To Distribute Ownership of Equity & IP More Intelligently
If we want to see the type of sustained innovation that can address the very real-world challenges we are seeing today, we need to evolve the system to spread personal and financial risk more intelligently.
Hardware is hard.
I’ve heard this lamentation repeated over and over as well-funded hardware startups fail and sell their assets for pennies on the dollar. A CBInsights research report found that 97% of hardware startups fail or fizzle out without any meaningful exit — a much higher failure rate than what is seen across tech startups as a whole.
What this ultimately leads to is a world of 140 characters on twitter (now 280) instead of, for example, flying cars. The built environment is lagging so far behind the digital, but hardware is how the world moves at the most fundamental level. And the problem is not that there is a lack of investable money in the world, it’s that the existing systems and structures don’t adequately direct them towards innovation. Early-stage R&D costs a lot of both time and money and is seen as too risky for both private and institutional capital. But early-stage R&D is where meaningful breakthroughs that address our greatest challenges and improve our lives occur.
So of what significance to hardware founders is that failure rate? If history foretells a 97% failure rate, and investors expect a 97% failure rate — so too should the founder. If you’re starting your journey with an expected outcome of failure, then you need to be planning — from the outset — for either a return to the traditional workplace or another startup attempt (with similar expected outcomes). Even if success equates to great personal wealth, that risk profile is entirely unacceptable.
If we want to see the type of sustained innovation that can address the very real-world challenges we are seeing today, we need to evolve the system to spread personal and financial risk more intelligently. This is essentially what VC investors have been doing for some time: they spread their risk over several hundred companies anticipating 90% of them will be failures and the other 10% will become businesses that pay, in principle, for all of the failures.
And the real money is made on the “unicorns” — those companies whose names we are all familiar with. Even if you only own 7% of that company (which is the standard for Y Combinator), their incredible valuations make you suddenly very wealthy.
Why shouldn’t startups and founders adopt the same approach? Why shouldn’t they share equity among other startups in much the same way that investors spread their risk now?
With the rise and proliferation of distributed ledger technology and smart contracts, I believe we have the instruments necessary to achieve this in an affordable and efficient manner. Such a system could optimize the situation of founders and startup teams, creating a safety net that allows them to really push the innovative capabilities of themselves and their startup. It could also align the interests among founders, employees, and investors - as investors want startups to shoot for that unicorn payout which requires the opposite of a risk-averse founder. Perhaps such a system would transform the status quo into a higher-performing version of itself…
What might this look like, and how might it operate?
Let me know what you think. I have started drafting my own version, which I’ll share in my next post ...
