A crypto-valuation discussion on how rational pricing of top protocols could ramify into systematic overvaluation crypto-wide

Brett Winton

VC: Valuations are bonkers. Invest in a team w/o a working product at >$10m? Umm, non-starter.

Crypto: This time is different.

VC: $10mm is the ceiling pre-product because there are too many unquantifiable risks; you just can’t tell until the thing is in a user’s hands.

Crypto: This time is different.

VC: Besides $10m pre-product probably produces negative returns on net. There’s a reason Y-Combinator does $2m and 500 Startups does $2.5.

Crypto: This time is different.

VC: AND there are huge regulatory risks. AND there are huge technical risks. AND I don’t even get a board seat?!?

Crypto: This time is different.

VC: AND the operating entities don’t get any ongoing cashflow. AND there’s no clean M&A mechanism.

Crypto: This time is different.

VC: AND trying to bootstrap a world-scale infrastructure off a single-raised round is categorically insane.

Crypto: This time is different.

VC: Particularly when barriers to entry = 0 and all of crypto is likely to devolve into a war of raised capital a la Uber vs Lyft.

Crypto: This time is different.

VC: Notwithstanding that customer acquisition costs against no operating cashflow are going to eat developer teams alive.

Crypto: This time is different.

VC: Anything greater than $10mm is insane. It makes no sense.

Crypto: This time is different.

VC: Yeah. YOU are the thing that’s different. Moron.

Crypto: BTC at $10m: ~2,300x return (so far); ETH from $100m: ~220x return (so far).

VC: …

CN: If crypto follows typical private-asset power-law return-distributions this would suggest that I’ll 10x my money.

VC: …

CN: If power law returns hold, and ETH and BTC are indicative, I should be willing to pay up to $400mm post-money to equal your returns.

VC: This time IS different

CN: See? Welcome to the flock!

VC: But not in the way that you think.

Crypto: …

VC: Network effects stacked on network effects stacked on network effects suggest that the power law return distribution should be much much steeper.

CN: That’s a good thing.

VC: This means that those pinnacle positions should accrue most of the return in the space. You missed the 2 CryptAcorns and are dabbling in the CryptoCrap.

Crypto: Well, even if I assume that I missed the two CryptAcorns but everything else is incremental then I can still justify $240mm post-money.

VC: BUT it’s a negative-sum game. Equity values undergo a huge compression when converted into network values.

Crypto: …

VC: So while crypto-models may dominate, they reduce total ownership-wealth at the end-application level.

Crypto…

VC: And within crypto itself the opportunity is 0-sum: Velocity effects suggest that CryptAcorn success takes from the CryptoCrap opportunity-set.

CN:…

VC: You get 200x for the CryptAcorns because they are going to serve as Store of Value for the entire space.

CN:…

VC: Without strong Store of Value characteristics, end-applications may have extremely high velocity.

VC: Crypto may transform trillion dollar businesses into 100 million dollar protocols…

Crypto…

VC…

Crypto: Well, you have to admit; that would be different.

Brett Winton

Written by

Director of Research, @ARKInvest. Disruptive Tech: Autonomous, AI, Blockchain, CRISPR, Fintech, 'Omics, Robots... Disclosure: http://arkinv.st/2rxmMRG

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