Chasing a Perfect Storm

Posted on August 3, 2018. Filed under: Uncategorized |

Every few years a deep change in technology, capital markets, society, or regulation catalyzes meaningful flow of power and value from large incumbents to new market entrants. These catalysts are the lifeblood of venture capital returns and the beginning of every thesis I have ever had as an early stage technology investor. As a general rule, my approach is to look for the “native” systems and companies created in a catalyst’s wake that could not have existed prior to it’s occurrence. These native systems are the purest expression of the underlying change and are often the most valuable when they grow up. Today, we are in a moment of deep flux. As of October 2017, it is possible that not only has a single catalyst emerged along one of the above axis, but rather that we are in a perfect storm where deep change is present in all four of these catalyzing realms, simultaneously.

From a technology standpoint, the advent of blockchain technology looks like a fundamental development that has and will enable multiple $10B+ market cap systems to develop where they could not have previously. Recent technical catalysts on the magnitude of this development might include the advent of social networking technology in 2002 (~$1 Trillion of value creation/capture), the development of the iPhone and mainstream mobile computing in 2007 (well over $1 Trillion of value creation/capture), and not much else.

This technical breakthrough not only challenges the large, centralized incumbents that dominate the technology landscape today, but importantly also the capital markets that surround them. A new financing mechanism, business model, and organizational structure has emerged around blockchain technology, known as tokens, and their issuance and behavior has impacted the early stage capital markets on as fundamental a level as, say the accelerator model and Y-combinator did in the early 2000’s. Venture Capital firms, hedge funds, angel investors, and entrepreneurs are reeling and reorganizing in response to this development and new entrants are capitalizing on de novo market positions built from scratch for this new reality.

From a societal perspective, both domestically and internationally, bottom up dissatisfaction and lack of trust in the powers that be, coupled with modern communication tools assisting in self organization and public communication, has led to a state of social instability. Tensions between the “haves”, the “have nots”, and the “used to haves” are at a boiling point and existing societal systems and infrastructure are being challenged daily and with ever increasing veracity. Further, we have entered a “post truth” world where we can no longer take an image, a public figure, or a piece of content at face value. Many of the upstack systems built on a premise that facts exist can and will be rewritten. The crowd, whatever faction of which you choose, wants change and increasingly has the tools to exert force against our organizing systems, namely private enterprises and government structures. These tools, to date, have largely been social media and messaging platforms that have organized and amplified voices, whereas Blockchain represents a new ability to align and coordinate economic force within these now networked and organized segments of the population. With coordinated information, behavior, and economics, incumbent challenging ideas, movements, and services stand to accelerate the flow of value toward new entrants and those that finance them.

From a regulatory standpoint, the United States has an administration that is ripping up the carpet on which we have stood for over almost a decade. Value promises to change hands in highly regulated arenas such as insurance, healthcare, transportation and energy, as well as tangential markets that feel the ripple effects of administrative 180s. In addition, new regulation around capital markets and cryptocurrencies is being written and defined in real time. Decisions made here will have a profound effect on the early stage capital markets, themselves, as well as the very formation of entities that birth new technology.

Exciting times!