Hi,
Welcome (back) to MWAVC for my 547th post on about finance, investing, venture capital and all that jazz. My name is Ato (more about me here and here) and I try to write every single day, inspired by Seth Godin (Seth’s Blog) and Fred Wilson (AVC). I haven’t done the best job over the last few months (read: years 😬), but I’m working to be better and more consistent, even as I manage this crazy schedule.
In case you’re new here, quick introduction: I’ve been investing in some way shape or form for the last 12+ years and now work with one of the pre-eminent VC firms in Africa - Microtraction, and the family office that acts as the GP - Pave Investments. Read more on us here and here. Much of the writing I’ll share here are based on things I find interesting that I’d like to share and hear your thoughts on. This is also an outlet for my thoughts, lessons, asks etc. and I think you’d find most of it valuable if you’re remotely interested in learning about venture capital.
I’ll be developing the content further, including things I think will be helpful and would appreciate any feedback on what’s working vs. not, and what could be helpful for you over the long term. If you’d like to sign up, you can do so here. Or just read on.
The Bitcoin Playbook
While staying on the Bitcoin topic, had to go back to this Acquired episode and refresh my memory on why this makes sense. It’s 3+ hours long but well worth it.
1. Technological paradigm shifts are ideal opportunities for attacking incumbents.
The traditional finance system worked fantastically well for 500 years, but it wasn't built for the internet. The fact that sharing your bank account or credit card number is required in order to transact, but there's no really robust way to protect against fraud when doing so, provided the perfect seam for a new entrant. Bitcoin and its creators saw this shortcoming and created a new form of money that worked like email.
2. In the early days of a network-effect system, usage matters more than use-cases.
Because the value of a network grows as a function of Metcalfe's Law (value = # of engaged participants squared), in the early days simply growing the number of engaged participants matters more than the specifics of what those participants are actually doing. As the network's value grows, it will become attractive to successively more groups of users and use cases.
Bitcoin started as the domain of researchers and fringe libertarians, then illicit transactions (Silk Road), then speculation (the ICO boom) before finally reaching adoption by the mainstream investment community. Each wave built enough monetary value in the network to make it attractive to the next set of users. Similarly Facebook went from sharing photos of attractive undergrads to how billions communicate, and Airbnb went from ratty airbeds to ~10x larger than any hotel chain, all within a few short years.
3. Distributing network value out to its participants creates large incentives for adoption.
Rewarding miners with bitcoin itself created a huge incentive for participants to join and stay in the Bitcoin network. Although this dynamic got a bad rap during the ICO bubble when it was overused and overpromised by grifters and scammers, it remains a powerful strategy and will likely be used more going forward.
Perhaps most excitingly, this incentive unlocks massive new potential for open-source software development: people who work on open-source software (or provide other functions) can now receive direct value for their contributions, without being employed in any traditional sense.
4. Just HODL, baby. (aka let your winners run)
You can get rich quickly by getting in early on a winning investment. But you can only get really rich by holding a compounding asset for an extended period of time. Sequoia learned this lesson painfully with its Apple investment in the 1970's: selling its entire position for just a ~$6m profit within a few years. Similarly, anyone who bought 1,000 bitcoin for $10 a piece in 2012 could have sold them for $1m four years later in 2016. But four years on from that, they're now worth $35 million. If you continue to believe Bitcoin has a bright longterm future (which, to be fair, you may not!), what could they be worth in 2024?
5. We're only just realizing the implications of digital scarcity.
For its entire existence before Bitcoin, computing and the internet was all about turning scarcity into abundance. (via infinitely replicable + easily distributable software and other digital goods) For the first time in history, Bitcoin and its underlying blockchain have introduced the opposite: scarce, non-replicable digital assets. Native digital currency (Bitcoin) and smart contracts (Ethereum) are the first big outcomes of this advancement, but there may be many more seismic shifts to come.
Currently Reading 🎒
Currently Listening 🎧
The Truth About Building AI Startups Today
I hope this is helpful to some founders out there. I’m happy to speak more on this with anyone looking to build a company and wants feedback. Thinking of bringing my Office Hours back for founders to book 30 minutes to tell me about themselves, their businesses and ask for feedback, but haven’t made a full decision yet. Should I? 😬 (I’ve got 9 yeses to this so far, and looking for 1 more before I push it).
Remember: “Until the lion learns to write, every story will glorify the hunter.”
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Till tomorrow,
AB