Over the last 12 years of it’s existence, Bitcoin has been misunderstood by Silicon Valley which has led to many cringe worthy moments as they’ve endorsed silly ideas and even worse, scams.
The two big players in Silicon Valley are the tech companies and Venture Capital (VCs aka investors). The tech companies build the products that we all use, and the VCs fund their endeavors.
There is a nuanced courtship that intertwines these two parties. Through that process they dictate what is built, who gets funded, and what ideas are hot. In this newsletter I hope to explain that process which should give insight into why they’ve missed the mark on Bitcoin.
A little about me
I’ve spent the last 8 years in Silicon Valley working at early stage crypto companies all the way up to multi billion dollar companies like Uber and Kraken. Roles included:
- Product management: organizing resources, stakeholders, data, and politics to build the product
- Growth marketing: acquiring users via paid and free (organic) methods
- Product marketing: communicating to existing customers about features, issues, new products, etc.
This is how Silicon Valley approaches making products. If you aren’t innovating you’re dying. You don’t want to be the Myspace.
No product is ever perfectly right the first time. Every product you see is the culmination of countless revisions, iterations, and pivots.
The idea that Satoshi perfectly crafted Bitcoin on the first try is unfathomable for them to consider.
When tech workers see Bitcoin, they want to fiddle with different parameters: block size, monetary policy, it’s core capability/utility, etc.
This is exactly the right mindset when building applications, but the wrong mindset when it comes to building the base layer of the financial system. You can’t be constantly tinkering with the base layer of the financial system.
Bitcoin was near perfectly crafted and has already succeeded, it doesn’t need to upgrade.
VCs are not contrarian
One of the most disappointing things I found out after spending 8 years in Silicon Valley is that VCs are not contrarian.
At first this blew my mind. How could they not be contrarian? After all this is exactly what their purpose is, to allocate capital to the next big idea before it becomes the next big idea.Subscribe
Unfortunately, they have a poor incentive structure alignment. The top VCs in Silicon Valley dictate what’s hot. If A16Z or Sequoia develops a thesis for a particular sector, then as a VC your LPs will be pounding down your door asking why you aren’t in on these deals.
Similar to how Michael Burry from the Big Short felt. He correctly called the 2008 financial crisis, but the trade was so unpopular/against the grain that he suffered a revolt from his investors who demanded to withdraw their capital.
He would end up earning his investors a profit of more than $700 million.
Chatbots, blockchain/ICOs, scooters, ridesharing, drones. Over 8 years in Silicon Valley I’ve seen an equal intensity (ebb and flow of interest) in these sectors regardless of how great or poor the concept. An example of an objectively poor idea: Chatbots. Graphical interfaces convey high amounts of information. A human would take quite some time to parse through an excel file full of data versus a visualization of that information. Edward Tufte, the father of data visualization, would call this “data density.” Additionally, the number of taps it takes to enter a text string command with a chatbot vs one tap button means that it would take greater effort to accomplish fewer tasks.
Hot tech sectors and narratives come and go. VCs will quickly embrace a narrative then immediately reject it when it isn’t hot.
Bitcoin wasn’t immune to those cycles.
Bitcoin for payments era (2012 – 2015)
Silicon Valley first became interested in Bitcoin to disrupt VISA/PayPal etc in 2012-2015. Disrupting payment systems seemed like it had great product market fit and was understandable as an investment thesis.
VCs couldn’t go to their LPs and say “we’re here to undermine central banks across the world through a new digital gold standard.” Their LPs would have called them insane and they would have been shunned by their peers.
It was painfully obvious to many companies on the ground that this investment thesis didn’t have product market fit. There was little reason for consumers to use Bitcoin as an alternative to PayPal or VISA since Bitcoin is slower, harder to use, and more expensive. However, that’s what the VCs wanted to hear, that’s what got you funded, so that’s what the narrative was.
Ethereum and ICOs (2015 – 2018)
VCs had been disappointed with the failure of Bitcoin and payments narrative in the previous era, but something magical was on the horizon.
In 2015, Ethereum was perfectly crafted to match narrative market fit with Silicon Valley. Apps and app stores were all the rage at the time. Uber, Airbnb, etc were all mobile first. Ethereum was marketed as a “decentralized” app store which would allow for “dapps” to be spun up by any developer without restriction. This was the holy grail that Silicon Valley VCs and builders had dreamed about.
And then ICOs were the cherry on top. ICOs “disrupted” the VC model. What more meta way to invest than investing in something that is disrupting yourself. Additionally, it allowed VCs to become immediately liquid which was an incredible investment opportunity.
In order to embrace this new narrative, they had to reject Bitcoin as “outdated and old.” That Ethereum represented a new more bold narrative of a world decoupled from centralized tech companies like Google, Amazon, and Apple.
To anyone with a basic knowledge of how blockchains work, it was easy to use how few potential use cases there were and how a “dapp” world wasn’t realistic. For example, only valuable data could be stored on the blockchain due to the necessity of copying it for decentralization/redundancy. And the dapp/ICO world didn’t make much sense either from a basic monetary perspective, why would we want to regress back into barter (a token for everything)?
Due to the high failure rate of tech startups, a commonly used strategy is diversification. Picking early stage winners is a notoriously difficult exercise. They use due diligence, research, and experience to help them evaluate potentially good investments vs bad.
Despite the myth that VCs generate phenomenal returns, they typically don’t beat the market. Which means that they don’t know how to pick the winners.
“We analyzed the Kauffman Foundation’s experience investing in nearly 100 VC funds over 20 years. We found that only 20 of our funds outperformed the markets by the 3% to 5% annually that we expect to compensate us for the fees and illiquidity we incur by investing in private rather than public equity. Even worse, 62 of our 100 funds failed to beat the returns available from a small-cap public index.” – Harvard Business Review
Most VCs aren’t experts in the topic. They talk to startups and consultants who are the on the ground experts in the trenches. Bitcoin’s blockchain is the intersection of many disciplines like game theory, computer science, economics, and law.
When it comes to crypto, they naturally applied a diversification strategy. For VCs there are a near infinite number of potential new companies to invest in. Scarcity of ideas is a rare thing.
This doesn’t work for crypto. Satoshi’s innovation was using technology to enable a breakthrough in monetary policy, the 21,000,000 fixed quantity of Bitcoin. The adoption, security model, and function of Bitcoin’s blockchain all hinge on this.
Once you’ve invented scarcity, you don’t need to reinvent it.
So there’s no such thing as “diversification” here. You’re diversifying your digital gold with bark and twine.
Prices are signals
Both VCs and tech startups use fundraising rounds/valuation as legitimization of a sector/product. The valuation and amount raised is the signal.
With crypto, valuations are nearly completely divorced from anything resembling traction or usage (something working and/or solving a problem for people). As evidenced by clearly useless and/or broken chains like IOTA and Bitconnect that were once worth billions.
The last 8 years I’ve spent in Silicon Valley has been an incredible experience for me. I’ve seen what best in class building looks like and I’ve gotten glimpses into the mindset of some of the smartest/most forward thinking people in the world.
I hope that more content can be created in the future to help bridge the knowledge gap between Silicon Valley and Bitcoin. We need many new products and services for Bitcoin and some of the best people in the world to build it are in Silicon Valley.