Why I Want Crypto to Succeed

For all the right reasons, public sentiment towards crypto is spiraling. Scammers, ponzi schemes and the like are being exposed daily, and unfortunately it’s coming at a real monetary cost to unassuming ecosystem participants. Alas, it is easy to be a critic when things are so painfully awry. I am by no means a crypto-absolutist, nor am I an outspoken skeptic. I think the most prevalent use case for crypto today is speculation in the form of a global casino that operates 24/7. There are a few other use cases and projects that cross the chasm and provide real value to network participants like Helium, but they’re the exception, not the rule. But I still want crypto to succeed and remain long-term bullish and optimistic.

Crypto is a potentially very important innovation within the technological revolution that is the information age. It’s important because it has the potential to deliver a rather utopian end state to the proliferation of software as it continues to eat the world and infiltrate our daily existence. I want it to succeed because I would like to see the following ideals exist and believe that crypto is well-suited to support them:

  • A structurally sound alternative to incumbent control: Azeem Azhar does a good job illustrating the problem in his book The Exponential Age (read my review here). The gist is that a handful of executives at tech companies control a majority of our data that’s lodged in silos and influence our daily lives significantly more than most of us would like to acknowledge. Crypto is a logical and viable way to decentralize that consolidated power. If the history of business is the bundling and unbundling of services, crypto can be a force for unbundling (or disaggregating). Here’s a good Albert Wenger article on why this is important.
  • Users are owners: Today’s incumbents have created some of the most impressive businesses in history on the back’s of their users (who received and continue to receive impressive value from them). One of the things I love most about crypto is the notion that network participants can become owners of the networks they help build through token incentives. To date these token incentives have had a rather perverse impact on most projects (i.e. participants game projects early on to earn tokens in the hopes of selling them off without really caring much for the longevity of the service itself), but the idea is powerful and wonderful. Here’s a nice piece by Fred Wilson about token business model innovation.
  • Democratized governance as a coordination experiment: In addition to being user owned, most crypto projects have a stated end goal of being governed by their users. This is a fundamental premise of DAOs, and some projects have done a nice job handing off the reigns to their users. There’s something fascinating about this. There are a lot of obvious downsides, but the notion of democratic governance for the most important internet protocols and services is a fascinating experiment. If you want to dive deeper here’s a great podcast featuring Joel Monegro.
  • Transparency and composability can accelerate the pace of innovation: Crypto is open source by design, and it’s composable so I can mix and mash existing applications however I’d like. Imagine if you could take the pieces of Google, Twitter, etc. that you love most, combine them and then build something new that you’d like to use on top of them. Being able to assemble internet applications like legos is a powerful tool for rapidly building and testing new applications. Here’s a deeper dive by Linda Xie.

There are other aspects of crypto that I like (namely that it’s fun and that DeFi can create a more inclusive global financial ecosystem), but these are the ideals that I value most and would like to see flourish in the real world. Crypto is the most viable foundation for them. I don’t know if it will happen. For all the capital and time that has been deployed in the space by brilliant builders and investors, it certainly has not fulfilled its promise. But the future is still there for the taking, and I remain optimistic.

**Sometimes I like to revisit these articles that helped me understand how important crypto can be:

Incentives Drive Behavior

One of the most important Fundera board meetings I ever participated in took place in 2016. We were reviewing sales productivity metrics and one of our independent board members, Phillip Riese, asked about our compensation plan. When we explained that everyone was paid a healthy base salary and that we didn’t need a bonus plan because everyone was super sharp, talented, mission-driven and cut from a different cloth, jaws hit the floor. I was promptly reprimanded and then pat on the head for my naivety. It was then that I learned a critical lesson: incentives drive behavior.

It’s a phrase I find myself repeating over and over again. I learned it well while building Fundera. Need to solve a problem? Hit a target? Do something spectacular? Incentives work wonders. Incentives are one of the most powerful tools people have to inspire the behaviors needed to drive desired results. They are deeply embedded in virtually all systems: political, economic, social, environmental, etc. Sometimes incentives produce phenomenal outcomes, and sometimes they create havoc. They are a double edged sword as too much focus on driving short and medium-term results can come at the expense of long-term mission and vision. For operators, a balanced scorecard can help to mitigate detrimental effects.

One industry where incentives can create misalignment between businesses and customers is venture capital. This thread by Rob Go does an excellent job illustrating the point.

And this Dan Primack observation succinctly explains the oppositional dynamics.

The fundamental interests of most founders are oftentimes directly at odds with those of their investors. It’s worth stating that I am huge fan of venture capital. I’ve worked with many firms and partners across GroupMe and Fundera that I deeply respect. It’s a remarkable tool to create something out of nothing and build and scale businesses. That said, for most founders and employees, optionality is an important thing to preserve in order to optimize for beneficial financial outcomes. But VC makes almost all of its economic returns on a handful of outlier grand slams. 3-5x returns on any individual company are nice, but they do not make or break an individual fund. They’re rounding errors at the end of the day. But a $50-$100 million outcome can be economically life changing for founders and employees that haven’t over-capitalized and own a meaningful percentage of their companies. This is a unique friction that exists in the industry, and it’s critical that founders are cognizant of its existence.

Once you fully grasp the concept you begin to notice how incentives influence virtually every institution in our society. For instance, this insight from Palmer Lucky will make your head spin.

When you’re frustrated with the way something works, this realization helps you get to the bottom of why things are the way they are in the first place. For people who like to reason in first principles, it’s a powerful tool to get to Why.

Now when I set out to build something or tackle a problem that’s loaded with complexity, one of the first things I try to understand is the role and influence of incentive structures.

Tough Love

At the beginning of my junior year of high school my English teacher, Dorothy Palme, gave me a D minus on a paper I wrote. It was the first grade below a B I had received in my entire academic career. I was flabbergasted and livid. I stayed after class to ask her why she gave me the grade and she walked through all the reasons. What it boiled down to was that I was a poor writer. I left the classroom even angrier after getting the feedback. Like the little brat I was, I brought the paper home to my parents and exclaimed that I had been cheated. They read the paper and I’ll never forget their reaction. They unanimously supported Mrs. Palme’s assessment that I couldn’t write worth a damn. They said so themselves and I knew they were a combination of disappointed and embarrassed.

Mrs. Palme was the best teacher I ever had. Over the course of the year, she worked with me to transform the way I approached writing. She taught me about introductory prepositional phrases, how and when to appropriately use adverbs, how to coherently structure my thoughts, and so much more. She did it all on her own time outside of class, too. Her lessons will stay with me forever and it’s not hyperbolic to say that she changed my life for the better.

Most teachers would have played it safe. Perhaps they would have graded the paper a B minus or a C. But Mrs. Palme wanted to teach me a lesson – that I could and must do better. It was a lesson that required her to be brutally honest, and to roll up her sleeves and take the time to help me if I wanted to fix it. And while I hated the lesson in the moment, it fondly sticks with me to this day.

The Mrs. Palme’s of the world are far and few between. Over the course of my professional career, I haven’t encountered a lot of people who had the courage to tell me how it is. There are two investors and board members I’ve worked with that particularly stand out: David Weiden and Scott Feldman. David once lambasted me for not truly understanding basic concepts around unit economics like payback periods. And Scott once vehemently claimed that I was in the process of running my business into the ground because I was being a poor steward of capital. Both took the time to explain what they meant to me, connected me with people that could help, and also did the hard work of helping me themselves.

When it comes to investors, David and Scott are the exception to the rule. Most egregiously pander to entrepreneurs. For many, telling the brutally honest truth doesn’t have any upside. Why rock the boat and develop a reputation with founders as being the mean investor, especially in the hyper-competitive of the past decade? So much emphasis is placed on supporting entrepreneurs and being “founder friendly” that it’s nearly impossible for most operators to get to the truth.*

The irony is that withholding the truth is the opposite of being founder friendly. There is a market for those who can do this exceptionally well. It’s something I try to do when I invest in companies and work with founders. And to my delight, it’s not just me who appreciates “real-talk.” Entrepreneurs crave it. They may hate it in the moment because it can hurt the ego, but it resonates. When it comes to company building, I want to partner with someone who tells it how it is and isn’t afraid to hurt my feelings than someone who prioritizes simply being liked. In my experience it’s those that dish out the tough love that I’ve grown closest to and admire most.

*The counterpoint to this is that a majority of VCs are terrible at giving feedback, are bad at what they do, have zero compelling or relevant operational experience, and their hands-on involvement is oftentimes destructive. Choose your partners wisely or suffer the deleterious consequences.

Dear Republican Friends

I have been trying my best to have an open mind when it comes to politics and worldviews. I try to understand and question my biases so I can feel confident that my opinions and beliefs are informed ones. I consider my political orientation Left/Progressive. I don’t agree with all Democrat policy. I think most politicians, regardless of party, are inept and care more about preserving power and their jobs than they do legislating. But I do believe that the government can be a remarkably effective tool to make Progress and help people.

As part of my quest to have a more comprehensive and empathetic understanding of people’s political inclinations, I follow a lot of Republicans that I think are very intelligent and successful people. I try to learn about what is most important to them, politically speaking. The common denominator seems to be fiscal policy.

I understand that people don’t like taxes.

I understand that people don’t like it when the government spends lots of money.

I understand why people think the federal government is bloated and ineffective.

I understand why people don’t like their business regulated.

I understand why people are vocal about these issues. But I do not understand your silence when children are regularly massacred in schools in this country. It’s a preventable epidemic and it does not happen anywhere else. And like it or not, this is a political issue.

Is this not your line? And if it isn’t, do you have one? When is enough enough?

Asking for my children and yours.

Constraints and White-Hot Risks

I recently read The Power Law by Sebastian Mallaby. There is a section about how Thomas Perkins, the founder of Kleiner Perkins, approached venture capital. His strategy was to “identify the white-hot risks, then find the cheapest way of going after them.” Essentially, determine where the startup might fail (e.g. is there a foundational technical breakthrough that’s required? Some complex operational execution? A question of market demand? etc.), and maniacally focus on solving for that singular element in the most economically efficient way possible. I very much like this approach to investing and company building. Constraints (i.e. the limited amount of money one has in the bank) force focus and ruthless prioritization.

In the past decade tech entrepreneurs have experienced remarkable market conditions. Money from venture capitalists was seemingly infinite. This created a series of bad behaviors that entrepreneurs will have to unlearn. Mainly, it enabled founders to do too much shit at once without truly understanding and focusing on what was most important to make their business actually work (i.e. what is the white-hot risk?). My strong preference for company building, particularly at the early stages, is to singularly focus on the thing that is mission critical and to tackle that in the scrappiest way possible. I, like every other entrepreneur, have made the mistake of trying to do way too much on more than one occasion. The times things worked best were always when we had a crystal clear focus on the absolute most important thing to accomplish and focused all of our resources and attention towards it.

The recent market turn is going to create new constraints for entrepreneurs. Capital will be much harder to come by, and this will be a forcing function for leaders to do less. Ultimately, I think this is a very good thing. Many founders will struggle to adapt – these are new market conditions for a lot of people and new is always difficult. But those that do embrace these newfound constraints and zealously hone in on the white-hot risks are going to emerge having built industry-defining iconic companies. They will likely build better companies faster in this capital-scarce market than they would have in the capital-abundant one. Call me old-fashioned, but I’m excited about this return to normalcy. In the long run I think it will produce better outcomes for everyone in the ecosystem.