Brad Burnham's posts and talks

Protocol Labs

Protocol Labs made a series of announcements earlier today including that Union Square Ventures made an equity investment in the company late last year. We are thrilled to be working with Juan Benet and his team and excited to be able to share some of our thinking here. 

As most of you know all of us at Union Square Ventures believe in the decentralized, emergent, permissionless innovation that was so central to the vitality of the early Internet. Prior to the Internet, the media industry was dominated by a small number of companies that controlled access to in their respective mediums, print, television, radio, cable etc. It was the broad adoption of a set of open protocols, like TCP/IP, SMTP and HTTP, that allowed any creator on the planet to get to any consumer and unleashed the wave of innovation that led to the consumer Internet we know today. That vital innovation is threatened today by consolidation at the applications layer of the Internet. Publishers find themselves becoming commodity content suppliers in a sea of undifferentiated content in the Facebook news feed. Web sites see their fortunes upended by small changes in Google’s search algorithms. And manufacturers watch helplessly as sales dwindle when Amazon decides to source products directly in China and re-direct demand to their own products. 

The source of this market power is control over the data we all contribute as we interact with these services online. The key to mitigating the market power of the web giants is open protocols further up the stack. If an open public communications network (the Internet) unlocked the distribution bottlenecks that characterized the media industry, an open public data layer is the key to and unleashing another wave of innovation. It is the mission of Protocol Labs to coordinate the efforts of a large and passionate community of open source contributors to create these protocols. 

It is an audacious mission. As you move higher in the stack the complexity of the protocols is exponentially greater. Luckily, they are not starting from scratch. Juan Benet, the founder of Protocol Labs, is the creator of IPFS (the Interplanetary File System) an increasingly popular protocol that allows content on the web to be addressed directly instead of by reference to a file located on a specific server. This subtle but profound change means that a provably unique piece of content is no longer tied to a specific server but can exist anywhere there is a little surplus storage capacity on the web. Protocol Labs and everyone else working on open protocols today has another advantage that was not available to the creators of the original Internet protocols. They have blockchains. 

Blockchain based crypto tokens have been have been described as the native business model of open source software. They have the promise of being able to fund the critical shared infrastructure of the information economy in a way that equity can not. Protocols are more valuable when they are open and shared broadly. But equity is most valuable if a company can extract monopoly profits from a resource they exclusively control. When a protocol incorporates an incentive in the form of a crypto token it can resolve this inherent contradiction. 

In the next few weeks, Protocol Labs will be introducing Filecoin, a crypto-token to support the development of a next generation protocol that enables a decentralized data storage layer on top of IPFS. By funding this effort through the sale of a token rather than the sale of additional equity, they ensure that the creators and consumers of value in the storage network (the people who buy storage with tokens and the people who earn tokens by storing files for others) will benefit directly from the success of the network and the protocol that defines it. This happens because the protocol sets limits on the number of tokens that can ever be issued. Because the tokens are the currency in this marketplace for storage, as the protocol becomes more broadly adopted and the marketplace for storage grows, demand for the token increases, and the currency appreciates. So the tokens that investors purchase in a pre-sale to fund the engineering effort to build the protocol, the tokens people hold in their wallets in anticipation of buying storage and the tokens people earn by providing storage capacity all grow in value over time. 

The bitcoin protocol demonstrated that it was possible to finance an enormous computing infrastructure - reportedly one with a hashing power greater than all the super-computers in the world - with an crypto-token. But it does so at a great cost. Securing the bitcoin blockchain could by 2020 consume as much electricity every year as all of Denmark. With Filecoin, Protocol labs, hopes to secure the network with useful work - work that has to get done anyway - storing files for people. Over the next few years, Protocol Labs plans to develop a series of protocols that could become the infrastructure of a more decentralized economy. By funding these efforts through sales of crypto tokens, they ensure that the economic value of the protocols is shared broadly. By designing systems that secure the network by doing useful work, they respect the limits of our natural resources. 

But they have also made one more investment to further the development of this shared infrastructure, they have invested heavily in the legal design of the Filecoin token and the pre-sale process in the hopes of demonstrating that these offerings can be done responsibly in respected jurisdictions. We have already made the point that the pre-sale of a crypto-token is different than equity. It is also not a commodity, a currency or a futures contract. It is something new. As such, it does not fit neatly into any existing regulatory or legal framework. Many of the recent offerings of crypto-tokens have avoided the difficult task of fitting the round peg of crypto-tokens into the square hole of existing regulatory frameworks by raising money in a foundation based in Switzerland, and offering the token for sale in a jurisdiction like Malta or Singapore. This is a reasonable approach. The reality is that these offerings are inherently global. Pretty much anyone anywhere can participate, and the recent returns in the sector have caught the eye of investors around the world. In the near term, it benefits the existing holders of the token to have access to global demand in an unregulated offering, but not all of these offerings will end well. Protocol Labs is playing the long game. They believe that a pre-sale of a crypto-token is an important new funding mechanism that will support the creation of a rich ecosystem of protocols that decentralize the web, democratize access to services and spread the wealth created by networks beyond a narrow cohort of equity owners. To further that goal, they are working with an army of lawyers to create a mechanism that is defensible under U.S. law and regulation - one that can hopefully be a template for others who want to build infrastructure that lasts. 

Protocol Labs is creating new infrastructure in an new way. We think their commitment to the re-decentralization of the web will lead to protocols that are powerful, broadly embraced and generative. Their approach to financing their work will spread the value that is created more broadly. Their commitment to investing in a legal approach that respects the current regulatory environment while not compromising on the promise of the new technology will be a foundation others can build on. We are thrilled to be along for the ride.

Tucows

Union Square Ventures has made a substantial investment in Tucows, a 23 year old company company that has been publicly traded for over 15 years. Since we have never before invested in a public company, that requires a bit of an explanation.

All of us at USV feel fortunate to have participated in the wave of innovation unleashed by the open Internet. That innovation is now threatened by consolidation at the application layer and the access layer. Watching football over the weekend and seeing every carrier advertise video and music services on national television that don’t count against your data cap punctuated, for me, the end of the era of permissionless innovation that gave rise to Twitter, Tumblr, Etsy, and Kickstarter. As Fred pointed out  when large companies can pay to play, start-ups ability to reach consumers has been seriously compromised.

We are investing in Tucows because we believe they have built a great business, but also because they have been a stalwart defender of the open Internet. We are excited to be working with them now because they are challenging the incumbent access providers and the conventional wisdom, by building modern fiber networks in local communities across the U.S.. They are doing this at a time when telephone and cable companies are exploiting their natural monopolies in these communities, underinvesting in their outdated networks, raising prices and using the excess profits to buy back their stock, and buy their way into global entertainment businesses, pleasing shareholders but doing nothing for the communities they serve.

Tucows is doing the exact opposite. They are using hard won profits from the competitive wholesale domain name business to invest in modern fiber networks in cities like Charlottesville VA, Holly Springs, NC, and Centennial, CO. They believe, as we do, that, a modern communications infrastructure is the most important investment any community can make to expedite the transition from a 20th century economy based on undifferentiated manufacturing to a 21st century economy based on highly specialized manufacturing and services.

While they are at it, Tucows is exploding the myth propagated by the cable and telephone companies that the only way to finance a fiber network is to return to the gatekeeper model of the cable industry where the network build is subsidized by fees extracted from content providers in exchange for access to consumers. Tucows is committed building open networks that offer unfiltered, unthrottled, and unfettered access to consumers.  Open networks preserve the defining feature of the open Internet, permissionless innovation. It is that feature that ensures applications layer services have the freedom to innovate. More importantly, without open access to the Internet, no community can protect the economic, political, or personal freedom of their citizens. And without those freedoms, communities will have little chance to successfully manage the transition to a modern 21st century economy. Individuals in these communities will need unfettered access to knowledge to retool their skills for the new opportunities. Gig workers will need to access multiple platforms to optimize the return on their labor. Specialized manufacturers will need to fit seamlessly into global supply chains. All of this will need to happen quickly if we are to minimize the economic dislocation these communities are already grappling with. None of this will happen, if access to the Internet is mediated by vertically integrated global conglomerates.

The cable and telephone companies would like us to believe the open Internet is threatened by over reaching government regulation. In fact, it is threatened by crony capitalism. Instead of investing in local communities, the incumbents deploy thousands of lobbyists to argue that communities should not be able to invest in their own future. We are thrilled to be working with Tucows, because instead of lobbying Washington, to prevent competition, they are actively investing in fiber networks, the critical 21st century community infrastructure, and while they are at it, proving that investing in community fiber networks is a great business.

Veniam's new round of funding

Our portfolio company Veniam announced today that they had closed a significant new round of funding led by Verizon Ventures. The funding will allow Veniam to deliver on the promise of "smart cities" by connecting thousands of vehicles in public and private fleets to create city-scale mesh networks. These networks will allow local transportation systems to offer internet access to commuters at higher speeds and lower cost than existing cellular networks. They also allow cities to affordably collect sensor data to improve security, and streamline the management of transportation infrastructure. Veniam has the hardware, software, networking, and real world operations experience to offer complete solutions, not just technology. That means they can deploy today. This funding will be used to grow their teams in U.S., Europe, and Asia to support deployments in cities around the world including,  New York, Singapore, Barcelona, and London. We are excited to see these networks go live. We are confident that public and private fleets will benefit from this unprecedented level of connectivity. We are even more excited to see the creative, unanticipated uses of this connectivity that we know will emerge over the next few years. 

Introducing Koko

Last week, Farhad Manjoo of the New York Times mused in his column that the Internet was getting meaner:

“If you’ve logged on to Twitter and Facebook in the waning weeks of 2015, you’ve surely noticed that the Internet now seems to be on constant boil.  Your social feed has always been loud, shrill, reflexive and ugly, but this year everything has been turned up to 11”.

It’s hard to argue the point. The question is, are we seeing the inevitable end state of an open permissionless medium, or is this just an ugly adolescence - one that we as a society will struggle through to reach a much better place.

We know the Internet can create amazing social value, by using collective intelligence to organize the world’s knowledge and making it immediately accessible. Google, Wikipedia, Stack Overflow, and Duolingo have shown us that. But it is nice, at times like these, to be reminded that the Internet can also bring out the best in people.

We are pleased to announce today that we are investing alongside Joi Ito  in Koko, an app that does just that. Koko uses an innovative form of crowdsourced cognitive therapy to help everyone manage the day to day stress of modern life.

While doing PhD work at the MIT Media Lab, Koko co-founder Rob Morris wondered if crowdsourcing could be used to improve people's mental health and emotional well-being. To test his thesis, he built a platform to crowdsource cognitive therapy helping people facing stressful situations to rethink the causes of their stress by putting their situations in a more positive light.  As a part of this thesis work, Rob conducted a clinical trial and recently published the results in a leading medical journal. The bottom line - it works. The use of the platform significantly improved mental health outcomes compared to a control group. Most interestingly, the people who helped the participants rethink their situations, were not trained professionals. They were other participants in the trial or Mechanical Turk workers who received minimal on the fly training. But the most exciting part was that the people who provided the most help on the system appeared to benefit the most. Perhaps this should not be a surprise - it makes sense that helping someone think more flexibly and positively about their life naturally reinforces one’s ability to do the same in their life.

Here is what a few of the early users have to say about Koko:

“Every time I use the app - whether to post my own struggles, rethink someone's post, or just read others' replies - my ability to rethink situations gets stronger. Koko shows that changing your viewpoint *changes everything.*”

“The biggest benefit of Koko, other than feeling like part of a caring community, is that I find myself thinking differently and it's really made an impact in my life and my overall sense of wellbeing.”

“Koko is real brain training with the real human problems. Whether it's defining your own problems or using your lateral thinking to help someone else rethink theirs or just plain learning from others. All done in confidence and support.”

All of us at Union Square Ventures are thrilled that we have been able to support Rob, and his co-founders, Fraser Kelton, and Kareem Kouddous’ effort to bring Rob’s work to a much larger audience. Koko is now available as an app for the iPhone (Android is in the works). If you are dealing with stress (and who isn’t), I encourage you to download the app and join the community that is helping themselves by helping others. If nothing else, it will remind you that the Internet can make a real positive, and lasting difference in people’s lives.

Introducing OB1

We have said many times that we believe in emergent, decentralized, start-up innovation. Institutions public and private, no matter how well intentioned, tend to protect their institutional interests, whether is it a current revenue stream, or a position of market power. That makes them inherently conservative. Start-ups and the entrepreneurs who create them are almost always outsiders. They depend entirely on innovation for success. So we are sensitive to market power and constantly on the look out for innovations that unlock markets by creating value for consumers and changing the structure of markets.

We bet on networks like Twitter and Tumblr because they efficiently connected creators and consumers challenging the incumbent bureaucratic hierarchies in the media industry. But those networks also concentrate market power through network effects and as they grow, they tend to consolidate control over their creators and consumers in an effort to extract more economic value. This is capitalism’s creative destruction at work. We celebrate it, but we also look for opportunities to continue the process with new models, that are even more efficient.

That interest in what’s next has led us to look closely at protocols that further flatten hierarchies and decentralize control. We are pleased to announce, today, our investment in OB1.

OB1 is a company formed to further the development of OpenBazaar, an open source project that is refining a protocol that will enable anyone, anywhere to sell products and services to anyone, anywhere in a fully decentralized marketplace. Because the marketplace is defined by a protocol and distributed across every participant’s server, the hosting costs are shared and there is no way for a central authority to leverage network effect market power to extract rents from the participants.

This begs the question of how OB1 can be a for profit business that will generate a return on the investment we are announcing today. How can a business that is consciously architected to undo network effect defensibility, one that is tearing down the walls and filling in the moats that every paper on market based competition has insisted are necessary for success… succeed. To paraphrase the old EF Hutton ad (yes I am dating myself), they intend to make money the old fashioned way: they intend to earn it.

OB1 will offer a set of value added services to buyers and sellers on the OpenBazaar market. They expect others to provide services to the participants on OpenBazaar, and they don’t expect to have any proprietary advantage over those competitors. As investors, we hope that their familiarity with the marketplace and the goodwill they generate as early sponsors of the open source project will give them an advantage but we understand they must execute very well or be left behind.

A close observer might say that the recent experience with decentralization is that it often leads to an unanticipated re-aggregation that creates extraordinary market power and financial returns. This is certainly the story of the TCP/IP and HTTP protocols that are the foundation of the Internet. Those protocols radically decentralized the creation and distribution of media and fundamentally changed the structure of the media industry. But the challenge in this newly decentralized world was discovery. When media was defined by distribution, the newspaper, radio station or cable franchise decided what was available to you. In a world where anything was available, the hard problem was finding what you want. The answer was search. And Google, whether they fully understood it or not, stepped in to meet that need and reaggregated human attention is a way that created an enormous amount of market value.

A cynic might then say that OB1, is consciously architected to create this same reaggregation opportunity in commerce. I can say with some conviction, having talked about this for hours with the founders of OB1 that this is not their plan. But I also have to say that none of us understand exactly how discovery will work in a fully decentralized marketplace and how to prevent discovery from becoming a source of market power in the decentralized world we envision. We hope by calling it out here, you will keep us honest and help us imagine a new model for discovery that won’t subvert the goal of empowering buyers and sellers to trade freely and to capture the value they create.

Finally, we can’t end this post without addressing the potential dark side of decentralized markets. Decentralization empowers individual participants in the network or marketplace. Some may use the protocol in ways that others consider immoral or that are illegal in some jurisdictions. That should, however, not prevent us from creating an open protocol. TCP/IP and HTTP, for instance, allow content to be shared between any two people who have access to the Internet. Some of that content is morally reprehensible to many if not most people. Some of that content is illegal. Still overall, most would argue that society is better off because the Internet has enabled everyone to connect and communicate. The Internet could have been designed to centralize control, but then it would not have enabled the permissionless innovation that led to so many of the services we now use every day. The OpenBazaar protocol makes the same conscious design choice. It is inherently decentralized. It favors innovation over control, so it is possible that the openness of the protocol could lead to use cases that some or most of us would disagree with. But as with TCP/IP and HTTP, we believe the creative and legitimate use cases will quickly dominate the marketplace.

OB1 will, of course, not knowingly offer its value added services to anyone using the OpenBazaar protocol to engage in illegal activities. The trickier question is how OB1 supports the development of an open protocol, one that they do not control, without encouraging, or endorsing, or even facilitating the misuse of that protocol. This calculus is further complicated by the fact that many current contributors to the open source project may be motivated by a mistrust of political or economic power. We do not have an easy answer. It would be disingenuous for us to say the OB1 team has no influence over the open source project. They are respected code contributors. They are likely to encourage the development of the protocol through their own work and will now be in a position to offer bounties to encourage the development of specific features. But we can’t think of any design principle we could encourage, that would eliminate the possibility of misuse, without undermining the value inherent in a free and open marketplace, so the best we can do is aggressively advocate for the responsible use of the OpenBazaar protocol, be open and transparent ourselves, and be an example for others.

USV and our syndicate partners at A16Z are committed to responsibly furthering the OpenBazaar protocol. We are excited to be working with the team at OB1 who we know shares our values and that commitment.

Do peers really want to govern their platforms?

Fred's prompt suggests that participants in the peer economy may not care about ownership as much as governance. I am not even sure they even want to be actively involved in governance - that could turn out to be a lot of work. To quote Oscar Wilde " the trouble with socialism is that it takes up too many evenings". Most peers might be perfectly happy to have someone else own and run a platform as long as they felt respected, valued, empowered and fairly compensated. If the network effects that create defensibility in the first generation peer economy companies turn out not to be forever, perhaps peer network platforms will naturally begin to return more value and autonomy to the creators and consumers who use the platform. Eventually market forces may lead to something like a distributed autonomous corporation - an economic and governance structure that is fair by design and is resilient in preserving that fairness in the face of external and internal change.

How the Deep Web could inform tomorrow's online marketplaces

What is fascinating about Joel’s overview of illicit marketplaces on the Internet is not that there is illegal activity happening there. I suspect, even though Joel estimates the sale of illegal drugs is ten times larger than the next category of goods, that’s still a tiny fraction of the drugs sold on the street. The really interesting thing about Joel’s analysis is what it tells us about the future of open, transparent and legal markets on the Internet.

By definition, these illegal markets are unregulated. There is no government agency you can complain to when you get ripped off. You cannot take a seller to court. You are entirely on your own. These markets are, therefore, some of the most free markets in the world. Because they are illegal, the marketplaces themselves have a strong incentive to use technology efficiently. They have to limit the amount of capital required, and the number of employees, so they may also be the leanest marketplaces in existence today. So what can we learn from them that might help us refine our approach to investing in legitimate markets?

I have worried for some time that as the value of marketplaces like AirBnB and Uber soars, they become vulnerable to a new breed of competitors. No matter how efficiently they use technology, they now have another mouth to feed - the shareholder. If Uber is valued at $40bn in the latest round and the new investors expect a 3X return, the company must somehow extract enough value out of the marketplace to justify a $120bn market capitalization. Yes, established marketplaces have strong network effects, but it is possible for buyers and sellers to use more than one app, and it seems likely that they will begin to move to apps that share more value with creators in the form of lower costs, and with consumers in the form of lower prices.

It seems to me illicit markets on the dark web may offer a template for creating the next generation marketplace. At the end of his post, Joel summarizes what he found most interesting about these markets. He suggests their existence is proof it is possible to create and operate a lean, decentralized, market and lists the key requirements - low capital requirements, and an independent discovery mechanism and reputation system that spans multiple marketplaces.

The illicit markets that Joel studied apparently not only decentralize control, they disaggregate functionality. Discovery and reputation are not the only service elements that are independent, it appears that these illicit marketplaces unbundle other services like escrow, and charge for them separately. As the Internet breaks down distribution bottlenecks, we see already see unbundling threatening to disrupt media markets like cable TV. Perhaps we are seeing a hint of what’s to come with legitimate, legal marketplaces, as network effects break down.

Interestingly, the friction and latency, necessary in illegal markets to hide the identity of the participants, may not be necessary in open, transparent, legal markets. My first thought was, how cool, in a legal market you can leverage the design principles of the illegal markets but skip the overhead of encryption. But that may not be true. For a decentralized reputation system to work, you need some way of knowing that a review of a seller by a buyer is credible. The illicit markets do this by relying on the buyers private key to establish their identity. In existing legal markets, the platform manages identity and enforces the legitimacy of reviews. An existing network like Twitter or Facebook could create a truly independent and portable identity scheme if they were willing to give up collecting sensitive user data but they don’t seem to be going there. Even if you still need private keys to establish identity, you could still simplify user experience and reduce latency by eliminating the need to hide it.

All this leaves me wondering not so much if the world will move toward decentralized, and disaggregated marketplaces, but when and why. Because the activities on the dark web are largely illegal, there is no other choice. For the rest of us, we are still generally willing to depend on a centralized platform for discovery, and identity management. For the moment, we are also still willing to accept the fees, the terms of service, and the bundling, these platforms enforce. My guess is the models pioneered on the dark web will come into the light first as leaner more efficient competitors to the first generation of peer economy companies, but the question I am still struggling with is where to look. Are there legal markets where the value of a decentralized market is greater so this transition will happen sooner, or will it happen first in any market where a first generation peer economy company goes too far by economically and politically disenfranchising the value creators at the edge of their network?

Introducing Veniam

There has been a lot of talk recently about the Internet of Things. Some analysts estimate there will be 9 billion connected devices, from parking meters to thermostats by 2018. By then, that will be roughly the number of smartphones, TVs, wearables and personal computers combined. There has been a lot less talk about how all those devices are going to be connected and almost no talk about the devices that don't stay put like drones, or sensors in cars will remain connected as they move around. 

Our newest portfolio company, Veniam, has been working on that problem for a long time. Their goal is to become the networking fabric for the Internet of Moving Things. 

Veniam's technology can be deployed in controlled spaces with many moving machines such as ports, airports, construction sites, and mines where it provides reliable and secure real-time data communication, creating new efficiencies in areas where cellular technology often does not work. But the real promise can be seen in Porto, Portugal where the companies technology was developed. There, Veniam has built the largest network of vehicles in the world, including the entire public bus fleet, garbage trucks, and taxis.

By connecting all of those vehicles, they were able to create a mesh network that turned every public bus into a WiFi hot spot. Today, after just a few months 72% of the riders in Porto with smartphones connect to the Internet on their commutes. To make this possible, Veniam created the necessary connection management, multi-hop mesh routing, session management, cloud-based control and security. 

Veniam will initially offer its technology to private companies and public institutions that own and operate large fleets of vehicles in urban environments. We believe, however, the company's mesh networking technology will ultimately do much more than create efficiencies for fleet owners. We expect Veniam to become a resilient, flexible, and cost effective alternative to cellular networks for connecting people and things on the go. We are excited to be along for the ride.

Is Facebook optimizing their user experience or manipulating ours?

Every social media company A/B tests every change they make on a page. How do we know the difference between testing and manipulating? Is it ok to refine user experience to keep users engaged, but not ok to try to elicit a specific action? Is it ok to encourage behavior on the site like positivity, but wrong if your are trying to encourage behavior in real life - like voting? Is everything cool as long as they tell us? Do we really want to know when they are testing which fonts and colors increase time on site? 

Like it or not, we are going to have to start thinking about this.

Yieldmo raises a round

Yieldmo is doing some really innovative work in creating and optimizing novel formats for mobile advertising