On Amazon, Pets and Blockchains
Tim Berners Lee created the first website in 1990. A decade later, it had become quite clear that the internet would fundamentally change our lives, and almost all businesses to create a “new economy”. At the time, it wasn’t quite clear how this would happen, but many entrepreneurs rushed to find out, by creating a new generation of “dot com” companies to dominate this new economy… and their stock prices soared.
Dot coms
Amazon.com started selling books online and soon reached a $15B valuation, which many rational people ridiculed, calling it a “bubble”. Meanwhile, pets.com, a startup that famously spent $1M on a super bowl ad, was also ridiculed by the same rational people for its focus on such a small niche. And another company, Commerce One which was using the internet to revolutionize business purchases, reached a valuation of $21B after a successful IPO.
Where are they now?
Amazon is now worth $690B.
pets.com declared bankruptcy in 2000. But there have been many other successful internet businesses revolutionizing retail, by focusing on even smaller niches. For example, Unilever bought “Dollar Shave Club” for $1B in 2016. Amazon bought Zappos, a shoe retailer for $800M. pets.com was just too early.
Commerce One went bankrupt in 2004, but there are a multitude of companies, like $80B juggernaut salesforce.com that have since built businesses selling software as a service to other companies, radically transforming their business processes. Commerce One was too early to have the right business model and scale.
Sample Research Reports From 1999 - 2000s
crypto
In 2009, Satoshi Nakamoto released Bitcoin, the first cryptocurrency. Today, almost a decade later, many believe that cryptocurrencies, like the internet, have the potential to fundamentally change our lives and almost all businesses to create a newly decentralized “new economy”.
We are not yet quite sure how this will happen, but many entrepreneurs are rushing to create cryptocurrencies to transform and revolutionize whole sectors of the economy… and cryptocurrency prices have been soaring.
So how can we know which blockchains will become the pets.com of crypto-currencies, and which will turn out to be its Amazon?
To begin with, let’s accept that it is hard to predict the future. People forget that amazon.com, now recognized with 20/20 hindsight for its outstanding foresight, had itself invested in pets.com in 1999 and owned more than 50% of it.
Then, let’s discuss a few fundamental characteristics of blockchains to help guide our thinking.
1. Blockchains are decentralized
They can be revolutionary because they have the potential to remove the middleman in traditionally, centrally controlled systems. So, for example, if only three banks get together to create, own, and control a new blockchain they really don’t need a blockchain. The three banks could achieve the same thing with a traditional database. A cryptocurrency will be successful in a sector if real decentralization makes that sector fundamentally more efficient than the incumbent centralized system.
2. Decentralization doesn’t mean value cannot be created in companies
The internet too promised to remove traditional middlemen, but then, it found re-aggregated (or re-centralized) power in players like Facebook and Google. Typically these new winners are not the incumbents. For example, in 2000 it was clear that news content and delivery together would be powerful, so AOL bought Time Warner – a brilliant move in theory, but a disastrous merger in practice. It took more than a decade for facebook to merge news content (which it doesn’t own) with a delivery mechanism (Newsfeed), to build a successful business.
3. blockchains are generally open source
To understand them, it helps to understand how open source software is developed and what businesses can be built on them. For example, Linux is an open-source software and Red Hat (NASDAQ:RHT, Marketcap $23B) has built a business on top of it. Similarly, Hadoop is open source and Hortonworks (NASDAQ:HDP, Marketcap $1.4B) has built a business on top of it. Google has released much open source software, such as kubernetes (for containers) and TensorFlow (for AI) and it is building businesses around it. In the same vein, companies can sponsor new successful blockchains to disrupt incumbents with the objective of building businesses leveraging these blockchains. But incumbents often resist the open source disrupters. Microsoft, the incumbent operating system vendor tried to fight and derail Linux for a long time. Similarly, facebook is unlikely to launch a blockchain based social network that threatens its own dominance. This creates an opportunity for both new entrepreneurs and existing companies (like Brave or Telegram) to build disruptive new services on the blockchain.
4. Like open-source software, blockchain software can evolve
Continuously to adapt to new circumstances and situations. For example, Ethereum, one of the dominant cryptocurrencies, intends to fundamentally change its underlying software by adopting new technology that uses less electricity to maintain. (Famously, maintaining or ‘mining’ Bitcoin and Ethereum has been very energy intensive, and many have ridiculed the blockchain for this reason. Ethereum will try to prove the nay-sayers wrong by adapting its software to address this criticism.) This adaptability of blockchains has a couple of interesting corollaries. Blockchains can be immensely competitive – if a blockchain innovates with new technology, other blockchains can adapt by “copying” the same code. Telegram’s new blockchain for example intends to incorporate multiple new technologies pioneered by other blockchains, like Ethereum.
5. The leadership and governance of a cryptocurrency is key
Last year, both Bitcoin and Ethereum survived serious governance and adaptability challenges. They each resolved these challenges in typically internet-centric ways – with much animated (and sometimes rancorous) debate on public forums while trying to reach consensus. But they also resolved these challenges in different ways, each native to the way blockchains work. Bitcoin, which needs the consensus of core stake-holders and miners to evolve, ultimately split into two (Bitcoin and ‘Bitcoin cash’). Ethereum, which is led by its founder, Vitalik Buterin was able to guide the community to a number of “hard forks” last year, where the underlying software of Ethereum fundamentally changed. In the fast evolving world of cryptocurrencies, (not unlike other early stage ventures) the quality and credibility of its leaders is extremely important. Buying a cryptocurrency also means buying into the quality of its leadership team and governance structure.
6. Cryptocurrencies will only be valuable if they ultimately serve a real purpose
if they are used in everyday transactions by a large number of users - not just bought and sold by enthusiastic investors. This is not the case today. Many blockchains are still under development, building features that may or may not be valuable for their users in the future – much like Commerce One built software in the late 90’s – for which future demand and pricing was highly speculative. Others, like Ethereum are being used by other developers to extend the cryptocurrency infrastructure, but not yet used in consumer applications. Yet, a cryptocurrency will ultimately prove its value if it has a viable path to being broadly adopted by users, rather than just investors. If pets.com was built 10 years later when millions of users were connected to the internet via their mobile phones, it would have been more viable - as demonstrated by the fact that Chewy was sold to PetSmart for 3.35B$ last year. But in 1999, pets.com’s user-base was quite theoretical and speculative. Similarly, with so few people actually using cryptocurrencies for any kind of transaction, many of the use-cases of blockchains are still theoretical. Some have plans to kick-start their user-base into adopting their cryptocurrencies. For example, Telegram intends to leverage its 180M users to hasten adoption, and the Brave Browser, led by the founder of javascript, has issued tokens to allow browser-users to pay content owners.
Jeff Bezos famously studied multiple sectors before focusing in on books, because it was his way of finding “users” for his online store. He didn’t set out to create an online bookstore. He set out to create an online store for all sorts of goods, and books were the best way he found to get early user adoption. Similarly, those who manage to leverage the right use-cases to find persistent user growth, will be best positioned to survive the ups and downs of financial markets and emerge as the Amazons of cryptocurrencies.
Disclaimer
The content of this article has been approved and issued by TOP Fund Advisors SA for background, information and discussion purposes only and does not purport to be full or complete. No information in this document should be construed as providing financial, investment or other professional advice.
Authors: Salman Farmanfarmaian and Richard Rimer