BILLION DOLLAR TOKENS, ICOS & CRAZY MARKET SWINGS WTF IS GOING ON!?

Opening Statements & Disclaimers:

• When I talk about ICOs here I am not talking about how they are today, but how they should and will be built by sane, rationale professionals that want to build sustainable ecosystems and don’t want to go to jail
• Many of the failings of the first wave of ICOs are easily fixed if you want them to be. Starting with appropriate DD, vesting, KYC, AML and governance structures. It’s not rocket science.
• Everything I say in this post still stands despite a sea of red in crypto-markets right now (as of 15.07.17) which I believe is largely as a consequence of the success of ICOs as founding teams dump Ether / Bitcoin for fiat
• Fundamentally ‘crypto economics’ is an emergent field of study that, like economics more generally, is imperfect and that no one has all the answers to.. yet / maybe ever
• Keeping this in mind any token issuance should be considered the seeding of a new digital economy requiring thorough thought in the behavioural economics that underpin it, ideally with pre-ICO simulations run.
• These economies like Web 2.0 will increasingly become THE general economy therefore they should be designed with the appropriate levels of diligence and thoughtfulness to ensure they create a more sustainable and equitable world

Action: Over the coming year Outlier Ventures will pioneer a new standard in both the corporate structuring and governance of the entities that issue tokens and the design of the tokens themselves. On the former we will shortly announce a global partnership with a leading law firm. On the later point we will work with world class economists and specialists in open protocol design to construct and test our models before any issuance.

Framing:

• We are all now investors speculating on the ability of open source communities to build new digital economies.
• Tokens allow these communities to directly incentivise risk and contribution proportionately to a fractional degree
• As a consequence we are witnessing unparalleled network effects and a wave of opening source initiatives, unlocking huge amounts of otherwise proprietary technologies & datasets. That is a very good thing for society and innovation more generally.
• Whilst seeing teams raise hundreds of millions (that they don’t often need) may seem at face value a wasteful allocation of capital, compared to the previous VC model where 90% of startups fail it’s a huge improvement
• This is an important point to emphasise. When 90% of startups fail almost always all value is lost forever. All IP, code base and know-how. Literally nothing can be worse than this.
• In principle with an ICO as long as there is genuine value created, even if one team fails to execute, the community continues to live on and in theory very little value is lost.
• In fact, if a team or particular approach is seen to be systemically failing the community can fork. This can happen innumerable times and in each instance all investors retain some value
• Therefore when assessing the seemingly crazy market caps of tokens see them not as the valuation of an individual startup but rather the community the founding teams work within
• For protocols that require corporate / incumbent adoption open source solutions are infinitely less risky. Typically they will not otherwise carry out complex change management on critical infrastructure if there is a 90% chance of failure rate. Here the startup dependency is removed.
• A further point on corporate engagement with open protocols is that there is an increased urgency they take a stake in what could become critical infrastructure, even as a hedging strategy. Most importantly because it prohibits their typical approach to disruptive innovations in market which is usually acquire-to-kill. This is no longer possible.

Action: At Outlier Ventures we are investing time and money in helping existing communities of startups, corporates and academia working within select themes design and launch tokens. Success is based on depth of community centered around real and quantifiable problems. Unlike the typical VC approach of distributing risk across as many startups as possible we propose to focus only on supporting a handful of communities with all our resource and capital. I would propose any VCs not doing the same do not get the paradigm and their investment of a vote of confidence means less.

Conclusions: Go Big Or Go Home

• As a VC I am being approached by numerous startups wanting to ICO. Often they are looking to raise capital to build the same underlying open source infrastructure. This makes no sense.
• I propose instead startups join forces, where practical, under a meta theme to combine code-base, know-how or user-bases to carry out an ‘aggregate ICO’
• This already guarantees investors a degree of network effect and through depth of community significantly de-risks the investment and forces the remaining ecosystems into your orbit
• The corporate construct carrying out the ICO can act like a thematic fund that deploys capital proportionately to those that contribute to its larger vision and accelerates it’s progress
• This can be like a swap at the beginning where startups commit value, including ownership of code, for tokens or allocate capital for acquisitions
• When I have discussed this a few people felt this is trying to centralise a decentralised system. But that misses the point. All of these parties can fork at any point in the future if their vision requires a more nuanced approach but they still benefit from the early and rapidly developed shared infrastructure and subsequent network effect.
• In summary we are talking about infinitely more less fragile, or as Taleb would say, it is an ‘anti-fragile’ system.

Action: At Outlier Ventures we are currently constructing 3 x Aggregate ICOs including: Open Mobility, Knowledge Marketplaces (Training AIs) and Open Banking. Each will include multiple startups, some will allocate capital for large acquisitions and many will have corporate backers. That’s right the first corporate backed ICOs!

Now it’s always interesting to end on some predictions so let’s give it a shot.

Near-Term Predictions:

• A bunch of ICO folk will be prosecuted, very likely first by the SEC, for breaking securities laws after it goes bust / someone runs off with money, or the team implodes because of poor / to no governance structure and basic bookrunning. This does not require any new laws to happen.
• Hot on the heels of Singapore a number jurisdictions will make formal communications that ‘network access tokens are not inherently securities unless marketed as such’. This will take ICO mainstream in the next 12 months.
• The US will be the last place to adopt this stance. Sadly the UK should be the first but will likely be driven by Brexit escalating or deescalating however more likely it will be smaller nimble EU states like Estonia or the usual hubs for online gambling / crowd funding Gibraltar, Malta etc
• A plethora of zombie startups (no growth, stalling) will ICO over the next 18 months, often directly pushed by their VCs, to enable them to liquidate their positions. You can spot these a mile-off based on the lack of lock-in / vesting periods for existing investors.

Mid to Long-Term Predictions:

• A number of ICO takeovers of ailing Web 2.0 platforms by employees or user communities will happen (1st high profile one being Twitter or Soundcloud in the mid-term). Through lack of proper crypto-economic design they will likely fail to turn the platforms around long-term
• We will see increasingly aggressive activist investor forks installing hand picked teams of commercial execs to lead protocols
• Similarly hedge funds / private equity firms will begin scouting ICO scrap yards where teams have failed in execution only to revive under new management
• A more long-term view is an increase in token based open source economies means an acceleration of ‘the gig economy’ with much more fluid labour markets. This kills the corporate employer model of organising economies and will create a crisis in how the state taxes and cares for its citizens. Only the most entrepreneurial will succeed with even less of cushion in pensions and social care.

Original Post: 15.07.17 @ OutlierVentures.io