The Unknown Path to a Decentralized Future

Some companies with currently centralized services have been criticized for issuing tokens and raising money in ICOs. There are even allegations that venture investors are pushing companies to do so as a ploy for liquidity. I suspect that some situations like that do actually exist, but I know from first hand conversations that many of the entrepreneurs pursuing this route are doing so out of a genuine conviction that it is the right path to a decentralized future.

Most startups that have come into the crosshairs of one of the large centralized players (Google, Facebook, Amazon, Apple and maybe a few others) have experienced how difficult it has become to grow a new offering. The new incumbents are aggressively managed, have nearly limitless financial resources and most importantly leverage their existing network effects to keep potential competition at bay.

Along come blockchains and crypto currencies. Here is a new technology that represents a foundational breakthrough: the ability to build decentralized networks that have consistent data without being controlled by a corporate or government entity. It is a technology that is potentially disruptive to the large players, exactly because it goes against the core of their existing businesses, which is the control and rent extraction from networks.

Now there are two schools of thought as to how to get to that decentralized future where networks are owned by their participants and anyone can innovate on top of the network. One group believes that we need to start from scratch and build new protocols outside existing services. There are good arguments for that position, such as being able to iterate on a protocol with few users on the basis of feedback from early adopters. Another group though believes that existing services, some with millions of users, can give a new protocol immediate critical mass. They also point out that it may be possible to take a stepwise path where some centralized elements remain at first (for instance, ones that demand throughput right now that’s not yet achievable on blockchains) with a view to decentralizing those elements in the future.

I believe we should be pursuing both approaches. Getting to a decentralized future is too important to restrict right now how we are going to reach it. We will know in a decade or two what worked, but until then we shouldn’t be attributing ill intentions to fellow travelers simply for choosing a different path. We can be critical of specific steps and proposals. We can suggest how they might be improved. We can demand (increased) transparency. We can start or fund or own efforts. By all means: let’s do more, rather than less.

Flip

A Google search for “apartment lease” returns 86 million results. Which makes sense. One of the constants in life is finding a place to live, and signing a long-term contract for that living place. That constant — that lease — remains in force even though changes in our lives may not line up neatly with that one- or two-year period. Many things happen to us while we are stuck with a long-term house or apartment lease: new job opportunities, new roommates or relationships, new family members, and so much more.

If you could construct a service for home rentals that would reconcile that conflict between life and lease, what would it look like? Probably like Flip — a marketplace for flexible housing specifically designed for leases that last for any duration, starting at one month.Just take a look at this word cloud below, which pulls from descriptions on Flip listings, where people explain the circumstances that drew them to the platform

Since 2016, 15,000 people have listed spaces (rooms, apartments and houses) on the Flip marketplace. Unlike traditional housing platforms, Flip is completely end-to-end, by qualifying every user, handling all payments,  legal documents and landlord approvals. Today, over 50,000 people have used it to search for a new home across New York, Los Angeles and San Francisco.

We are leading Flip’s latest financing round, as it is the type of market or domain specific network that USV focuses on. In market-specific networks, closing the loop on a transaction is the key to unlocking network effects, and Flip does just that.  

As importantly, Susannah Vila and Roger Graham, the founders of Flip, aspire to enable seamless access to all all housing, everywhere, for everyone. Flip accomplishes this via a fully digital platform that does not assume that fixed lease terms are necessary. Instead, it works from the idea that the rental housing market should be truly liquid, and that if housing were transacted on one digital platform, it would be easier and more affordable for everyone to get on a lease or off of a lease.

Flip’s mission is to provide seamless access to all housing for everyone, everywhere. We think that is one measure of increasing individuals’ economic freedom; we are excited to be able to support this company’s development.

 

Blockstack Browser and Token

Today Muneeb and Ryan from Blockstack delivered the morning keynote at the Consensus 2017 conference here in New York. They made two important announcements: first the availability of the developer edition of the Blockstack Browser and second the news that there will be a Blockstack Token. To understand the importance of both of these announcements, it useful to look at some of the history of the Internet. 

The Internet got going in the early 1960s but for the first quarter century its usage grew slowly. Broad usage really didn't take off until the creation of an easy to use consumer layer with the Web and the availability of developer tools in the mid 1990s. Now fast forward to today. We all use the Internet every day for nearly everything we do. But now we are seeing some critical problems that have emerged based on the basic architecture of the Internet. For instance there is a lot of blind trust into lower level infrastructure, such as certificate authorities that can result in large scale man-in-the-middle attacks (for example a recent event in Turkey which resulted in endusers believing they were connected directly to Google when they were not). Even more importantly, state in the current Internet is maintained in databases operated by companies such as Twitter, Facebook and Amazon which hold and control users' data. 

Blockstack aims to resolve these problems using blockchain technology and by building the developer tools and consumer layer to make this new decentralized Internet broadly available. The Blockstack system has now been up and running for 3 years and has a community of over 5,000 members. 

How does Blockstack address these problems? With Blockstack endusers (individuals and companies) control their identities, storage and payment credentials directly. This is accomplished by keeping the namespaces — both enduser names and addresses for applications — in a blockchain. The blockchain here is a virtual chain that currently sits on top of the Bitcoin blockchain but could be migrated to another blockchain in the future. In fact the chain has been migrated once already as it started out on top of Namecoin. The virtual chain layer requires only minimal guarantees from the underlying layer and allows for separate scaling. 

The Blockstack blockchain itself in turn only contains keys and pointers. All the enduser data is stored in existing storage systems, such as S3, Dropbox, Google Drive etc. But the way it is stored there is fully encrypted and distributed across these systems. That way each underlying storage system is used like a dumb hard drive and the use of multiple systems provides resilience at high performance. This is provided by Blockstack's Atlas Network and Gaia Storage components.

Now that all of these components are in place, how do consumers access these systems and how can developers build applications? This is where the Blockstack Browser comes in. By running a local application, consumers can use any existing web browser (Chrome, Firefox, etc) to access the new decentralized systems. Right from there they can do things like register names, make payments, configure their storage. This feels just like using an existing centralized system and requires no special skills or knowledge. Similarly, developers can now write decentralized applications without having to learn all the details of the underlying systems. Instead, they can write in Javascript and implement the authentication and data access APIs exposed by Blockstack. 

Finally, how does the Blockstack Token fit into all of this? For the Blockstack network to work there is some degree of scarcity that has to be maintained. For instance, there is a need for names to be unique. Whenever you have scarcity, you need an allocation mechanism. To that end Blockstack will introduce a token some time later this year. The Blockstack Token will be mined at the layer of the virtual chain and will power operations such as name registration. It will also be used to let Blockstack network participants vote on protocol changes, including a potential migration to another underlying blockchain in the future. 

So if you are a developer and want to start building apps for the Blockstack Network, head on over and download the developer preview.

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.

goTenna

Disruptive innovations often start out as worse versions of something that already exists. Worse along all dimensions except for one, but one that turns out to really matter because it unlocks a new use case for which the incumbent does not work at all or is not affordable. The PC was slower, had less memory and less storage than a minicomputer. But it was massively more affordable and could be set up and run without the help of the centralized IT department. That’s why the early adoption of PCs was in parts of companies that did not have minicomputer access.

Direct networking among consumer mobile phones is a disruptive innovation. It doesn’t give you the bandwidth of, say, LTE. If there is extra hardware involved it only works between participants who have that hardware. But it has one crucial advantage: it works even when the mobile network infrastructure is down (e.g., during an emergency) or where it doesn’t exist at all (e.g., when hiking in the deep countryside).

Extra hardware paired with your phone is exactly the approach that goTenna has been pursuing for phone-to-phone communication. They have been shipping tens of thousands of their first device which are in use by outdoor enthusiasts and also by emergency responders.

goTenna’s latest product, goTenna Mesh is about to ship and supports mesh networking. That means as more people in an area have the product, phone-to-phone connectivity improves for everyone. Including one super cool feature: with SMS network relay, if any phone in the mesh also is connected to the SMS mobile network then all the goTenna-enabled phones can relay regular text messages out through the SMS-capable device.

We are excited to be leading the Series B round for goTenna. The team has accomplished all of this on very little capital to date, including the development of the mesh protocol and of a hardened Pro device which will start shipping later this year. We believe this is a disruptive innovation in connectivity, and a perfect fit with the Access 2.0 portion of our current investment thesis.

If you are excited too, you can pre-order a set of the new goTenna Mesh units. And if you are truly excited you should check out the terrific opportunities for joining goTenna’s team.

Upgrade

In July 2011, we were fortunate to lead the Series D financing round in Lending Club, founded in 2006 by Renaud Laplanche. Along with Zopa (UK company) and Prosper, Lending Club was a pioneer of the now-familiar marketplace lending model, which cut interest costs for high quality borrowers by as much as 50% (not a typo) and at the same time offered investors attractive risk-adjusted returns not available elsewhere. This was a fundamental innovation in financial services that is thriving globally and will continue to gain in importance.

During the next four years, we watched Renaud and his team execute extremely well, growing from $20mm a month in originations at the time we invested to $500mm a month when Lending Club went public in December 2014. Lending Club originated over $20 billion in loans to over 2 million borrowers, saving consumers substantial amounts. Scaling a company at this rate is very difficult. Renaud and his team did as good a job as we have seen.

In retrospect, Lending Club probably went public too early. Financial services companies are held to high standards in the public markets these days, regardless of size or vintage. In May 2016 the company faced compliance issues and Renaud left the company, a difficult and unfortunate event for all involved.

Today, Renaud and his new team are announcing the launch of Upgrade, a new marketplace for consumer credit. We think of it as Lending Club 2.0 and are excited to be Series A investors in this new venture, along with our friends at VY Capital, Sands Capital, FirstMark Capital, Ribbit Capital, Silicon Valley Bank and others.

In our view, we are still in the early innings of the marketplace lending model. We believe Upgrade’s team and business plan makes it well positioned to quickly become a leading company in the industry, benefitting both borrowers and lenders. We look forward to helping Renaud steer his ship once again.

USV Session: Building the Healthcare Stack

The USV portfolio network consists of 67 active companies with over 7,000 employees across the US, Canada and Europe. We believe in using the power of networks to help our portfolio companies build better businesses through peer to peer learning, external network relationships, and shared resources. On average we host 60 portfolio events each year and, in 2017 we are on track to host nearly 80 in total.

Within the USV portfolio, we have several companies working in the healthcare space. Based on their feedback and recommendations we organized an intimate session with leaders from the USV portfolio, USV partners and staff, and external industry leaders. We held this discussion at our office and called it “Building the Healthcare Stack”.

This “Hacking Healthcare” event was the brainchild of USV CEOs who wanted to connect with other healthcare organizations and professionals that are spearheading initiatives and development within this industry. They wanted to debate high-level areas such as telemedicine as well as dive into granular challenges facing open source health data and patient care.

In USV fashion we organized this as an “unconference” style conversation and segmented the day into 4 high-level topics.

  1. Open Source Health Data
  2. Reinventing the Patient experience
  3. Treatment and Telemedicine
  4. Big Data for Big Outcomes

Our goal for this session was for participants to come away with thoughtful perspectives on a variety of areas. We chose specific, complex topics that would seed provocative and unfiltered discussions and I have chosen to highlight 3 of the top takeaways.

1. Healthcare companies are investing too much money in walled gardens

When thinking about medical facilities (hospitals, doctor’s offices, research centers, etc.) every single one of them controls their own data — what they collect, how it is stored, cleaned, and analyzed. There is no universal system that allows patient data to connect and talk to each other.

One reason why walled, healthcare gardens exist and in fact flourish is that there are no financial incentives to open them up. As a result, healthcare organizations only see the world through their own institutional myopia. This nearsighted mentality can have lasting effects on the staff, patient experience and culture. An example of a set standard are the Press Ganey scores which are calculated from post-appointment patient surveys. Some facilities use these scores to award bonuses which can cause tension and wrongfully placed incentives for the physician. This can also shift their priorities from treating someone as effectively as possible to focusing on personal, soft skills and excellent bedside manner. As we see more digital health companies emerging in the space, we may need to find ways to blend and ultimately open up some of these datasets.

2. How can we open source healthcare data?

In software, open source data is anything made publicly accessible for others to use or modify. But what does this mean when talking about personal data in healthcare, such as patient records and diagnoses?

One view in favor of open sourcing health data is that asynchronous medical care is absolutely required to improve the efficiency of the medical industry. In theory, this could allow a patient to visit any clinic in the world, see a physician, and get a diagnosis utilizing their existing data. This diagnosis could be based on the patient’s medical history as well as aggregated data from other doctors and facilities.

One point made against open source health data is that since clinical data is not being captured in structured data formats, there would need to be major, additional regulation around the input and “cleanliness” of the data points. It would also be extremely time consuming and costly to implement this open source database. Finally, if this data is open to anyone, then patients would of course have access as well. Is this in fact useful to you as an individual or rather is it too much clutter and detail to comprehend in a relevant way? If it is accessible to anyone, it could be incredibly susceptible to abuse and malpractice.

3. More data ≠ better data.

Some of the participants challenged the group on whether healthcare data should be considered “big data.” One opinion was that big data is dependent on the quality of the data, not quantity. In other words, if you feed bad data into the system, the AI and data output will produce bad results. Deep learning has struggled to work in healthcare as, contrary to other industries, there is not a lot of big data to be analyzed yet. Let’s take Facebook for example — if you think about facial recognition technology, Facebook services millions of people through their tagging feature. There is not that kind of system built yet for health systems.

Another crucial issue worth mentioning is that there is a tremendous amount of bias in datasets. When aggregating data in a machine learning context it is difficult to deduce evidence based conclusions. The methods used to analyze and collect data vary from one provider to another and every facility wants to use their data to help control their own standard of care. A suggested solution to this issue is to build a business model focused on aggregating data on a patient level. This would allow facilities to recognize the behaviors of individuals (habits, socializations, family complexity, etc.) and collect rich, unbiased data.

Staying in line with the idea that less data is better, what is the least amount of data that could be collected to achieve optimal results? For example, if a pregnant woman is asked if she previously had a premature birth (Yes or No response), based on her answer she could receive more targeted treatment and precautions to reduce complications and medical bills. Rather than attempting to tackle big healthcare data, one could focus on “small data for small outcomes”. This would result in more precise patient data through light-touch interactions which would lead to better facility / patient habits.

_ _ _

I wish I could say that we unraveled answers to some of these complex questions. Instead, the conversation between 30 industry leaders was rich, unfiltered and provocative — in our eyes, a success. Everyone was willing to share critical developments, milestones and roadblocks. Industry giants heard the voices of mighty, lean startups and vice versa. Arguments and compromise ensued, relationships were built and partnerships were seeded.

With some of the brightest minds in medicine, technology, insurance, non-profit, and academia, some leaders around the room had been confronting these issues for decades — others for less than a year. Out of all of those brilliant minds, not one person could pinpoint the solution to one of these healthcare challenges. Personally, I left with hope that big strides are being made in this industry. On behalf of USV, our hope is that we can continue to facilitate open and transparent conversations like this across the country and world.

Call for Genomics and Software-driven Biology Startups

Everyone knows the big Web 2.0 companies use hundreds of data points to determine which ad we might prefer. And yet — in the deathmatch against disease, we reduce human health to single variables. 

Granted, this has partially been due to immature technology and infrastructure; after all, an assembly line of PhDs can only annotate the genome so quickly. There is also a hard limit on a human’s ability to find patterns within the noise.

In the last couple of years however, a few trends have reshaped the landscape for startups working at the intersection of computer science and biology: 

1) the hardware layer of the genomics stack has been commoditized, 

2) the cost of genomic sequencing has fallen below the threshold required for routine reads, 

3) data storage is effectively free, and

4) sophisticated computational tools, including deep learning, have matured, allowing us to apply strategies that were not possible before

               

  

      

 

Once in a while, there is an inflection point that completely changes the rules of the game. We saw this in the early 2000s, for example, when suddenly you didn’t need a big check to build your own servers and infrastructure, just to get a website up and running.

               

 

What this shift enables, is a new generation of biotechnology companies very distinct from its predecessors, with characteristics not unlike the software and machine learning companies we are familiar with.

                

 The characteristics that make software startups so appealing — that you can test your idea cheaply, that you can de-risk early, that you can scale quickly, etc — will be found in this new generation of biology companies also. In fact, many of these startups should really be thought of as machine learning/software companies with domain knowledge in biology. Just as we saw an explosion of web startups running many experiments at a low cost in the mid 2000s, we expect to see a similar phenomenon in the biology space.

                            

 

And clearly genomics is a big-data problem — arguably the biggest today. The thing is, most people think of the genome as a static tell-all dataset. In reality, even your somatic dna changes at an astonishing rate; in fact, we can predict your age, within around a 5 year confidence interval, from your genome. That would not be possible if your genome was static. So we need to reframe the genome as a dynamic real-time data stream of what is happening in the body. Then of course, we also need to couple longitudinal genomic datasets with time series biomarker data before we can use our new tools to understand human health a little better. 

We have been excited to meet teams that are fully leveraging the promise of this new era. A couple weeks ago, for example, we met cancer diagnostic startup Freenome, which uses cell-free dna from liquid biopsies to detect cancer at an early stage. If that sounds scary, at a very high level, it is just a machine learning categorization algorithm. What is exciting is that they have essentially taken an agnostic approach to the problem. Healthcare is a notoriously slow-moving industry, but imagine that in the future, new findings will simply be incorporated through a software update.

Beyond disease diagnosis, we have seen startups working in agriculture genomics, drug response, and even designing a new genomic programming language, that have all captivated our imagination.

It will be tempting at times to dismiss these startups as naive; after all, many of them are tackling highly complex problems that generations of scientists have given blood sweat and tears to, only to make tiny contributions. And indeed, there are many technical and commercial bottlenecks we have yet to overcome (next post). However, we have seen impressive real-world results, and we are excited about what is to come.

Top Hat

Even back when I was in graduate school, I found the price of textbooks to be high and their quality to vary widely. Now that I have children taking college courses, I was shocked to find textbooks that cost over $200 and are still large physical objects that have to be lugged around! The high prices and lack of innovation are the result of a market structure which has become highly concentrated among just a few textbook publishers. That's why I am excited to announce that USV has led a new round of financing for Toronto-based Top Hat, which last year launched a content marketplace for higher education.

I first met Mike, the founder & CEO of Top Hat, shortly after he had started the company. He told me about his exciting vision for bringing innovation to the higher education market. But then he said he was getting going by replacing Clickers. For starters I didn't know what those were as they had come after my time in college. Once I figured out what a Clicker was, I admittedly thought going after those was, well, boring. But Mike was right and I was wrong. Starting with classroom engagement turned out to be the perfect basis for establishing a large footprint in higher education. We stayed in touch as Top Hat grew and then last year the team successfully used their user base to launch a content marketplace.

While it is still early there are many positive signs about the potential for the content marketplace that remind us of other successful marketplaces we have invested in over the years such as Etsy and Science Exchange. In addition to individual professors adding content by themselves there are also new behaviors emerging and we are particularly excited about collaboratively developed content. Much work remains to be done but the company is now well funded to execute on that.

Our investment comes from the USV Opportunity Fund, which we set up in part for this type of situation where we have developed a relationship with an entrepreneur over time. Also worth noting is that Toronto continues to impress us with its quality and diversity of companies. We now have five investments there, placing Toronto third as a location in the USV portfolio after New York and San Francisco.

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.

Shippo and the Power of Abstraction: Introducing USPS ePostage

Our portfolio company Shippo today announced that it is now providing all customers with access to the United States Postal Service ePostage program. Shippo is the first company to have received such a license from the USPS since 1999. But best of all, the benefits of this license go to Shippo's customers without them having to do anything themselves! Such is the power of abstraction provided by API companies such as Twilio, Clarifai, Dwolla, Stripe and Shippo.

Wait, "power of abstraction" what does that even mean? When you are a Shippo customer, you integrate the Shippo API into your service, and Shippo connects on your behalf to the USPS and many other shipping carriers around the world. So: you as the customer have a single integration that is always the same and Shippo behind the scenes maps the many different integrations it has to this one format. Next time when your hear a programmer say "abstracting" you now know they mean hiding complexity and changes behind a well defined, easy-to-use "interface" (just like the graphical user interface on your computer hides all the complexity of the operating system underneath it).

Abstraction is powerful because it hides both complexity and changes over time. In the case of Shippo each carrier around the world works slightly differently, but Shippo's API gives you a single interface. Shippo does all the hard work behind the scenes to hide the complexity. And change: Shippo just got a much better integration with the US Postal Service. It allows Shippo to respond to your queries faster and achieve much higher uptime (by cutting a dependency on USPS systems). Because this change happens "under the hood" the service to you as the customer gets better without you having to do anything!

This power is why going forward I believe all software will be created by composing APIs. Need communications? Use Twilio. Need payments? Use Dwolla and Stripe. Need deep learning? Use Clarifai. Need shipping? Use Shippo!

Digital Currency for Virtual Worlds

In Neal Stephenson’s 1992 novel, Snow Crash, we were introduced to the concept of a Metaverse, the 3d mixed reality heir to the Internet marked by a convergence of the physical and virtual worlds.  Technologists have been trying to bring this topic out of the realm of science fiction and geeks in basements for a few decades, so many are asking the obvious question: Why now? 

I think the answer to this question lies in the fact that many of the technologies needed to enable this phenomenon finally coexist:  

- High resolution portable displays (including mobile phones in a headmount retailing for less than $100)

- Larger bandwidth

- Gesture tracking (& enhanced sensory technologies)

- AND crypto-currency

You may have read through this list and said, “One of these items does not belong…” I’d like to use this post to explain why I think crypto-currency is the most intriguing piece, and one seldom associated with the potential for innovation within virtual reality.

To set the stage, I believe there are two factors that need to be aligned in order to catalyze the use of VR: Consumption and Creation. Consumption is predicated on consumer desire. For the purpose of this blog post let’s assume that the desire is there. Desire is increasingly aligning with accessibility, with the Google Daydream headset retailing at $80.

The content creation piece of the equation, however, has not been aligned with the rate at which consumers adopt the technology.  Even as the hardware becomes widely available, our current computing paradigms create roadblocks to content creation as we enter the age of the metaverse:

Hyper-centralization under a single protocol. It is almost impossible to achieve interoperability among siloed platforms. This means we are unable to create dynamically with anyone else in the metaverse.

Security. Integrity of the data is in the servers rather than placed within the data itself.

Computing Power. Think about the massive computing power necessary for these environments. I was listening to the CEO of a gaming company discuss the shift in processing power as his firm takes on VR games. In typical games today (think Playstation, Xbox) the majority of the games are rendered at 1080 pixels, 30 frames per second. In a typical VR experience, the displays are about 2000 pixels (at the end of the day you’re probably rendering closer to 3K), and you’re facing a range of 90-120 frames p/sec. If you follow the math, that’s about a 7X increase in horsepower to render for VR versus traditional PC gaming. Oh, and no pressure, all of this needs to be done in a 20 millisecond time frame as people turn their heads and move about. Even if I wanted to create a complex environment as a developer, I am operating under some serious constraints.

There is a solution that addresses these roadblocks: Blockchain and crypto-currency.

We have other blog posts (https://www.usv.com/thread/<wbr/>blockstack) that have addressed the power of blockchain to ensure security and a decentralized model that is more powerful for sharing than a single protocol. One of the greatest, and perhaps most untapped, abilities of the blockchain technology is the incentive to contribute computing power through cryptocurrency. In a hypothetical scenario, if I were to operate a virtual environment, I could invite people into my environment (invite incentivized through cryptocurrency) and they could lend their computing power within that environment. 

For reference, take a look at a Minecraft world someone has been building (for 5 years!!). I think this is a prime example of a complex world whose functionality would be magnified if others could contribute to the computing power in the environment. 

Put the computing power of cryptocurrency into perspective: When Bitcoin reached a hash rate of 1 petahash/sec in 2013, that was roughly equivalent to the computing power of every Google server in the world combined. That was 3 years ago.  Bitcoin’s hash rate has increased ~4,000% since that time (see chart below).  That’s pretty incredible if you imagine all of the computing power that could be gathered by getting a community of people together who want to build VR environments.

We ought to use shared computing resources to render virtual worlds, and use an app coin to compensate each other for doing so. What’s currently missing is a protocol powered by an app coin. If you're currently working on this, we'd love to learn more!

Blockstack Funding

Walter Isaacson from the Aspen Institute (and author of the Steve Jobs biography) recently wrote a post titled "The internet is broken. Starting from scratch, here's how I'd fix it." His core contention is that the Internet at present lacks native support for identity, security and payment. And while that's correct, it doesn't necesserily follow that we need to rebuild from scratch. Instead, we can and should use the capabilities of blockchain technology to augment the existing Internet (and in parts supersede it).

There are a number of different initiatives underway to do just that. One of them is led by our portfolio company Blockstack (which was called Onename, when we first invested). The Blockstack team has been building a stack of open protocols on top of the bitcoin blockchain (hence the name) to support decentralized namespaces and applications. Naming is critical to building trust, which Muneeb points out in his recent TEDx talk. And Ryan in a blog post describes how this can then be used to address Isaacson's original points. 

We are excited about the progress that the Blockstack team has made, in no small part thanks to a growing community of contributors. To help grow this effort, we have led a new round of funding. You can read more about it on the Blockstack Blog.

Numerai

Part of the genius of the Internet is its ability to coordinate the actions of many disparate and geographically diverse people by eliminating the marginal cost of sharing information. In the last few decades alone, we've seen this happen again and again in areas such as education, science and commerce with remarkable results.

One question we have asked ourselves over the years is how best to apply the network model to the business of allocating capital. What other components or technologies would be necessary for a global scale community of people making investment decisions?

Numerai is a hedge fund managed by an anonymous community of data scientists. It encrypts its data and allows anyone in the world to continuously apply machine intelligence to the set and anonymously submit price predictions back. Numerai turns these predictions into trades and compensates the best performing models with bitcoin.

Today, we're excited to announce that USV is leading the Series A round of financing in Numerai’s management company.

For an activity so heavily dependent on the efficient transmission and interpretation of information, the business of allocating capital has been slow to adopt the network model. Meanwhile, the pace at which the field of machine learning is advancing is rapidly accelerating. Between breakthroughs in our understanding of the science, platforms such as Kaggle, the Netflix Prize and a wealth of free online learning tools, there is an increasing supply of talent tackling all aspects of computing and data analysis. But these thousands of data scientists around the world with expert knowledge in machine learning are unable to apply that expertise to finance for lack of high quality data and trading capital.

Numerai attempts to fill this gap by acting as an interface between the machine intelligence community and global capital markets with an open-access, open-participation model. Anyone with an email and a bitcoin address can download the company’s data for free and train machine learning algorithms on it.

Every participant approaches the data set in their own unique way, producing many different solutions to the same problem. Numerai then combines each of these approaches into a single meta model, which dictates how to allocate the assets in its investment fund. In return, users are compensated in bitcoin in proportion to how much they help improve the meta model.

By encrypting its data set before releasing it to the public, Numerai turns the challenge of price prediction into a purely mathematical problem by removing the influence of human bias upon the results. Participants don’t know which securities they’re modeling nor what their predictions mean; only whether their model is performant or not. At the same time, Numerai itself does not know what algorithms the data scientists are using; their code and intellectual property remains theirs. Richard Craib, founder and CEO of Numerai, calls this a trustless relationship between Numerai and the data scientists, facilitated by encryption and anonymity.

Numerai is thus not a search for the best model; it is a platform to synthesize many different models, an invisible collaboration to build the meta model. At scale, Numerai’s fund is exposed to every model and a diversified portfolio without the risk of relying on a single and imperfect model.

This is a new kind type of capital allocation business that also has network effects - from the community, from their individual models and from the collective meta model. These network effects result in an open access fund that will generate more intelligence than a closed system built on a pre-internet organizational design.

In the year since its launch, this appears to be working: 7,500 data scientists have created over 500,000 models representing 28 billion predictions. This may be the largest ensemble of stock market machine learning models in the world.

Numerai describes this directly and succinctly: “The world doesn't need another hedge fund, it needs exactly one hedge fund that's powered by every artificial intelligence.”

More about Numerai can be found at https://numer.ai/about

Sharing Holiday Specials from the USV Network

USV network companies: Let us know if you’d like us to include your holiday offer in this list!

The potential of digital network effects has been crucial to our investment thesis from day one. As an extension of this thesis, we spend a lot of time seeking out opportunities for our active portfolio companies to collaborate with each other. Within this USV portfolio network, more than 60 companies help each other build better businesses through shared resources, relationships, and peer-to-peer learning.

And this holiday season, we wanted to share a little bit of our network with you. Below is a compiled list of holiday specials and promotional offers that some of our portfolio companies are offering through the month of December. We hope you (or your business) can take advantage of a couple of these.

Clarifai
Receive 50,000 free API credits for their visual recognition API, powered by machine learning.
Eligible Dates: Now - 12/15/2016
Offer link

Jobbatical
Expand your hiring campaigns. Attract global business and tech talent on Jobbatical.
- 1 month unlimited job openings - 900€
- 3 months unlimited job openings - 1,500€
- 1 year unlimited job openings - 15,000€
Regular price for 1 job listing is 2% of the location's annual salary up front.
Eligible Dates: Now - 12/31/2016
Offer link
Promo Code: JOBBATICALHOLIDAY

MongoDB
Get $25 in free MongoDB Atlas credit by using the code GoAtlas25. Within minutes, you can sign up your free, cloud-hosted MongoDB cluster with none of the operational overhead.
Offer link
Eligible Dates: Now - 12/31/2016
Promo Code: GOATLAS25

RealtyShares
Sign up for RealtyShares and get $100. Directions: Sign up, link a bank account, enter referral code HOLIDAY by clicking on the link in the "bank account confirmation" email. You can expect payment to appear in your linked bank account within 30 days.
Eligible Dates: Now -12/31/2016
Offer link
Promo Code: HOLIDAY

Skillshare
Gift the gift of learning with Skillshare e-gift cards (available in 6 or 12-month increments).
Eligible Dates: Now -12/31/2016
Offer link

SoundCloud
Re-enroll in your subscription of SoundCloud and receive three months of access for just $9.99
Eligibilty: Users who have subscribed to SoundCloud Go, but no longer have an active subscription (US, UK, and AU)
Eligible Dates: Now - 12/15/2016
Offer link

Nurx

For all the promise of digital technologies, medical care today is still largely provided in the same unstructured manner as it always has been. When you need to see a doctor, there are typically 5 or 6 steps you need to take before a potential outcome: finding the doctor; finding time to schedule the appointment; visiting the doctor; getting a diagnosis and prescription; visiting a pharmacy and paying for your medication. Each one of these steps, while necessary, has to be done with live communication and often in-person visits that requires the parties involved be present at the same time. This can be not only inconvenient, but also an inefficient and unnecessary waste of time for both the patient and the provider. These processes account for a material percentage of the costs of delivering medical care.

We believe digital processes, accessible via a mobile phone, and in an asynchronous manner, will over time transform how medical care is delivered, and how much it costs.

Nurx is a service that today prescribes and delivers medication from a mobile app and in doing so is redefining the doctor-patient relationship and the practice of primary care. We are announcing today that USV had led the company's latest round of financing.

Today, Nurx delivers birth control and Truvada for PrEP, conveniently and quickly, with the user in charge at every step, done via a simple text based mobile interface. We believe this is a radical new way of providing care -  by  changing unstructured interactions into structured care, by shifting work from MDs to algorithms where possible, by automatically and on the fly creating a portable, digital medical record. As a result, this dramatically lowers the cost to the user (to $15 or less) as well as potentially making the lives of medical professionals better by giving them more time for creative work with more patients, resulting in better outcomes.

Since launching earlier this year, Nurx has served thousands of users across 3 states - California, Washington and New York. It will be available in 3 more states this year and nationwide in 2017. Users love it. To supplement this growth, Nurx will be expanding their team to build new applications for messaging, apps, and other integrations that will come to define these new healthcare accessibility systems.

Beyond that, we believe this focused entry point can evolve into being the first point of contact for anything healthcare, giving the user as much control over their care as possible for as low a cost of possible. We are excited to be participating in one of the mobile medical networks for the 21st century.

 

Code Climate

Code is everywhere these days. There is code running in your watch, your car, your thermostat. You can't make a call, pay a bill, or book a ticket without code. Code is what allows companies to create new businesses and differentiated user experiences. "Software is Eating the World," as Marc Andreessen put it.

The amount of code in systems tends to grow over time. Here is a beautiful illustration of the size of various code bases. As a first approximation, the historic growth in the lines of code is exponential, which is also confirmed by this chart of the growth of the Linux kernel. One fascinating aspect of exponential growth is how quickly the future outweighs the past. We have been writing code for about 75 years but it seems fair to assume that over the next decade we will write 4-5 times as many lines of code as we have up to now. Put differently, of all code that will exist in the year 2026, 75-80% will have been written between now and then (this is based on a 20% annual growth rate).

With that growth comes the question of whether all of that new code will work. We all encounter code that is buggy, has security holes, or doesn't run at all. An extreme recent case are the US F-35 fighter planes that cost $100 million per plane but have largely been grounded because their software isn't working.

When the question of code quality comes up, many people just shrug — they see bugs as an inevitable part of software development. Worse yet, there is a common mantra that you can have any two in software: fast time to market, low cost of development, or high quality, but never all three. This is also what people used to believe about manufacturing before the rise of techniques such as lean manufacturing and continuous improvement. As it turns out when you lead with quality in manufacturing you can in fact have all three: quality, speed and low cost. The same will be true for code, which makes assessing and managing the quality of code a key challenge for the coming years.

We are excited to be investors in New York City-based Code Climate, which provides tools to do just that. With Code Climate you can make quality improvement explicit, continuous, and ubiquitous, by incorporating source code analytics throughout the workflow of your entire development organization.

You can read more about the financing and the company's plans on Code Climate’s blog. Also: Code Climate is hiring.

Hillary Clinton for President

This is the fourth presidential election during the existence of Union Square Ventures and the first one in which we as a firm feel compelled to endorse a candidate: Hillary Clinton.

As investors in technology companies, we believe that technology and innovation create broad opportunity and improve lives. But we also know that, to date, the benefits of technology and globalization have not been evenly distributed. People with access to education and capital have prospered while many others have seen good jobs lost to automation or offshoring. We understand why people whose lives have been upended are frustrated by politicians who squabble for partisan advantage instead of developing consensus solutions. We are not surprised that many feel the urge to reboot the whole system.

We agree that more of the same is not the answer. In the next few years, we need to make the necessary smart policy adjustments to ensure that the benefits of technology and innovation are shared by society as a whole.

Shutting out the world is not an option. We don’t think it’s desirable, or even possible, to return to an earlier era when America was less diverse, or the economy was less global. There is no wall big enough to protect us from a changing climate or the unintended consequences of new technologies like artificial intelligence or DNA manipulation. Now, more than ever, we must work together. We cannot unilaterally set the rules for the other seven billion people on the planet. The only way forward is through an open, respectful, and rational dialogue grounded in science.

Of the two major party candidates, we believe that only Hillary Clinton has the temperament and experience to lead us at home and represent us abroad.

We hope that everyone, no matter how frustrated with our current politics, will get out and vote. We applaud the movement to give employees extra time off on election day. If you’re not registered and don’t see the point, we hope you will reconsider and register here or here.  This is an important election and we need to make a choice among the two leading candidates -- we believe that a protest vote is a wasted vote -- and for us the clear choice is Hillary Clinton.

Shippo

Take a look around you, chances are, pretty much everything you see has been shipped, often multiple times, in order to get there. Transport of goods is a massive industry. Global parcel shipping alone is worth $300 Billion. With the shift to e-commerce parcel shipping is growing rapidly and consumer expectations for fast and cheap delivery are being set by the very largest players, led by Amazon.

Creating a compelling shipping experience for customers is hard. The industry is fragmented with many different carriers and service options. Information about shipping is difficult to find and pricing is based on multiple criteria that are not always clear. Individual carrier APIs vary widely and are often difficult to implement.

Today, we are excited to announce that USV has led the Series A financing for Shippo, a single API for all shipping needs. Shippo connects businesses to multiple shipping carriers, letting them compare rates, generate labels, and track shipments. Shippo brings access to shipping infrastructure, discounted pricing, and detailed data to businesses of any size with just a few lines of code

The complexities of the underlying infrastructure are abstracted away for developers, with Shippo taking care of the nuances and handling the edge cases. Just as Twilio made communications easy, Stripe and Dwolla payments, Shippo is doing the same for shipping. Businesses just getting started can even use Shippo without programming through a console and plugins for popular e-commerce platforms.

Shippo is building a network of customers and carriers to help optimize shipping for everyone that is already processing millions of packages to and from 230 countries. For customers Shippo provides access to more carriers and better rates and for carriers Shippo is a technology partner that allows easy programmatic integration by new and growing businesses.

We are thrilled to be backing Laura, Simon, and the Shippo team. You can read more about the financing and the company's plans on Shippo's blog. Also, Shippo is hiring.

Hello!

I'm Jennifer, one of the new analysts on the Investment Team at Union Square Ventures! 

Before joining USV, I studied statistics and computational biology at Harvard, and then worked at a hedge fund after graduation. I'm particularly interested in new financial/banking paradigms, blockchain + decentralized networks, and genomics. 

Growing up, many people around me were entrepreneurs. I was completely fascinated by the idea that you could make your own path, especially in a culture where adherence to the rules was glorified. And whether they were successful or tremendously unsuccessful, they all tried to leverage technology to make the world a better place — and I really admired that.  

I'm very excited to get to know all of you — please say hello at @jml_campbell or email me at jennifer AT usv DOT com

Hello From a New Analyst

Hi all!

My name is Jacqueline Garavente and I’m excited to introduce myself as one of two new analysts joining the investment team here at USV.

Prior to this, I worked in the AI sector at IBM Watson and a few years later went to a startup, Dataminr, where I applied open source data to study complex criminal networks (if you ever want to talk ISIS and cartels on Twitter, I’m your lady). I wound up at USV through a confluence of luck and powerful network effects. AKA, I saw a retweet that USV was searching for a new analyst and dashed to apply at 10 pm when applications were due at midnight.

I feel privileged to join this team at a time when technology continually diminishes our preconceived notions of what constitutes an “insurmountable problem.”  I am most captivated by the innovations in artificial intelligence (NLP, Machine Learning) and decentralized networks.

In my spare time I like to think about govtech, economic development, networks and where to find the best bagels in NYC. I like to read at least one new book per week and I’m looking forward to soliciting book recommendations from a new network!

I also look forward to chatting with all of you. Please feel free to reach out @jacqgaravente or jacqueline at usv.com

Fat Protocols

Here's one way to think about the differences between the Internet and the Blockchain. The previous generation of shared protocols (TCP/IP, HTTP, SMTP, etc.) produced immeasurable amounts of value, but most of it got captured and re-aggregated on top at the applications layer, largely in the form of data (think Google, Facebook and so on). The Internet stack, in terms of how value is distributed, is composed of "thin" protocols and "fat" applications. As the market developed, we learned that investing in applications produced high returns whereas investing directly in protocol technologies generally produced low returns.

 

Value distribution on the web

 

This relationship between protocols and applications is reversed in the blockchain application stack. Value concentrates at the shared protocol layer and only a fraction of that value is distributed along at the applications layer. It's a stack with "fat" protocols and "thin" applications.

We see this very clearly in the two dominant blockchain networks, Bitcoin and Ethereum. The Bitcoin network has a $10B market cap yet the largest companies built on top are worth a few hundred million at best, and most are probably overvalued by “business fundamentals” standards. Similarly, Ethereum has a $1B market cap even before the emergence of a real breakout application on top and only a year after its public release.

 

Value distribution on the blockchain

 

There are two things about most blockchain-based protocols that cause this to happen: the first is the shared data layer, and the second is the introduction cryptographic “access” token with some speculative value.

I wrote about the shared data layer about a year ago. Though the post has gathered some dust since, the main point remains: by replicating and storing user data across an open and decentralized network rather than individual applications controlling access to disparate silos of information, we reduce the barriers to entry for new players and create a more vibrant and competitive ecosystem of products and services on top. As a concrete example, consider how easy it is to switch from Poloniex to GDAX, or to any of the dozens of cryptocurrency exchanges out there, and vice-versa in large part because they all have equal and free access to the underlying data, blockchain transactions. Here you have several competing, non-cooperating services which are interoperable with each other by virtue of building their services on top of the same open protocols. This forces the market to find ways to reduce costs, build better products, and invent radical new ones to succeed.

But an open network and a shared data layer alone are not not enough of an incentive to promote adoption. The second component, the protocol token[1] which is used to access the service provided by the network (transactions in the case of Bitcoin, computing power in the case of Ethereum, file storage in the case of Sia and Storj, and so on) fills that gap.

Albert and Fred wrote about this last week after we had a number discussions at USV about investing in blockchain-based networks. Albert looked at protocol tokens from the point of view of incentivizing open protocol innovation, as a way of funding research and development (via crowdsales), creating value for shareholders (via token value appreciation), or both.

Albert’s post will help you understand how tokens incentivize protocol development. Here, I’m going focus on how tokens incentivize protocol adoption and how they affect value distribution via what I will call the token feedback loop.

 

Token Feedback Loop

When a token appreciates in value, it draws the attention of early speculators, developers and entrepreneurs. They become stakeholders in the protocol itself and are financially invested in its success. Then some of these early adopters, perhaps financed in part by the profits of getting in at the start, build products and services around the protocol, recognizing that its success would further increase the value of their tokens. Then some of these become successful and bring in new users to the network and perhaps VCs and other kinds of investors. This further increases the value of the tokens, which draws more attention from more entrepreneurs, which leads to more applications, and so on. 

There are two things I want to point out about this feedback loop. First is how much of the initial growth is driven by speculation. Because most tokens are programmed to be scarce, as interest in the protocol grows so does the price per token and thus the market cap of the network. Sometimes interest grows a lot faster than the supply of tokens and it leads to bubble-style appreciation.

With the exception of deliberately fraudulent schemes, this is a good thing. Speculation is often the engine of technological adoption [2]. Both aspects of irrational speculation — the boom and the bust — can be very beneficial to technological innovation. The boom attracts financial capital through early profits, some of which are reinvested in innovation (how many of Ethereum’s investors were re-investing their Bitcoin profits, or DAO investors their Ethereum profits?), and the bust can actually support the adoption long-term adoption of the new technology as prices depress and out-of-the-money stakeholders look to be made whole by promoting and creating value around it (just look at how many of today’s Bitcoin companies were started by early adopters after the crash of 2013).

The second aspect worth pointing out is what happens towards the end of the loop. When applications begin to emerge and show early signs of success (whether measured by increased usage or by the attention (or capital) paid by financial investors), two things happen in the market for a protocol’s token: new users are drawn to the protocol, increasing demand for tokens (since you need them to access the service — see Albert’s analogy of tickets in a fair), and existing investors hold onto their tokens anticipating future price increases, further constraining supply. The combination forces up the price (assuming sufficient scarcity in new token creation), the newly-increased market cap of the protocol attracts new entrepreneurs and new investors, and the loop repeats itself.

What’s significant about this dynamic is the effect it has on how value is distributed along the stack: the market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer. And again, increasing value at the protocol layer attracts and incentivises competition at the application layer. Together with a shared data layer, which dramatically lowers the barriers to entry, the end result is a vibrant and competitive ecosystem of applications and the bulk value distributed to a widespread pool of shareholders. This is how tokenized protocols become “fat” and its applications “thin”.

This is a big shift. The combination of shared open data with an incentive system that prevents “winner-take-all” markets changes the game at the application layer and creates an entire new category of companies with fundamentally different business models at the protocol layer. Many of the established rules about building businesses and investing in innovation don't apply to this new model and today we probably have more questions than answers. But we’re quickly learning the ins and outs of this market through our blockchain portfolio and in typical USV fashion we’re going to share that knowledge as we go along.



[1] Also known as App Coins, as coined – pun intended – by Naval in 2014

[2] Edward Chancellor writes a thorough and entertaining history of financial speculation and its place in society (you’ll be in awe by how similar cryptocurrency speculation today is to prior bursts of financial exuberance!) and Carlota Perez describes the important role of bubbles in the development of new technologies by attracting financial capital to research and development.

USV Opportunity Fund, circa 2016

Over five years ago USV launched its first “Opportunity Fund” - a pool of capital meant as a complement to the core activities of our early stage funds. A few years thereafter, in 2014, we raised a second Opportunity Fund. Both of those funds have been continuously active. In light of making our first investment in our 2016 early stage fund, we thought this would be a good time to take a look back (and forward) at this investment strategy.

To date, the Opportunity Funds have invested in 15 companies in sectors such as financial technology, infrastructure, marketplaces and consumer services, located in both North America and Europe. The initial investments have ranged from $7.5 to $15 million, and we have made follow-on investments in many cases. About two-thirds of these investments were in companies in which we had previously invested out of our early stage funds.

The Opportunity Funds give us the ability to invest in more developed companies where we think our perspective can add value to the business. It also gives us flexibility to invest in companies that we missed in the early stage. As we wrote in 2011: “We hope you'll think of USV as stage-agnostic, highly-focused investors who can add value to your company.”

Importantly, these funds are designed to operate in a way that complements our core activities.

The first way they do this is by letting us support portfolio companies across a wider range of stages and at higher valuations than we can with our core funds. An example of this is the round we recently led for Foursquare.

The second way is by developing relationships with entrepreneurs over longer periods of time, which in ultimately results in an investment opportunity outside of a bidded investment round. A good example of this is Cloudflare, which was led by Brad.

The third way gives us a very real opportunity to invest in companies that squarely fit within our thesis but we missed during their earlier stages. Lending Club and Realty Shares fit into this bucket.

In many of these examples, founders felt that USV's approach and experience was relevant and we structured a deal outside of the usual fundraising process that worked for both sides.

We have plenty of capacity in our existing Opportunity Fund and are actively looking for new investments. If you think this focus is relevant to your business, please reach out to us.

Payjoy

Sometime in the late 90s I picked up my first mobile phone, a Motorola StarTAC. The sound quality wasn’t great but it was a radical change to no longer be tethered to a wireline. Next up was the Blackberry, which combined voice with email, and quickly became the device of choice for many. Then, in 2007, the iPhone was released and the smartphone era began.

Today I use a Google Nexus 6P, and it’s hard to imagine living without a smartphone. My guess is I use at least 10 different applications every weekday. At USV, we’ve invested in many mobile-first applications across a variety of services, including Foursquare, Soundcloud, SigFig, DuoLingo, Figure 1 and Clue, but these are only a small fraction of what’s available in the app stores. Smartphones also provide an alternative connection to the internet for those who cannot afford the costs of, or don’t have access to, broadband services.

Over the past few years, the smartphone has become an essential device for work, play and daily life. It also provides an alternative connection to the internet for those who cannot afford the costs of, or don’t have access to, broadband services. Last year the Pew Research Center published an excellent study on the importance of smartphones.

The average price of an Android phone is still over $200, and is not projected to go below that anytime soon. The best unlocked smartphones can easily exceed $500 and are out of reach for many. Our newest investment, PayJoy, addresses this problem by providing underbanked consumers with an innovative financing option at lower cost than normally available to borrowers with little to no credit history.

PayJoy will finance 70-80% of the price of a smartphone over 3-12 months at a monthly cost of $50-150, depending on price and term of payment. Similar to platforms like Lending Club and Funding Circle, PayJoy uses an off-balance sheet model that connects purchasers with a financing source. If customers fail to pay, after multiple notices PayJoy’s technology locks the phone until payment has been received. To date, default rates have been quite low, as you would expect for an essential device.

For many of its customers, PayJoy is their first financing product and the first step towards developing a credit history and using internet-based financial services.

PayJoy currently operates only in the United States, but we believe there is a large global market for its services. We are excited to lead this Series A round to provide PayJoy with resources to expand outside the US, and we look forward to working with PayJoy’s three founders, Doug, Mark and Gib

USV 2016, LP

This week, we will close our first investment in USV’s 2016 fund, which has total capital commitments of $175 million, the same size as our 2014 fund. This will be USV’s fifth early-stage fund. We continue to make new investments in our second Opportunity fund, which is not fully invested and has an investment life extending into 2018. As many of you know, our Opportunity funds invest in later-stage and non-traditional opportunities. We’ll do a separate post on this topic soon.

As has been the case since we organized our 2012 fund, the 2016 fund will have five investing partners: Brad, Fred, Albert, Andy and me. I’m leading the first investment, which we expect to announce in July. Andy is in discussions about a possible second investment. It will take us approximately three years to identify 20-23 companies for the new fund. Since the firm has more than 60 active companies today, we will likely have a slower investment pace than the last two funds, but who knows?

There is one change with the new fund. In past funds, the key man provision in our fund formation documents was focused on USV’s founders Fred and Brad. This provision gives limited partners a second look at a fund if named members of the general partner become inactive. In the 2016 fund, the provision focuses on Albert and Andy. They will take an increased leadership role and lead more investments in this fund cycle. Fred, Brad and I will be active in all investment decisions for this fund, but it seems time to acknowledge the leadership role that Albert and Andy have been playing and will play at USV going forward.

We all love what we do and the partnership we have developed, but last summer Fred, Brad and I independently concluded it was time to cut back a bit as we discussed the next fund and examined our gray hairs. VC requires long time horizons, at least ten years and often fifteen or more. We still have four companies remaining in the 2004 fund and 15 in the 2008 fund.

We have been talking to our limited partners, companies and colleagues privately about this transition for about a year, but last month at our CEO summit we learned there continue to be unfounded rumors that Fred and maybe Brad were retiring. This amused us greatly since on most days we share email threads almost every hour and the firm’s activity level on investment, network and policy matters has never been higher.  You can find Fred’s thoughts on this topic at avc.com.

Each investment fund is an adventure as we build a portfolio and help our companies succeed. As anyone reading this post knows, it's an exciting time to be in this line of work. We are grateful to everyone who supports us. USV 2016 is now open for business and we are committed to managing it until it is fully liquidated, almost certainly until 2030 or beyond.