Silicon Valley Doesn't Get Blockchain

Bitcoin's marketcap, at $41B (as of June 30, 2017) is bigger than all but about 24 other giant tech companies. Nearly all of these 24 tech companies had top tier venture capital investment, including Apple, Cisco, Microsoft, etc. In comparison, Bitcoin had nearly zero venture investment (Tim Draper, Fred Wilson and a few others are the notable mainstream venture exceptions in the blockchain arena). How did most Silicon Valley investment pros miss this huge success?

Let me explain where the idea for this post came from. Several days ago I attended a tech meetup South of Market in the heart of San Francisco's technology zone with about 200 startup junkies and geeks (that would be me), lawyers and other assorted tech boosters. When the moderator asked how many people owned a crypto coin, only about 10 people raised their hands and when they asked how many people traded crypto coins, only about 5 people raised their hands. I was pretty shocked. We are either in very early days or we have a large blind spot in Silicon Valley. Bitcoin has already been out there for 8 years and there are now thousands of crypto coins, so I'm going to say it's because they are oblivious to cryptocoins and the blockchain. People are clueless and if this continues, San Jose is a future Detroit in the making.

It's normal human behavior to focus on and invest in what worked last time. Hammers like to find nails to hit. The big money is never early to the party, they let the smaller guys take the bigger risks and only back up the money truck once they see a clear path to success - the notion that the second mouse gets the cheese after the first one has its head smashed by the trap. Usually, someone else has already pioneered the path and the VC's are coming to build the superhighway. But Bitcoin, Ethereum, Ripple and the other leading crypto coins have been out of the garage for several years now and the total marketcap is north of $100B. This tech is increasingly used and owned by millions of people. Why are the smartest people in Silicon Valley behind the curve?

I think the answer is two fold. First, cryptocoins are a total paradigm shift and if they reach their full potential they could wipe out much of the entire venture capital industry -- why would VC's fund their own demise and lose control over the companies they fund? The ICO (Initial Coin Offering) is a fundraiser for a company or project where funders usually provide Bitcoins or Ethereum in exchange for a new coin being developed by a group of individuals. Typically, the new coins trade on an exchange even before any product has been released to the public for testing and successful ICO's have raised tens of millions in value in literally seconds. This funding approach has several HUGE advantages over traditional funding via sales of shares and venture capital:

• The investor remains anonymous, the coin they receive is sent to a public address in a wallet after the sale concludes. The coin holder is responsible for their own coins and if they lose the keys, the coins are GONE. There is no "lost certificate" affidavit to get a replacement certificate. They are also responsible for their own taxes.
• Crypto investors made most of their wealth with crypto in the past couple of years. They know what worked and some of these individuals have made hundreds of millions and maybe even a billion investing in crypto -- the returns have been absolutely astounding. Their cost basis is low on the cryptocoins they own, they like big risks and high rewards and they can make a decision in seconds without a single Monday meeting and committee to approve anything. Entrepreneurs love crypto whales.
• Fast and cheap access to capital. The project receives immediate funding in crypto coins on terms that are vastly superior to any term sheet ever contemplated by a venture capitalist. No preferred anything, no meddling board seats, no loss of control and future cram down, no milestones, etc. Given a choice, there is virtually no entrepreneur who would ever touch VC money again, if they can get an ICO done. The VC's have almost zero control with crypto and the entrepreneurs love that.
• Nearly immediate liquidity. As soon as the coins trade on an exchange, which can take as little as a few days, you have complete liquidity of your coins. There is no lockup (unless imposed via the ICO), there's no Rule 144, no limits on selling or holding, you can trade your coins right away for Bitcoins and go right to cash from there. Everyone who ever invested in a small company immediately understands the value of this liquidity. No venture deal can touch this and it's revolutionary.
• No expensive middleman. Most venture capital doesn't belong to the VC, it's provided by a pension fund, family office or wealthy individual. The VC traditionally charges a 2% annual fee and 20% carried interest and they work hard to get a good deal for their investors. Venture capital can be the most expensive source of capital on the planet. With an ICO, there's no fee, you store the coins yourself or trade them on the exchange. Win-Win-Win.

The second reason why VC's are not big players in cryptocoins is the regulatory and taxation uncertainties around cryptocurrencies. Crypto takes on characteristics of property, commodities, securities and money and it's currently taxed as property. No one is sure how to regulate this beast and it appears that no one wants to be responsible for killing the next internet golden goose, so most regulators haven't taken any major action. Anything involving the credit system which includes banking, securities and investing is highly regulated. Yes, there are some protections for the widows and orphans and preventing a money laundry, but the main protected class appears to be the credit system itself, fundamentally limiting the supply of credit and artificially keeping the cost of credit high. The cost of credit isn't just the interest rate, it's availability, terms, governance, control and so forth and entrepreneurs know all about this. People are frankly tired of being screwed by the credit system.

In the U.S. at least, many ICO's appear to possibly violate state or federal securities laws. For this reason, U.S. residents are increasingly being blocked from participation in offshore ICO's. If the SEC does come down on recently issued tokens like BAT (Basic Attention Token), the San Francisco based company that recently raised $36 million in 30 seconds and other U.S. people or companies, you will see U.S. people and entities no longer welcome to participate in ICO's. We're starting to see this and attorneys I personally know in the U.S. and EU agree with this assessment. If that happens, very promising companies seeking this attractive capital, along with the most talented people, will likely leave the U.S. for greener pastures. Venture capital funds are often limited by the geography of their partners. Perhaps you'll see some of the more adventurous venture capitalists open offices in Zug, Vaduz or Estonia where they can continue to use their expertise to help entrepreneurs in new ways under different terms.