Outlier Ventures — Invaluable Crypto Startup Insights from CEO Jamie Burke
Annissa from the $WHALE community sat down with Jamie Burke, the CEO and Founder of Outlier Ventures. Outlier Ventures is Europe’s first blockchain Venture Builder and early stage fund that pioneered the convergence thesis. It focuses on blockchain as fundamental to key emergence trends like Artificial Intelligence (AI), Internet of Things (IoT), mixed reality and autonomous robotics with huge significance to the health e-gov industry, 4.0 mobility Smart Cities and Financial Services. Jamie dove deep into the details about working with startups, the pitfalls, identifying quality ideas and teams, and crypto market trends.
Can you tell us a bit about your and Outlier’s journey through the Crypto space?
Outlier and myself have been in the space for about seven years. I’ve seen the space mature as it’s gone through it’s various cycles and as an organization we’ve really evolved with it. In the early stages there weren’t really many startups to invest in that were truly native to crypto. We didn’t really know where this space was going but it felt important, so we did some applied learning and basically broke a lot of stuff trying to learn.
We spoke with thousands of startups when everybody was pitching themselves as a blockchain startup but in reality they hadn’t fundamentally changed anything about the business model — it was a classic Web 2 proprietary business trying to be a platform. So at that point we decided, yes there were many conceptual use-cases for blockchain that were being talked about, however very few startups had fundamentally understood the paradigm shift and even if they had, the technology and infrastructure just wasn’t there to execute. So we decided to focus primarily at the infrastructure layer and we became more of an incubator for protocols that were building foundational primitives for web 3.0.
Our perspective of blockchain shifted to it being a new data economy in the context of IoT devices, how the data is distributed and commodified using distributed ledger technologies and ultimately how it was going to be consumed by machine learning and AI. That was the framework that led us to invest in things like Ocean Protocol, IOTA and then Fetch.ai, which is looking at machine learning and autonomous economic agents, and also Secret Network which is privacy preserving computation. More recent investments include DIA data, which is curated crowdsourced data oracles as well as Quedos, which is distributed computing.
About two years ago we felt that generally the Web 3 stack was maturing and that we could start investing at the middleware (developer tools) and application layer (NFTs and DeFi). When people talk about adoption they always think about it in a consumer context but 99% of the world’s developers still aren’t building anything on a blockchain, so our focus was on the middleware — startups and protocols that abstract away the complexity of building on top of blockchains — both technically and economically.
“When people talk about adoption they always think about it in a consumer context but 99% of the world’s developers still aren’t building anything on a blockchain.”
At the application layer we’ve begun to focus more on NFTs and DeFi. We’ve become an accelerator primarily and this year we’ll work with 50 startups, half NFT related, half DeFi and of course many of them a mixture of the two.
More recently we’ve reframed our thesis as the open metaverse OS (Operating System) so this is specifically looking at another 10 years forward. Normally every couple of years we write a new thesis which you can find it on our website outlierventures.io. This talks about how Web 3 infrastructure like self-sovereignty of identity, self-custody of digital wealth, privacy preserving technologies, NFTs and DeFi all combine to make the capabilities of an open metaverse as opposed to a closed metaverse — one that’s dominated by all these web platforms gaming engines.
What are some of the core principles in creating a sustainable business model in Web 3 that can increase the adoption curve to the mainstream audiences?
There is no one right path. It depends on a number of things that might be specific to that use case, for example technical dependencies like a dependency upon Ethereum or to specific stakeholders. One common misconception of crypto is that the end users are already native to the space like in DeFi. However, even with DeFi you could argue it’s still a very small subset of crypto that uses it. It’s still incredibly complex to use, it’s not user-friendly and it’s very difficult to manage risk. With all of these startups that we work with we help them to take a very pragmatic pathway. They need to acknowledge that they are building in a new paradigm and it’s amazing how many startups think with the old Web 2 mindset. They’re trying to build proprietary platform-based businesses primarily financed by venture capital and they’re trying to do a winner takes all market. In reality, many things have changed about the web which fundamentally means that it requires a different business model. It requires a more collaborative more open business model. Our job as an accelerator really is to help them fast-track decisioning, to understand what is important to them to be able to gain traction and adoption.
“In reality, many things have changed about the web which fundamentally means that it requires a different business model.”
On the other hand, nothing’s changed as a start-up. You still need to find product market fit, you need to establish that people actually need the thing that you’re building and they intend to use it in the way that you hope they’re going to use it. During these times you want to be relatively centralized, you don’t want to decentralize the governance for a startup that hasn’t established product market fit because following lean startup principles, you want to be able to iterate rapidly and that requires a small group of decision makers to be able to make data-led decisions that can iterate product until you establish fit.
It often makes sense for startups to raise money through equity and to have a core staffed team that is working exclusively on the project. Once they’ve established market fit, then they can potentially begin to open up the network, open up the source code, perhaps devolve more governance to the network. This is called a pathway to decentralization. Most projects, even projects that you would perceive as being very decentralized like Maker DAO, have followed this pathway. We’re typically working with early stage projects and the key thing is that they achieve what you would call a flywheel. You want to focus on a number of outcomes that reinforces one another and they build up momentum around user adoption, which then informs you of your fundraising capability.
Can you explain the differences of how you as an Accelerator invest in this competitive market compared to Venture Capitalists?
There are a couple of different approaches. People always talk about red ocean and blue ocean — red ocean being bloodied because it’s highly competitive, highly sought after and blue ocean being “virgin territory.”
As an Accelerator we have a very specific role in the ecosystem. We speak to many startups — probably about 2,000 each year. We see these startups very early on and one of the benefits is that we have one of the best views on the market because we see what’s coming before most VCs. You start to see patterns, e.g. 15 of those startups may be focusing upon this particular problem area or market, and so you get a feel for momentum of innovation. We are perhaps 12–18 months ahead of the market and our job is to filter the ones that have potential, de-risk the investments and then feed them into our co-investor network — VCs, Crypto Pools, and increasingly DAOs.
One of the things I’ve learned over the last seven years is that your thesis can be right, you can even make the right bet on a startup/team but you can get it wrong by being too early. So our sweet spot is actually to be six months ahead of the market. Anything more than that and the project will struggle to raise from other investors.
“We’ve had two billion dollar market cap projects out of the gate in the last 12 months and we’ve had three that have been over 600 million and honestly the difference between a project that goes out at 30 million and that isn’t much. It’s often simply making sure that the market perceives them in the right way and that’s a big part of what we do.”
Are there any investment principles to identify companies that have tailwinds instead of headwinds?
I use a slightly different analogy which is sometimes you’re swimming upstream and downstream. Often it’s very difficult for the entrepreneur to see it if they’re alone. Sometimes you really believe in something and you know it’s inevitable but it feels like you’re swimming upstream, it’s just not getting the traction. It isn’t connecting with investors or you’re not closing customers or establishing fit. It’s difficult to understand why when you’re doing that in a vacuum and one of the benefits of being in a cohort of ten people is that together you can see the difference immediately between upstream and downstream.
For example we had a team that is solving the problem of physical to digital to physical redemption that we accelerated in the depths of the crypto winter (over 18 months ago) and no-one was interested in what they were doing. They created a really elegant primitive that solves that problem, it abstracts the complexity away and makes decentralized e-commerce possible which is going to be massive for NFTs, but 18 months ago nobody was talking about NFTs so even though we knew it was huge they couldn’t raise any money. Fast forward to the Summer of last year and all of a sudden they were closing several millions. They’re now four thousand percent oversubscribed in their private sale round. So timing’s a really big thing.
The hardest thing for a founder to know is whether they should continue swimming upstream or if they should pivot. We’ve had several projects put in front of 50 investors back to back and at the end of it they’ve got a pretty good feeling that nobody’s buying. We sit down with them and work out if it’s just a messaging thing or if they actually need to fundamentally pivot the business. It’s rare, but we’ve had some teams do entirely different businesses.
“We back founders, not even necessarily the thing that they’re pitching. It’s likely the business will pivot and so you want to invest in people that you know are going to hit the jackpot at some point.”
The internet is now filled with bots. Are we still building for people or should we shift our incentives to machine to machine instead?
This was central to our thesis around the convergence stack, machine learning and AI. If you accept that Web 3 is primarily about data in a data economy then it’s natural to understand that increasingly the thing that will be interacting with your token and your network might not be a person, it might be a thing with increasing levels of intelligence and economic autonomy.
“This isn’t some distant future, the reality is that already the majority of web traffic on the internet is from bots.”
The question is who do these bots serve? At the moment they’re primarily malicious because there is no cost to being a bad bot. You can spam a website to crash it or do various attacks. So when you’re designing a tokenized system you increasingly need to be thinking about the stakeholders in that system and that it could very well be malicious bots operating at scale. How do you constrain these bots? The answer is disincentives. By having a cost, even a low level cost to carry out activity in the network, at scale it could cost the bots tens of millions of dollars to attack. The 51% attack on Bitcoin is cost prohibitive to actually carry out, and so it doesn’t happen.
In the future I think people will devolve things to bots once they know that a bot is not serving a platform e.g. bots on Facebook primarily either serve an app developer or Facebook itself, they’re not serving you as a person. They’re often looking to extract value from your data to resell or to target you with ads or something much worse.
As smart contracts continue to develop in complexity, We will be able to devolve more logic, more economic activity to bots because they can now have economic agency. I could have a swarm of agents carrying out economic activity on my behalf — buying and selling things. Also because I now have sovereignty of identity through the blockchain, I can make that data available to bots in return for money. I can trust that the agent is serving my interest and not the interest of a platform.
“We are moving towards an agent-based web and the key thing is that the agent-based web is serving us as an individual — user-centric versus serving a platform.”
Right now, we still manually type things into Google, but in the future, we would have bots searching on our behalf, probably voice activated (but not Siri and Alexa because they serve Apple and Amazon, not us). Then I won’t have to worry about trying to navigate Ads and trying to determine what is actually the best thing for me versus what the Ad is telling me. So the whole online Ad business will likely be dead.
What are some issues that we face for Internet of Things (IoT) and what are you most excited for?
There’s a lot of considerations around hardware and I had a really interesting conversation with Nvidia recently and they’re working on a lot of software for the Metaverse and how that interacts with hardware devices. They’re already thinking about things like NFTs.
For IoT, I’m most interested is the convergence in the open Metaverse, things like Augmented and Virtual Reality. How will our mobile devices interact with the Metaverse? For example on the latest iPhones there is Lidar technology. It’s effectively computer vision — it’s what’s used for self-driving cars but it also allows your device to effectively map a 3D space. You could download an app right now and scan your room in about 15 seconds. Then you get a 3D file and using software such as Nvidia or a number of other open source 3D modeling solutions, you can create a digital instance of a physical space or objects. This hasn’t yet been connected to NFTs but I’m super excited about the idea of having an app on my phone that can scan an object I’ve bought or my house or an interesting bit of graffiti on a wall and instantly mint it as an NFT and sell it. I could use a bit of real-life furniture to populate a virtual world.
What do you think are some dogmas that startups and developers have in the space and have you noticed an effect from the current easy money that is flowing in the space?
There is a lot of dogma from hardcore libertarian principle around absolute decentralization and absolute privacy. This idea that we need to obfuscate everything. Of course I agree with principles of decentralization and privacy but at the same time, if it’s taken to its extreme, what does that mean for the world? Will there be huge socio-economic consequences?
I’m old enough that I was around at the beginning of Web 2 and at that time everybody was running around (myself included) saying social media is going to disintermediate news agencies, it’s going to democratize information flow, the world’s going to be better. Then we had the Arab Spring and everyone thought this was going to be a flowering of democracy across the Middle East, but the Middle East is now ruined and it’s because we didn’t really think through the consequences.
You can look at what’s happening with the polarization of politics as a consequence of social media.
“I think social media has had a net positive outcome but it has had disastrous consequences on society, on internet, on culture.”
So I think we need to also think that through in the context of what we’re now building before we unleash it into the world. Decentralization is something you can work towards. People need to be pragmatic, not dogmatic. They need to be considerate about consequences and outcomes.
Specific to the question around money, you know we’ve been through a lot of cycles. A huge amount of money was invested and wasted in the ICO cycle in 2017. A lot of projects that should have never had any money got a lot, but at the same time, a lot of really great things got built that would have never been built. I’m actually really proud of the amount of open innovation, open-source technology that got built from 2017 to now that would have never got financed otherwise. Yes there are a lot of scams, but I think overall it was a net beneficial outcome for Web 3. Now we’re in another bull cycle and it is a seller’s market especially if you’re in NFTs and DeFi and most of these projects are more likely to happen because the infrastructure from 2017 is there.
“This is what financing innovation looks like in a permission less system. It’s messy, it looks inefficient, it looks ineffective but I think ultimately it’s net beneficial.”
I think the fundamentals are much better now. We’ve got a much more mature stack, we’ve got multiple protocols now emerging, we’ve got different approaches and I think everyone’s a bit more disciplined. We have more ways of benchmarking a project and to be blunt there are a lot of people who raised money in 2017 that will never raise money again because they screwed people over and they didn’t execute. So whilst there are going to be new bad actors that join the space, I think there are a lot of bad people that don’t get to play.
What are your takes on the current NFT market?
I just did an interview earlier with Nonfungible and they’ve got some great data on NFTs for 2020. I thought this would happen much later, maybe 12 months down the line but apparently NFTs as an asset class have decoupled crypto. The price of NFTs has detached from the fluctuations in price of Bitcoin and Ethereum and could drive market growth in crypto generally. And according to their data, that’s already happened since February! This is insane if you think about it because we’ve only just got started. It’s primarily art and collectibles now but we’re soon going to have a huge amount of gaming NFTs, Audio NFTs coming through — it’s almost limitless the different types we’re going to have.
“The fact that they’ve already decoupled as an asset class means that they have a really strong likelihood of becoming a very powerful alternative asset full stop.”
The great thing about NFTS are that they’re an extension of crypto but the use case is understandable (the behavior of collecting). Most people don’t understand money are never going to go to Binance to buy Bitcoin or Ethereum or any more exotic crypto tokens. But with NFTs all of a sudden you’re saying well it’s like a digital instance of this digital print or edition of an artwork, it’s like a digital LP. It’s a unique thing that belongs to you and it has provenance. People understand that.
Gaming is already a huge multi-billion dollar industry and the idea that you can have a gaming skin but then could sell or use it off platform, people get that. NFTs are the gateway drug to Web 3 and Crypto. I’ve experienced this firsthand. I’m finding established artists or professionals working in advertising or visual communications that discovered NFTs as a way to monetize their work as a part-time thing but that then had to figure out Metamask, buying Ethereum, and exchanging for Fiat on an exchange. Then as a consequence of earning digital wealth they have to begin exploring Crypto, understanding principles of self-custody and once they have a certain amount of value in this space it then becomes a form of collateral, so DeFi then becomes important.
“NFTs are the gateway drug to Web 3 and Crypto.”
If you think about digital wealth in the traditional gaming context, there’s a whole generation who have invested a huge amount of time and money in playing games like Fortnite etc. and all that wealth is stuck in that platform. It’s very difficult for them to even cash out into Fiat. Inevitably, this generation is then financially excluded from a house as they can’t get a mortgage. They might have a million dollars worth of in-game items and they couldn’t get a mortgage on a house worth $250 000. But the minute that you allow people to unlock digital wealth and turn it into a financial asset that can be freely traded in the secondary market, you can begin to borrow and lend against it and I would say by the end of 2021 somebody would have gotten over a million dollar mortgage on a physical property using NFTs as collateral. You’ve got people in the Philippines playing Axie Infinity as a main form of income. That’s how they pay the rent, that’s how they put food on the table for their family.
“I would say by the end of 2021 somebody would have gotten over a million dollar mortgage on a physical property using NFTs as collateral.”
And increasingly these people that are earning collectibles might, instead of selling the NFTs, just want to borrow on them like a temporary loan. So I think everybody that comes into NFTs are eventually going to start looking at DeFi as a means to realize their digital wealth and as an increasing form of how they pay for things in the physical world.
Where do you think NFTs are going to go in the next 10 years?
Most people are currently only thinking about NFTs as collectibles that you keep in your wallet but I think NFTs will increasingly become social objects. So rather than just being a virtual good, they would allow virtual services for example, an NFT that is redeemable for access like a ticket. It could be one-off or perpetual access to both a virtual or a physical experience. We’re playing around with Outlier Venture Crypto beverage cans and if you’ve got it in your wallet you can access my calendar and you can book in time for you to do a pitch session. Effectively those startups with the cans get to jump to the front of the queue of the 2000 startups that speak to us a year. I think that’s just the beginning of it and what’s really interesting about NFTs is to think about them in the context of loyalty.
For a DeFi platform, how do you (other than just giving people unsustainable yield) lock liquidity in a platform? Well, if you allow them to earn effectively loyalty points in the form of collectibles with some game on top you can begin to form loyalty and so in this case NFTs are being used as a form of marketing. A good example of this is Aave and the Aavegotchi.
“NFTs in the context of access to digital services experiences and redeemable loyalty is really exciting.”
Centralized revenue streams for music has been a major issue that could be solved through basic decentralization practices. Do you think NFTs will solve the issue of music monetization or are they going to be an add-on?
Honestly I don’t have a concrete answer. On one hand, the streaming business is broken, it doesn’t work for 99% of artists. If you think about what the internet has done to music, the digitization has brought huge value. It’s allowed for global universal non-stop distribution of digital things. Like anybody can listen to any music 24 hours a day almost for free on any device. It’s ubiquitous. The problem with that is that music is now just something you can chew, it isn’t something you own or collect. There’s a reason why LPs have not only retained value but have increased in value the more music has become digitized and streamed. It’s because people want to collect music. They want a relationship. They want an artifact that has provenance, that has scarcity. There’s a status associated with being a collector or an owner. So I what I know for sure is that NFTs restore a lot of value to music. NFTs are going to allow artists to become their own platform. So rather than streaming through a platform, the artist is the platform. They get to set the terms of how people can interact with this asset both in terms of it being a multimedia asset — how you can experience it but also the underlying economics in perpetuity.
So I think digital LPs are going to be huge. Does that mean that every song that is streamed is an NFT? Maybe not, but I would also argue potentially yes. One of the projects I’m working with, is working on the solution that an artist can effectively can sell their back catalogue to a DAO that is owned by fans. Then the fans can share in the revenue from streaming. Now will that be streamed through an NFT, I don’t know but I think what you’re going to end up with is NFTs fundamentally redefining what it means to be a creator and be an owner of digital things like music.
Let’s say I’m an artist and I create a platinum album that’s sold exclusively through NFTs. It’s limited supply and I can then say if you own that NFT, you can access my concert. So it effectively becomes the mechanism through which an artist can directly control their relationship with their community outside of any platform. I think that that’s just going to be huge.
“I think what you’re going to end up with is NFTs fundamentally redefining what it means to be a creator and an owner of digital things like music.”
If you look at Kanye West, he was recently saying he wanted to create contract templates where artists didn’t need a record label anymore, they could configure these contracts slightly and to own their music. It’s not a big stretch to make these contracts smart contracts and then effectively it’s a combination of smart contracts that can govern rights and royalties between an artist, other musicians and the people that add value to their value chain.
Watch the full interview here to hear more invaluable insights into building a startup in Crypto, NFT market trends, and entrepreneurship.
You can reach Jamie at his socials here:
Founders of Web 3 (Jamie’s Podcast): https://podcasts.apple.com/gb/podcast/founders-of-web-3/id1511782129
Outlier Ventures: https://outlierventures.io/links/