Brock Pierce: My criteria for investing
DNA co-founder Brock Pierce on the death of paper, how the financial system is like power plugs, his criteria for choosing investments, and his advice for blockchain entrepreneurs
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There have been three fundamentally disruptive technologies created during our lifetimes. The first being the semiconductor/computer. The second being TCP/IP and the internet. And I think the third is going to be the blockchain.
And when I say fundamentally disruptive, I mean that every business and every human life on the planet is going to be materially impacted and disrupted at a foundational level. Everything is going to change as a result of this technology.
The death of paper
We live in a world that’s still built on paper. When you buy a car, you’re still getting a pink slip, you’re still getting a piece of paper. Houses still run on title. The stock market. You still have all this paperwork.
We’re moving into the death of paper now. And when you move away from paper and you start to use technology to do these things, everything is going to be faster and cheaper.
Blockchain is going to eliminate the need for trust. I call the blockchain “the internet of value” and “the internet of trust.” Because everything becomes trustless. It’s a big distributed ledger. Think of it like an Excel file that’s being maintained and updated and managed by millions of computers around the world.
Blockchain is going to eliminate the need for trust.
You’ve probably seen some headlines that would give you the impression that it might not be safe. That’s just because the technology is early. The internet wasn’t useful until some basic infrastructure was built. And that’s largely what I’m financing today: the building of the bridges, the roads, and the tunnels. The infrastructure that makes it useful. The internet wasn’t useful until you had a browser, an email client, and DNS.
So the industry’s taken in about a billion dollars of venture capital and angel money over the course of the last fifteen months. In 1996 internet, it cost five million dollars to build a basic e-commerce business. Now, with open-source software and AWS services, you can build a business with $50k.
This billion dollars of capital is being deployed to build those bridges, roads, and tunnels. But it takes 1–3 years for that capital to be deployed and turned into products and services. So over the next one to three years, you’re going to see some pretty incredible infrastructure come out of this that will be the foundational layer.
Think of the least technological member of your family. We’re building this infrastructure so they’ll be able to use this with complete comfort and without risk.
How the financial system is like power plugs
The basic thing that blockchain is doing well now is serving as a transport layer for the movement of money. Money remittance is about a $550 billion a year industry. The Western Unions of the world are making about $55 billion in revenue. Their fees are very high for small transactions, so you might be spending 20–30% to send money back home to Mexico. And sending money across borders is difficult.
The basic thing that blockchain is doing well now is serving as a transport layer for the movement of money.
The financial system is not interoperable. Think of it like power plugs. There’s 110 and 220 and you have all these different adapters. The world’s financial system is very similar. It’s very archaic. It was designed for a world of paper.
So I think the best and most interesting use-case today is that instead of taking a couple of days to send money, you can now send money from here to there instantaneously and at very low fees. And that’s where most of the growth in the industry is coming today: a transport layer to move money across borders. It’s really fast and really cheap.
I can call you up and say, “You pay a lot of vendors in China? Send me the money and I’ll pay your vendors and I’ll do it for a fraction of the price that you’re currently paying.” And your vendors will give you better deals because they’re getting their money faster. And you don’t need to know how I do it. As a transport layer to move money across borders, there’s no better technology. Anyone that gets on that bandwagon benefits immediately.
Now, some of the areas where it’s less useful but has serious long-term implications, would be around payments and merchant processing. Credit cards and Paypal are charging their fees. And you have all the customer service costs associated with dealing with fraud detection systems, chargebacks, etc. When you look at your all in costs, that’s upwards of 10%. This technology brings it down to basis points. At the highest, you’re looking at 1% all in.
And if you’re a company that’s actually selling a physical product, your margins might only be 20%. These incremental savings could really move the needle for you. That margin expansion could double or triple the profitability of your business.
Blockchain is the OS
Up until now, the problem was you couldn’t send money on the internet. You couldn’t own money on the internet. You needed to have a trusted counterparty, or an intermediary, holding that asset in custody for you and maintaining a ledger for your benefit where you’re the beneficiary.
But now, you can actually put an asset on the internet without any intermediaries. That’s what Bitcoin solved. Think of blockchain as being the operating system, think of Bitcoin being the first application, and now there’s going to be an infinite number of applications — and any asset can reside there.
My criteria for choosing investments
My approach is really about identifying global macrotrends, stepping back and asking: How is the world evolving? What is the world going to look in five or ten years? The space I’m working in now, how big is the market? How big can it be at scale? Blockchain technology, and things like Bitcoin, are playing in the largest market there is. It’s not a big pond, it’s a big, blue ocean.
For choosing my investments, the most important thing is the team. I ask: Is this a team that I think can execute and build a great business? Even if the idea is great, if the team’s wrong, there’s no way we’re investing. So the team comes first.
The most important thing is the team.
Second: Is this an area where we believe there’s a big market opportunity? Is a problem being solved where enterprise value is being created as well? Because there’s value creation and there’s value capture. I have to believe they’re going to be able to capture value. More questions: Are they the right people focused on the right problem? Do we think the market timing is right? What does the competitive landscape look like?
Try to understand the potential partners they’re going to have as well. Reach out to the companies they’re going to need to eventually work with and find out if this something they would do. Can you envision yourself working with these groups? Because any time there’s a disruptive technology, there’s normallly an incumbent. Try to understand how that incumbent is going to behave. We’re quite comfortable challenging incumbents.
This is inherently an industry that most people would like to go away. Over the last couple of years, the banks have gone from “We hate this technology” to eventually going “Ok, you can’t uninvent something that’s been invented, so let’s get smart about this technology.”
Also, I like to see a minimally viable product, customers, and revenue. Obviously the more of those things a business has, the more likely you’ll get a “yes” out of me. The fewer of those things you have, you better have a really compelling team.
As an investor in an early stage company, you’re most likely going to lose all your money. That’s even assuming you’re investing in people of high integrity, you’re still going to most likely lose all your money.
My advice for entrepreneurs
Some takeaways:
Stop shopping, start building
A lot of entrepreneurs are optimizing to ownership versus optimizing to success. They’ll spend six months shopping a deal, trying to get a slightly better deal — when they could’ve just spent that six months trying to make a better business. Get the best deal you can and call it a day. Move on and build. Get the show on the road. I constantly give entrepreneurs this advice and they tend not to take it. Like most lessons in life, you have to learn it yourself.
They’ll spend six months shopping a deal, trying to get a slightly better deal — when they could’ve just spent that six months trying to make a better business.
Be an early adopter
Another important lesson is to be an early adopter of technology. Engaging with products early gives you the advantage of having more information earlier. I tinker and experiment with things before everyone else is using them. That means I’ve had more time to process. Go out, buy things, and play with them. That gives you insight.
Study money
It’s worth reading the original Satoshi White Paper. It’s not long and it will help you understand the foundational layer of what this technology is. It’s also worth reading Adam Smith’s “The Wealth of Nations” and Jared Diamond’s “Guns, Germs and Steel.” They both show how money plays such an important role in human life. So few people actually know what money is, where it comes from, and why it even exists.
Blockchain time is running at ten or a hundred times internet time, so any static contact I would give you is probably not worth using. But in terms of resources, there’s an industry news-site called Coindesk which has lots of data. That’s a great resource. There’s another site called Cointelegraph, that’s useful. And there are some great podcasts, like Let’s Talk Bitcoin. If you spent 100 hours listening to those episodes, you’d probably be as knowledgeable as I am about this.
Go an inch wide and a mile deep
Some people will go an inch deep and a mile wide. I go an inch wide and a mile deep. I try to pick a sector where I have some of the prerequisites skillsets to be successful. And then it’s hard-work. I’m pretty much working 24 hours a day, seven days a week. Even my social life is deeply integrated with my worklife in a Malcolm Gladwell 10,000 hours kind of way. I believe everyone is capable of just about anything if you commit yourself to it.
