Electric Capital
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Electric Capital

Software ate the world. It will eat venture capital too.

Software ate the world. It will eat venture capital too.

Software has eaten the world. Software companies acquire more customers, have better margins, and are able to deliver novel services to customers. Because software has become the critical business lever in every market, every company must become a software business.

When a market is eaten by software, companies must reimagine their human organization.

Walmart was the original retail giant; Amazon is now worth 3x as much

Walmart has not been able to compete against Amazon, despite having 30 years to do so, and about as long of a head start. Most newspapers have died despite seeing the writing on the wall 30 years ago, too. Why?

When software eats an industry, building great software products becomes the primary means to acquire, retain, and monetize customers. In order to build great software, a business must empower those who know how to build software. Engineers, designers, and product people must be given decision-making authority. Software engineers must go from being considered a cost center (i.e., “IT”) to being the primary revenue generators. This is a dramatic shift in power, prestige, and compensation from how businesses were run in the past.

For an old-world business to become software first, it must pay software engineers significantly more, take power away from the partnerships, marketing, and sales divisions, have the CEO become the COO, and have the CTO or VP of Product (if there is one), become the CEO. Most companies are incapable of this sort of organizational upheaval.

Thus, startups emerge with organizational models that are software-centric from inception, enabling them to quickly build the software products and services that the market demands. Engineers and designers, the talent most suited for building the best software, run the company. They are compensated as the revenue drivers. The CEO is the product person and the COO is the “business person.”

Software is eating money and capital markets.

With the rise of Bitcoin and Ethereum, software began to eat stores of value. As value became more digital, a marketplace to transfer and aggregate that value naturally emerged. While the ICO boom of 2017 was speculative, it demonstrated the potential for on-chain, 24/7, global, capital markets.

Since then, the crypto market has grown to $2 trillion, the market cap of stablecoins has grown to over $180 billion, and the total value locked in DeFi protocols has grown to over $100 billion. These permissionless protocols for value transfer will eventually outcompete their traditional counterparts because they are composable, permissionless, global, and available 24/7. Eventually crypto will eat all forms of money movement and most capital markets.

As of April 2022. Data from CoinGecko.

Crypto is already eating venture capital.

Venture capital is just one of many forms of capital deployment in the global capital markets that will get eaten by crypto. Already, blockchain-based decentralized autonomous organizations (DAOs) such as Seed Club, The LAO, and others are building decentralized venture firms. SyndicateDAO enables anyone to form an on-chain investment club. The founders of projects like yearn.finance ($680M market cap), LooksRare ($380M market cap), Trisolaris ($21M market cap), and others have used on-chain mechanisms instead of relying on venture dollars.

Crypto lowers investment barriers and further commoditizes capital, posing an existential threat to venture firms that do not adapt. To compete over the next ten years, venture firms will need to be run like software businesses.

The most successful venture firms of the 2020s will be software-enabled and led by software engineers.

We firmly believe that software engineers, not financiers, will run the next-generation of iconic venture firms. When software eats an industry, new companies emerge, led by software engineers. These new firms design their organizations to use software from the ground up. Most incumbent firms struggle to make the transition because they must upend their existing organizations, processes, compensation, and power dynamics.

Unlike traditional venture firms, we don’t have a heavy band of investment associates or principals for sourcing. In fact, we have none. We hire engineers who ship code and hang out in Discord, not an army of associates who cold-call founders and hang out at happy hours.

Electric Capital’s org chart reflects our software-first approach. Over 60% of our team has a background in engineering, while 50% of our team members are former founders. We have two designers on staff, and our investment partners still write code.

This approach also makes us better investors and better partners to founders. Our team has the skills and resources to help founders dashboard key metrics, design the right user experience, and think through governance and tokenomics. Founders can lean on our engineering and design teams to help interview candidates, review code, conduct user studies, provide actionable feedback, or integrate with product teams to deliver scoped features. We actively participate in the governance of the protocols we invest in, and we will stake tokens and provide liquidity when founders need it.

We are building a modern VC firm by shipping public goods.

One of the biggest challenges in building a new venture firm is attracting the best founders. For the last 15 years, many investors have established their brands through media. Partners at firms published thought leadership via blog posts, Twitter threads, and YouTube videos.

As a software-enabled venture capital firm, our approach is different. We build open-source public goods, and return this value to the community. For example, we publish industry-leading reports like our annual Developer Report, where we fingerprint over 150 million code commits to understand developer activity within the crypto ecosystem. We build the Report in collaboration with most of the top foundations and largest DAOs in Web3. The taxonomy of data we use to generate this report is available in our Github–we regularly share data about ecosystem growth and app adoption with DAOs and foundations to help them grow their communities.

By shipping public goods like the Developer Report, we demonstrate that we are focused first and foremost on creating value for founders and the ecosystem at large. In addition to demonstrating our intentions and alignment, we develop deep expertise in ecosystems and platforms, which makes us better partners to early-stage founders.

We are hiring engineers and data scientists.

We are hiring more people to work on public goods projects, including:

  • Suite of public data dashboards — We’ve already shipped dashboards tracking Curve pool balances and metrics on Convex. We are working on shipping more.
  • Community Report focused on understanding NFT and DAO communities — For social projects like NFTs and DAOs, developer activity is less meaningful than social dynamics. We are mapping and will share data on community growth across top communities.
  • Smart contract verification tools — As with any new technology, crypto users are unfortunately the target of scams and attacks. To help make the Web3 community safer, we are creating tools to help verify smart contracts for top DeFi protocols and NFT collections.

We’ll lean on the community to iterate on each of these, and to identify other needed public goods. As a founder-first, software-forward venture firm, we are dedicated to building and sharing tools and data with the community.

Does one of the public goods we are working on excite you? Have another idea for what tools the crypto ecosystem needs? If so, join us and work with founders, get paid to ship open-source software and public goods, and help build a next-generation venture firm.

Check out our open positions in software engineering and data science, or DM us on Twitter.

Disclosures

This Content is for Informational Purposes Only

Nothing in this publication should be relied upon as financial, investment, legal, tax, or other advice. You should consult your own advisers as to those matters. Nothing contained in this publication constitutes a solicitation, recommendation, endorsement, or offer by Electric Capital or any third party service provider to buy or sell any securities or other financial instruments, provide investment advisory services, or adopt any investment strategy. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation. Furthermore, this content is not intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by Electric Capital. (An offering to invest in an Electric Capital fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and all such documentation should be read in its entirety.)

Any forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Past performance is not a reliable indicator of current or future results. Actual results could differ materially from those anticipated in forward-looking statements, and future results could differ materially from historical performance.

Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Electric Capital may have previously held, currently hold, or will in the future hold tokens, or otherwise invest in some of the projects mentioned in this publication. We do not short tokens.

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Electric Capital is an early stage venture firm focused on cryptocurrencies, blockchain, fintech, and marketplaces.

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Electric Capital

Electric Capital

www.electriccapital.com

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