This is a topic I’ve discussed before here, but it’s nice to have some data to back up the story.
The strategy described here makes a lot more sense when talking about high risk assets like venture and crypto, and like most of these rules of thumb it must be suboptimal, but I’ve been thinking about taking this approach for future investments. Dividing assets in three separate chunks to diversify away risk, and still remain exposed to the original theses, seems like a good idea.
By far, the most interesting aspect of this podcast was around the 1hr mark on why mega-corp moving into your niche business is not necessarily a problem, followed by a fascinating discussion of M&A vs buybacks. I had never thought about M&A in that way, but it is interesting to hear the public markets side of the coin after reading so many positive comments about acquisitions from people like Elad Gil and Marc Andreesen about the early startup stage M&A.
At the early stage, startup valuations are mostly about signaling. If you’ve raised N million dollars then you can tell people that you were able to do so. If you’ve invested in a company valued at N you’re able to tell your LPs that you got great terms on that company’s last round. If you’re an employee and your company just raised N you can tell that to the recruiter who’s trying to poach you. But in the end, for any number N, most companies that raise N end up dying. We should focus on it less. N is much more about market conditions than it is about a particular startup’s potential.
What makes banking different from other peer to peer platforms like Airbnb, Uber, or Tinder? Not the kind of question that I expected someone at the Bank of England to be thinking about.
For quite a while now I’ve been saying that the market feels a little too hot, and that there must be a recession coming. This article is similarly pessimistic about it. I don’t feel confident enough to set short positions, but I have kept good chunk of cash at hand to buy whenever shit hits the fan.
A great conversation about venture capital. The points about how the value added by investors as you shift between seed and series A was super interesting. I might have to listen to this one again.
The point about not reducing distributions to scalar parameters (minute ~34) was very insightful. What are some other things that we treat as scalars when we shouldn’t?
Yes, more crypto. I’ve slowly started to become more bullish on the idea of the Ethereum network taking over Bitcoin, and Gil makes several good points in that direction here. In a vacuum, I think that Ethereum has more fundamental value, making it stronger even without the network effects that come from being the first mover, but what will end up deciding whether the number one network is BTC, ETH, LTC or some other coin, is a substantial reduction transaction costs while increasing throughput. Whether that means Lightning, Plasma, Truebit or something else (Gil mentions Bulletproofs), will matter just as much as other versions of SGML matter to us today when using HTML on the web.
Ok, last crypto one. The last month or two have been crazy, but I still think we have a fundamentally different thing going on with the crypto market. And when I say fundamentally that’s exactly the word I’m looking for. When people discuss valuations, cash flows, and discount rates, they’re using concepts that were invented by people to explain prices. Humans made these up, too. That the current model doesn’t apply here doesn’t mean there isn’t fundamental value underneath, it means it is time we come up with a new way to explain prices.
My friend Leon got me hooked on O’Shaughnessy’s podcast. This one is full of interesting ideas about how to value online assets such as accounts on Airbnb or Instagram, and how one could potentially set up an incentive system to transfer the cashflows of these accounts without corrupting the quality of the underlying service being provided by the creator. See also the episode with Chris Dixon on the future of tech.
This is true capitalism at work. At a certain point, the demographics and economics of small towns make it impossible for private businesses to survive. This is why we have governments! Certain human processes are just not profitable, no matter how necessary they are, and we ask the government to step in and do the work to align those incentives, or to put up its own offices instead. A relevant example of this is USPS which is not meant to be a profitable business, but a useful service. Capital flowing out of these towns is inevitable - it is up to local governments to figure out how to provide the necessary services for its people. If that means these little towns should not exist, so be it.
I recently read the Basecoin whitepaper which is intriguing, even if a bit too utopic. Having a currency that is pegged somehow to the values in the real economy is a must if we want to transition into a non-fiat world. Paying rent, receiving a salary, or buying bread and eggs with something as volatile as BTC is a non-starter, and one of the tough problems to be solved in the space.
There are interesting questions about centralized decision making, organization, and coordination here. For example, if the same people own all the airlines, via indexing, does competition still emerge? The answers matter, but I think we’re still pretty far from having enough concentration of capital for this to be real concern.
Investing is hard. Mostly because of the uncertainty, but also because even the parts of it that seem intuitive are underneath quite complex, making us wrong more often than not. This article discusses optimal strategies for repeated bets (aka the Kelly Criterion) in the context of the stock market. Their test seems biased, given the strategy’s return over the bull market of the last ten years, but the article is interesting nonetheless.
In a short conversation, Levine and Cowen discuss recent innovations in the fintech space. From blockchain, blockchain, blockchain to index funds and globalized diversification, the two bring up good examples across the spectrum. What’s interesting, and which neither Cowen nor Levine really discuss is the fact that the surplus of innovation in finance has not really gone to the consumer. Perhaps the only exception mentioned is the expansion of access to credit products, which is not necessarily a net positive.
I realize that in a way this is an ad for USV, but it is also a good explanation of how the VC business works, and its cyclical nature. I wish Fred had expanded more on how the new paradigm of cryptographic tokens and decentralized applications will change their model. I guess that’s the secret sauce, and we’ll have to wait and see.
A lot of people are asking themselves how is it that the market is doing so well, when the political environment and various economic indicators make it seem like it should not. Many people predicted that with Trump as president, the US economy would not do well - myself included - so what’s going on? Fox argues that a good chunk of the growth is coming from increased consumption abroad, that investors expect Trump’s business friendly policies to be good for the market, and that maybe we’re just looking at the wrong metrics. One point he doesn’t make, and which I have not seen elsewhere, is that the dollar itself is losing value (nearly 6% since election day), so the bull-market is not actually as strong as it seems.
Last night my cousin asked me, “wait, so I heard bitcoin split, how does that work?” to which I replied, “it is not quite a split,” and pointed him to this article. The implications of value creation via new blockchains, and how that value affects the pre-existing base is something I had not thought about until now. It might be that inflation in the world of crypto comes from the creation of new chains. A lot of thinking to do about this. Also recommended, Levine’s follow-up “Bitcoin Forks and Unicorn Fakes”. In general, I’ve been enjoying Levine’s writing a lot lately.