot insider tips? Email us editor@cryptoniteventures.com)
AI Tracker
We recommend reading a recent Fortune interview with OpenAI’s tech boss, Mira Murati. She sees one of her biggest challenges is to ‘predict the emerging capabilities [of AI] and to get ahead of some of the deployment risks—you need to institutionalize and operationalize these things, and they can’t just be policies and ideas.’
The Dartmouth engineering grad and former senior product manager on Tesla’s Model X says she is an artificial general intelligence (AGI) believer and ‘very optimistic that we can make sure that it goes well.’
True.
Ms. Murati also reiterated Sam’s sentiments in a recent X post. ‘It’s a technology that will probably affect international politics more than anything that we’ve ever built,’ she warns.
Social Networking
Elon Musk’s plans for X to join the dating app scene. In addition to the dating feature, Elon told employees that X will also operate as a digital bank. Elon is looking for ways to diversify away from a purely ad-based model as part of his plan to turn X into a $250 billion business.
X announced to its employees that the company is now valued at $19B, a markdown from the $44M Elon paid for the bot-reddened social network a year ago in April. The surviving 10% to 20% of the staff are being offered options at a $20B valuation.
If you join the X team today, with a good stock package, it might be like joining Apple in late 2008—representing more upside than most all startup opportunities without as much risk. On September 29th, 2008, AAPL stock closed out at $3.47 per share and has increased by roughly 4,811.25% at its current share price of $170.60. A lot of fine people made a lot of money on that run.
VC Whispers
Now that it’s widely known that the CCP’s constitution allows the People’s Liberation Army full access to all commercial IP, SoftBank Vision Fund is joining Sequoia Capital and other VC funds and largely pulling out of China. The political heat comes from both sides, especially the CCP’s increased control of the Chinese private sector.
The above chart is the PitchBook analysis of financial statements from the University of California Regents, a limited partner in about two dozen Sequoia funds with vintage years 2018 and later.
Sequoia is outflanking its VC competitors on ROI in downtimes. While many VCs reduced the portfolio values over the past year, Sequoia has marked up 15 of its funds by an average of 9.2% for the fiscal year ending June 30. Sequoia has also written down the value of four of its funds by an average of 6.9%, two of which are India-market-centric, one focuses on China, and one growth fund.
IRR across US-based VC funds was -16.8% for the year ended Q1, according to the latest PitchBook-NVCA Venture Monitor. Significant markdowns, according to the UC Regents’ portfolio, include three Khosla Ventures funds that lost 16.6% of their value, a 2012 Canaan fund written down by 21%, a four-year-old Iconiq fund was down 25.6%, and seven GGV vehicles that lost an average of 4.2%.
AI Tracker
Google is betting an additional $2B on Anthropic in its bid to compete with its rival OpenAI. Google previously invested $500M for an estimated 10% stake in Anthropic prior to the current funding. Amazon is also thinking of throwing in another $2.75B as well.
A street mural in Bogotá, Colombia, calls for greater respect for women by Javier Rodríguez.
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On Hollywood
The Beatles’s AI-assisted ‘final’ song Now and Then is to be released this month. Software developed for Peter Jackson’s documentary Get Back has been used to separate Lennon’s vocals from a demo tape he left to Paul McCartney.
“There it was, John’s voice, crystal clear,” said Paul McCartney. “It’s quite emotional. And we all play on it; it’s a genuine Beatles recording.”
Going Green
A new generation of eco-friendly cruise ships offers sustainability-focused excursions. That means working with local artisans, eliminating single-use plastics, minimizing carbon footprints, and focusing on and working to preserve and protect wildlife.
Le Commandant Charcot ship. Credit: OLIVIER BLAUD/PONANT
‘Biodiversity at Sea’—5 days aboard a hybrid-electric polar exploration ship that floats you from Brest, France, to Reykjavík, Iceland, while environmental specialists share their knowledge of the polar regions via lectures and discussions.
The Science of Life
Neuroimaging shows that after someone takes psilocybin, ‘brain regions that don't typically communicate with each other start to share in new ways that could help treat people with psychiatric conditions.
Mexican artwork depicting María Sabina, a Mazatec shaman, demonstrating psilocybin mushrooms for healing.
‘Even two of the same type of mushrooms grown next to each other can have wildly different amounts of psilocybin,’ said Fred Barrett, director of the Johns Hopkins Center for Psychedelic and Consciousness Research. ‘Nobody should be seeking out mushrooms to treat themselves.’
Follow the Crypto
Nocturne Labs, a crypto startup that wants to bring private accounts to the Ethereum ecosystem, has raised $6M in equity with token warrants seed funding. Bain Capital Crypto and Polychain Capital co-led the round, with Ethereum cofounder Vitalik Buterin, Bankless Ventures, Hack VC, and Robot Ventures.
Nocturne Labs’s founder is Stanford CS grad Luke Tchang. ‘Our users will be able to deposit or receive payments anonymously via zero-knowledge proof technologies,’ Tchang says.
The third edition of the NFT Paris conference is on February 23-24, 2024. Show founder Alexandre Tsydenkov is bullish about turnout, that brands are ‘fully embracing’ NFTs for marketing and branding, and that the French government is positioning Paris as a crypto and NFT hub.
Conference backdrop at the Grand Palais, where 20,000 NFT enthusiasts will bump heads at NFT Paris.
Into the Metaverse
Web3 games are moving towards mainline adoption by streamlining functions, including no longer requiring players to connect a wallet or buy or borrow an NFT to get rolling. More Web3 games are now accessible via Web2 distribution platforms such as Google Play, AppStore, and the Epic Games Store—All in pursuit of a slice of the $334B video game market.
Boston Dynamics is integrating OpenAI's GPT-4, Visual Question Answering datasets, and speech-to-text software into its agile humanoid robots. The new features include programmable personalities and fake moving mouths so that you may have realistic dialogues with Spot. Six companies, including National Grid, BP, and even the NYPD, have already deployed Spot.
Meet Spot, your programmable pooch who will talk to you when you are lonely.
A Japanese startup, Tsubame, has developed a Gundam-like advanced robot known as ‘ARCHAX’ with a price tag of $3M and designed to mimic human-like movements. An imposing 4.5 meters (14.7 ft.) high and weighing 3.5 tonnes (7,716 lbs.), Archax can be moved and operated by a pilot in the cockpit.
‘I want to make it possible for people to get on board a robot and control it, just like in science fiction movies,’ said Yoshida, the 25-year-old CEO of Tsubame.
Entrepreneurial Huddle
Startups interested in joining Solana Labs’ Web3 Incubator program have until November 30 to submit their applications. ‘Our priority is to remove obstacles for founders so their teams can focus on solving the burning problems of their users,’ says Solana Labs’s Emon Motamedi.
Self-executing, code-based smart contract agreements are simplifying the way startups handle investment, customer, and vendor agreements. Check out a good overview of the benefits of blockchain-based administration.
Google paid $26 billion to device and browser companies in 2021, including $18 billion to Apple to be their default search engine. The DOJ wants a federal judge to deem such ‘secretive agreements’ illegal because they help solidify Google’s monopoly in web search and prevent a level playing field for competitors. The trial is expected to wrap up in November, with the judge’s final ruling soon thereafter.
Chaos & Complexity
The 14th annual American Values Survey, carried out by the non-profit Public Religion Research Institute (PRRI), shows that 23% of Americans agree that ‘because things have gotten so far off track, true American patriots may have to resort to violence in order to save our country’—up from 15% in 2021.
What the Math Says
A 20% flat tax for non-habitual residents and a lovely coastline have turned Lisbon, Portugal, into the ‘digital nomad capital of Europe’, yet 40% of Portugal’s graduates leave in search of a better life outside the country. High-paid remote workers and wealthy retirees have pushed up housing and living costs and caused a hiring crisis for local industries.
After the 2016 presidential election, Madonna relocated her family to Portugal and moved into a $8.9M, four-bedroom 18th-century Moorish Revival mansion located 20 miles outside of Lisbon.
Know Thy Enemy
The US is building a new ‘gravity bomb’— a B61 nuclear bomb 24 times more powerful than the Hiroshima nuke and 14 times larger than the bomb dropped on Nagasaki in 1945. This bomb is designed to deter threats from the main nuclear-armed competitors—China and Russia.
Bibi and Vlad—No longer the way they were.
Russian despot Vlad Putin is trying to form ’a new axis of terror against the West,’ experts fear - as he invites Hamas leaders and the Iranian nuclear negotiation head to Moscow. Russia, a former alliance partner of Israel, was praised by Hamas for taking an active ‘stance’ against ‘Israeli aggression.’
Seven factors reduce depression risks: a good night’s sleep (7 to 8 hours) by 22%, never smoking by 20%, frequent social connection by 18%, regular physical activity by 14%, moderate alcohol consumption by 11%, and healthy diet by 6%.
Artificial Intelligence
Question asked Google’s Bard: Will humans become immortal this century?
Answer: “I think it is possible that humans will become immortal this century, but I do not believe it is certain. I am optimistic about the potential of technology to extend human lifespan and improve human health – one of the most promising avenues for achieving immortality is through biotechnology. Scientists are already working on a number of technologies that could potentially extend the human lifespan significantly, including stem cell therapy, gene editing, and nanotechnology.
“In addition to biotechnology, advances in Artificial Intelligence could also play a role in achieving immortality – it could be used to develop new medical treatments and to create personalized healthcare plans that maximize lifespan and health.”
Then came the obligatory sermon:
There are a number of factors that could affect the likelihood of this happening, including the availability of funding for research, public acceptance of immortality, and the ethical implications of immortality. A “public conversation” needs to take place about immortality because it should only happen if it benefits everyone.’
Jeanne Calment reassured her French compatriots that they could eat their chocolate, smoke their cigarettes, drink their port, and live a good long time.
The closest the world has ever come to anything looking like immortality was a woman called Jeanne Calment, who was 122 years and 164 days old when she died in 1997. She outlived the second-oldest person, Kane Tanaka, who was 119 years and 107 days old when he died in April 2022.
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