The Arc of the Industrial Era Corporation

David Rangel & Vijay Sundaram

In our introductory post, we alluded to crypto’s potential to improve economic systems for the Information Era. Let’s situate this within the broader crypto landscape. There are several ways to think about cryptotokens’ purpose and value:

• Medium of exchange: will crypto be used to pay for everyday purchases?
• Store of value: is crypto a good way to store wealth?
• Securitization: can tokens be used to represent and trade assets?
• Utility: can tokens be used to provision, use, or pay for services?
• Fundraising: will crypto change how ventures raise money?
• Speculation: which tokens can be traded for short-term gains?

These are all valid and important perspectives, but the one we’re most excited about brings all of these together: we believe crypto enables an entirely new kind of venture entity and structure that becomes the spiritual successor to the corporation. It’s a form of infrastructure that goes beyond the basic idea of “utility tokens” and puts crypto at the very core of a venture.

This is the lens we’re using to understand why crypto has broad social, economic, and technological impact, and why decentralized use cases and projects should exist. But before we get into that, let’s start by understanding why we need a new entity in the first place.

The Origin of the Corporation

In the transition from the Agricultural Era to the Industrial Era, the emergence of mass transportation and production techniques led to the rise of the private sector joint-stock company and financial markets as we know them today. Prior to this, most commercial activity took place between partnerships or sole proprietorships which were adequate for the limited financial scope and organizational complexity of the day. However, as ventures started to scale, corporations emerged as the standard way to organize and execute on four activities:

1. Fundraising
2. Governance and strategic decision-making
3. Coordination of a larger and geographically extended workforce
4. Distribution of profits

Bundling these activities under a standard, yet flexible share-based entity proved very useful, enabling the growth of large industrial companies, national-scale networks and infrastructure. For over two centuries, this bundling made sense because:

1. Capital was scarce and it was difficult to raise in large amounts
2. Business frameworks were first being developed
3. Coordinating a large workforce required a direct management structure
4. Shares (potentially traded on a stock market) were necessary to distribute value

But the world has dramatically changed since then. Breakthroughs like personal computing and the Internet are fueling the transition to the Information Era and changing the rules of the game.

Information technologies give rise to networks and platforms with powerful scale and business dynamics that, when combined with the corporate structure, result in potentially negative consequences. These entities are only becoming more common as technology permeates more and more industries.

The corporation — the core mechanism in our current economic system, shaped for a world of constrained capital, sub-global-scale businesses and costly coordination — has yet to evolve. Its fundamental limitations are becoming clearer.

The Limits of the Corporation

There are four key ways in which the current system of corporations, shareholders and stock markets are no longer serving us well when it comes to technology networks and platforms.

I. Value creation is at odds with value capture

Technology platform companies, in theory, create environments for an ecosystem to build on and add value. However, it’s common for platform companies to either limit what its ecosystem can do or compete with them directly, thereby limiting the overall value created on the platform.

This may seem at odds with their purpose, but platforms do this because the mechanics for a corporation to capture value create a zero-sum game between the platform company and its ecosystem. The only way for a company to capture value is by taking in revenue, and revenue taken in by one company is not available to another. Once a platform reaches a certain size, the only way for them to keep on growing revenue (capturing value) is by preventing others from doing it themselves, even if they could do it better.

While the platform company may achieve further growth through these actions, they inevitably decrease their ecosystem’s ultimate size and they may even hurt its health by this impairment of third party activity.

What if there were a way to align platforms and ecosystem partners so that everyone wanted to maximize ecosystem value instead of making sub-optimal competitive decisions?

II. Value capture is highly inefficient

Once revenue is taken in by a company, the value captured by shareholders is determined by how efficiently that revenue is converted into free cash flows. Shareholders are at the mercy of management, their incentives, their pricing decisions, and their ability to run the company, independently of how much value is being created at the platform ecosystem level.

This dynamic can lead to situations where a company creates a valuable ecosystem, yet is unable to capture value for shareholders because of bad strategic and tactical decisions.

What if there were a way for stakeholders to participate in the total ecosystem value created, without having to rely on enlightened management?

III. Market pressures lead to short-term thinking

The last decade has seen a marked decrease in the number of publicly-listed companies, both because companies are choosing to go private and because new companies are delaying a public listing as long as possible.

Some of this is due to regulatory overhead (which is a problem in and of itself), but an important contributing factor are the short-term, quarter-to-quarter, performance pressures that being public forces on a company and its managers. The market’s focus on quarterly revenue and earnings per share leads managers to make short term tradeoffs at the expense of long term investments. Needless to say, this reduces the long term potential of networks’ and platforms’ ecosystems. Managers who are able to ignore short-term pressures, thereby risking investor penalization, are rare.

What if networks and platforms did not have to keep their ownership closely-held in order to make the best long-term decisions?

IV. Wealth concentration is increasing

As more companies have retreated from, or delayed their entry to, the financial markets, only sophisticated investors and early shareholders have benefited from the enormous value creation technology companies generate early in their lifecycles. In addition, the inefficient value capture dynamics detailed above lead management to “squeeze” certain stakeholders (e.g., contractors) as much as possible to reduce costs and increase cash flows. Non-shareholders, which includes the vast majority of the population, have no way of benefiting from the value created.

What if there were a way to let the general public more easily participate in the wealth being created, especially any that stand to be negatively impacted?

Just as emerging industrial technologies led to a new economic system for the 19th and 20th centuries, today’s emerging technologies are leading towards a new economic system for the 21st century and beyond.

We’ll explore crypto’s role in this change, and its promise, in our next post.