Why are they here? Why isn't it all decentralized? Why do we see the same names over and over again?
Is this good? Is it bad? Whose fault is it?
Read to find out more - this is actually quite simple.
2/ This all starts with the SEC and specifically the "Howey Test"
This is a test of if something is a security in the United States, specifically:
✅An investment of money
✅In a common enterprise
✅With the expectation of profit
✅To be derived from the efforts of others
3/ So to take a simple example.
You think you can build a great exchange for trading NFTs. You need some money to pay the salary of you and your colleagues, servers, etc.
You pitch this idea to your friends or your twitter feed.
$ for shares or ETH for tokens
3/ How does this look
Investment of money? Yes
In a common enterprise? Sure is
Expectation of profit? Yup
To be derived from the efforts of others? Yup, in this case the "others" is you and your team
4/ Congratulations!
You have just sold an unregistered security and violated the law in the United States
So what you can do?
Well the easiest and most practical thing to do is to sell shares to "accredited investors" who are primarily defined in the United States as "rich"
5/ The United States allows you to sell unregistered securities to accredited investors with, effectively, no restrictions.
So most startups, excited to build their business, not navigate a bunch of regulations from the SEC will go the fast route and go to accredited investors
6/ Who are typical accredited investors who invest in startups?
✅ Rich individuals ("angels")
✅ Rich established families ("family offices")
✅ Venture capital firms ("VCs")
VCs can typically make larger investments at higher valuations.
7/ What are your alternatives?
a) self-finance until you have a decentralized product
b) crowdfund (lower) amounts through the crowdfunding regulations
c) file to be a public company
For most cases, all of these are harder for the startup
8/ What about the rest of the world?
In terms of startup funding for crypto firms, the rest of the world does not matter so much (yet).
The majority of startup funding for crypto comes from the United States for now
9/ OK, so who are significant funders of crypto startups.
A very much non-exhaustive list off the top of my head:
- a16z
- USV
- Pantera
- DCG
- Paradigm
- Polychain
and a few more
10/ What is very interesting is that the large majority of silicon valley venture capital firms have not yet gotten comfortable with funding crypto startups.
The number of firms willing and able to write a big check to an early stage crypto startup on a regular basis is <10
11/ So here is an approximate model of funding for crypto startups.
a) most money is raised in the USA
b) the SEC pushes startups to VC firms
c) Most VCs are clueless about crypto
d) The VCs who are not clueless show up in a lot of deals bc their competitors are out to lunch
12/ Is this good or bad? It depends on the alternative:
a) SEC being more creative on web3 funding would be BETTER
b) More VC firms investing in crypto startups would be BETTER
c) But everything staying as-is and the VC firms that invest in crypto investing less, would be WORSE
13/ So, sure Jack Dorsey is right that the same firms appear in a lot of firms' shareholder bases, but I have not seen him propose an actual practical alternative such as:
a) specific changes at the SEC
b) helping getting more money to these startups in other ways
14/ I think also that people overestimate the level of involvement of VC firms in day-to-day operations of their "portfolio companies"
Each VC typically has a 1% to 10% stake and invests in many startups.
No good VC has time for operational matters within their portfolio
15/ Now, what should a budding founder do?
a) If they can self-finance, self-finance for as long as possible
b) If their product can get to market without funding, sure, do it
c) But if they need capital to execute their vision, they should go get it and not be ashamed
16/ Also, and this is more an issue for inexperienced founders than for experienced ones, it is OK to listen to ideas and advice from VCs, but you have to make your own decisions.
The buck stops with the CEO, not shareholders or directors
17/ The only time I have been irritated with startup founders has been when they have 'hidden' behind their investors.
"Well, my investors told me to do it"
"Yes, but it is YOUR decision and you have to stand behind it"
18/ There is no pattern matching of a "good CEO" who hides behind their board of directors or shareholders for decisions.
If it is a good decision, you should stand behind it.
If it is a bad decision, you should not.
Anything else is insta-loss-of-respect.
19/ I note that sometimes, with 2nd tier VCs and inexperienced founders, the investors use the founder's lack of knowledge or insecurity against them.
There it is the VC's fault.
Interestingly, the weaker the VC, the worse the behavior.
20/ The best VCs in the world are:
a) personally very successful
b) know that power laws rule everything around them (the big wins are what matters).
c) don't sweat the small stuff
You generally do not see them messing around with a company for a small tactical advantage.
21/ So this is where we are.
It is not perfect, I hope it can improve, but also I don't think it is an impossible barrier to where we need to go.
The impossible barrier will be banning directly or indirectly non-custodial wallets.
All eyes must stay on that prize!
22/ If this is your first time around here, we are heading for an open metaverse.
1/ While I would be happy to be proven wrong, I don't think undercollateralized algostables can work
I have been thinking about this for almost a decade and have not come up with a plausible solution that I believe in - otherwise 6529USD would be a thing 😂
2/ Making your token = 1 dollar is a subset of a broader question of 'pegging your currency to another currency"
In freely convertible currencies, even major nation-states fail at this regularly.
(you can do it if your currency is not freely convertible but defeats the purpose)
3/ As far as I can tell, the viable design space is:
a) Centralized collateral like USDC. This can work, will be regulated, has 'nation state risk'
- much worse licenses than prior Yuga licenses
- no rights in Otherdeeds
- restricted rights in Kodas, 100% revocable
- if punks license ends up looking like this 😬