Unblocked

by Alison McCauley

  Fundraising via token sale exploded in late 2017, as shown in Figure 5-1.

  Figure 5-1. USD funds raised to support token projects, 2012–April 2019. (Source: Smith + Crown.)

  But the ICO heyday also jump-started global interest more quickly than possibly any other nascent technology. While early technologies often struggle to break out of the small communities that can understand them, the excitement of this unique moment in history triggered curiosity from a broad range of people. In the early days, all you needed to open a path to capital was to name a team, publish a whitepaper describing what you would build, and provide a cryptocurrency address. Suddenly, people were moving into the space from a range of backgrounds. Others were simply curious enough to read an article, attend a meetup, or make an investment. For a painfully early technology, blockchains had succeeded, in a very short period of time, in becoming the talk of the town. Even as the market turned, many of the minds that became involved in the ICO boom days stuck around to continue to work in the space. They had a lot to inspire them.

  This new phenomenon had broken out into the open what used to take place behind closed doors, locked away from all but those with special pedigrees, access, and networks.

  This new phenomenon had broken out into the open what used to take place behind closed doors, locked away from all but those with special pedigrees, access, and networks. For the first time, via a token sale, smart teams could connect to capital, no matter who they were, what they looked like, or where they came from. As long as they had great brains and a decent internet connection, they were in the pool of candidates.

  Whereas startups traditionally guarded their strategy, many were typing up their vision and even technical detail of how they are going to get there in neatly organized whitepapers, which were widely circulated or even published online. Where once teams would pitch venture capitalist after venture capitalist, aspiring to get into the offices of the most lauded Silicon Valley players, they could now get tens of millions of dollars from anyone—and without diluting equity or giving up a board seat. And, since most blockchain protocols are open source, they could copy anyone’s code to get a running start: no need to make it from scratch if someone else has already made progress. Just “fork it” and make it work better for you. Even the inner workings of how these young teams code the governance of a protocol and sometimes even manage their organizations may be published to the world.

  Breaking Away from Silicon Valley

  This Age of Open Innovation also disperses innovation from a Silicon Valley–centric hub. We are at the beginning of the most globally dispersed digital transformation of all time. Countries in Asia and Europe see the opportunity in creating friendly environments for cryptoassets, attracting both investment and entrepreneurs. Leading blockchain development is coming out of countries such as Switzerland, Estonia, and Israel. And we can expect many compelling early-use cases to come out of emerging regions, where arguably blockchain functionality is most urgently needed. Entrepreneurs in less developed regions are also free from the obstacles presented by legacy institutions, systems, and processes that teams in more developed countries face. As parts of Sub-Saharan Africa completely skipped the “landline phase” of development, adopting mobile phones (and all the rich functionality they enabled) faster than consumers in the United States, it’s conceivable that consumers in developing regions could become sophisticated users of blockchain-enabled technology in advance of more developed countries.

  We are at the beginning of the most globally dispersed digital transformation of all time.

  Jalak Jobanputra founded venture firm Future Perfect Ventures, and has worked and traveled in nearly 40 countries throughout her career. “Crypto and blockchains are capturing the imagination of young people everywhere,” she explains. “In traditionally underserved and underrepresented regions—Africa, India, Indonesia, and the Philippines, for example—people see that it can give them a voice. Anyone, anywhere, has access to the tools to build on top of this open source technology. They don’t need formal education or much capital to start innovating, to find a solution to problems in their market, or tap into new opportunities. And this is happening for thousands upon thousands of people around the world. They are building for their communities, their cities, their countries.”

  But, Jalak believes, this innovation could jump borders with the right mentorship and capital. “One of the reasons I started Future Perfect Ventures was for the investment opportunity in cross-border learning,” she says. “I saw that solutions developed in Mexico were also relevant to India, that innovation could move from India to China, Africa to Latin America. The next three billion people that are coming online will be in these markets, and they’re going to do it through a smartphone. They are likely to be crypto-native from the beginning in a way we don’t understand, sitting here in New York, or in Silicon Valley. It is from these emerging markets that the business model of the future may very well emerge.”58

  Figure 5-2. Blockchain-focused venture capital and token project fundraising events, 2012–April 2019. (Source: Smith + Crown and Crunchbase Data.)

  In late 2017, fundraising via token sale eclipsed blockchain-focused venture fundraising (see Figure 5-2). Even though ICO activity slowed in late 2018, token sales were still the primary method of funding.

  The Decentralization of Entrepreneurship

  In short, we are seeing potential for the decentralization of funded entrepreneurship. More people, and different kinds of people, will be working to solve the world’s problems and seize the world’s opportunities. They are more distributed than ever, bringing a broader range of diverse perspectives to the solutions they propose. They will use blockchain technology to fight critical global challenges, such as food insecurity, social and financial inequality, and climate change—problems that urgently require the minds and energies of the global brain trust. They will use blockchain technology to come up with attractive alternatives to every internet giant today. The next Uber? Airbnb? Facebook? Amazon? Dozens of teams around the world are already working on new versions of all of these (although they can look dramatically different from what is in place today). They will also attack totally fresh ground with innovations made possible only through a blockchain business model. And indeed teams—some composed of just a few college-age kids—are discovering new mind-expanding applications of the technology every month. Since the technology is so new, even the most experienced are typically just a few years in, which not only levels the playing field (and makes it much easier for a newcomer to catch up and add value) but also suggests that we could see another acceleration cycle once there is a large body of thinkers with 5 or 10 years of experience behind them.

  There are many factors driving the great number of developers devoting themselves to this space. Many are guided by the belief that they can offer the world something better than what is available today. But many also are motivated by the potential of great financial reward. There was no money made in the development of the underlying suite of protocols that drive the internet. Instead, the money came from applications built on top of the protocols. Blockchains appear to reverse this—if you build a successful protocol that is used widely by a range of players, you potentially stand to do very well financially. Whereas just a few teams were involved in the development of the internet’s core protocols, this next cohort of protocols is being developed, iterated, improved, and iterated again by thousands of the world’s smartest developers in a race to develop the winners, across the globe. The winning protocols—the ones that grow to dominance years out—are well positioned to be incredibly sophisticated. And lucrative.

  The sheer volume of teams simultaneously attacking the same challenges; the new, diverse thinking that comes from the many more able and willing minds contributing; the open ethos of the community; the reams of code contributed to a protocol laid open to inspection or duplication by anyone—they all build to one fundamental truth: we are entering a totally n
ew age of open innovation.

  There is a long way to go, but it is going to move very, very fast.

  There Will Be Blood

  As you can see, we’re looking at an insanely accelerated innovation cycle. We’ll have more creative solutions—but also more competition than ever. And, as we will see, higher rates of failure.

  Conventional wisdom in the hallways of venture hub Sand Hill Road is that 9 out of 10 startups fail. While the actual data is hard to find (there is no startup “death certificate”), research firm CB Insights recently did an analysis of 1,000 startups from the moment they raised seed investment, and found that just over 70% of startups stall at some point in the process and fail to exit or raise follow-on funding.59 While venture funding arguably filters with bias, it also filters for some tell-tale markers of success: a capable team, a working product, traction with customers, and an attractive market. These same filters are not applied consistently in ICO, IEO, or STO fundraising. Products are often not yet built. Teams can be technology-centric with varying levels of knowledge about their actual market and the pain they are solving for prospective customers. Some projects feel more like science experiments than the beginnings of a viable company. Sadly, during the ICO rush, more than a few were outright scams. And because success in the blockchain world depends on large-scale adoption, all face the uphill battle to attract others to their particular movement and develop thriving ecosystems. Vitalik Butarin, the co-creator of Ethereum, one of the most widely adopted blockchain protocols to date, has asserted that 90% of ICO projects or tokens launched on top of the protocol will likely fail long-term, a metric oft-repeated from the stages and in the hallways of blockchain industry events.60

  Regardless of what actual failure rate transpires in coming years, it is not a stretch to believe that it will eclipse that of venture-funded startups—significantly. However, while in the world of blockchains 2017 had the feel of an untamed wild west, 2018 and 2019 signaled more experienced entrepreneurs moving in the space and the birth of many thoughtful projects.

  On a rare sunny day in Portland, Oregon, I visited the offices of Smith + Crown, one of the world’s leading cryptofinance research organizations. Over lunch, the unassuming and deeply intelligent head of research, Matt Chwierut, and I discussed the new field of cryptoeconomics and what characterizes a successful token.

  “Network effects are so important,” Matt emphasized. “Tokens need to achieve network effects at the market level through liquidity, and at the user adoption level through utility. This will weed out a huge portion—at some point there will be a dramatic reduction in the number of viable projects.”61 Basically, not only are blockchain entrepreneurs wrangling a new technology and creating new companies, but they also need to develop an entire mini-economy in order to achieve success. This is staggeringly difficult.

  The blockchain battlefields will be littered with the carcasses of ideas that never connected to users, missed a key piece of business design, or were built with the wrong protocol.

  It also means that one day, the blockchain battlefields will be littered with the carcasses of ideas that never connected to users. That missed a key piece of business design. That never built traction in a confusing and fragmented landscape of competing ideas. That blundered a good idea by building on the wrong protocol. Or that were unable to build the complete ecosystem upon which so many of these business models depend.

  Building on The Backs of Failure

  I prefer to profit by others’ mistakes and avoid the price of my own.

  Prince Otto Von Bismarck

  The Age of Open Innovation has a corollary: an abundance of second mover plays. A “second mover advantage” is the edge a company gets from following others in a market or mimicking an existing product. Facebook wasn’t the first social platform and Google did not pioneer the search engine. These players leveraged others’ innovations, coupling what they learned with astute business and marketing strategies to climb to the top. Creating a product is costly, in terms of both hard dollars and mistakes made on the journey. When pioneers pay a steep price to create a product category, a later entrant can use the knowledge of what worked and what didn’t to win at the game the pioneer created.

  With the rawness of blockchain technology, blockchain business models, and today’s gap in addressing the basics of good user experience, there will be a lot of skeletons for second movers to choose from. And many will be well documented in great detail, with the code still beating and available for the taking. Some of these failures will be technical; some may have been sound if better executed, or stewarded by a team with stronger business acumen. And still others may find their stride only when wrapped with a new business model or mashed up with other emerging technologies. In the Age of Open Innovation, the second wave of players will be at a great advantage to learn from the mistakes and sweat of those who failed before them.

  Spotting the spoils among these skeletons requires a deep understanding of what you are looking for. It takes knowledge of how blockchain technology could create new opportunity or solve key obstacles in your business. It demands acumen in the technology, and cross-functional teams that are able to identify the points of failure and grasp how your business could succeed where others failed.

  The first place to start is understanding the potential—and the threats—that all businesses will face as we curve toward new kinds of decentralization.

  Part II. THE SIX FORCES OF AN UNBLOCKED FUTURE

  Chapter 6. MORE VALUE

  Whatever you are, be a good one.

  Abraham Lincoln

  Summary

  Businesses will no longer be able to passively extract value for the privilege of sitting in the middle of a transaction. Instead, they will need to work harder to actively contribute value to all parties—and authentically market that value.

  The days of passively extracting value for the privilege of sitting in the middle of an exchange between two parties are numbered. Today, the real cost of using a middleman is often hidden. But blockchain entrepreneurs, lured by the prospect of disintermediating incumbents, will launch attractive alternatives that open customers’ eyes to those costs. These new offerings will use blockchain features to reduce friction and cost.

  Customers will grow skeptical of middlemen, and more carefully scrutinize what value they actually provide in exchange for the cost of working with them. Middlemen—and most businesses have at least some middleman role—will have to more actively provide value versus passively extracting it. They’ll also need to work harder at making sure their customers see the magnitude of the value they provide, and this will become an important focus at every customer touchpoint. Incumbents will need to continually increase the value they provide in lockstep with an increasingly competitive landscape as the technology matures.

  The Setting

  Wired for Middlemen

  Since the dawn of trade, middlemen have played a valued role in getting buyers what they wanted, when they wanted it. In ancient Indus Valley cities, traders brought minerals from Iran, copper from India, and jade from China. City workers turned these materials into finished goods, and traders then sold these finished products. Vikings established trading centers; goods were brought in via merchant ships and sold to merchants, who would then resell to the public. Across early civilizations, “if you or someone in your town didn’t grow it, herd it, or make it,”62 you needed a middleman to get it. These middlemen often took on great risk—traveling slowly over long distances, fronting the cost of goods, and facing the difficulty of finding interested buyers. These services were of high value to the parties on either side of the transaction, and the middlemen were rewarded with lucrative margins.

  As commerce became more globally interconnected and products more complex, additional layers of middlemen were introduced. Many of these middlemen helped to transform raw materials into finished goods. But many more were recruited to serve as an intermediary in place of trust, protecting one party fr
om the potentially bad actions or outcomes of another.

  Middlemen serve as an intermediary in place of trust, protecting one party from the potentially bad actions or outcomes of another.

  If two parties trust the intermediary, they do not have to trust each other. Middlemen such as escrow services, insurance providers, dispute resolution services, credit reporting agencies, and payment processors all serve in place of trust.

  The rise of the internet has made it possible for many more people and organizations to collaborate and transact, but it has also increased the physical and cultural differences between parties. This has created more risk because we end up dealing with parties with whom we have little shared history or knowledge. It’s made it even more vital to have systems and intermediaries in place to facilitate those interactions.

  The Rising Cost—and Power—of the Middleman

  Each middleman plays a role that parties on either side of the transaction value, or they would be disintermediated. But with each added layer of complexity comes a layer of fees. This compensates the middleman for their role, but compounds expense for the customer. A 1% transaction fee may seem nominal, but if applied a dozen times as a good moves through a supply chain, it adds up.

  Driven by economies of scale, sophisticated management practices, and modern technology, many of the companies in the middle have grown very large. And many have become very powerful. For example, a few huge companies dominate digital access to sellers and their products, and exert massive control over the goods consumers can discover, what they pay for them, and the data they give up in exchange.