Decentralization of startup building

How to adapt to the rapid decentralization of startup creation

(A previous edit of this article was published on TechCrunch: http://tcrn.ch/2um23G1)

The old paradigm // physical centralization

Silicon Valley is the innovation bellwether of our time. The concentration of talent and capital — as well as a culture typified by speed and boldness — has created trillions of dollars of shareholder value and pushed the envelope of innovation.

The venture capitalists on Sand Hill Road have for decades dined on the fruits of funding entrepreneurs who travelled to the valley’s rich pastures or the alums of local academic institutions. This has led to the concentration and subsequent clustering of talent and startups. Whether building processors, web or mobile products; proliferation has been global whilst the innovative companies and venture investors remained local.

The evolving startup stack

In recent times venture capital has become pervasive, or as Brad Feld argues often undifferentiated. In 2016, global venture investments totaled $134bn versus $40bn a decade earlier. Breakthroughs in technology, changes to regulation and socio-economic tailwinds are allowing talent and capital to be more widely distributed and at the same time closely connected.

Let’s further explore the two main categories of this shift, capital and the startup stack:

Distribution of capital

Startup funding historically has been in the form of cash for equity though several new models are disrupting this:

Indiegogo and Kickstarter were at the forefront of the initial wave of reward based crowdfunding, where cash would be exchanged for future products — with the financing allowing such products to be made. Equity based crowdfunding has been typified by AngelList’s rise which allows accredited investors to invest in angel syndicates. In 2016, AngelList facilitated $190m of investment in over 460 startups, on a run-rate basis, that’s roughly the equivalent of a $570m angel fund.

Tokens are creating a more interesting and pronounced decentralization of capital. The advent of the blockchain, firstly through Bitcoin and more markedly through Ethereum provides open, decentralized networks through verifiable ledgers of record. The blockchain is likely to be to the financial system what HTTP was to TCP/IP in the early days of the web — new protocols which allow explosion of new products and economic systems.

Recently, we’ve seen the acceleration of initial coin offerings (ICOs) amongst startups and organizations. ICOs allow individuals to purchase organization or startup specific tokens (cryptocurrency) within a specified timeframe. They do not provide the token holder with equity in the traditional sense but allows them to own a company linked public, tradeable store of value. In the first half of 2017, ICOs have outstripped traditional blockchain venture capital funding, raising over $400m of funding at the time of writing.

Importantly, ICOs allow startups to quickly raise capital at the early stage whilst not having to undertake oft lengthy and expensive venture funding. Records are constantly being toppled, The Bancor Foundation $153 million worth of ether through a 3 hour token sale in June. We’ve seen the record broken twice; firstly with the Block.one raising $185 million, then Tezos raising $207 million. It’s important to note that this isn’t the reserve of shrewd internet gun slingers — messaging service Kik is pivoting its business model and releasing its own coin, Kin, which can be spent within their ecosystem — this after having raised $120m in venture funding.

“By enabling the development of new open networks, tokens could help reverse the centralization of the internet, thereby keeping it accessible, vibrant and fair, and resulting in greater innovation.” Chris Dixon, a16z

One of the key arguments for coin offerings is that they ‘thaw a lot of frozen capital’, small denominations of capital can now be used to invest directly into organizations and/or cryptocurrencies. The current lack of regulation and oversight provides equal risk and opportunity for participants. Regulators will have a pronounced effect on the outcome of these funding methods — expect to see more jurisdictions lean in to this, like Zug (a.k.a ‘crypto valley’) and Dubai have done.

The atomisation of the startup stack

The most sweeping changes have been to startup IP creating and the usage of individuals creating it

The Cloud

Cloud infrastructure has been a pervasive force in allowing teams to quickly stand up products without significant back-end investment. We’ve seen cloud encompass infrastructure (servers, storage), SaaS (browser, email, CRM) and platform (app store, blockchain, dev tools, database).

The power in which the cloud yields will continue to grow exponentially as machine learning capabilities become broader and more powerful. So far, we’ve seen the likes of Google and Amazon build around their sizeable datasets and processing power. Google, has built and opened sourced Tensor Flow which famously powered DeepMind’s AlphaGO victories. This isn’t only altruistic but importantly puts machine learning tools in the hands of developers. Not to be out done, AWS has also invested heavily in the space, with a significant AI/ML cloud stack:

AWS AI Cloud stack

Workforce

Distributed workforces have also benefitted from expansive networks driven by technology and an attitudinal change in job market entrants. This trend is manifesting itself in two separate ways for startups; pay-per-play contract workers and remote employees.

In the last 10 years, 94% of net job additions in the US have been from independent workers. Distributed workforces are becoming a significant factor in the new economy, they should be actively embraced.

Knowledge resources + User Acquisition

In the age of information, this is self-evident with the near endless content produced about startups (yes, I get the irony here). We’ve seen some more procedural efforts such as Y Combinator’s MOOC Startup School of which 1,500 startups just “graduated” and the TechStars Anywhere program which allows founders to undergo a virtual remote accelerator. Distribution of products has also become easier for founders. We’ve seen channels like the App Store, Product Hunt, Twitter, Medium and a slew of news site distributing to an ever increasing audiences of adopters. The decentralisation of centralisation if you will.

Startups everywhere

The atomization and decentralization of the startup stack will continue to accelerate. Our perception of what a company actually is will also morph through time — with more decentralized teams, services and decisions becoming prevalent. This will give birth to new organizations, stores of value, economies and will put the power of startup ‘creation’ in the hands of people far from the pastures of Silicon Valley.

(A previous edit of this article was published on TechCrunch: http://tcrn.ch/2um23G1)