What happens when you cross the fundamentals of competitive advantage with our new, emerging world of blockchain and crypto?
By Matthew Le Merle
Companies are not likely to spend time creating a one-year strategic plan – we always start further out, and then work backwards. Yet most of the content you can find on blockchain – arguably one of the most disruptive technologies we have yet to see – has a short-term, highly-technical outlook, which ends up being very tactical. So how do you look to the future using a technology you might not fully understand, without being blindsided by being overly focused on the short term? Consider these ‘inevitable truths’ that might inform a competitive strategy session for project teams managing a leading blockchain project.
1. The Internet Will Continue Evolving: Digital Monies and Assets Needed
This is the big one, and so let’s start with it. Everything about blockchain and crypto are only important because we are in the process of migrating to a fully digital world. We started 40 years ago when the Internet was first conceptualized and the initial communication protocols were established. Twenty years ago we really got to work, and today everyone relies upon the Internet almost ubiquitously. But the Internet was built for communication, NOT for commerce. So we tell each other what we want to buy or sell, for example, and then go offline to transact. The financial and commercial implications of our ‘on internet’ communications are always transacted ‘off internet.’ This is true with payment rails, financial marketplaces, asset registries, and so on, and it has remained broadly unchanged for almost 100 years.
What we are left with is an internet that is good at digital communication but which lacks native digital monies, and does not support native digital assets. Yet we need both to complete the migration to a fully digital world, which is inevitable. Oh, and yes, security, identity, trust, speed, cost, and reliability matter too, and across all of these dimensions the internet we have is old and troubled.
Implications: This is why blockchain and crypto matter – more than anything else, they hold the promise of bringing digital monies and assets ‘into’ the Internet. Project entrepreneurs, investors and others should keep this always uppermost in their minds in 2019. Blockchain based payments, digital registries, security tokens, accounts, and exchanges are what will drive the next phase of the Internet’s evolution, so this is where the traction will be.
2. Most Blockchain Projects Will Fail
I am sorry to be the bearer of bad news, but in all areas of innovation, failure is the norm. The angel and venture capital failure rates are between 55 and 65 percent even after they have done exhaustive due diligence and worked for years to help the teams they back make a go of it. The crowdfunding failure rate is probably more than 80 percent though crowdfunding is too new for us to be sure. So how can we expect anything other than massive failure for the world of blockchain projects?
Implications: In 2019 the failure rate among the first wave of blockchain projects backed in 2018 and before will spike. Most of the crypto tokens will be abandoned or will crash in value. Even though point 1 is still true. There is an enormous need for these projects — but only for the really good and deserving ones. If you are an investor, invest using the best practices of early stage technology investing, and always be diversified.
3. The Bad News Comes First
Failure always comes first. In areas of new technology, the initial barriers to entry are often low. Teams of entrepreneurs can say they plan to compete and often investors, excited by the promise of a new technology, will seed them with the money they need to get started. The complex realities of applying new technologies to make products and services that people really want, only surface later. And new markets only become competitive even later on. So the losers begin to drop out as they are confronted by these inevitable realities and as their money begins to run out. Those that continue to play, not only begin to show traction, but also find that follow on capital flows towards them and not to the also-rans.
Implications: The shakeout has begun. In 2019 the bad news will be widespread, but that does not mean that the good news will begin to flow. Expect that later. Investors understand how J curves work.
4. A Few Potential Winners Will Begin to Emerge
At the blockchain protocol level, the competitive battle will begin in earnest. In every area of technology we have seen emerge over the last 40 years, the pattern has always been similar. First, we see a few pioneers, then a plethora of wannabes, and then a shakeout, often accompanied by consolidation and feature acquisition, with the eventual emergence of a handful of large and capable competitors. We’ve seen these battles before, with mainframes, operating systems, browsers, and more. So what does this one look like?
First, in software, it is a war for the best developers. There are only a finite number of blockchain developers, and the best can work anywhere they want. Protocols that make a compelling story to their developer community will pull ahead — attracting, and even raiding, the best developers, miners and so on. Smarter protocols will make their story much more compelling than the others. Second, expect feature expansion. Most protocols begin with a focus on something they want to do really well. Once they master that, they begin to add the features and foci of their principal competitors. If one protocol is good at smart contracts, then to compete, a protocol that might be good at store of value may need to add smart contracts too, and vice versa. Third, while sometimes this is organic feature expansion, often it happens by consolidation. The protocols that are beginning to pull ahead, hoover up teams and even other projects to enhance their competitive position. The strong get stronger by cannibalization of the weak.
Implications: In the top 20 blockchain protocols by market capitalization, we already see some that have next to no developers working on them. In 2019 expect more to be abandoned and their values to collapse once the reality becomes obvious.
5. Potential Winners Will Start to Play Hard With Each Other
If cannibalizing the developer communities of your competitor protocols does not already sound like hard ball, consider some other competitor strategies that are widely used in traditional industries. You might steal your competitors most important clients and users, undermine their pricing strategies, or attack their economic profit pools. You might launch copyright and IP protection campaigns. Cautiously, you might harm your competitors perhaps by having others file legal, competitive, or regulatory cases against your competitors. The list is long.
I am not suggesting that you would engineer a 51% attack against your competitor protocol to get it dropped by exchanges and put out of business…but you never know. When survival is the objective, people begin to compete much less graciously. The “we are all in this revolution together” mindset gets replaced by a “my team has got to survive” mindset, and the feasible set of competitive tactics and strategies grows as that change takes place.
Implications: Expect to see the leading projects and protocols act more competitively and less collaboratively in 2019.
6. Most Surviving Projects Will Move Beyond Their Start Up Phase
For those projects that are still moving forward into 2019 and beyond, the reality sets in that the early euphoria of a white paper and fundraising campaign are now to be replaced by the hard reality of building the products and services that were promised to the community that backed the project. It is easy to say that a new technology will change the world. It is easy to find a big current challenge or unmet need that really should be solved. It is also easy to combine the two and say that you will solve a world problem with a new (blockchain) technology. But bringing products to real world use, convincing users to shift to your new offering, and aligning existing players, channels, outlets, service partners, etc. to support the new offering is a world of work. And most of the time, start-ups just fail to go from concept to business reality.
Implications: Expect many teams to give up in 2019 when they realize that concept and reality are not the same thing. For many the work needed to make something real will prove to be beyond their capabilities — or just not that attractive to commit themselves to.
7. Building Global Technology Businesses is More Than Technology
Every blockchain project backed in 2018 or before, began with the proposition that new technology would be able to meaningfully make the world a better place. In almost every case, the people who made those claims and wrote those white papers, were technologists. But building a global technology business is about more than technology. Every use case, every potential product and service, will require a host of other capabilities, including customer service, sales, marketing, advertising, finance, regulatory, human resources, and so on. These functions and capabilities take up the majority of the people at technology leaders like Amazon.com, Apple, and Google. So too, in the ecosystems that surround communities like Bitcoin, EOS, Ethereum, Abra, Coinbase, Ripple, and Securitize. The balance of work will begin to shift in 2019 from focusing on technology, to focusing on building global communities and businesses that can conquer the go to market challenges and ensure adoption and usage.
Implications: Being good at much more than technology will be essential to compete successfully in 2019.
8.Capital is Not Enough to Win — Smart Capital is King
In 2019 it will become apparent that raising capital, which seemed so easy in 2017 and the first half of 2018, is not sufficient to help a project win. In traditional technology investing, we know that ‘capital’ is only enough to get started and to fund the engine you build. Much more vitally, ‘smart capital’ brings with it the ability to help the portfolio companies set strategy, build capabilities, and get to market with momentum. The best technology venture capital firms like Andreessen, Draper, RRE and Sequoia are successful only partially because they have capital. As Sequoia puts it “we are good at building public companies.”
More importantly, the value of the long-term investors in blockchain will become apparent because of the value added they provide to the companies they back. Meanwhile, the funds that just bring capital, will be, and should be, avoided by the best teams and the best projects.
Implications: If you are a blockchain entrepreneur, convince the best investors to back you, if you are an investor, invest alongside or through the best value added investors, and if you are trying to be a blockchain fund, focus on determining what value added you can secure that will make your investments the winners.
9. Location Does Matter
I was born in England. After more than 30 years in the US, I am now a proud dual citizen. But I remember. Britain has been an expert for centuries at making overseas territories good places to get regulatory and tax advantages such that some companies, investments, funds and so on, chose to locate their legal entity in locations such as Bermuda, Cayman Islands, Gibralter, Jersey, and Isle of Man. However, that does not, and never has meant, that those places are good for entities to locate themselves and their people. Innovation occurs in innovation hubs. Finance and commerce occur in global economic centers. While users, communities, and partners are everywhere, they tend to be in the most affluent and populated parts of the world.
Implications: You aren’t going to succeed if you think your project and your people are going to be based in Gibralter, Malta, or any other tax haven. Indeed, thinking that way only limits your ability to compete in the medium term. In order to be the long-term winner you need to serve the globe, and for better or worse that means operating in locations and in ways that work across jurisdictions. Trying to hide in a regulatory or financial haven only puts a regulatory bullseye on your forehead that will slow you down enormously once the competition really begins.
10. The Tax Man Cometh
This one I add to the list because during the Dotcom boom and bust too many friends found out the hard way what happens when you forget about the tax obligations that you are creating as you move forward. One of the most common tax traps of the Dotcom era was to start a company, get options, incur taxes on your option grants at the then value, maybe exercise the options without paying your taxes, then see your company fail and the value of your options and/or stock go to nothing. Unfortunately, the tax obligation did not go away. So too in crypto. People have been buying, selling, making gains, not paying anything on those gains. If the assets go to zero, it does not automatically mean that the tax obligation is written off. Especially, if some of the gains were consumed before the losses wiped out the rest of the position.
Implications: In 2019 the tax man cometh. Be prepared by banking the money you will need to pay your tax obligation as you go.
Good strategy is not set by focusing on a one-year outlook and a set of one-year predictions. Indeed, the only way to win in the long run, is to take in the long view. In blockchain and crypto, a few of the leaders have begun to do just this, and they are preparing now for a much more competitive game which is coming fast.
Matthew Le Merle is Co-Founder and Managing Partner of Fifth Era and of Keiretsu Capital – the most active early stage venture investors in the world, General Partner of the Blockchain Venture Fund of Funds, and Chairman for Securitize, Linqto and Concept Art House. Matthew grew up in England before living most of his life in Silicon Valley where he raised his five children with his wife Alison Davis. Today he splits his time between the US and UK. By day he is an investor in technology companies and a bestselling author and speaker on innovation, investing and the future. In his spare time, he enjoys reading, writing and photography. He was educated at Christ Church, Oxford and Stanford University.Back to TriumIQ