You don’t need me to tell you 2017 is, without doubt, going to be the ‘Year of the Token’. As investors, we have patiently watched from the sideline whilst for the first time ICOs raised more money than was invested by VCs in ‘blockchain’ startups in this last quarter. This fundamentally rewrites how capital is raised and distributed and we are convinced this is only the beginning. At Outlier Ventures we hope to lead as this crosses over into the wider deep tech industry and in particular our heartland, the points of their ‘convergence’. Today we make the first step on that journey.
The killer app of blockchain would appear to have been right in front of us all along: the tokenisation, fractionalization and financialisation of The Web starting with how it’s owned. Whilst I’ve always advocated the idea Web 3.0 will lead to the rebirth of a cooperative commons type model I didn’t think it would happen this quickly. The best way I have heard it described is to think of a token as a ticket to participate and own a stake in a future economy.
You may remember 3 months I wrote 99% of blockchain startups are bullshit. That was largely based on the belief almost all of the infrastructure we were seeing created should be close to the point of free and owned and financed by the community. This is because for the first time in history the open source community now has a method to self-finance it’s development, in theory, distribute the upside more equitably and all with some of the most powerful network effects we have ever seen built in by design.
In the same post I laid out what we at Outlier Ventures found most interesting, that rather than blockchain for its own sake, it was where it was foundational to other deep tech scaling securely. IoT is one of the best examples yet of a technology crying out for blockchain characteristics to fix its problems: namely distributing risk to the edge, down to a single machine level and enabling economically viable m2m transfer of value.
Almost all the corporate partners we speak to in Industry 4.0 who have deep IIOT requirement say the economics of today’s leading public blockchains simply don’t stack up for large-scale deployment. Over the last 6 months, one player increasingly kept on coming up in conversation about how this might be solved… IOTA.
Quick Stats on IOTA:
IOTA began in mid-2015 building on an idea called ‘tangle’. It issued 2779 Ti (full supply: 2779530283277761) capped tokens and are now about to list on Bitfinex 13.06.17 after building a passionate following.
Tangle removes the tension and cost of miners that plague Bitcoin and, as it looks to scale, Ethereum. Each machine is a node and for every transaction it wants the network to process it must process two in return via proof-to-work. That means zero transaction charges making high volumes of micro-transactions possible at scale. So it’s no wonder we are seeing it’s explosive growth:
- 6,500 unique addresses with balances so far. (6,500 is including the YDX holders)
- Already 30+ people working on applications on top of IOTA in addition to a number of active projects with more than 15 x corporates
- An active community of 5,500 Slack members (more than 2,000 in the last 3 weeks alone, 11 June)
- 300% growth in the Android app this week alone (11 June)
I’m not going to focus on its current token price but what I will say is in the context of an Ether cap of $32bn with few serious corporate projects at scale and tangle being a solution that could fix a $267B market (IoT by 2020, Forbes) it is what it is. But we don’t come at this as day traders we are here to make long-term strategic investments and we think this is a good one.
Aside from the obvious fit with our convergence thesis IOTA ticked a number of other boxes for the type of strategic investment we would make in tokens.
- Great teams, clear leadership, contrarian vision. They have 4 x great co-founders. David Sønstebø, Dominik Schiener, Sergey Ivancheglo and Serguei Popov. Not only have they consistently shown great technical leadership in blockchain since as early as 2010 (Sergey invented proof-of-stake) but an astuteness to identify a real and tangible bottleneck in blockchain adoption in an industrial setting. Better still they have worked together in whole or part on projects before IOTA so know what its like to be in the trenches together.
- Our ability to inform & influence. Our dialogues with David & Dominik regarding a possible collaboration started over 4 months ago. Over that time we have got to know them well and they have been able to attract a number of diverse people to the project who I greatly respect. Throughout they have shown great self-awareness and humility in knowing where they need help.
- Emphasis on community. Talent in blockchain is scarce. The protocol war will be won or lost on how well it captures the hearts and minds of the developer community. IOTA have shown huge momentum here agreeing partnerships with a number of technical universities to tap into their professors and student bodies including Berkeley, UCL and NTNU. With us onside we also bring Imperial College’s blockchain lab ICR3 and their students to the table. Furthermore IOTA day 1 have set aside $10m in a Ecosystem Fund to support startups who develop on top of their protocol.
- We can value add early in the process. There is a very clear and immediate way we at Outlier can add strategic value and in particular leverage our network with enterprise partners with a heavy focus on the industrial giants of Europe. We already have 10 examples of this taking effect over the coming months.
- We can take a significant stake in the upside, early. We do not want to become a 500 Startups style ICO factory. We want to make a handful of long-term strategic investments each year pre-ICO, or at the latest pre-listing, in teams we really believe in. This is tokens ideally accompanied by equity in any associated commercial for-profit entities. As such we have made a 7 figure investment in IOTAs which we will likely grow over the coming year based on progress allowing us to focus a large percentage of our time and resource helping it reach it’s potential.
What does this mean for VC?
The day when VCs were the elusive elite and primary source of capital for startups has ended. When a startup can raise $35m in 30 seconds without any dilution (Brave) the genie is out of the bottle and it isn’t going back in. This doesn’t come without some challenges, which I have already laid out here, but it does mean if you are just hoping to get rich as a manager of money you just joined the dinosaurs.
At Outlier we have been very selective about where we have put our money over the last 4 years of investing in blockchain. That’s probably because, as a partnership of 15 x active investors, it is literally all our own money. However this now means we have the great privilege and freedom of being able to go where ever we see value. Most VCs, bar the exceptional few, are effectively locked out of investing in tokens for the next 3–4 years based on their terms with LPs. Which is just about long enough to miss all the early value in The Web 3.0 paradigm.
We have invested more heavily than most in building a specialist Web 3.0 research function and forging deep relationships with incumbents, as trusted advisers, to understand this paradigm from every angle. With the rise of tokens this now requires anyone who hopes to succeed in picking winners an evolving understanding of crypto-economics and the complex regulatory environment as well as the contact book to make it happen. That’s going to be very hard for a VC with one junior MBA grad with a year in banking. For us this is what all of our team have been pointed at for the last 4 years.
Being a partnership of 15 who all actively contribute to decision making its meant we have been more cautious than most because we operate by consensus. Whilst we don’t rank by portfolio as one of the top investors in blockchain this has saved us from hubris. At the same time we have shown real leadership and literally called bullshit where we saw it where we think many have not been prepared to admit their early mistakes.
As a consequence, I think it means much more when we put our name to something. Remember we spoke with over 1,200 blockchain startups (we published database here) so we saw all the other deals the rest of the market did if not more we just chose to largely pass. We don’t do FOMO.
I think we are all now at a stage that if a startup needs network effect to succeed it needs to issue tokens to stand a chance of competing. This is especially true in the convergence space where data and AI are so important. As such from the last few months all our existing equity investments have been exploring open sourcing large parts of their code base and to prepare to issue tokens that are fundamental to their design. From now on the majority of our new investments will have this as part of their fundamental design.
Furthermore, we hope to bring integrity, leadership and governance to the tokens space to help inform best practice.