Coinbase

One of the interesting things about Bitcoin is the contrast between how it is portrayed in the press and how it is understood by technologists. The press tends to portray Bitcoin as either a speculative bubble or a scheme for supporting criminal activity. In Silicon Valley, by contrast, Bitcoin is generally viewed as a profound technological breakthrough.

The Internet is based on a set of core protocols that specify how information such as text, photos, and code should be transmitted. The designers of the Web built placeholders for a system that moved money, but never successfully completed it. Bitcoin is the first plausible proposal for an economic protocol for the Internet.

This matters for two reasons:

1) It fixes serious problems with existing payment systems that depend on centralized services to verify the validity of transactions. These services are both expensive (roughly a 2.5% tax on all transactions) and prone to failure (Internet payment fraud is rampant).

2) More importantly, Bitcoin is a platform upon which new technologies can be developed. Developers have created some early applications, and speculated about future applications. Some potential applications include: a) micropayments as a replacement for banner ads or subscription fees, b) machine-to-machine payments to reduce spam and denial-of-service attacks, c) a way to offer low-cost financial services to people who, because of financial or political constraints, don’t have them today.

But to proliferate widely, Bitcoin needs a killer app the same way HTTP had web browsers and SMTP had email clients. That’s why today I’m excited to announce that Andreessen Horowitz is leading a $25M financing of Coinbase, a service that provides an accessible interface to the Bitcoin protocol. Consumers can use Coinbase to convert to and from other currencies and to pay for goods and services. Merchants can use Coinbase to accept payments and convert currencies. Developers can build new services using Coinbase’s API.

Coinbase has grown extremely fast and is now the most widely used Bitcoin service in the US. The founders of Coinbase, Brian Armstrong and Fred Ehrsam, have worked closely with banks and regulators to ensure that the service is safe and compliant. We think Coinbase can significantly accelerate Bitcoin’s proliferation, and as that happens the Internet will enter a new phase of invention and opportunity.

Some thoughts on startup crowdfunding

Like a lot of people, I’m excited about crowdfunding, and specifically the crowdfunding of startups now that’s it’s legal in the US. Based on my own experience investing in startups, here are some thoughts and issues that come to mind regarding startup crowdfunding.

1. Startup financings tend toward the extremes of being very oversubscribed or very undersubscribed. If you graphed out investor interest, it would look like a “U”. This is primarily the result of signaling – once a few investors commit (especially high quality ones), other investors pile on. If investors don’t commit, other investors start to wonder what’s wrong. So when you consider startup crowdfunding, it’s important to distinguish the oversubscribed cases from the undersubscribed cases. (Although one counter to this is that the U is the result of an inefficient market – when the crowds get involved valuations will float to their market clearing prices).

2. Historically, startup investing returns have tended to obey power laws (Peter Thiel has a good discussion of this phenomenon here). The vast majority of the returns came from the breakout hits. And if you go back and look at the early financings of breakout hits, a lot of them were hotly contested and oversubscribed. If amateur investors had been trying to invest in those startups via crowdfunding sites, they probably would have been squeezed out. If those amateurs were part of a syndicate, the syndicate lead would have felt pressure to drop them, at least for those hot deals. (Counterargument: the power law is caused by the myopia of traditional investors looking for the next Google. The crowd will be able to find new investments that greatly expand the set of successful startups)

3. Crowdfunding works best when the backers have special knowledge about the project that leads them to fund things that otherwise would have been overlooked or undervalued by traditional investors. This happens, for example, in the Kickstarter video games category, where most of the backers are game enthusiasts. The most promising scenarios for startup crowdfunding are where the backers are potential customers of the product (e.g. HR managers backing new HR software). This could also solve the adverse selection problem, as the startup founders would probably favor these backers over traditional startups investors.

4. When you look at the biggest crowdfunding markets – publicly traded stocks on NYSE, NASDAQ, etc – you find that a) In general, non-professional investors lose money when they try to pick individual stocks. This suggests that something similar to mutual funds would be the best mechanism for amateur participation. b) There is a constant cat-and-mouse game between regulators and sketchy market participants. If this happens with private financings, and more and more rules and regulations get added, many of the advantages of being a private company could go away.

5. Most successful seed investors will say that it is mostly about investing in great people, and it is very hard to evaluate people even after multiple in-person meetings. If founders are going to be evaluated online without in-person meetings, great care has to be taken to make sure the evaluation mechanisms are sufficiently nuanced and reliable. (The counterargument is that this might be true when individual professional investors evaluate startups. In the aggregate, the crowd can outsmart individual professionals even with fewer direct interactions.)

6. One way to look at startup crowdfunding is as the first step in a process that includes additional steps that prevent adverse selection, sketchy behavior etc. For example, a startup I know raised money recently from a single lead investor and then found additional investors via a crowdfunding site. They ended up rejecting many of the interested investors but found a few useful investors that they otherwise wouldn’t have found. In this model crowdfunding looks more like LinkedIn for investors – extremely useful for connecting, but only the first step of a process that includes interviews, reference checks, etc.

The Internet is for snacking

Web products have followed a steady evolutionary path from the compound to the atomic. Today’s popular social sites are spin outs of behaviors that emerged from blogs and forums, the primordial soup of the early social web. Before there was Twitter, people were doing something similar to tweeting on so-called link blogs or micro blogs. Tumblr was a direct descendent of a particular strain of blogs known as tumble blogs.

The successful products took big meals and converted them to snacks. The Internet likes snacks – simple, focused products that capture an atomic behavior and become compound only by linking in and out to other services. This has become even more so with the shift to mobile. People check their phones frequently, in short bursts, looking for nuggets of information.

A notable exception to this pattern are online products that users pay for. The dominant payment systems (mainly, credit card systems) were designed to be offline systems and only much later awkwardly grafted onto the Internet. They are inefficient and prone to fraud. As a result, paying online means making a commitment of time and trust. That’s why one of the most valuable assets an online business can have is “credit cards on file”. It is also one of the reasons there is a rich-get-richer dynamic for paid products. Big companies like Amazon and Apple are the beneficiaries.

The perverse result of this system is that products that are naturally suited to be “paid snacks” have to contort themselves to make money. News and music are good examples. Only a few news sites are popular enough to entice users to commit to paying, and even those have had only limited success with paywalls. Other news sites depend on intrusive ads to support themselves. Music is mainly purchased through aggregators like iTunes and Spotify who charge a hefty tariff. You need a comprehensive catalog to convince users to commit to a payment relationship.

In-app payments on iOS and Android are the one place where paid snacks exist at scale. They have been wildly successful, quickly becoming the dominant business model for games, replacing up-front payments and banner ads. (There are individual games that generate over one billion dollars per year from in-app payments.) Outside of games, entrepreneurs have started building interesting new products that wouldn’t have been viable without in-app payments.

This is one of the main reasons people are excited about new payment systems like Bitcoin. A broadly adopted form of “programmable money” has the potential to bring paid snacking to the rest of the Internet, and in doing so enable the save level of innovation in paid products that we’ve seen in the free and ad-supported products.

The idea maze

The pop culture view of startups is that they’re all about coming up with a great product idea. After the eureka moment, the outcome is preordained. This neglects the years of toil that entrepreneurs endure, and also the fact that the vast majority of startups change over time, often dramatically.

In response to this pop culture misconception, it has become popular in the startup community to say things like “execution is everything” and “ideas don’t matter”.

But the reality is that ideas do matter, just not in the narrow sense in which startup ideas are popularly defined. Good startup ideas are well developed, multi-year plans that contemplate many possible paths according to how the world changes. Balaji Srinivasan calls this the idea maze:

A good founder is capable of anticipating which turns lead to treasure and which lead to certain death. A bad founder is just running to the entrance of (say) the “movies/music/filesharing/P2P” maze or the “photosharing” maze without any sense for the history of the industry, the players in the maze, the casualties of the past, and the technologies that are likely to move walls and change assumptions.

Imagine, for example, that you were thinking of starting Netflix back when it was founded in 1997. How would content providers, distribution channels, and competitors respond? How soon would technology develop to open a hidden door and let you distribute online instead of by mail? Or consider Dropbox in 2007. Dozens of cloud storage companies had been started before. What mistakes had they made? How would incumbents like Amazon and Google respond? How would new platforms like mobile affect you?

When you’re starting out, it’s impossible to completely map out the idea maze. But there are some places you can look for help:

1) History. If your idea has been tried before (and almost all good ideas have), you should figure out what the previous attempts did right and wrong. A lot of this knowledge exists only in the brains of practitioners, which is one of many reasons why “stealth mode” is a bad idea. The benefits of learning about the maze generally far outweigh the risks of having your idea stolen.

2) Analogy. You can also build the maze by analogy to similar businesses. If you are building a “peer economy” company it can be useful to look at what Airbnb did right. If you are building a marketplace you should understand eBay’s beginnings. Etc.

3) Theories. There are now decades of historical data on tech startups, and smart observers have sifted through to develop theories that generalize that data. Some of these theories come from academia (e.g. Clay Christensen) but increasingly they come from investors and entrepreneurs on blogs.

4) Direct experience. A lot of good startup founders figure out the maze through direct experience, often at work. The key here is to put yourself in interesting mazes and give yourself time to figure it out.

The metaphor of a maze also helps you think about competition. Competition from other startups is usually just a distraction. In all likelihood, they won’t take the same path, and the presence of others in your maze means you might be onto something. Your real competition – and what you should worry about – is the years you could waste going down the wrong path.

FiftyThree

Steve Jobs predicted that tablet computers would become so dominant that “PCs would become like trucks” – special-purpose industrial devices. Skeptics replied that tablets were only useful for consumption and not creation and therefore couldn’t replace PCs, to which Jobs said:

We are just scratching the surface on the kinds of apps for the iPad…I think there are lots of kinds of content that can be created on the iPad. When I am going to write that 35-page analyst report, I am going to want my Bluetooth keyboard. That’s 1 percent of the time. The software will get more powerful. I think your vision would have to be pretty short to think these can’t grow into machines that can do more things, like editing video, graphic arts, productivity. You can imagine all of these content creation possibilities on these kind of things. Time takes care of lots of these things.

History supports Jobs’ argument. In the past, new user interfaces led to new categories of creation applications. Back in the 70s and 80s, when computers had text-based interfaces, word processors and spreadsheets were invented. In the 80s and 90s, when computers had graphical interfaces, presentation and image editors proliferated. Jobs was simply predicting that historical patterns would repeat.

Today we are announcing that Andreessen Horowitz is leading a $15M Series A investment in FiftyThree, a company whose goal is to build the essential suite of mobile tools for creativity. You might know FiftyThree as the company behind the iPad app Paper. Paper has been embraced by millions of everyday creators, and has won dozens of awards (including Apple’s App of the Year). It is also one of the top grossing iPad productivity apps ever. But this is only the beginning of FiftyThree’s ambitious plans.

The FiftyThree team spent their careers working on breakthrough computing projects, including lead roles on Office, Kinect, Sonos, and the Xbox. Particularly relevant was a project they led at Microsoft called Courier that has been widely praised as a visionary take on tablet computing (unfortunately, Courier was never brought to market).

FiftyThree didn’t need to raise money, but decided that the opportunity was so large that it made sense to accelerate their efforts with additional capital and resources. They’ll be expanding their engineering teams in New York and Seattle, and will broaden their offerings across software, services, and hardware.

I first met the founders in New York in 2011, and have since spent a lot of time with them. I’m convinced that they are one of the most innovative design and engineering teams in the world. In the past, they reimagined how we play games, view images, listen to music, create documents, and more. With FiftyThree, they are rethinking the very way we create and collaborate on ideas. I couldn’t be more excited to be involved.