Macro Environment

Should We Care that JPMorgan Wants Its Own Cryptocurrency?


A lot of people are twittering – and Tweeting – this week about the fact that JP Morgan filed a patent for its own cryptocurrency.  The move certainly holds some interesting implications but ‘JPM Coins’ as a realistic competitor to Bitcoin is not one of them. Quite the opposite – it is more evidence that Bitcoin is a serious alternative to many revenue lines upon which banks are dependent.


First, could ‘JPM coins’, a corporate cryptocurrency, succeed? To achieve success as a widely-used currency, the ease of use must transcend what users already have.  In a vacuum, JPM’s currency is certainly easier than all the friction one encounters using the existing methods of transacting – any cryptocurrency is – but we don’t live in a vacuum: if a currency is usable only in the economy of a single company (corporate “autarky”) even one as large as JPM, it is not “easy to use”, its just another layer users face in their overloaded financial universe.  JPM Coins’ limited footprint will kill it in the cradle.


Even within the JPM economy, it doesn’t change much.  I can already easily pay other people who also have a JPM Chase account (Chase Quickpay) and I can easily transfer money to a company that has an account at JPM.  Maybe the JPM cryptocurrency will make those things a touch easier but not enough for me to care and it impacts the life of those outside of JPM, i.e., 99% of the parties with whom I transact, not at all.


Cryptocurrency is still a winner take most game and a cryptocurrency owned or sponsored by a corporation is not going to win.


The implications of the patent filing by JPM do, however, bode well for Bitcoin.  Jamie Dimon is not stupid. In fact, he is brilliant.  So why did he do it?  Like all of Wall Street, Dimon is alternately propelled by fear or greed.  This move smells like fear.   He knows Bitcoin is a serious threat to parts of his banking business and this is an attempt to dilute that threat.  It’s as if a large competitor just entered his market. He needs to counter-punch.  Unfortunately for him and much of his industry, he is punching at air.  His new competitor is everywhere and nowhere.


Better to integrate Bitcoin into his company and get ahead of other banks than to waste time creating a rival currency.  If this were 1992, would JPM be better off filing a patent to create it’s own, closed Internet, or leveraging existing protocols to get ahead in his industry?  JPM’s “competitor” to Bitcoin will work out about as well as AOL’s 1990s walled garden did (or as well as Facebook Credits did).


JPM Coins are also dead on arrival because of regulatory overhang: governments will have a hard time regulating a decentralized “currency” like Bitcoin but they can easily regulate a bank.  Regulate JPMorgan and you regulate its currency.


In sum, it’s a little annoying that JPM is dragging patents into the cryptocurrency movement but it has no negative implications for Bitcoin.  In fact, it’s good news: when someone of Dimon and JPM’s seriousness acknowledge Bitcoin’s power, it’s strong proof that Bitcoin is no fad.

The Singularity is Indeed Near

It’s been about eight weeks since I moved to Silicon Valley.  Every day I learn something new — this is truly the Athens or Rome of antiquity — and occasionally the implications of what I learn overwhelm me.  At the moment, the unification of human and machine  — which seemed so distant two years ago — is blowing my mind.  “Wearable devices” will soon become “embedded devices”, then it’s off to the races.


Down the street from a wearable tech conference, sitting in this Vegan restaurant in SOMA, eating my hyper-local personalized gluten-free food that actually tastes great, listening to thrash jazz and watching a dead-ringer for the T-Mobile motorcycle girl (add tatoos and nose ring), it feels like we are on the cusp of a downhill Tron ride into Singularity. The ideas and technology in this space are so powerful, the advancements so exponential, that we are about to be swept into, rather than choose, our future.


Google Glass is just a very tiny beginning.  “This” — this human-AI integration — is much bigger, folks, so much bigger, than all of us. Faster than any regulations can keep up with. We are on an accelerating speed of light ride into a transhuman future in which algorithms get further and further ahead of us, predicting and perhaps controlling our behavior and (therefore?) who we actually are. Maybe they will be who we are.  Or maybe it won’t matter anymore.


The Matrix hypothesized that love could not be predicted, that it introduced a human emotion that could not be controlled by the programmers, by the machines. I’m not so sure.


I am pretty sure that this is it. We either turn back now or get on a Hyperloop to an age of spiritual machines. There’s probably a small group of people that truly understand this moment in time and most of them are within an hour from here. Some have an influence on the decision and I guarantee you they aren’t going back (sorry, Bill Joy).


TechCrunch Disrupt is Dead, Long Live TechCrunch Disrupt

Jon Evan’s post about TCDisrupt inspired me to write some thoughts about Tech’s preeminent conference.


I decided kind of last minute to attend – last year I hung around and met people nearby but did not pay the price of admission.  Any panel that seemed interesting, I watched on the website.


This year I sprung for the wildly expensive attendance fee and almost immediately regretted it.  Why?  It’s not that there were no innovative ideas; it’s not there were no interesting panels but, really, how much “new” did attendees learn?  Not much.   Moreover, how much did we learn that could only be learned at the event? Even less.


It was like sitting through a disappointing three and a half-hour movie or attending a three-day press conference.


I also got bummed out walking through the exhibit hall.  On stage, the one-percenters, the billion-dollar Thunder-lizards, were feted while, out in the crowded hall, the proletariat masses begged and pleaded for attention, each one believing they would someday be a one-percenter.  I found myself avoiding eye contact and walking faster each time through the hall.


Jon Evans says software has gotten boring.  Maybe that’s it, I don’t know but I do know I felt annoyed at TC and myself about the investment of time and money.


And yet, when I think about it,  TCDisrupt is essential.  If it didn’t exist, we would have to invent it.   It is the barometer, the measuring stick, however imperfect, for the state of the startup ecosystem.  (Someone compared it to Fashion Week in Milan – good analogy.)


What Disrupt 2013 revealed is that we are in a state of transition.  This thing we are in, it’s not a straight line up; it’s not a linear progression of brilliant innovation.  It’s more like a sine wave and right now we are in a trough.  One door closes, another one opens but sometimes we are in the hallway for a while…


Fortunately, troughs usually precede an upward shift to new innovation.  As Jon wrote, that new area might be hardware, it might be Bitcoin, it might be, yes, energy (I think it’s fair to file Cota under that category).  If that’s true, then we will look back at TCDisrupt13 and say that it, again, revealed critical future trends.


Regarding the snark about it being a three-day press conference.  It was but press conferences also have value.  I gather some people find Mike Arrington controversial.  Whatever.   He’s a gifted interviewer and he entertained while driving unique conversations with key players.



Mike has the air of an old-school “ink-stained wretch” that got pulled off the stool of a newspaper bar and told to interview the President.  He’s an authentic counter-weight to our faux casual, be rich dress poor tech style.  And I appreciated that he grilled every interviewee about the NSA scandal, which in the midst of our chasing Internet riches we should all be grateful for – at least someone with a megaphone still gives a damn about privacy.


In sum, the level of innovation may not have been high at Disrupt 2013 but it will return, as Google glass, automated cars, Bitcoin, drones, sensors, 3D printing, etc. all take off.  How do I know?  I went to Disrupt 2013.


The Other “Brazil Cost”

The “Brazil Cost” usually refers to the cost of bureaucracy in Brazil.  There are other costs, however, that have nothing to do with bureaucracy but are just as damaging to business.

I’m referring to the dozens of little things, daily, that reduce productivity.

Let’s take a typical workday in Sao Paulo.  You wake up and drive to work, if you can: due to road space rationing you may not be able to use your car that day.  Sao Paulo traffic congestion is probably the worst in the world,  so you spend two hours in traffic getting to work.

During that time, you try to make some calls to increase productivity.  Unfortunately, your cell service is not good and your call drops repeatedly.  The calls are an exercise in half-conversations and accomplish little.

Maybe, just maybe, you live close enough to walk or take public transport to work.  Even walking in Sao Paulo, however, is difficult.  One of the things that you notice is how narrow the sidewalks are.  You are constantly stopping or moving side to side to avoid other walkers.  Also, stoplights are often unclear– where and when to cross a busy street can be a dangerous guessing game.  The point:  it takes a lot of extra time to walk from one place to another.

Finally, you get to the office.  Here’s perhaps the biggest problem: the internet is unreliable.  It keeps going on and off or, more commonly, bandwidth doesn’t drop completely but gets overtaxed and can’t handle, e.g., a videoconferencing.  So Skype calls with important clients are interrupted.  If the internet completely drops, online projects halt, emails go unanswered, etc.

Every Skype call I had last week — and I had a lot — got dropped at least once.

At the end of the work day, you reverse the commute and re-encounter all the issues mentioned above (plus, you need to leave the office early to compensate for the traffic).

Add all these little things up and multiply them times the millions of people working.  It’s a staggering cost.

This is not to criticize Sao Paulo or Brazil. It’s life in a LOT OF CITIES.    For example the San Francisco Bay Area has horrendous traffic jams which reduce the quality of life — and productivity — there.  Walking in Manhattan during rush hour is brutal.

When you combine all the little things that reduce productivity in daily life throughout Brazil, however, and multiple that times hundreds of millions of people — it’s crippling to the country’s productivity.  It hurts Brazil, Brazilians and anyone trying to do business there.

Optimism and the Brazilian Online Market

I attended a get together organized by BayBrazil last night.  Lots of members of the Brazilian startup community are in town for TechCrunch Disrupt and the atmosphere was great.   I expect the same at the StartupiCon event on Thursday night.

It’s fun to see hard-working Brazilian entrepreneurs (and investors and mentors etc.) in the Valley/San Fran environment – there is something energizing about it, it provides a morale boost.  Anything seems possible here and entrepreneurialism is king.

The amount of quality Brazilian startups here proves how dramatically the startup ecosystem has improved in the last few years.  Several of the pitches I saw last night would fit seamlessly into the Y Combinator Demo Day I saw last month.

One big cloud hangs over my optimism, however, and there is insufficient discussion about it: the customer market for Brazilian startups remains small.

I am not talking about the size of the Brazilian economy, which is huge.  I am talking about the number of people who use and PAY FOR new online products and services.  We hear a ton in the news about the large size of the Brazilian market, the growth of the middle class, improving infrastructure, etc. — all true, all important — but the real size of the paying online community in Brazil is still extremely small.

Yes, people buy shoes and clothes online but, outside of that, we still don’t know when and where other parts of the online market will grow, nor how big it will actually be.

For the moment, the market for new online product and services is thin.

It’s true that startups face less competition in Brazil – in any given niche, there may be two or three competitors versus six or seven in the US – but the true market for those three competitors is proportionally much smaller than the market for the seven competitors in the US.

It is better to have seven competitors in an addressable market of 50 million users than three competitors in a market of 10 million users.

I don’t think anyone, including me, truly knows how large the online market will be in Brazil, what will people pay for (outside of normal retail goods), nor when they will start paying for it.

I am an optimist (come to think of it, maybe that what is in the air this week: optimism) but a lot of positive assumptions about the Brazilian online market remain unproven.

Vamos ver…

History Repeats Itself: the Internet Boom and Bust 2.0

The venture market in the United States is in a bubble.  In the US, including (especially) in SV and NY, valuations for companies at every stage are way too high.    Because most of these companies have no revenue, it is not possible to quantify how high but, if you do the math, there will simply not be enough exits at a high enough multiples to provide sufficient returns in exchange for the risk being taken.

Yes, the problem is worse in basic consumer businesses (B2C) than in enterprise businesses (B2B) but the problem is in pretty much all Internet verticals.

I feel more and more like I am re-living Web 1.0 – the Dotcom boom and bust.  I was part of building and investing in a VC fund beginning in early 1997 – we caught the wave and the fund did 90%+ IRR net of fees – this is top tier for VC returns.  It was useful because I witnessed how a VC fund can be successful.  I left for AOL later but my former colleagues – pretty much the same team of extremely smart and talented people – did the same thing with Fund II and it returned $0 because the bubble popped.  So I witnessed how a VC firm could fail.

So you can be smart and good but, with a traditional VC fund, timing matters.  (Timing matters in all investing but moreso in a fund that must be deployed over a fixed five-year time span.)

Some other indicators of a current bubble: the proliferation of “accelerators”.   You had the exact same thing happening during the Web 1.0 bubble – just substitute the name “incubator” for accelerator.   Some of these incubators even went public, then became penny stocks, then got delisted, then went bankrupt.  They all had promising startups inside which, in retrospect, were interesting ideas or products but not actual businesses, at least not sustainable businesses.

Instead of building businesses, the game was a chase to be acquired or, in Web 1.0, go public.  The same is true now.

Economic markets run on fear or greed and we are currently in a “greed” phase.  The Facebook IPO will only increase the frenzy.  Many people who were at FB at the right place at the right time will believe they are smart and either start new companies or become angel investors, which will make the bubble worse.  Again, substitute “AOL” for Facebook and you can see Web 1.0 all over again.

The only difference between the dot-com (Web 1.0) and this bubble (web 2.0) is that web 1.0 included inflated valuations in the public markets. The high prices in public stocks and the ease of going public led to huge valuations in private (VC) markets.  When the public market bubble popped, it immediately popped the private market bubble, since the latter’s valuations were based on assumptions of public market multiples.

The Facebook IPO will be the moment when the Web 2.0 bubble officially comes to the public market and it will be the beginning of the end of this cycle.  It’s not that FB isn’t an incredibly valuable company – it is – the issue is the psychological impact of the IPO on valuations and exit assumptions in general and, again, on the companies and investors lower down the chain.

Right now, the web 2.0 bubble is “trapped” in the private markets and, because it has been trapped in non-liquid markets, it has been hard to quantify just how big the bubble is.  Now, however, the bubble will float up into the public markets.  In the full light of the public markets – liquid markets that require disclosure and quarterly updates, etc. — it is a matter of time before valuations correct.

As an aside, many people have argued that we are not in a bubble because the public markets for tech stocks are not inflated.  This is ridiculous – just because private tech companies have not had access to the public markets, because they are receiving private financing, does not mean that their valuations are sane.  In fact, it is the opposite – a lack of liquidity, transparency and comparables in the private markets leads to the inflation of valuations.

Anyway, since access to the public markets for internet companies has been shut off for many years, we have a huge pent up demand for liquidity in the private venture market.  Dozens of tech companies are lined up like trucks in refugee convoy trying to get to the IPO border.   Investment bankers are once again at the wheel as the SEC directs traffic and public market investors prepare to dump bags of money off the back of trucks and helicopters.

You can’t outrun reality, however, and every business is a function of its current and future cash flows – at some point, the private and public markets will realize that, for most internet companies, the cash flows don’t currently exist and won’t ever exist.

One might ask why the bubbles hasn’t been worse or faster-inflating.  First, a lot of people over 35 remember the dot-com bust – these memories have provided a useful governor on the engine of hype.  Second, we are in the worst economy since the Great Depression – which has dragged on growth even in tech investing.

In sum, for all the negativity in this post, I still believe in venture capital, in early-stage investing and in the future of the US (and Brazilian) ecosystems.  Markets run in cycles, it is natural. We are near a peak right now — so what?

For entrepreneurs, there will always be a place for creating companies with products/services for which many customers pay.  There is as much opportunity to create great businesses as there ever has been in the history of the world.

As for investing: the best advice I ever got in football, maybe in life, was to “Focus only on things you control”.  Simple to say, hard to do. The amount we control is far less than we believe moment to moment.  The point is: ignore the outside noise, cultivate your core investment thesis and execute against it.

The Death of Distance in Venture Capital


Many experts in VC will tell you that venture capital, like politics, is a “local” business.  It’s true, of course: the VC needs to know entrepreneurs face-to-face; they need to know the market into which their companies are selling; and they need to build the local networks that lead to quality deal flow.   In addition, it’s difficult to effectively assist portfolio companies that are not nearby.

On the other hand, social media and inexpensive voice/video conferencing services enable effective communication over great distances.  That, combined with sufficient travel, makes successful, geographically-diverse venture investing very feasible.
In fact, the world of startups, and thus venture capital, is increasingly global.  Online media is melding together various markets into one international popular culture – the same YouTube videos go viral in the US, Europe and Brazil; Jeremy Lin is as massive a cultural phenomenon in China as in the US; people in Lebanon follow the same Twitter feeds as people in NY.  

Regarding language, for better or worse, English seems to have become a common language of business and culture.  This is not unprecedented – for many decades, French was “the language of diplomacy” – if you wanted to travel in international circles, especially diplomatic circles – you needed to learn French.  Perhaps someday soon we will all need to know Chinese or Portuguese – many Americans are currently scrambling to learn one or the other – but right now it’s English.

Aside from that, translation services continue to level the playing field.  It’s recently become possible to “get by” in most markets despite not knowing the language. Google Translate functions imperfectly but well enough.  Other services like MyGengo increase efficiency and accuracy in translation.   US personnel in the Middle East use handheld devices to communicate instantly in Farsi or Arabic.  A high-quality smartphone app for the rest of us cannot be far behind.

The most intractable barrier to the globalization of startups/VC is bureaucracy. By that I mean anything from shipping to taxes to trade barriers. (Perhaps “logistics” is a better choice than “bureaucracy” but you get the idea.)   These barriers, however, cause problems mainly for companies that require physical fulfillment of goods or services.  For a great number of companies, this is not an issue.  Facebook, Twitter, Google and Skype serve as obvious examples of companies largely unaffected by logistics/bureaucracy.

In sum, the importance of "local" in startups and VC remains but the importance of global perspective has increased.  The pace of globalization is accelerating, almost in the same proportion as the pace of technological innovation — it’s as if there's a Moore’s Law in effect for globalization.  As such, VC funds that are built for global investing, such as DST, may have the greatest future success.

Economic Crisis


The economic crisis in Europe has dominated the headlines in the last week. 

In my opinion, Europe faces one of two scenarios.  In the first scenario, banks in France and elsewhere that hold bad debt (read: debt from the "PIIGS" — Portugal, Ireland, Italy, Greece and Spain) face collapse but are saved by their governments, who will essentially take ownership of the banks. 

If that happens, the economic crisis in Europe will be morph into a steady but serious decline, leading to a period of five to ten years of economic malaise.  During that time, countries will struggle to reconcile the economic reality that they cannot afford the welfare programs upon which their citizens have become dependent.

In the other scenario, government action is not sufficient to save major banks and the economic crisis becomes a "crash".  Credit vanishes and European economies decline severely, which leads to various nasty but historically predictable outcomes such as political unrest, the rise of far right and far left political parties, etc.

As for the US, we are about to slide into another recession (a "double-dip" recession — the first dip was 2008-2009).  Unemployment will grow to well above 10% and we will struggle for another three or four years, as we complete the "great de-leveraging" (reducing our debt) that began in 2008. 

We will face our own political reckonings.  For example, no President can be re-elected in such an economic environment and Obama is unlikely to be in office come January 2013.

Given this situation, the importance of Brazil and China will only increase.  Why are Americans and Europeans pouring into Brazil, learning Portuguese and claiming a new-found love of the country?  In addition to being a fantastic place, Brazil is one of the few places on earth that has solid economic growth.

For my friends and family in the US and Europe: hold on and see through this tough time — it will end, as it always does. 

For my friends and family in Brazil: let's be thankful for our presence in a great country that holds a special place at this moment in history.


Convertible Notes and Valuation

Following up on yesterday's post on valuations in Brazil: the problem of valuing early stage companies is not new and one of the solutions that appeared years ago was the convertible note.  The convertible note basically delays the need for valuing the company until the next round of financing, when presumably the company will be more mature and thus more accurately valued.   Some VCs swear by convertible notes, others dislike them but they are one solution to a situation where the entrepreneur and investor are too far apart on valuation.

It's easy to find more information about convertible notes online: one of the great things about the venture ecosystem is the amount of quality information available on the blogs of VCs. I highly recommend Fred Wilson's AVC (spend time in the comment section, as well) and Brad Feld's Feld Thoughts.  Brad also posts on an excellent site called Ask the VC.

Fred and Brad have weighed in on the convertible note issue multiple times and I recommend checking out what they say.

Valuation Sanity

Three years ago, when I told people that I was doing venture capital in Brazil, they would usually ask “Why?”

Two years ago, when I said the same thing, they would say, “Interesting.”

Now, they say, “I am too."

The influx of venture capital to Brazil, while great for entrepreneurs and our venture ecosystem, seems to have brought with it inflated valuations.

Last week I had a call with an entrepreneur that said he wanted a R$30 million pre-money (pre-investment) valuation for his company. His 2010 revenue? R$1MM. That represents a 30X multiple on revenue – not EBITDA, not net income – revenue. 

Very high, I thought, but maybe the growth was so extraordinary that the valuation was justified. I asked, and was told that revenue would be $R20MM. Oh good, “In 2012?," I asked.   “2016”, was the answer.   

Wow.   To understand how ridiculous that is, consider that Google is currently valued at less than 19X trailing income.

It was a friendly call and I never get indignant about business but, in retrospect, that’s not cool. It’s not healthy to expect that valuation and it’s not smart to ask for it (the investor will think that you think they are a fool).

We want to work with driven entrepreneurs building world-changing companies. We will work hard to make those companies hugely successful and drive extraordinary financial returns for our entrepreneurs. 

But remember that venture investors like Arpex are also running a business, a business that will fail if we invest at unreasonable valuations. 

After the call, I sent an email to my partner saying, “Good company, crazy valuation.” And he shot back, “Too bad — the market is being destroyed before it exists.”

Let’s remember that investment transactions do not need to be zero-sum games, in which one side wins and one side loses.   At its best, venture capital is the ultimate win-win proposition for investor and entrepreneur — that can only happen at reasonable valuations.