Crypto Investing? Someone should be telling you all this

The pitch is always “crypto is a massive opportunity and will revolutionize everything”. It appeals to investors FOMO (Fear Of Missing Out). There’s a little footnote that it’s a bit volatile & uncertain but what the heck – the upside is huge!!

So … yes, you can make a lot of money. Yes, you can make shitloads of money very quickly. But it’s disingenuous to focus so much on the upside and neglect the risks and downside. But then maybe that’s how the financial world works anyway!

Up until Feb 2018 everyone holding Bitcoin was making shitloads of (paper) money very quickly. HODL was the word: Hold On for Dear Life and never sell. It hit over 15,000 USD per bitcoin. Remember: there was no way to short (to bet on it going down), and it was pretty difficult to sell them. The more it went up, the more buzz it made, the more people wanted part of the action, and the only way to get exposure to Bitcoin was to buy some, helping to propel it even higher. Virtuous circle, bubble, whatever…

Then came Bitcoin futures: financial products launched to make it easy to trade Bitcoin. You no longer had to buy Bitcoins but you could buy a regulated financial product that tracked Bitcoins (but didn’t buy or sell actual Bitcoins). Rather than propel Bitcoin higher, it turns out that the investors trading Bitcoin futures were more inclined to bet on it going down (shorting it). As I write this (March 2018) we are 2 months into this. And Bitcoin is trading within a band  8000 USD to 15000 USD with lots of volatility.

Up to now I’ve focused on Bitcoin. There’s thousands of other crypto currencies (altcoins) which are either:

  • Being marketed as a better/different/niche crypto currency than Bitcoin
  • Being marketed as a blockchain project where they are a medium of exchange for a revolutionary platform which in most cases hasn’t been built or tested yet.

Most ICOs are the latter. And I think it’s useful to make the comparison with the internet bubble of 1999.

Back in 1999 the new platforms each promised to dominate a market. Each pitch was that there was market which was going to be revolutionized by the Internet because the old way of doing business was no longer suited to the the Internet world. We all know how that ended: bubble, carnage, but a real revolution and long term value creation.

Now in 2018 it’s the same but just replace “Internet” with “blockchain”. Back in 1999, a team would create a startup, pitch to investors who would throw money at them. Most of the startups got a few millions before they really had a product. Then they built a product and spent an unsustainable amount of money acquiring each customer. If it all went to plan, they IPO’ed as a cash-burning but high-growth company. It was a land grab: “there is a finite percentage chance that we’ll own this enormous market therefore we’re already worth billions”.

Behind this 1999 madness there was some control. Most of the cash was coming from VCs who drove a Faustian bargain with the startup founders. We will give you loads of money BUT you’re signing this legal contract saying:

  • We get our money back and more before you get a penny (a.k.a. the Liquidation Preference)
  • This has to go up in value or we take control (a.k.a. Preference shares conversion, Anti-Dilution). You’ve pitched us crazy growth figures – so we’ll give you eg. 18 months to either IPO or raise far more money from other investors, or we’ll take it away from you.

Netscape’s successful IPO in 1995 was the model: haemorrhaging money, high growth, land grab. Fast forward to 2018. Replace all references of Internet with blockchain. Except that if you dig deeper there’s some subtle but very significant differences:

  • You are investing in a coin, not shares in a startup. Financial regulators (seem to) allow selling coins to anyone (provided it doesn’t give you shares in a business), but selling shares needs proper financial oversight and can only be done to accredited investors.
  • This time round, Investors don’t make the Faustian bargain with the startup founders. The startup founders are completely in control. They create the coin, they sell the coin to investors, they choose whether the investors’ money goes into their startup or their own pockets.

Why do investors agree to buy a coin and not shares in the underlying business?  The pitch is:

  • This market needs a distributed ledger (a.k.a. blockchain) rather than the way it’s managed today. It will be more efficient.
  • This distributed ledger will be oiled by its own crypto coin (which we’re selling to you now) and these coins should each have shitloads of value. I.e. rather than people buying and selling on our platform using US$ or Euros, they will buy and sell in our coin and somehow this coin will be valuable.

A Blockchain is a distributed ledger which enables “exchange of value without powerful intermediaries acting as arbiters of money and information” (so says Each blockchain implementation needs a crypto coin only if the blockchain is public.  If the blockchain is a private run project (where access is controlled by some entity) then there’s really no need to have a coin. Here’s IBM’s explanation.

Outside pure speculation, it gets very complicated to work out just where the long term value is going to be – if there’s value in the startup business operating the blockchain, the crypto coin, both or neither.

For a balanced view on Blockchains, don’t listen just to crypto coin speculators. Another side to Blockchains are the technology groups working on blockchains for business – businesses who’s business isn’t making money from crypto ICOs. They are led by and .  The trouble here is IBM is still trying to sell you something: consulting instead of coins so it’s still a marketing pitch.

But Hyperledger is a non-profit opensource project – they are not selling anything. So here’s an example from Hyperledger on how you could manage healthcare claims.  Today when there’s a claim the information is sent between the doctors, hospitals, insurances etc. systems: there’s no one master copy of the whole file – the information is held all over the place. It’s inefficient, plenty of delays, nobody knows what’s going on. A Blockchain based solution would mean one copy of the claim’s data held on the blockchain and enable all the participants to edit, approve, pay, reject, bundle, and take any action they want (and are allowed to) on the claim. In theory it’s far more efficient than the system we have today. Easy to implement? In practice there’s massive effort to figure out how to build this and deal with the resistance of many participants to lose control of their part of the data & work flow. Great idea, lots of work and problems to solve. No mention of ICO, crypto coin, etc.

My guess is this healthcare claims project could be either a public blockchain  or a private blockchain – either way each claim file would need to be encryption and access restricted. But who’s going to run it? Who’s going to do the work to build, maintain & police it? This is where I get confused. Is it really a startup opportunity backed by a crypto coin ICO (like some of these think)? Is it a consortium of the major players? Is it a non-profit NGO? Is it the government? How different would it really be from a well-managed centralized system?  Does it need an intermediate (or several intermediate) steps to get there? How does it get to critical mass if the major players won’t play ball, or even if they are just moving at different speeds?

Here’s an  interview (18 minute long) with Brian Behlendorf of Hyperledger putting the case for private blockchains.

For the public blockchain ICO approach the premise seems to be that the crypto coin will create strong enough incentives for people to use the platform and at the same time it will pay the operator (and whoever is running each blockchain node) to maintain and improve the whole platform. Everyone wins. Powerful stuff.

When many financial commentators are quoted that “raising money via ICOs is the future” they are being mis-quoted/mis-interpreted. Often they said “With regulatory acceptance, raising equity via ICOs is the future”. (eg. ). They are not talking about the speculating on crypto coins which is being done today, but a future where the register of shareholders  is a blockchain with smart contracts that can be bought and sold so that startups can raise money directly from investors. This can’t happen until there’s regulatory acceptance. When is that going to happen? Who knows…

Meanwhile back in 2018, the possible ways of making money on crypto are:

  • Go for it: spray and pray, pump & dump, don’t worry. Rely on the value of crypto being propelled higher due to greater demand. At some point this is a “finding greater-fools strategy” and will lead to a crash. Maybe you are the fool …. There’s only one way to find out.
  • Mining crypto coins – provided mining costs are less than the current tradable price of what you’re mining.
  • Trade volatility (bet on it going up and down, buy and sell).
  • Find the rare ICOs where there’s a proper project behind it with proper oversight.

Or throw your money at someone else. There’s now a whole bunch of investment vehicles that will take your money for a management and invest in a diversified way into the whole “crypto” space. Are they any good? Do they know what they are doing? Who knows. Nobody has a track record but they probably do more due diligence than individual investors are capable of.

What we do know is there are some hurdles for the whole crypto space to solve before it matures:

  • Can Bitcoin be financially stable enough and flexible enough to be used as a currency? Here’s Varoufakis saying no – a currency needs to be managed by a government. Period.
  • Has there been a whole load of mis-selling going on which will lead to a legal mess if/when the whole thing crashes down and people lose their life savings? Maybe…
  • Can it be made hack proof? There’s a lot of work to be done here and who knows what happens when quantum computers come along…
  • How to avert an environmental disaster? Mining is already using the electricity needs of a reasonable country.
  • Do each of these markets actually need an open blockchain solution with a crypto currency?
  • What new challenges does un-deletable public blockchain bring? eg. if it contains illegal content does it make it illegal to host a blockchain node?

Me: I bought a few of bitcoins in 2014 (the equivalent of buying Netscape shares just after their IPO). I sold most of it when the Bitcoin futures were launched and the prices stopped going up. I’m sad that I didn’t buy more in the first place. I’m happy that I didn’t buy more because the whole mining thing is an environmental disaster in the making. I’m not doing any ICO investing because I’m just not capable of due diligence on which ones are maybe interesting, which ones are being over-optimisitc and which ones are outright scams. They all look like in 1999 to me. And all the blockchain engineers and smart-contract lawyers I talk to all tell me there is a long, bumpy journey ahead to get this whole thing working.

So I’m missing out on the equivalent of Amazon, Ebay, Paypal for blockchain. Maybe I’m really wrong. Or maybe they haven’t been started yet. Or maybe they’ll never be started. Who really knows…

Most new markets have matured – growing startups has become a serious business

Most new markets are ten years old, if not older. Ecommerce, Online apps, disintermediation platforms, social, mobile, games, enterprise SaaS, etc. are all mature or maturing markets. What this means to new startups is when they try to scale user acquisition they are up against serious competition:

  • Mature startups with a full product suite and a sales & marketing machine staffed with teams with a track record of growing, maintaining and monetising user bases. They are either already profitable, or have raised tens of millions of growth capital.
  • Mature global companies who, when it’s clear there’s a sizeable market opportunity, they move into this market.

Gone is the day where customers will mix together products from dozens of new startups. Apart from a few early adopters who will buy the best tool for each task, most see this as too complicated. Instead it’s easier, less risky, to by a product suite, one tool which does everything OK, works together and has enough customer references/online reviews to say it works.

These mature startups and global companies have mature sales and marketing operations – to them it doesn’t mater if it takes a couple of years before a new customer is generating revenue for them. Their products are bigger than the “minimum viable product” from a young startup – they can sell it for more so they can outbid the young startups in all user acquisition channels. This dynamic has always existed – it’s about scale. However in the past there’s been several paradigm shifts which have shifted the power from mature products towards startups:

  • Exponential growth of internet users starting in the 90s – a rising tide raises all boats meant success for many who were one of the first to see an opportunity
  • Disintermediation (many players in a value-chain were no-longer adding value in an online world and they could be easily disrupted by startups starting off small – eg. Ebay)
  • The first wave of agile product development (in 2000 mature products were built on Oracle & coded in C or Java, and along came Linux, Apache, PHP and Mysql which was free and easy to update your product continuously)
  • The techcrunch effect circa 2006 was strong enough to launch new products
  • The rise of social
  • The second wave of agile product development – the move to the cloud, SaaS, cheap and scalable
  • Exponetial growth of smart phones (Mature products were slow to adapt to building mobile versions)

Maybe there will be new paradigm shifts which will create opportunities again. However the main shift I see is working against startups. It’s the convergence of hardware, software and services with the internet of things, sensors, wearables, increasingly complex smart phones. It’s difficult to see what a “minimum viable product” is in a world where everything is converging and the tech giants (Google, Apple, etc.) are sucking in more and more data.

As a tech seed investor, it’s become increasingly difficult to judge what’s going to succeed. For a startup to see off the mature competitors it will need a VC to back it all the way and a team which is motivated to build out the product until it and the team have matured – its a long and uncertain journey. In this interconnected world, the halfway solution (that we’ve used in Europe where startups raise a tenth of what they raise in the US and find a niche) is going to be increasingly difficult to make work. Even if the IP (intellectual property) is compelling, it’s risky to try and build an industry from scratch unless you have access to the full US scale VC capital (tens of millions) and a team with a track record to scale startups big. The default European option will continue to be to sell the startup early to avoid the risks of going it alone.

My guess is somehow this maturing will play into the hands of the multinationals. They have the scale, and somehow the combination of them, their corporate VC teams, kickstarter/indigogo (as a means of testing product/market interest), accelerators/incubators (to process ideas in large batches), VCs and angels will have work together to get new products to scale.

But (except for the rare exceptions) it’s not going to be about startups going it alone. As markets mature, its brutal out there for startups.

P.S. Here’s an example of Apple’s software maturing and competing with many startups

The global hardware startup ecosystem in depth

The Silicon Valley/Shenzen based hardware accelerator haxlr8r has just published a 200 slide presentation “hardware trends 2015” on slideshare.

Masses of info showing trends, successes and failures – every slide has some key information that anyone involved in hardware startups needs to know. For example here’s an extensive list of traps to avoid:

hardware risks

Hardware innovation is happening very fast. You can see that there’s lots of elements driving this. Behind all this is also the commoditization of hardware components such as sensors, platforms such as Arduino, and a lot of software components (frameworks and algorithms) which are mature enough and modular enough to use as building blocks.

In Switzerland we’re doing well in intellectual property for components, but we are struggling to capture more of the value with complete products or even just subsystems. The only example of a Swiss product I can find in the presentation is Gimball (due later this year) – I think the other Swiss drones are still research projects.

The Silicon Valley seed-investing bubble deflates

Mattermark has just published a report showing that Amid Pre-IPO Mega Deals, Overall Q4 2014 Startup Deal Volume Returns to Late 2011 Levels with Seed Rounds Slowing Dramatically – here’s a couple of graphs from that report (linked from their site) which show it clearly.

I think this lower volume makes sense when you consider the following:

For low-funded startups its difficult impossible to retain rockstar engineers in Silicon Valley – they all want to work at somewhere like Uber where they think that their stock options are more valuable. Note: this is a silicon Valley specific problem – elsewhere it’s not the case.

As sectors mature, it’s difficult impossible to launch a startup with a tiny team of 2 or 3 founders – a hacker (programmer), a hustler (deal maker, biz dev) and a hipster (designer). Eg. in order to get visibility on the app store you also need a marketing budget of $50k/month to build traction and in a lot of sectors it’s now extremely difficult to launch an app which is really just a feature solving one pain-point – users are expecting something more fully-featured from day one. For many sectors to build,test and support a minimum viable product and to create enough mindshare amongst users to get growth needs a team of 10 or more.

There’s serious momentum investing (I’ve written about this before) where one startup in each sector gets $ tens of millions and, unless they screw up big time, this cash gives them enough power to crush all competition and dominate their market. Seed investing in this environment is high risk unless you’re sure you’re backing the one which will attract the momentum investors.

Why raising money for Hardware startups is hard

Here’s my attempt to summarising the investment ecosystem for hardware startups (with my European bias, but it does seem to be a similar position in the US). It’s based on what I saw and heard at the Invest in Photonics (photonics is lasers, displays, LEDs, etc.) conference recently in France, plus my own experience as an angel investor in several Swiss hardware startups.

On the face of it, it’s all very contradictory. For example, in the same presentation at Invest in Photonics a US VC said:

  • Optics + IT will save more lives than doctors.
  • VCs won’t invest in the hard part (the optics).

The discussions, presentations & roundtables at the conference did provide some logic to this. VCs get a better return on investing money in software, so they focus on that. Hard stuff is just too hard for VCs to finance and to get a return comparable with software. If they do invest in hardware then it’s startups who are mostly just packaging up components and building a brand – eg. Occulus Rift, Nest, GoPro, etc. or, occasionally materials.

In addition to the lack of proven returns is another less-obvious issue: traditional VCs don’t have the network to do proper due diligence on most hardware startups. Doing DD involves getting actionable data on the market, how it is going to evolve, what the completion will look like and which tech is going to win out. Only industry insiders have this. A VC can’t act on the limited data that he can get hold of.

Even European success stories like Novaled’s recent exit (to Samsung) for 260M EUR hasn’t change the VCs’ lack of interest. The general consensus from speakers & panels (including Novaled’s outgoing CEO) is that it’s got even more difficult to finance hardware startups the last few years.

Most of the advice was pointing to this strategy for startups:

  1. raise initial funding from a combination of government grants & angels.
  2. be very capital efficient
  3. raise follow on from Corporate VCs and/or family offices.

Wellington Partners said they see all photonics fundraising post-series-A coming from family offices (what they call “unconventional sources”). But it’s not that simple – matching a family office to a deal can’t be done systematically – it has to be opportunistic networking on a case by case basis.

Corporate VCs also seem to be getting involved at a late stage and filing some of the void of traditional VCs (my guess is at this later stage they can do the due diligence that traditional VCs can’t). The general feeling is that getting a corporate VC onboard works well unless there’s a conflict over strategy between the startup and the corporate VC, therefore a corporate VC who operates independently of the mother ship should be best.

All this uncertainty in the investment ecosystem means that the initial investors have to expect that there is a high probability that they will have to lead the follow-on investing all the way until the startup reaches break even. And the new normal is the hardware CEO is always in full-time fundraising mode. Although for really exceptional startups it can be a lot easier than all this.

And finally: although financing hardware innovation is a bit pessimistic, the technology continues to advance. In the near future Airbus thinks we’ll see drones powered from laser beams on the ground and other fun stuff!

Tech Innovation in China

A quick report from the LIFT China conference & maker tour of Shanghai and Shenzen.

Anyone following high-tech innovation in Europe also needs to follow what happens in the US (mainly Silicon Valley) and Israel (mainly Tel-Aviv). We know things are happening in China but does it need to be on this watchlist? In September 2014 I headed to the LIFT China conference and LIFT’s tour of the maker/kickstarter ecosystem to better understand what’s happening there.

I’d been to Shanghai 6 years ago (when we were setting up manufacturing for Poken). It’s still the same city but I think since then it feels that there’s a lot more Chinese who have exposure to the west (speaking excellent English, easy to have in-depth discussions about China vs. the West, etc.). There’s also about 1M Westerners in China, many of these working in high-tech.

We had a tour of DFrobot in Shanghai. DFrobot sell robot kits (and related things) online, distributing worldwide. Because their cost base is lower than Europe and also because they are in such a big efficient manufacturing ecosystem, they can design & build products so much cheaper, they can just throw them out there (like this DIY spider bot for $6) and because it’s great value there’s a market. Whereas the Swiss approach would be to beautifully engineer something and then struggle to sell a few of them at $200 each.

I started to think that maybe in the same way that Silicon Valley has built an engine which sucks in data, capital and brains, China has built an engine which produces electronics.

When we moved on to Shenzen, we met some of the team from Seeed studio. Seeed in an electronics manufacturing operation which helps design and manufactures hardware products for many of the Kickstarter startups. Again, a very efficient organisation.

We were invited for a tour and discussion of Foxconn. Usually it’s impossible to get a tour of Foxconn, but now they have decided to reach out to the kickstarter/maker community. Foxconn say they want to be innovators, not just assemblers & copycats. They want to enable some of their 1 million employees to start prototyping ideas (as people would in a hacker space), and to also have makers bring ideas to them. They have set up a site where anyone can pitch ideas to them called This site is in Chinese only because they are not ready to process world-wide applications.

Clearly Foxconn is in a dominant position for doing large scale high-tech manufacturing. When you see the scale of what they have, it seems possible that Foxconn and Shenzen could turn this manufacturing dominance into an engine which sucks in innovation and progressively more of the value chain (and finally rid themselves of their employee-exploitive past).

So maybe the US and China both have powerful engines which increase their dominance in tech, and Europe will be powerless to compete.

Thanks to the LIFT conferece and David Li  from the XinCheJian hacker space for organizing the tour.

Bilan & Le Réseau’s manifesto for Swiss startups

Bilan and Le Réseau have published a 10 point manifesto (in french) for the Swiss government to make some simple changes to improve the startup ecosystem:

  1. Allow private individuals to make tax free investments into startups. Tax would be paid if the investment is subsequently successful (sounds similar in principle to the UK EIS scheme)
  2. Improve the fiscal system for startups. Encourage R&D and the generation of revenue from IP
  3. Improve the system for share options. Granting options has been made easier, but the tax status on exercising options when startups are still loss making is currently unclear.
  4. Create a VC fund of funds. Get the pension funds to invest into local high-tech.
  5. Create a Swiss “second market”. Lower the barriers of entry for IPO or create a separate segment.
  6. Legislate for crowd-funding and the sharing economy.
  7. Create an “entrepreneur’s visa”. Like several other countries are doing/have done.
  8. Have a small business act. Improve the ability for SMEs to bit on public projects.
  9. Reform the CTI. Streamline the Commission for Technology & Innovation, and make it more accessible for startups who aren’t spinouts.
  10. Create a Swiss “DARPA”.  Use military spending to help create disruptive technologies.

It all seems pretty logical and would make a massive difference to the ecosystem. The petition can be signed here

Full disclosure: I am a passive member of Le Réseau.