Technological Trends, Financial Capital, and the Dynamics of Disruption

There’s all sorts of interesting tech trends happening right now, including AI, VR/AR, self-driving cars and drones (as well as interesting stuff happening in verticals like healthcare and finance) — and there’s a lot also happening in seemingly more “mature” tech revolutions, such as mobile and cloud. But where are we now, really, with these shifts… and how does that inform how we think about the next couple decades?

And does a framework like Carlota Perez’s — as outlined in Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages and summarized by venture capitalist and longtime internet investor Fred Wilson (of Union Square Ventures) — fully apply when it comes to software? Because, argues Chris Dixon (general partner on CFI crypto), software “has so much more plasticity, ability to adapt, ability to evolve” that unlike hardware, “the core itself will also dramatically change… not just the apps around it”. The total economic value that will be unlocked with the software revolution, observes Wilson, should be orders of magnitude bigger than what we saw with manufacturing for sure.

But just how much internet innovation is actually powering true disruption (i.e., is more than just a sustaining innovation, to use Clayton Christensen’s terminology)? How do new business models change everything? Dixon and Wilson consider all this and more in this hallway-style episode of the CFI Podcast, where we recorded the two having a think-aloud conversation about everything from the history of the internet and startups, the evolution of capital and infrastructure, to the advent of crypto. How do they they both define “decentralized”, what do they think of dApps, and where do NFTs and “crypto goods” come in?? One thing’s for sure: It’s the most interesting time they’ve both ever seen in over 30 years of internet work, life, and play.

Show Notes

Discussion of the early internet and how it drove new technology [1:20]

The current state of technology, including cloud and SaaS [17:31]

Changes in the current capital market [26:21] and the enormous potential of crypto-based technology [37:51]

Discussion of timing around tech developments on the horizon [49:30]

Transcript

Sonal: Hi, everyone. Welcome to the “CFI Podcast.” I’m Sonal. We recently took the “CFI Podcast” on the road to New York City. And so, today’s episode features a fly on the wall recording of a conversation between venture capitalists and longtime internet investor, Fred Wilson of Union Square ventures, and CFI crypto general partner, Chris Dixon. The two discuss everything from current tech trends like AI, to seemingly more mature trends like mobile and cloud to the advent of crypto.

And throughout the episode, they weave through past and present in internet history to reflect on where we are now, really, to where we may go next. Are we seeing disruption? Or is a lot of current innovation just “sustaining innovation,” to borrow from Clay Christensen’s framework? Or, how about Carlota Perez’s framework for tech revolution and financial capital? Does that fully apply to software? And what, precisely, is so unique about software itself? And how might that affect internet native applications for things like crypto?

The two discuss all this and much more in this episode of the “CFI Podcast.” As a reminder, the content provided here is for informational purposes only, and does not constitute an offer or solicitation to purchase any investment solution or a recommendation to buy or sell a security, nor is it to be taken as legal business investment or tax advice. Please also see CFI crypto.com/disclosures for further information there.

Early internet and tech developments

Fred: So, 2018, you know, I don’t know what it is now — 25 years into the internet, sort of the modern — the mainstream internet. Some very large, some, you know, trillion-dollar tech incumbents, very — venture industry has grown dramatically. Tech seemed more mainstream. Some people argue it’s, perhaps, becoming mature, you know, maybe it’s like TV where there’s like four TV channels, and there’s four big incumbents. There’s all sorts of interesting stuff happening in, like crypto and AI, and new devices like virtual reality and augmented reality and self-driving cars and drones. There’s interesting stuff happening in verticals, so, like, changes in healthcare and real estate, in finance. You know, so I guess — I don’t know, a question I think about a lot and, I’m sure you do, is where are we now? And how does that inform how we think about the next decade, two decades?

Chris: So, you know, I think it’s really important to have a framework. And as a lot of people who, you know, follow me and USV know, we’re really big fans of Carlota Perez. And, if you look at the big technological shifts that have happened over the past 200, 300 years, what you see is that many of them last for, kind of, a century. Like automotive, or more broadly speaking, industrial or manufacturing-based businesses were, kind of, the technological revolution of the 20th century.

And, even though internet and tech, kind of, emerged very powerfully in the ’80s, and ’90s, I think we might argue that internet and tech really is the technological revolution of the century we’re in now. And so, if that’s the case, it’s 2018 — we have 82 more years to go and yet, like, we’re feeling like it’s already a mature sector. We’re looking at everything, Google, Amazon, Facebook, Apple — you know, they have these massive entrenched platforms, and it’s becoming really, really hard to compete with them. How could we have, you know, another 50, 60, 70 years to go?

And I think, you know, going back to something that Marc Andreessen said, you know, in the original design of the internet and the World Wide Web, you know, we didn’t necessarily get it all right. And so, what we have now, in terms of, like, these entrenched platforms, is maybe a function of what the spec was that we’ve been building on for the past 25 or 30 years. And, if we could maybe broaden out what the protocols are, to a point where, you know, we could have a much more open and level playing field, we might actually have a lot more ways to go. So, that’s me speaking optimistically about where we are.

Fred: Let me give you maybe a more — even a more optimistic view, which is — so, one thing about Carlota Perez, and I think it’s a brilliant, you know, brilliant theory and explains a lot of history. But I wonder if software is different than hardware. And let me try to explain that. So, you build a car, you know, 1900-ish, you build cars, you have Ford and GM, etc. They get better but, you know, they don’t — fundamentally the car has stayed mostly the same — you know, obviously gotten better, but they’re still the same basic function, same basic, you know, kind of, design.

And then, all the action from, I don’t know, 19, probably what, 30s to today moved to, kind of, the “app layer.” It was [the] interstate highway system and shopping centers and shopping centers and trucking systems, and the sort of the “apps of cars.” And then TV, like the TV, you build the TV, you have the radio, you know, you build the physical infrastructure, and then maybe you upgrade color, or HD or [something], but it’s fundamentally fixed. It’s fundamentally — once you’ve built the core, it’s fundamentally done, and then you just build around it.

The Internet, as you, of course, know, is deliberately designed to be a very lightweight protocol, where all of the intelligence lies at the nodes and the servers, and are software-based, and can upgrade themselves. And so, I guess what I would say is, I wonder if software, because it’s fundamentally a software — I mean, of course, at the bottom level, it’s copper, and other, you know, fiber and other things, and radio waves. But the heart of it is software. And, I just wonder if software has — my view, software has so many more degrees of freedom. It has so much more, kind of, plasticity, ability to adapt, ability to evolve, that maybe unlike the car and the TV, that the core itself will also dramatically change, and not just the apps around.

Chris: So, I think, certainly the total economic value that will be unlocked with the software revolution should be at least one, maybe two, maybe three orders of magnitude bigger than what we saw with manufacturing, automotive, you know, for the reasons you described. I just think that it’s just, if everything, if we can get everything into software, then just imagine, like, what the possibilities are.

Fred: It’s the expressive power the — it’s the design, it’s a much richer design space. You can write it, you can do so many you can encode —any kind of human process can be encoded in software.

Chris: Yeah, I mean, even, you know, the greatest thing about Tesla is the over-the-air software upgrade. It’s like, literally, I get in the car and all of a sudden, I got a new upgrade, and there’s, you know, new software, all of a sudden.

Fred: And they actually fixed like the breaking and stuff where…

Chris: They can fix anything. But I read today that they pushed an update to people who have cars in the affected areas of Hurricane Florence, I don’t know — to make their batteries last longer, like so that they could go long without charging. That’s fucking amazing. Just think about that, boom. Kind of, imagine like Elon Musk woke up thinking he was gonna do that and he just hits a button.

Fred: Well, and it has implications like so, if I remember reading a book about Ford and the whole — you know, the big problem was they broke down all the time. And so, the big innovation was service centers everywhere. And so, you know, this change in being able to update over the air also changes, for example, the service model, and, therefore, the, kind of, almost, you know, the industry structure, potentially.

Chris: I mean, the car, I mean, that car is still not a piece of software, but there’s more software in that car than all the cars that I’ve been driving for my entire life. And so, you know, we’ll get more and more of what we interface with in business and our personal life, whatever, that’s gonna be software as opposed to hardware. And I just think that that makes the total available market of this technological shift way, way, way larger. I think we’re in a moment in time where it feels like there’s not a lot of innovation. And, you know, I will admit that, you know, the past, maybe four or five…

Fred: Well, are you saying innovation or disruption?

Chris: Disruption is a better word.

Fred: Yeah, there’s a lot of innovation, right?

Chris: Yeah.

Fred: I mean, there’s great stuff happening in AI and self-driving cars, and…

Chris: Right, but a lot of that’s accruing to…AI is a really good example. So, you know, if you look at the big tech companies, I don’t think that they were disrupted very much by the shift from web to mobile. And, I don’t think they’re gonna be disrupted very much by the adoption of AI power software.

Fred: It may just, it may further entrench their monopolies because of the data — the fact that you’re differentiating the AI through data, and they’re most likely to have the most data.

Chris: I forget where I read this, this data is now four or five years old. But if you look at the top 100 mobile apps, and you look at what the top 100 websites were before the iPhone came out, it’s not a very different list, right? So, you know, those companies — Facebook, I think, is the perfect example of this — saw that the mobile phone and mobile apps could potentially disrupt them. They pivoted their focus to get there, and they got there. And the net of it is that they are in a stronger position than ever. So, I don’t think, you know, that a lot of the innovation is currently powering a lot of disruption.

Fred: One thing that mobile did, you know, you take the ride-hailing as an example. It did enable new behaviors which allowed for startup opportunities that — I mean, so it did — you know, I think of it as every new computing platform has new capabilities. And, generally, startups will exploit the uniquely new capabilities, and incumbents may or may not successfully port over to the platform. In the case of mobile, they did. But it also unlocked, you know, so you had the intimacy of the camera allowed for Snapchat and…

Chris: But even that, you know, I’ve always thought that the maps layer could commoditize the entire ride-sharing business. It hasn’t, like Uber and Lyft, and a bunch of other companies, and a bunch of companies in Asia dominate that business. But I don’t understand why the map on your phone, whether it’s an iPhone or an Android phone, isn’t the ride-sharing application. And then all of these ride-sharing networks…

Fred: And it’s maybe what Google wants to do longer term. And one would think with their self-driving car effort and the maps…

Chris: It just seems like…

Fred: You’ve got a button — you use Google Maps, you open it up, you’ve got a button and get a car and…

Chris: Like, why does that happen today? I don’t get it like how — I mean, I don’t understand why the map interface hasn’t become the default interface for dispatch of anything. Whether it’s a scooter, or a car, or a bike, or whatever — maybe it’s just, like, it’s gonna take some time. Maybe that stuff doesn’t happen overnight. But that’s where I wanna do dispatch. So, even that, I think, you know, the mobile OSes have the opportunity to suck that functionality in. And that is one thing that’s going on a lot right now, is that the functionality is getting sucked more and more into the operating systems and the proprietary apps that these big companies have built on top of those operating systems.

Fred: And so, when you say there isn’t a lot of innovation, I think what we’re — to clarify, there’s a lot of clever, you know, inventions happening. There’s AI. I think of it as, like, AI, new computing platforms, crypto, etc. But there’s a lot of that happening, but a lot of it feels sustaining, as, like, Clay Christensen would say, not disruptive, right?

Chris: For sure.

Fred: So, it will reinforce the current industry structure, not change it.

Chris: I think that’s right. But yet, you know, and this is why we’re so interested in crypto. I think crypto is the one innovation out there that feels highly disruptive, because it’s a real change in business model. It’s not just a technological change. It’s a fundamental change in business model. You’re not monetizing with ads, you’re not monetizing with subscriptions, you’re monetizing with the underlying token. It’s, like, orthogonal too.

Fred: So mobile wasn’t. Mobile was, some would say, the standard. The internet was disruptive. So in some ways, crypto, like the internet, is the first, kind of, potentially major disruptive wave. Is that your view?

Chris: Yeah, I mean, I think what Google did is that they made advertising the business model for applications. Like, my mail and, you know, my browsing and my searching is all supported by advertising. Like, Microsoft would have made me pay for that. They would have said, you’re gonna pay for Explorer, you’re gonna pay for Outlook, and that’s how we’re going to monetize it. Google comes along and says, “No, that’s an ad product.” And so, that’s what’s disruptive, is, like, that’s just — everything changes when you change the business model. It’s like, all of a sudden, you know, your strengths become your weaknesses. And, that’s what allows a lot of new entrants to come in.

Fred: It’s funny because I talk to people now who I think weren’t around during the early internet. And a lot of people will say — I hear it a lot — that, well, the internet came along and, you know, by ’94, had all these killer apps. And, you know, I think one fun exercise is to go watch movies from the ’90s as a way to, kind of, go back and look at it. And, first of all, the interesting thing, the internet just doesn’t exist. There’s no mobile phones. Every once in a while, someone will, like, it’s like this ritual. They’ll say, “I’m gonna go online,” and like the very phrase, like, go online, kind of is this, kind of, archaic phrase that is from that era. And then suddenly there’s, like, this beeping and there’s this and that, and then there’s like, you’ve got mail, and they get on and they do this thing, and then they get off, and like it’s this thing, and it’s the thing you do for 10 minutes.

But it almost — if you actually watch movies from the ’90s like the internet, even that doesn’t happen except for, like, hackers or a couple of, like, specialty movies or something. And it was essentially, you know, I mean, it was like literally waiting for an image to load, and, like, innovations of the time were things like having the image load in a less annoying way because it was that slow.

Chris: Like, I remember listening to what we would now call podcasts over dial-up in ’97, ’98. A friend of mine, Josh Harris, had this company called Pseudo, and he was making basically audio and video.

Fred: Wasn’t it kind of like “Justin.tv,” like, he’s filming his life and…

Chris: Yeah, yeah. He was just 15 years too early, but he had all the right ideas. And, you know…

Fred: All the ideas that happened, Webvan, Instacart — like, they all, all of them — I had this game, this board game, I still have it somewhere, it was called “Dot Bomb.” And it was, like, making fun of all the terrible ideas. I blogged about this once, and it was, like, this joke game about all the stupid ideas in the ’90s. And it’s literally, like, every unicorn, like, hot company today. It was, like, internet money, you know, grocery delivery.

Chris: Well, you know, you and I are friendly with an entrepreneur here in New York named Adi Seidman. Adi Seidman had YouTube in like ’99. It’s just like it didn’t make any sense in ’99. I mean…

Fred: Yeah. Well, it’s broadband, he needed the infrastructure. Like, I mean, I think it was 2000 — was YouTube 2005, I think?

Chris: ’05, ’06.

Fred: Like, that was kind of the moment when broadband really tipped and you could plausibly have — I mean, it’s a model — the internet wasn’t a real thing, I think, until you had broadband.

Chris: I also think we needed — I think the two big moves that made YouTube successful, whereas all the people who tried YouTube before YouTube — were broadband, that’s, like, 80% to 90% of it, and also social sharing. It’s the idea that you could take a YouTube video and embed it on your MySpace page, or even just send somebody, like, a URL, and boom, they hit it, and they could watch something. Like, the idea that everybody was going to go somewhere to watch something with social and social sharing, it blew that idea up. Now, all of a sudden — the embeddable YouTube player, like, that was genius.

Fred: Yeah. Before that, I remember it was like heavy.com and they’re really like, there’s a whole concept before that — was destination, it was business model. Part of it was a business model, in addition to your earlier point. Because the thought was you need to get eyeballs on your page, stickiness, these concepts, which prevented people from encouraging, why distribute — like, the whole idea of embed, like, one school of thought would have been letting people embed YouTube — well, how do you make money? How do you do this? But that was one of the very insightful things that YouTube creators did.

Chris: Right. But broadband, I think, you know, was the main thing, but everybody had that opportunity. Everybody who was trying to do YouTube at that time was benefiting from broadband. So, there were a couple things that YouTube did that others didn’t do. And I think the embeddable player was maybe the move that differentiated them from everybody else. And just maybe the timing. Plus they had a lot of venture capital money behind them. So, they could spend money. Sometimes that’s the key difference.

Fred: Yeah. I think I was reading this history of — I think it was Vimeo and a few of the other competitors. And, they had just a whole different set of financial constraints and couldn’t — and also, frankly, the view towards copyright. I think YouTube took a more laissez-faire view.

Chris: Right. But that ultimately caused them to have to sell to Google, because they concluded that they couldn’t continue to play the game that way, which was the right way to play the game as an independent company. They needed somebody who could fight the content owners.

Current state of technology

Fred: Yeah. Okay, so going back to what’s happening today then. So, kind of, the big — I mean, I think there’s multiple layers here. So, there’s, kind of, the big core tech trends. I don’t know if you agree, but I think it’s, kind of, AI, kind of, proliferation of new, kind of, computing devices.

Chris: I still think cloud, I think cloud is still — I mean, cloud’s like a 10-year-old-story. But I still think cloud is driving a lot of innovation. I still think…

Fred: Cloud infrastructure or apps, SaaS or…

Chris: Well, I’m thinking infrastructure.

Fred: It’s pretty amazing how having the fresh codebase, having the fresh attitude, the different perspective, you can kind of type them.

Chris: If you could build on Stripe versus you couldn’t build on Stripe, you know? Like, that was a big difference. Like, that whole — I mean…

Fred: Well, just the whole modern thing and as a developer, I think the whole concept of, like, developer experience, that really thinking through, you know, I think you didn’t — obviously, you were an investor in Twilio. One of their big focuses was, kind of, the “time to delight” or something, or time — “hello world” of just, like, immediately getting in there.

Chris: Like, the idea of introducing text messaging into your app, like, what’s the big deal about having to be able to text natively from an app. But you think about it, and, like, so many little things — but they’re big things — are enabled by an app being able to text you. Like, with a two-factor code, or your car’s arriving, or whatever, like — and to do that before Twilio was like, hard. And, now it’s like five lines of code.

Fred: But how do you think about — so in that, in the cloud infrastructure world, you have AWS, Azure, Google Cloud.

Chris: That, I think, is game over, mostly. Like, maybe there’s somebody who’s gonna come out from left field.

Fred: Game over in the sense of incumbents are winning, or AWS has won it or…

Chris: I think incumbents. I think Google’s gonna take some shared — I feel like what Google is doing is going top-down into that market. They’re going to some of AWS’s biggest customers, and they’re saying, you know, we’ve got some better tech, maybe they do, maybe they don’t — we’ll do it for less, and we’ll care about you where they don’t. They’re taking share. But I think it could be, like, Amazon has 60% of the market, Google has 30% of the market, and Microsoft has 10% of the market. I think it’s gonna be a three-player game in that business. And that’s good.

Fred: I think the thing I hear from Google is the challenges. It’s just that, sort of, the high touch concierge enterprise, kind of, model, which those companies, you know, whatever, the Citibanks of the world expect is just not something they’re used to, although they have now they have Diane Greene. In that, I think they’re…

Chris: So, maybe Microsoft will get there, you know.

Fred: The data I’ve heard is Microsoft has been making more progress because they’re used to it — because exactly that is — I mean, Microsoft fundamentally is an enterprise company today, right? And they’re very, very good at, sort of, you know, servicing these large corporate clients. And, then they also have, as I understand it, these sort of, like, they tie everything together, effectively a new kind of bundling. You already have Office, you have all this other stuff.

Chris: But there’s a second kind of enterprise customer. There’s the truly legacy enterprise customers who are, I think you’re right, it’s a very high touch, white glove kind of thing. Then there’s the new enterprise companies, the Spotifys of the world, right? Like, Spotify is gonna either be on Amazon, Google, or Microsoft. But Spotify might not be high touch. Like, they may just want really really good infrastructure.

Fred: And they may care that, for example, Google seems to have an advantage on, you know, their TPUs, their AI chips, for example, you know, all the, kind of, bells and whistles and fancy technology they have, which, of course, they will have.

Chris: I think winning the hearts and minds of developers is really hard when you’ve got an incumbent, and it’s, like, the standard. Like, every developer knows how to build on AWS. So, if you’re starting a company, where are you gonna build it on? You’re probably building it on AWS — 90% of the companies, maybe 95% of the companies we back are built on AWS. But once you’re an established company, and you can think about maybe moving from one to another, I do think, — I think that there’ll be three players in that market.

Fred: So how do startups fit into cloud?

Chris: Well, I think they’re a big beneficiary as a cloud infrastructure.

Fred: Okay, right. So, building on top, and you’re able to take what was CapEx and move it to OpEx and not worry and focus on what you wanna focus on — music playing…

Chris: By the way, that’s a story that has been playing out for the better part of 10 years. What I’m saying is, I think there’s still some legs to that. Like, you were saying, what are the big drivers? It’s AI, it’s AR and BR, it’s crypto. And then we were talking about a few other things that I think are still playing out. And one of the things that’s still playing out is cloud. I think there’s still some legs there.

Fred: Well, I think also on the app side. I mean, SaaS — I mean, I think we live in this world where we think everything is, you know, is SaaS-based. And the data I see is something — it’s, like, sub-10% of corporate applications today are still — you know, it’s unbelievably low. I mean, people are still using, you know, I don’t know, you go to the whatever, you go to the United desk, and they’ve got like a DOS interface, you go here, and they’ve got Windows. You know, I mean, the government hack was, like, Cobalt, you know.

And so, and a lot of it’s more modern, but it’s still like, it’s Windows, it’s whatever, it’s not — you know, we live in this, kind of, world where we think everything is SaaS-delivered. And so, you know, you see these really interesting things happening, where, like, vertical SaaS is an interesting trend, where you see this, you know, whatever, massage parlors need their own billing and reservation system or something. And it turns out that’s a big market, and those people previously wouldn’t really have software.

I, kind of, think of it almost like — people have this view that like AI is gonna come take the jobs, but they have this, kind of, anthropomorphic idea that it’s going to be like the Jetsons, like, this robot is going to come in and like, “Move over, I’m gonna type and do it.” But actually the way that the jobs are actually taken is a much subtler thing, which is these new software applications, just, you know, whatever, your new, you know, payroll system, your new payroll SaaS app, just suddenly, you don’t need as many people in your payroll department.

And it’s a much subtler thing. And it’s not a one-to-one transition. And it’s not a literal thing of, like, kind of, like ,Elon Musk, AI comes in and, like, replaces your payroll department, it’s just like, more and more just, kind of, incremental software comes in and just makes everyone more efficient, which takes jobs. Now, I think it also will create many jobs, they’ll just be — it’s just always harder to envision the jobs that are created than it is to envision the jobs that are destroyed.

Chris: What you’re talking about right now, I think is where a lot of the action is in startups and venture capital right now. If I look at where, you know, a lot of the dollars are being invested, where a lot of the value creation is happening, where a lot of the bigger companies are getting built — it is sort of in that enterprise SaaS area. I think consumer has gotten harder because of some of the things we’ve been talking about before, but I don’t think that enterprise SaaS has gotten harder.

And so, in a way, I think, for — we’ve thought for the past four or five years, it’s more of a grinded out execution, operational, not super sexy style of startup and style of investing that has been winning the day. And the things that were, kind of, happening in the latter part of the last decade, where you had, like, a Facebook come out of nowhere, a Twitter come out of nowhere, or a YouTube come out of nowhere, where VCs were making 100 times their money on these huge big consumer breakouts — we see those but not as many.

Fred: Yeah, I mean, the great thing about SaaS is the business. Once you have those customers and they like your software, they stick with you. So, it’s like an annuity. It’s a very high margin annuity. It’s a challenge to get those customers, and you have to get — there’s a lot of detailed, kind of, sales and marketing execution to go reach efficiently. And that’s, kind of, the trick in a lot of those companies, is how do you efficiently reach the massage parlor, the whatever, small business payrolls, you know, person who needs payroll.

Chris: The founders all complained to me, they’re like, every venture capital meeting I take they wanna know, CAC over LTV, they wanna…

Fred: Yeah, yeah, yeah. It’s very metrics-driven.

Chris: They wanna know our sales power, they wanna know, like, you know. And I was like, because honestly, that’s what separates the winners from the losers in that world.

Fred: And in that world, there’s almost always five, or two to five, credible competitors, too. So, it’s like a cage match. You know, it’s not, like, you’re some weird, you know…

Chris: But they’re also not winner-take-all markets. So, probably still a power-law distribution in the outcomes, but maybe it’s not as severe, maybe it’s not — maybe the winner’s not 10 times bigger than number 2, who’s then 10 times bigger than number 3, which you can see in consumer, but maybe in enterprise, it’s the winner’s 3 times bigger than the next biggest one, who is then 3 times bigger the next biggest one. And if it’s a business that can support, you know, billions of dollars of market value, that could be two or three companies that could be pretty big winners for the founders, and for the VCs who back them.

Changes in the capital market

Fred: So let’s maybe talk a little about the changing capital market world. So, the venture world has changed a lot. There’s new ways to fund startups, including, you know, crowdfunding, which you’ve been really involved with. There’s, you know, the ICOs and, kind of, the crypto stuff that’s kind of, you know, emerging. There’s a lot more venture capital, there’s a lot more stages of it, there are these mega-funds. You know, I guess, you know, how have you seen the industry change over time?

Chris: Well, I think the first thing I would say is, what you said, is that I think there’s more capital available for founders today than there’s ever been. And I think that’s a good thing. You know, a lot of people in the venture business, or the people who give us the money, you know, think there’s too much money, and maybe yes, but the reality is, like, what’s good for founders is good for the venture business. I just, kind of, believe that as, like, a fundamental truth. So, there’s a lot of money out there.

The traditional angel seed, early-stage VC, then growth VC market — I think the explosion of capital is probably more in the later stage. You know, with the SoftBanks and Sequoia going out and raising however many billions they raised, and so on and so forth. And I think that, if anything, there may have been a slight contraction in seed and angel and early-stage money in the past few years.

But I think what’s interesting about crypto — so first of all, you know, there’s a lot of people who went and, you know, used tokens, or just a crypto business plan or business model to go tap into like a lot of new money that was showing up in the world of crypto. And I think that may, you know — certainly in 2017, and even now, there’s a lot of that money sloshing around. But I think what we’re really seeing, and I’m an optimist here, and I’m hopeful about this — is that we’re seeing a new capital market being built. We’re seeing a new way of raising capital that’s global from the ground up, that’s not subject to these, I think, antiquated laws around who can invest in startups and who can’t invest in startups.

And just unleashing the startup capital markets to be global and anyone can play is great. It’s a huge innovation. And I understand there’s people out there saying there’s gonna be scams and, you know, people are gonna invest and lose all their money. And I get all that, and I realize that that’s not all good. But in general, I think that making it possible for everybody to invest in these, you know, high-growth opportunities is good. And I think it’s good for founders that the capital markets, for what they’re doing, are going to continue to grow.

Fred: I mean, the fact that today you have to be literally a millionaire to invest in startups, to be an accredited investor. If you actually participate in ICO, it’s very complex. You need to download, like, a wallet, you have to, like, put in a long hexadecimal address. I don’t — I mean, I’m pretty, pretty sure that almost all the people that participated in those things were technical people that were into crypto. I mean, the vast majority were, and those are people, like — and I just said, like, anecdotally around Silicon Valley, these were, like, programmers who were very sophisticated, who understood exactly what the technology was, who were maybe not accredited investors, and who felt like now they finally found a market were like they understood the product, you know? I mean, they were customers of the product. They were literally protocols built for developers, and they would use it and they could participate in this. And the idea that, you know, a non-technical, wealthy person is able to invest in that, but this programmer who really deeply understands the protocol is not, just seems strange.

Chris: Very strange and wrong. The other thing is, you know, if you were an early user of Facebook, you might have said to yourself, “Oh, my God, this thing’s gonna be huge.” It was — so, let’s say that was 2003 or 2004 or 2005, whenever that was — when did Facebook go public, ’11 ’12?

Fred: ’12.

Chris: Right. So, it was like, seven years before you could eventually become a shareholder on Facebook. But if you’re an early user of Bitcoin, you had Bitcoin day one. So, what’s great about crypto is that I think it allows the early adopters to not only be users, but also participate financially, if they want to — if they wanna hold on to their Bitcoin, and go along for the ride, they can do that. And that’s why I think that this token business model is so exciting, is that in a way, it kind of takes the world of investing and the world of using and combines them. And like, there’s this — I read this blog post last week about, like, there’s two parts of crypto. There’s the money part of crypto, and there’s the utility part of crypto.

Fred: “Tech and Money,” I think.

Chris: Yeah, “Tech and Money,” right. And, like, the money people are, like, Bitcoin maximalists. And they’re really focused on hard money, and the tech people are Etherium maximalists, and they’re focused on, you know, DAP platforms and smart contracts and all that. I don’t buy that at all. That to me is — I mean, I’m not arguing that that’s what the world is today. I think it’s Eric Thornburg who wrote it, and I thought it was very insightful about where we are in crypto right now. But I reject that idea. And I think what’s powerful about crypto is that they’re the same thing — that using and investing are the same thing — and you don’t have to be a user to be an investor, and you don’t have to be an investor to be a user. But if you wanna be, you can be both, and it’s just as easy to be — like, it’s just as easy to be both, right. And that, I think — it’s just not right, particularly for a lot of these businesses where the user is the product. Facebook users made Facebook, Twitter users made Twitter, you know, YouTube users made YouTube. It’s just not right that the people who make the product have no participation in the value appreciation.

Fred: And I think and beyond that. To me, one of the great tragedies in the history of the technology industry is that what happens is there’s a sort of lifecycle in every network. But I use network in a very broad sense, like, Windows is a network. So it’s a network between developers and users. And there’s a lifecycle, and they start off, and at the beginning, there’s sort of this, you know, the network, the platform wants to attract everybody, and they play very well. And so, you know, they provide tools for this third-party software developer. Facebook early on says, “Hey, media companies, come work with us,” you know, they’re solicitous. And then over time, you know, you hit the, kind of, growth peak, and everyone “it’s a party” and everyone’s having a good time.

And like, you know, you’re growing 100% year-over-year, you know, you don’t worry too much about stuff. And then eventually the top of the escrow comes, and then it becomes — that’s when things get ugly. And that’s when — and I don’t blame any of the management of these companies or the boards. I think it’s just the logic of the business model. The logic of the business model is, sort of, it forces them at that point, when things start to slow — like Google, like Google search. Like, if you look at mobile, like it’s hard now, you get all sponsored links on mobile, they just keep adding more sponsored links. You have Yelp going up in front of Congress and doing, you know — like, when it’s the growth period, hey, great, we’ll have one little ad at the top and like, but, you know…

Chris: When the pie is growing, no one’s fighting a piece of the pie. When the pie stops growing, people start fighting over the pieces of pie.

Fred: And then what happens is these networks have these, kind of, internal battles. And those are the most vicious — like, that’s the funny thing about tech. I think that, like, people outside of tech don’t — so, traditionally, in economics, people think of substitutes as the competitors. So, the hamburger and — this is an example, the hamburger and the hot dog are the competitors. Whereas in tech, actually, the hot dog and the hot dog bun are the ones that have the most vicious fights. Microsoft-Netscape, you know, Facebook-Zynga, like, Twitter and the Twitter apps or whatever, right?

Because, like with Twitter, it just feels, kind of, tragic to me that you had this giant developer ecosystem that was trying to make the protocol proliferate. And they could have worked together in concert, and it could have been a much bigger and more impactful platform. But the logic of the business model, the ad-based business model, said we need to control the experience, we need to control where the ads appear, we need to, like, etc., etc. Again, not placing blame on anybody. It’s the logic of that model, right?

Chris: Yeah. Well, look, I mean, you know, it did live through that period. And I was on the board of the company during that time. And I very much wanted to see an open platform. I mean, if you read the blog posts that I wrote when we invested in Twitter, it’s still on usv.com — I wrote about the API and the open ecosystem and all this stuff that was getting built on top of Twitter. That’s what I wanted Twitter to be. But we had an advertising attention-based business model. And the truth of the matter was, there were other people who were out there running around buying up third-party Twitter clients. And inside Twitter, we saw that, and we’re like, we can’t have that. Like, we can’t let somebody go get half of our user base by acquiring all these third-party clients, and then taking them onto a new network, and then we’ve just lost half of our users. Particularly when we have a tension-based business model.

If Bitcoin and tokens had existed in 2005 instead of 2009, I think it’s very possible that Twitter could have adopted a token-based business model, left the protocol open. Twitter could have been the protocol, and the third-party clients could have been the clients on top of the protocol, and it could have worked beautifully. And, like, part of me just wishes that we could have done that. And then we could have seen how powerful this new business model is. We’re gonna see it, eventually we’re gonna see it, someone’s gonna do it. And we’re gonna be like, “Holy fucking shit.”

Fred: Well, and the thing you’ll have is, instead of the fighting, you’ll have this beautiful alignment between the core protocol, all of the third-party developers, all of the users. And, by the way, the other thing you didn’t mention when you mentioned the Bitcoin users, not only do those users own Bitcoin and participate in it, they also probably, by the way, disproportionately have Twitter followers, Reddit karma, Hacker News cred, whatever that’s called, you know, Google juice. And they’re out there, like, talking about it and marketing it. And so, you know, you have this army of users, miners, developers, core protocol developers, all fully aligned. And by the way, and control — and probably very powerful, relatively speaking, on the most important marketing medium of, you know, the internet. And it’s just a very powerful combination.

Chris: I think that’s very —by the way, I think that’s a wonderful thing. I think that’s very scary to a lot of the people whose jobs it is to regulate and protect the capital markets, because they’re looking at that and they’re saying, there’s all these people who own a lot of this thing, and they’re out there promoting the shit out of it. The truth of the matter is, though, it’s — most of these people are not pumping and dumping. The truth of the matter is mostly people are true believers, who have held all the way through. Once my money gets into the crypto ecosystem, it’s gonna stay in the crypto ecosystem. It might, you know, move, like, I’m definitely going to be playing around in all these networks, and, you know, using them and staking and doing all this incredibly cool shit that you can do. But that wealth that I took out of Fiat and put into crypto back in ’11, ’12, ’13, ’14 is not going back that way.

The potential of crypto

Fred: Let me just try this out. I have this theory, let’s see what you think of this theory. I have this theory that we are in the middle of a transition period where the digital world is becoming more important to the point —but we’re in a transition period in the sense that we still — it’s even in our — we still think of the offline world as primary. And you see this, by the way, and all the critiques of Bitcoin, for example. Oh, like, in the end, a lot of, like, the, you know, traditional economists were taking — it boils down to, “Oh, it’s fake money. It’s digital, therefore, it’s fake.” And like, for example, like to think that gold, which, you know, has whatever, out of dental and speaker wires, and it has no real utility, like, to think that that has some kind of, like, ontological, like, higher status than a digital good is, I think, evidence of this, sort of, offline bias. And like, and I think you hear it — by the way, I notice this whenever people use language. E-sports, notice — e-commerce — like, when — you have to preface, the online one is the one with the modifier. Right?

Chris: Right.

Fred: Right. And so at some point, by the way, these things will flip, and it’ll be, like, that’s commerce, and then there’s offline commerce.

Chris: You’re saying — the predecessors to Bitcoin were called e-money.

Fred: Yeah. No, no…

Chris: And there were a lot of predecessors.

Fred: And whenever you have a modifier on the thing, you know that people think it’s subordinate. But eventually, it’ll flip and it’ll be, like, Amazon is commerce and Walmart is oh, yeah, it’s like, you know, meatspace, or offline commerce or IRL commerce, whatever they’re gonna call it. So, I think we’re in this transition period. And it’s funny, too, because like, you know, Fortnite made $300 million last month on dance moves, emotes. And so, digital goods have become a massive industry, for example, in video games, and there’s digital resources, domain names — you know, I’ve always bought — I’ve been a longtime collector of domain names. I’m like, let me tell you, it’s a little piece of the internet and like, of course, it’s going to be valuable, and I’ve always wanted them and I hold on to them. And that’s a multi-million…

Chris: I’ve never sold any of those either, by the way. I never sell a domain name. Why would you?

Fred: I mean, it’s the — I own a piece of the internet. It’s like owning real estate around Central Park or something.

Chris: In a way, this is like religion. Like, it’s like, you know, I would never ever sell a domain. I might swap a domain. Like, if you said, you know, “Hey, I’ve got, you know, ABCD,” and I said, “Well, I got…” you know, we might swap, but I’d never sell for dollars.

Fred: So, I think that when we’re in this transition period where we’re still, kind of, like, anchored on this sort of thing of, like, “Well, it’s not real.” But it’s gonna be obvious 10 to 20 years from now, especially as, like, the newer generation, kind of, grows up. And just, of course, like, of course, an emote is worth more than, you know, offline equivalent or whatever. And that it’s going to be — and these words are gonna — and the language is gonna change with it, and just the whole, kind of, way of thinking about it. And there’s not gonna be this weird thing like, “Oh, it’s digital. It’s not as — ” Do you see what I’m saying though? And I think, like, e-sports is a great…

Like, the other thing I think about is, like, a lot of, like — I remember, a lot of times in the history of tech, like, mobile 2011 or ’12, it felt like mobile was definitely growing. But I don’t think, at least for me, until, like, maybe 2012, I didn’t realize it had actually replaced desktop. There was a moment at which it was sort of, like, “Wait a second, this isn’t just like a big thing. This is the thing.” You know what I mean? And you realize, now, in retrospect, that we thought we were in, kind of, this growth period, where we’re actually in this hockey stick. And I think that’s sort of, I believe — one of my theories is we’re in this like — so take e-sports as an example. I think we’re in this hockey stick right now with e-sports. Like, video games, it’s just gonna be obvious that, like, it’s going to seem certain — I mean, I think it’s always great that people play physical sports, I’m not anti, but, you know, it’ll be like horseback riding, vinyl records, like, you know, a whole bunch of other kind of…

Chris: I think this is where what geeks called NFTs, non-fungible tokens — I think you just call them digital goods.

Fred: Crypto goods.

Chris: Crypto goods. I think the innovation here is that these digital assets can be scarce, can be one of a kind. You know, the reality is, like, we’ve never had the ability to make a digital good non-replicable. And that’s I think what, you know, has held back a lot of the business models around digital goods. It’s just like, if you had an mp3, you could give it to a million people. If you had an, you know, an MPEG, you could give it to a million people. So, I was explaining this to  somebody last week, who’s trying to, like, figure out, you know, crypto. And I said, you know, think about all of the digital goods that you earn in a video game, right? And you spend — you know, you’re obsessed about this video game for, like, six months, and you collect all these incredible video — but they’re stuck in the game.

Like, imagine if you could take them out of the game, and you could put them in your wallet or think about just, like, your bank account. And then, another game comes along, and you could literally take them to another game. And this person who I was talking to, who was a skeptic, like, a fucking skeptic like you wouldn’t believe, he’s like, “Holy shit, my 12-year-old would just be all over that.” Like, that’s like, you have just given my 12-year-old his, like, nirvana.” And I said, but that’s what we’re doing here. Like, that’s where we’re going.

Fred: I think games will be the first to adopt this stuff, because they just tend to be very, kind of, fast cycle time experimental.

Chris: But also, no, no, it’s not just that, it’s also who’s playing them.

Fred: You mean the kids, the kids that are far more open to new technology.

Chris: Yeah, like, tell a kid to download, like, an Ethereum wallet that has NFT capability, and move their games out of Fortnite into their Coinbase wallet or, like, that’s not gonna get in the way.

Fred: But I think the other thing with NFTs that excites me is, I feel like this should be a wonderful time in history for creative people with, you know, 4 billion smartphones, and the ability to just sit down and write something and create a piece of music. And from a business model perspective, it hasn’t been. And so one of the things that’s really exciting to me with NFTs is if you — let’s take music as an example. So, mostly on, like — selling the song itself has become a not great business model. And so, a lot of musicians have moved to — they go where the scarcity is, and the scarcity is offline. And so, it’s shows and merchandising.

And so one of the really exciting things to me about NFTs is the idea that you can reintroduce digital scarcity and have, whatever — exclusive album art, exclusive whatever. Maybe this is — to me, it seems like a very promising new business model not just for games but for writers, for musicians, for, you know, whatever, you know — filmmakers, videomakers. Reintroducing scarcity, allowing, kind of, business model innovation. I mean, game…

Chris: Well, the cool thing is, it doesn’t have to be that there’s only one of them. It could be there’s a million of them, or in the case of Bitcoin, 21 million. We still haven’t mined all the Bitcoin. And we’re nine years into it now. So, like, imagine if you made a song. I just came up with, I think, a pretty cool idea. Imagine if you made a song, and there was 21 million listens to it, and you had to mine the listens, but it was gonna take maybe 5 or 10 years to mine all those listens. You know, actually, you get 21 million listens pretty quickly on the most popular songs. But like, imagine if there was some mechanism of releasing a piece of art or a piece of music that felt more like mining Bitcoin than it did…

Fred: You could never do scarcity — there’s no way to ever do — I mean, they tried with DRM and things like that. But this is always…

Chris: But the point I’m trying to make is like, I don’t think necessarily for the artists the move is super tight scarcity. I think the move might be pretty loose scarcity, but still some scarcity. And the other thing that’s cool that’s happened with Bitcoin is, the value has risen over time. And I know that’s come down recently, but it’s mostly risen over time as we’ve started to mine more and more of it. So, we’ve never seen — well, you have seen that a little bit in art, like certainly physical art, that’s what you do see. But, you know, I don’t have a crystal ball view of how this is all gonna go down. But I definitely think that the move is not…

One of the things I learned really, like almost, like, painfully, was that when we first started investing in the internet in ’94, ’95, ’96, what we were doing was dumb. We were just basically investing in things that had existed in the offline world, that were getting moved on to the internet. Like, “Okay, so let’s invest in an online newspaper, let’s invest in an online store, let’s invest…” you know, like, but that’s actually not the move. The move is, [you’ve] got to find the native thing that needs to happen now to have this thing.

Fred: That’s funny. Every form of media, you go back and you look at the early movies, and they were plays, and they were trying to film the play, and then later on, they’re like, “Oh, we can do a close-up, we can do an establishing shot, we can do this, we can do that.” And they just up and develop a new grammar. And then there’s sort of the — there’s the movie-native movies or something. I think it’s a very common pattern throughout.

Chris: Right, so I think with digital goods, with music, with film, with art, whatever, like, I think…

Fred: It will be some crypto native thing.

Chris: I don’t think it’s to make, like, a limited edition piece of your art, like, that there’s gonna be 10 of these. I think it’s something that’s more like the way Bitcoin has happened, where it gets mined over time released by…

Fred: Something you can never have done before, as opposed to a direct, kind of, whatever — just, like, porting over some concept from the non-crypto world.

Chris: That’s why I don’t love when entrepreneurs/founders come to us, and they’re like, “We’re gonna take mortgage backed securities and put them on the blockchain, or we’re gonna take — like, they’re really — a lot of people are interested in taking things that exist in the physical world, or the existing financial world, and putting them on a distributed ledger. And I mean, I think that that’s like — I think there is some incremental value to doing that. But what I’m much more excited about is people creating brand new things de novo from scratch, on these crypto networks, that never existed off the crypto networks, couldn’t have existed off the crypto networks, and always will live on the crypto networks. Like, to me, that just seems like a 10x or 100x better idea.

Fred: Yeah, like DAO is a good example. Like, autonomous organizations. This concept, which is now — it, kind of, fell a little bit into disrepute because of this thing called the DAO, which was, kind of, mismanaged.

Chris: It’s unfortunate. It’s unfortunate that they named themselves after the big idea.

Fred: I know, I know. But this idea that you can — I mean, to me, it still blows my mind that you just look at any of these interesting solidity contracts. And it’s code running on the internet. No one — you know, once the developers have shifted out and taken off all, you know, the controlling, kind of, code, it’s just literally code that exists — it’s autonomous code. And it’s its own little organization. And these things will get more and more sophisticated. And this is something that could never have existed before. Like NumArray is one that you guys are involved in, for example.

Chris: People think that NumArray is a hedge fund powered by a crowdsourced network of data scientists. And it is, but I actually think if you really try to understand what Richard’s doing, I think he’s playing around with staking. Like, staking is a really powerful idea. I mean, it’s existed forever. I mean, if you read Taleb’s new book, it’s really all about skin in the game. It’s about staking. But I think that we’re gonna see a lot of really innovative things being done with staking, because I think crypto-tokens make staking super easy to do.

And there are — like, I think Richard’s idea is that if I can get data scientists to stake their models, to put skin in the game against their models, I’m gonna get much better models than if they just throw them up against the wall. So, I just think we’re gonna see a lot of innovation around staking, around governance, you know, on-chain governance, is that gonna work? I don’t know. I think, like part of me says it’ll never work. And part of me is, like, I hope it does work.

Timing of new innovations

Fred: Obviously, we’re both excited about crypto. How long — and there’s all these great ideas floating around, but it’s early. You know, how long do you think it’ll take to play out — to sort of — I mean, it’ll obviously, hopefully, take many decades, but like, when will we start to see meaningful applications used by people beyond the, kind of, crypto enthusiast?

Chris: I think that we got to fix — it’s the broadband issue. We’ve got to figure out how to get crypto networks that are truly secure and decentralized, that can handle much higher transaction processing speeds than what we have today.

Fred: To me, think of the crypto network as a computer. And the computer has different design criteria, it’s very different than traditional computers in-network but in the consensus mechanism, etc., it makes this abstraction that’s a computer on top. And you need trust, you need developer experience, you need scalability. And yeah, it’s like we’re internet pre-broadband, we’re mobile phone pre-iPhone. <crosstalk>

Chris: Exactly. Like, remember when people were building, like, what were they called? Were they called, was it WAP or something? There was, like, some standard for building applications.

Fred: I had this poor friend who was, like, into mobile from, like, the ’90s. And I think he, like, gave up in 2006. Like, it’s never gonna happen.

Chris: That’s what we are. We have not had our iPhone moment in crypto yet. And the right…

Fred: We need the iPhone moment and then we need…

Chris: That’s what I’m waiting for. And, you know, it doesn’t have to be totally decentralized. There’s this whole narrative around like, you know, where on the decentralized curve is enough? I just think, like, decentralized means that nobody controls the network. And that’s, kind of, to me, fundamental, like…

Fred: To me, it means trust, and it goes along with nobody control — like, you trust the network. I trust that if I have this NFT, I really have it. And no one can take it away. And no single person can take it away. No bad system engineering can take it away.

Chris: What’s the quote, like, power corrupts, absolute power absolutely corrupts, or whatever it is — but like, you just said, like, when Facebook realizes that they’ve got the keys of the castle, they’re gonna start to extract rents. Like, it’s what happens. So, that’s why decentralization is so important. And so, I think we got to have a crypto network, or 2, or 3, or 4, 10, who knows, that is truly decentralized, truly secure, and can process transactions at the speeds — at least of, like, an ATM network or something, you know. We don’t have that yet.

Fred: Yeah. So, we need that. And then it happens over — so, whenever that happens, and then hopefully we have the 5 to 10-year, kind of, immediate explosion of apps the way that we did with the internet and mobile, and then, a long tail of, kind of, further innovation.

Chris: Definitely. That’s what I see. And that’s why, largely, we’re not investing in a lot of DAPs. I mean, we are playing around with NFT’s in games, for all the reasons you raise. I just think that’s the first place that we might see it. And, by the way, if you go back and look at the history of infrastructure, sometimes it’s the apps that demand the infrastructure, and then the infrastructure gets there because the apps demand it. So, games, in a way — games might make it such that we get the crypto network we need, right, like…

Fred: What’s a good historical example where the app — I think actually, by the way, games have driven — for example, games have driven GPUs. So, like, just like, that market is one where the gamers have been endlessly hungry for more polygons. And that created this kind of, you know, Nvidia and this whole industry around it, which then had these interesting —you know, then, of course, spun out the deep learning movement.

Chris: Well, I mean, it may be a good example, like, a lot of interesting core infrastructure came out of Netscape. Why did Netscape have to build it? Because it didn’t exist.

Fred: Javascript, cookies, SSL.

Chris: But if you go all the way back to, like, where we started, I think we are maybe in the most interesting time I’ve ever seen in my 30-year career, but it’s not at the surface. It’s, like, under the water, and you’re not getting rewarded very much as an investor for being, you know, super bullish. Well, last year was great. Like, everybody wanted to own crypto, but I think that was, kind of, like, a wave and it’s certainly come and gone. I don’t think you’re getting rewarded a lot for that. And you’re getting rewarded a lot more for, you know, the more operational execution-oriented stuff, like enterprise SaaS and things like that. But I think what’s super interesting is the stuff that’s gonna start bubbling up and that’s where my head’s at.

Fred: Awesome. All right. Thank you.

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