Silicon Valley Stock Exchange and the Saints of Wall Street

A week ago, the news of the Long Term Stock Exchange (LTSE) backed by some of the biggest names in Silicon Valley emerged. The Elites in the valley, including
Marc Andreessen, Reid Hoffman and Peter Thiel have joined hands to set up a stock exchange where firms do not have to worry about “Short Termism”. It is seen as the tech world’s open war against Wall Street’s modus operandi.

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Some hail the move as a masterstroke. The features of the LTSE make it more attractive for investors who stick around longer with a firm. Voting rights are directly proportional to how long an investor held a firm’s stocks. But this is also a double edged sword as it makes founding teams too powerful. It could make bubbles bigger, and wave riders could get a smoother ride to exit.

Many questions come to mind when I think about where this could take us. Let us explore each one of them.

  1. Recent disasters of Uber and Lyfts – is Wall street better at identifying good business models?
  2. How long can patient capital be, errrr, patient?
  3. Does Wall Street need to be more tolerant of Visionary Founders?
  4. Growth vs Profitability conundrum – Won’t LTSE make profitability and a good business model rarer?
  5. Creation of monopoly – Good way to make money for businesses and investors? But what about the consumer?

Uber’s IPO earlier this month is arguably the worst opening ever as investors lost $650 Million on the first day. This also happened with Lyft and the stock hasn’t recovered yet. Analysts claim that the ride hailing business model is broken. Softbank’s stocks has taken a beating since then. Would LTSE have minimised the losses that Softbank made since the Uber IPO?

However, with investments (of ~25 Billion) in Ola in India, and Grab in South East Asia, SoftBank’s fund controls 90% of the ride hailing market in the world. One of them (Wall street or Softbank) is definitely wrong about the market and the business models in this space. Is LTSE needed to bridge this gap in perception of business models?

The question that immediately followed was, how long can Patient capital be patient? Early stage investors go largely with gut instincts, where as later stage and public market investors are generally more data driven. If all data points to continued losses (Uber’s Q4 2018 EBITDA loss was at $842 Million), should analysts still give the firm a thumbs up based on the market potential of the firm?

LTSE in this scenario could make Wall Street look good, if the intention was to stay long despite continued losses.

The other side of the argument is also valid. Markets have misjudged visionary founders. Michael Dell took his firm private at ~$25 Billion in 2013 and led the transformation of his firm. The firm has re-positioned itself, and it’s estimated valuation today is ~$70 Billion. When Tesla had pressure from the markets, Elon Musk, took to twitter and spoke about taking the firm private – and of course got into trouble with the regulators for doing so.

If LTSE went live, founders like Dell and Musk could operate in the public market more comfortably.

If LTSE went live, firms like UBER could keep growing and take more of the market, without having to demonstrate a sound business model underneath.

One of the approaches that private investors like to see is “Going for Growth”

If your growth plan doesn’t scare me, I do not want to invest in you” – That’s another famous VC one liner.

This approach has given rise to centralised tech monopoly over the years. Google, Facebook, Amazon, Uber are all leaders in their market segment. If LTSE backed them with public money, they have to worry less about profitability, if at all. They can continue with growth and their market conquest.

As an investor who is just looking for an exit, I would love this approach. But as a consumer, who cares about accountability and healthy competition, this is definitely not the way forward. The “Winner takes all” approach has made tech look like the new banking.

LTSE can be a boon to some visionary founders. If it had been announced during times of low liquidity in the market, it would have come across as a genuine attempt by proven Silicon Valley elites. It is coming at a time when market is rich with cash, and it feels like LTSE will make the bubble bigger, and the fall harder.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on “Sustainable Deeptech Investments” and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

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Bitcoin Maximalism is deeply threatening to Wall Street

Intermediaries

What if somebody around 1995 had given you a simple way to invest in the Internet? All we had around 1995 to 2000 was the option to invest in the ventures being sold by the Wealth Intermediation business. Today, if you want to invest in the Blockchain Economy, there is one incredibly simple way to do so – you just buy some Bitcoin. I just gave you a strategy, so where do I send my invoice for x% of AUM and y% of Carry/Profit Share? “Thanks, but I don’t need you to buy Bitcoin on my behalf, so your invoice will go in the round filing tray”.

I am using “Wall Street” as short hand for the global business of Wealth Intermediation ie getting a risk free return connecting users of capital with investors of capital. Wall Street can today be located in any major city, just like Silicon Valley has gone global. Global Wall Street aka Wealth Intermediation is a massive business (for more, go to this chapter of The Bitcoin Economy digital book entitled Blockchain Bits Of Destruction Hit Wall Street 

Aha, saying “just buy some Bitcoin” must mean that I am a Bitcoin Maximalist. Guilty as charged your honor. Let me explain why I am a Bitcoin Maximalist

5 reasons Why I am an economic Bitcoin Maximalist

Not a moral Bitcoin Maximalist – just economic. I don’t say that buying Bitcoin is any better for the world than buying an Altcoin. I am just saying that Bitcoin will be better than Altcoins as an investment. I said investment, meaning over the long term (there are plenty of short term trading opportunities in Altcoins).

Here are 5 reasons Why I am an economic Bitcoin Maximalist:

  • One. Brand and network effects. Step outside the cryptoverse for a moment. Do you have any trouble explaining Bitcoin to a normal person? Try Ethereum. Try hundreds of Altcoins. Building a crypto product/service? Building for Bitcoin is a no-brainer. Which Altcoin do you invest your R&D budget into?
  • Two. Not making any more of it. People who are fed up with money printing tend to like investing in land, gold…and Bitcoin. A big  question for the mainstream user is, but how can we believe “they” won’t make more Bitcoin? Now ask that question of every Altcoin.
  • Three. Copy that. Sidechains and other technology allows entrepreneurs to copy most feature of a cool Altcoin. Like Smart Contracts? Use Rootstock/RSK. Like privacy? Use MimbleWimble/Grin.  Altcoins as a sandbox for experiments are a “good thing”. As a donation to the community that experimentation is cool, as an investment thesis less so.
  • Four. Lightning Network. This crushes the BCH pitch that the only way to scale Bitcoin into a currency for daily spending is to increase the block size. The “will Lightning Network work in practice?” objection is looking less credible with each passing day.
  • Five. Flight to safety from both directions. Coming from Fiat, Bitcoin is an Antifragile bet against central bank money printing. Coming from Altcoins, Bitcoin is safe haven while still believing in Cryptocurrency. 

Ethereum is a wonderful technology innovation. If Proof of Stake really works in Ethereum, Ethereum could become a true public alternative currency because Proof Of Work is expensive. But that is like saying that if we can easily transport solar energy we can get off fossil fuels – easier said than done. Watch this space, this is a wild card. If you are convinced of Ethereum, maybe your crypto asset allocation is 80% Bitcoin and 20% Ethereum. Well that sounds a bit more complex, so where do I send my invoice for x% of AUM and y% of Carry/Profit Share? Yep, thought so.

The Bitcoin is Bad, Blockchain is Good idiocy

People who made a fortune in Legacy Finance, tend to trash talk Bitcoin. To show that they are hip to new technology, they often spout the line that Bitcoin is bad, but Blockchain is good.

Even Warren Buffet is saying this. Another famous, super smart Legacy Finance titan (I am being polite by not naming him) was heard on CNBC trash-talking Bitcoin but lauding the underlying Bitchain technology. These Legacy Finance titans are super smart about Legacy Finance and super dumb about Blockchain Finance.

When they learn that Blockchain can be both Permissioned and Permissionless, they come down on the Permissioned side and trash-talk the Permissionless solutions. Then when Oracle proposes a distributed database version of their RDBMS that they call a Permissioned Blockchain solution, the Legacy Finance titan can sagely nod their assent in the board meeting.

The Crypto Fund Products you will be pitched soon

These Crypto Fund Products all justify an intermediation fee, but not all are worth paying for:

  • Bitcoin Killers.  This could be like trying to find Facebook killers in the social media era. Even if there is a Bitcoin killer out there, your chances of finding it (or finding the Fund that will find it) is statistically tiny.

 

  • Index of all Altcoins. If you agree that finding the Bitcoin killer is too high risk, the lower risk approach could be to take a passive index approach and invest in all Altcoins. The problem is that the analogy with an S&P Index Fund is flawed. Altcoins are early stage ventures where 1 winner can make up for 99 losers. Compare that to the S&P 500 Index where all 500 companies are viable. What if the 1 winner does not do a Token but raises conventional early stage equity capital? You have 99 losers and no winner.

 

  • Filling in the blanks for Bitcoin. Bitcoin is the protocol level and the world needs exchanges, wallets, custodians, sidechains, offchain networks  and a load of application level/user facing ventures.  This makes sense as an investment thesis, even if it does not sound super exciting. This strategy requires classic early stage investing skills. The problem is that backing a first time fund is high risk and the top tier funds are not open to new investors.

Watch what Family Offices do in Blockchain investing

Family Offices are like retail investors in that they make their own decisions and have no explanation risk. The difference is obviously that Family Offices invest far bigger sums than classic retail investors. Family Offices are Retail investors with clout. Watch what Family Office do in Blockchain Finance to see the future.

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Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

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DX Exchange Security token model could democratise Wall street

2019 is the year of the Security tokens. We have had several ebbs and flows in the Blockchain industry over the last few years. Events of the past 18 months especially have shaken the industry into some serious introspection.

Revelations around the lack of controls and regulations around capital raising models have brought the industry into serious disrepute – in such a fashion that the merits of the Blockchain framework have been challenged. Being a passionate student and a commentator of the industry, I still believe, the model is intact, its the controls around it that have failed to stop human greed from causing havoc.

On the brighter side though, security tokens were seen as the bail out for the industry in many ways. Towards the end of 2018, there were a lot of talks that the model has merits, and as soon as the year opened, we have had the news of DX Exchange platform launch.

The DX Exchange platform allows bluechip stocks traded in NASDAQ on Blockchain using security tokens – this would cut out the middlemen, and when rolled out across markets, would save Billions. The disintermediation that the model brings to the table, will also put several business models dependent on Wall street at risk.

Why is this a better model than an ICO? Is this just another hype? Is this a perfect model that will create the new inclusive Capital markets?

I believe, ICO was the wrong start to the right journey. Being an early stage Venture Capital investor, I understand that valuing a startup is more of an art than science. There are very few data points. So when a business that has no way to value itself goes on Blockchain, the intrinsic value behind the tokens will be challenged by the traditional financial services industry.

Blockchain purists will argue that the new capital markets driven by Blockchain wouldn’t need traditional financial services principles AS-IS. However, what we are trying to do with Blockchain is a massive change in the way we exchange value, and that can only happen by collaborating with the incumbents.

If value has to move from traditional markets to the Neo Market, it can’t happen without key stakeholders in the traditional markets understanding the value of the Neo Market and embracing it. Security tokens can make that happen.

DX stressed that its digital stocks are classed as derivatives — with the underlying asset being equity of 10 Nasdaq-listed firms — and that its platform is regulated under the European Union’s Mifid II directive

CNBC News

With Security tokens, the problem of intrinsic value is resolved. When you have a token that’s valued based on an underlying stock – most people who understand derivatives will get it. Of course, the tokenisation process, the exchange, its participants, operational details of managing transactions will have to be regulated and audited regularly to ensure that the security token industry gains credibility.

In doing so, we would have created a disintermediated Neo market on the Blockchain, but still largely within a traditional financial ecosystem. That is the first step, and I believe the right step for Blockchain in Finance.

Will there be scams? There will be – for sure. But I believe the worst of these scams are behind us, and with controlled progress, the Blockchain industry should see the adoption that it was meant to.

I am really hopeful that there will be a day when Mangoes from my farm in India and Buckingham palace will both go on Blockchain, and I will be able to trade some equity in the palace with Mangoes.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

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