Advising Crypto Startups

*** This post is written in a personal capacity and reflects my views only ***

I've been agonizing over whether to advise Crypto startups.

On the one hand, I love the early stage ecosystem and have been involved with a dozen early stage companies in a variety of roles. If a growing company is building something interesting aligned with my mission, I feel lucky to help entrepreneurs learn from my mistakes. When I was a 25-year old founder, my company meaningfully benefited from an advisory board that helped us network, gain legitimacy, and make better decisions.

On the other hand, most crypto startups in late 2017 are window dressing for ICO fundraising, and their advisors are essentially promoters of unregistered securities. They are compensated in tokens that are illiquid, but create an income tax liability. And there's the regulatory overhang makes it even more difficult -- how do I file an 83(b) election for a token? For the full bear case, see this take-down by Preston Byrne.

But I realized the only way to understand crypto and to be credible in talking about it, is to participate in it. Learn by doing. Experience the challenges that different crypto companies face, understand the software they write, and shape the businesses they build. And do this in a way that's ethical. As a result, I am sharing in this update the companies that I am excited to contribute to as a strategic advisor. While they are all quite different, they are consistent with the expressions of themes I've talked about over the last year -- the intersection of artificial intelligence, blockchain, digital identity, financial products, and the crypto economy.

Focused Apps, Not Protocols

Some smart crypto investors want to own the crypto super-highway, grabbing a part of the "fat protocol" of a public blockchain. That makes sense when the infrastructure is the main thing being built. But we have 8 years worth of infrastructure -- from the payments vectors, to the smart contracts language, to the distributed file storage system, to distributed processing. When I look at ICO funding in the last 36 months, there's a clear trend to more vertical implementations of apps and businesses that leverage blockchain for real world use cases.

I know, how pedestrian! But that's also what gets me excited -- how do we build companies that reinvent things we know people need on modern infrastructure? So here are the companies:

Debitum Network

Debitum Network is a project by invoice lending fintech company Debifo, with the goal of decentralizing the SME lending ecosystem. Imagine OnDeck or Kabbage, but on a global scale and in jurisdictions where traditional financial services companies do not reach. That may be due to regulation or the nature of local capital market infrastructure, but the claim is that 70% of SMEs in emerging markets are lacking access to credit. The blockchain approach would allow opportunities to be international but powered by local communities, and the ecosystem will be developed both in crypto tokens (for internal operations) and in fiat (for locals). It's a compelling vision for helping entrepreneurs across the world, and the company has just won both a juried and an audience award at the Gibraltar d10e conference.

Risks. The first risk is similar to that of regular digital lenders. The availability of capital to lend out via the network has been something that OnDeck and others have struggled with. They had to go to hedge funds and banks to solve capital, rather than the P2P route. There is more crowdfunding power in crypto than in fintech, so perhaps this is mitigated by design. Second, the international nature of regulation for lending product across jurisdictions will certainly have implications on platform design, and will likely be a closely negotiated exercise. And third, the on- and off-ramps for fiat and crypto will need to be very stable for all parties to get what they need.

SelfKey

SelfKey can be traced back to KYC Chain, and the team has done a ton of work across Fintech accelerators like Fintech Innovation Lab, bank incumbents like Standard Chartered, and financial regulators. They idea is straightforward and intuitive -- banks need to follow Know Your Client and Anti-Money Laundering regulation (KYC/AML), as does every participant in the financial ecosystem if they are subject to a regulatory regime. Spoiler alert -- we are all subject to regulatory regimes, at least for now. SelfKey's blockchain-based system can capture and validate your identity, and then provide access to events like the Airswap token sale or processes like bank account opening.

Risks. One risk is competition with Civic, a well-funded crypto digital identity system. But SelfKey's focus on Asia and partnerships locally give it some breathing room. Further, digitizing a passport means users have to take a picture of a passport and keep it on their machine for upload, which creates risk unless the data is encrypted. The team says it will be. Another risk is that the network of participants that accept SelfKey's identity credentials and tokens needs to continue to grow to be useful. While banks are risk averse around these types of solutions, they are starting to grok that they need them.

Trusted Health

Trusted Health is a health tech project, coming from the startup Trusted Doctor. While there are many health blockchain companies claiming to digitize patient records or low-stakes medical services, this one is different. It focuses on life-threatening illnesses like brain cancer, and connects patients to specialists globally. Think about a patient from Europe finding a world-renowned specialist in Asia for a very particular problem. Yes, the software will also do records and workflows, but this global angle for life-threatening diseases is unique, and particularly powerful in a decentralized world.

Risks. This is a two-sided network -- patients and doctors. Both have to be built, and the doctors must be absolutely spectacular, which means the patient demand must be there to pay for it. ZocDoc built a two sided network, but it's not easy. Two other stakeholders are important -- insurance companies and regulators. Insurance companies have the pockets and can subsidize much higher usage by patients, but will have strong corporate interests. Regulators may have views on how and where medical services can be provided in a jurisdiction, particularly when those services are for life-threatening diseases. But building this network is a very worthwhile mission, and could literally save lives.

XTrade

Xtrade.io is a project by a team of high-frequency trading infrastructure experts to bring FIX APIs and aggregated liquidity to the crypto markets. There is an opportunity to build an onramp for financial incumbents into crypto as an asset class -- see LedgerX, CME, CBOE and others -- and XTRADE's approach would allow institutional traders to use their existing trading tools while accessing crypto assets at a lower latency. The first step is APIs, the second step is a trading platform user interface, and the third is aggregated liquidity. Hedge funds, institutional capital markets desks at investment banks, and proprietary traders require such infrastructure to really engage with the asset class.

Risks. Three risks come to mind. First, a large financial incumbent that already has the bulk of trading client relationships may rush to this opportunity first. If I were any of the high-frequency trading shops, capital markets divisions, or electronic exchanges, I would be working on this technology. Second, getting the major crypto exchanges to participate is not trivial; having this layer on top creates maturity on the financial side of the ecosystem, but brings its own set of challenges (e.g., routing orders away from exchanges that don't have best prices, disintermediating the exchanges from direct relationships with the traders). Last, this is a highly regulated market and may require data reporting that crypto exchanges have not built as of yet. But they surely will.

Hut34

Hut34 is an antidote to the concentration of Artificial Intelligence power that is held by the likes of Google, Facebook and Amazon. The platform proposes to integrate multiple narrow artificial intelligences, such as a weather chatbot or a financial assistant voice assistant, through a decentralized set of nodes. Think of each bot as having its own utility function, and the Hut34 network being the translation mechanism between them. Each of the bots can call into service another bot, keeping their human user in one conversational stream. Thus, if the network is able to amass a meaningful number of component bots, the overall effect is to create a highly useful loosely integrated mesh of intelligences that work together.

Risks. This project is taking on a big mission, which I love. That does imply that monetization may be tough until consumer adoption of virtual assistants and chatbots is more widespread, and can be distributed outside of the Amazon Alexa, Google Home or Apple Siri channels. And the company has some futurist competition -- SingularityNet, Synapse.ai, Starmine.ai, among others -- though its approach into the space is fairly unique and aligns well with independent developer incentives.

Hope you enjoyed learning about these projects, and if interested, I'd be happy to connect you to the founders.

***

The opinion presented here is (1) only that of the author’s and not any company with which he is or has been affiliated, (2) not tailored to any individual or company needs, (3) intended to be disinterested commentary and analysis, and (4) not intended to invite or induce the reader to engage in any investment activities. The author is advising the projects described in this commentary on strategy, and is sharing information about its progress, not doing reliable diligence across all of its aspects . Early stage technology projects are highly speculative and risky investments which may lead to full loss of the principal, and this commentary is not investment advice about them.