Overwhelmed by all the ICOs and different crypto-coins out there? Some thinking on how to evaluate them

The is the second article in a series on crypto-currency. If you landed here and don’t feel like you have a good understanding of what crypto is I would encourage you to read part one. I wrote that after I got frustrated with attempts of others to explain the concept to me.

Recap – trust by design and its implications

So to recap from the last article, crypto is really about helping people exchange either money or some other good or asset via a system where trust is built in by design. Why? Because all crypto-currencies are backed by a form of blockchain, a distributed digital ledger that ensures that the asset you are exchanging is what you think it is (the “what” of the trust promise), is actually held by the other party (the “where” of the trust promise) and that you are dealing with the party you thought you are dealing with (the “who” of the trust promise). The “chain” part tells us something about provenance (ie. where something came from) which might be useful for some applications. We can think of the “currency” part as bolted to the “crypto” part in order to incentivize the actors who help maintain the blockchain (in the case of many other crypto protocols). In the case of bitcoin it also represent a store of value.

Trust is essential for the exchange of anything —trust that dollar bills you are receiving are not counterfeit, that a Gucci bag you are buying is actually a Gucci bag, that the property you just bought wasn’t previously sold to someone else, that the person you are hiring actually went to Stanford, etc. Without a history of previously dealing with someone, to reduce risk you have to rely on a third party trust provider like an escrow agent, a background check company or a government agency. Doing so is costly — in that you either take a risk, or you pay for those 3rd party trust services or you don’t transact at all.

Now we get to the logical leap that I want to examine today. Because almost all exchanges of stuff require trust and because blockchain provides trust by design, then, crypto-currency advocates would have us believe, there is potential blockchain company for any exchange. As a result we have so many new blockchain based solutions cropping up every month that it is hard to keep up with them.

In this article, I want to examine that assertion and see under what conditions it might hold up. From there we will be much better equipped to figure out the strengths and weaknesses of each crypto company or ICO.

Let’s not yet evaluate protocol tokens, yet!

Lets start by ignoring tokens that are protocol-level or purely designed for the transfer of wealth. These are a little harder to evaluate because these likely succeed and fail based on various technical factors (security, speed of transaction processing/confirmation, transaction costs, etc), your belief in the success of tokens system that are built on top of these protocols and “animal spirits” that places faith in the value of the protocol token as a store of wealth.

Just so you are clear about what I mean by this I will mention an example.

Ethereum is a protocol token that actual serves two purposes.

First it is a token that the market seems to value as a store of value. This is due in no small part to the fact that its development was directed to address some weaknesses of Bitcoin (namely, slow and costly transactions).

Second, it is also a smart contract system. What are smart contracts? These are zero-denominated transactions which encapsulate a set of instructions. In its most basic form (and this represents > 99.9% of all smart contracts at the moment), those instructions describe a transfer of some other token from one person to another. So if I wanted to create a new token called AndrewCoin, instead of creating my own blockchain infrastructure I could just decide to build it on top of Ethereum. Any transfer of AndrewCoin would simply be described in a Ethereum contract which would be added to the Ethereum blockchain. By abstracting all the hard crypto stuff, Ethereum has made it really easy to make a crypto token. So easy that Ethereum gives you instructions and other websites are popping up to help you create a cryptocoin in seconds. Ethereum is happy to provide this service because it generates a small transaction fee to help pay their miners and that drives growth in the use of their protocol.

And ,if the protocol grows, the price of Ethereum coins will increase (as supply is more or less fixed). And if people perceive that Ethereum is growing in adoption then people are more likely to see it as a store of value (which also creates positive pricing pressure because more people hold their coins, reducing supply). A nice positive feedback loop.

Heads up, I like protocol coins, but more on that in another post.

The great unwashed masses of non-protocol tokens

Lets first get out of the way the ridiculous coins that really don’t deserve a place on the face of the earth. That many of these hold some sort of value is a testament to the hype in the market.

Let me give some prime examples (it would be impossible to give an exhaustive list).

Dentacoin … a cryptocoin that is accepted as payment in some dental clinics (market cap: $138M)

Unobtanium … a cryptocoin whose only purpose is to be rare (market cap: $40M)

Trumpcoin … a cryptocoin that is somehow supposed to help Trump’s agenda (market cap: $625K)

Whoppercoin … a cryptocoin that you can use to buy Whoppers at Burger King in Russia (market cap: worthless but still trades)

BitCoen … a Jewish cryptocoin (apparently successful but can’t find the market cap because Google thinks I am misspelling Bitcoin)

Incredibly, people are investing in these and other similarly dubious crypto coins. Worth checking out is yetanotherico.com that auto-generates an ICO website. This would be pretty damn humorous if not for the sad fact that people are investing in these things.

If only there was a way to short crypto coins …..

What about coins that purport to serve some sort of trust-related purpose? 

Then there is a long list of coins that articulate a reason for being.

I’m now reading more “white papers” than when I was in unversity 

Usually the best place to look is the top righthand corner of their website where there is usually a link to the “whitepaper” for the coin. This should explain what the coin is designed to do and why it is better than the pre-crypto alternative. Some of these are written as marketing copy while others are more technical. Most serious investors take the time to read these because they tell you a lot about the quality of the team and the technical underpinnings of the crypto system that they propose to use.  (Unfortunately many these are of poor quality, leading to commentators openly drawing comparisons between crypto white papers and toilet paper (see here for example), with the primary difference being that only toilet-paper comes pre-rolled. )

When I review whitepapers, the principle question I try to answer is “what problem is crypto trying to solve?”. And not just solve but solve considerably better than the existing market. In entrepreneurship, the adage goes that you either should be making a whole new market or need to be 10x better than the alternative in an existing market. There is no reason why this equation shouldn’t hold also for any new crypto business. Blockchain might be the beginning of internet 3.0 but we shouldn’t forget that there is an Internet 2.0 that is doing reasonably good in many areas. In other areas, blockchain could really step things up. The key is to figure out which areas.

So lets talk about some lenses of “trust”.

Trust that the asset actually exists (the “where” of trust)

Bitcoin is unique in that it is entirely encapsulated by the protocol. It defines how bitcoin is created, it defines what it is,  it defines the only way it is transacted and it defines the only way it is stored. Nothing exists outside of the system. In fact the only moment of trust involved is when you fund a wallet with money from your bank account (was the money yours? is it clean money? etc). And the bitcoin network doesn’t take that risk, bitcoin wallet companies do.

As people have sought to bring blockchain to other areas of commerce, there is a provenance problem that is hard to overcome. Let me refer back to an example I gave in a previous post – that of BRICKS, a blockchain for transfer of real estate. Lets assume it is universally adopted.

While my blockchain could irrefutably prove that I am the owner of a house at 10 Emu Flats Drive in Darwin, Australia, how do you know for certain that there is actually a house at that address, or even that that address exists? You are placing faith in the person or entity who created the asset in the first place. Such a problem exists whenever blockchain is designed to facilitate the transfer of physical assets or services. In those cases ownership ≠ existence. You’ll still need to involve an escrow agent or other 3rd party to ensure that that asset exists.

This is not a contrived example. Take Syscoin (market cap: $220M), for example, marketed as the Ebay of crypto. You list your goods and other people buy them for Syscoin. Their value proposition for the customer is that there are no transaction fees. But there is similarly no guarantees that the product you are buying exists and transactions once undertaken cannot be reversed.

Trust that the asset is actually owned by me ( the “who” of trust)

Bitcoin by design ensures that you cannot sell the same bitcoin to more than one person. It does this two ways. First, the only way you can transact bitcoin is via their blockchain. Second, for a transaction to be accepted on the blockchain, the person sending the bitcoin needs to have enough in their wallet.

Lets say I sell you my house on the BRICKS exchange. You are comfortable that the house exists as you have visited and seen it with your own eyes. You are ready to transact. There is a problem however – I have already sold the house to another party outside of BRICKS. The BRICKs blockchain doesn’t know this because that transaction was “off the chain”. Once again the only solution is some form of escrow or land title registry, which is exactly the trust entity that you were looking to avoid by moving to blockchain.

There are many ICOs underway that seek to implement such title transfer systems for houses, cars, boats, etc. But if you cannot ensure that such a system is the only way to trade (which would require a government-backed solution) then this problem is hard to address.

Trust that the asset is correctly described (the “what” of trust)

Bitcoin as a system encapsulates precisely what a bitcoin is. As a unit of exchange such a description isn’t particularly descriptive but includes two really important elements – first, a numerator, and second, a denominator. Any time you look at your bitcoin wallet you know what you hold and you can also know how many bitcoins are in circulation and how many are trading at any one time.

Ever bought an item on Amazon marketplace that wasn’t new? For example, something that was described as “like new” but when it arrived you discovered that it looked like it had been chewed up by a dog? Amazon or the marketplace vendor will refund that for you, something which is paid out of the margin they earn selling the item. How does that function in the blockchain world?

Take for example, Blocklancer, a blockchain based marketplace for the freelance services. I execute a smart contract that describes I will pay $1000 for a piece of code for a website I own. The smart contract is executed once the code is delivered. But what if the code isn’t fit-for-purpose? How do I ensure the quality of the service that is delivered. Their solution, at least so far, is that they help “vet” the exchange of services. Which is, once again, putting a trusted 3rd party into the transaction. The “what” of the exchange is not encapsulated perfectly by the transaction (and if it was you wouldn’t need the developer in the first place) so you have to trust a 3rd party.

And to illustrate the importance of understanding the system that a coin would trade in lets talk about Astrum, a new token that is designed to be a medium for payment for fashion items. Any tokens you hold are something of a claim on the network they would create — the more the network is adopted, the more valuable the coins. But recall that transactions for fashion items can happen off-the-chain as well with good old cash. So how can you really understand demand in a system where there are substitute transaction paths.  Said a different way, if everything that would be sold using such a crypto-currency also has a way to be transacted in US dollars then the value of the crypto-currency is effectively pegged to the US dollar. The only reason for a movement in the currency would be pure speculation.

So what? Are there some principles to follow?

It might seem that I am pessimistic on blockchain and crypto. I am not! I believe that it can solve some fundamentally interesting the situations. But it isn’t a solution for every trust situation and it scares me when I see crypto-currencies in the market that have valuations north of $50M that can’t explain why they are significantly better than the alternative . I wouldn’t invest in those businesses as an angel investor and so I don’t see why someone would invest in their tokens. A lot of people are going to lose money.

There is no golden rule to separate a good blockchain company from a poor one. There are a few rules though that have proved helpful for me:

  • Digital over physical. Digital assets just seem to be more able to be encapsulated by a blockchain system. Some examples might approaches to managing digital identities, digital asset management (eg. images, audio, video), managing your own privacy and data, monetizing your online attention.
  • Where provenance is a big issue.  Often quoted examples include supply chain solutions for rare things like diamonds, artwork, high fashion, etc. The difference in value between real versus fake (or for example ethical versus blood diamond) is high, so solutions that help mitigate some of that risk (even if not all of that risk) have the potential to be valuable.
  • Consortium approaches. I’m much more excited by solutions where existing players with a large part of a market are willing participants in a solution. For example, a blockchain for high fashion could work if major players were foundational members and agreed to create an entry in a blockchain for every item that is manufactured.
  • Solutions that bring existing collateral. Too often blockchain companies assume that that other stuff that is not “trust” is not necessary for creating value. But companies like Ebay are not just trust marketplaces – they provide features, UX, liquidity, and much more, that is valuable. New crypto-based solutions would also need to build these in order to create value. Now if Ebay said they were going to put their user and reputation system on a blockchain and open it up for others to build on, that would be a really interesting idea ….

Help me complete my list. If you have another principle that is helpful, please let me know.

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I hope that this has been helpful if only to reinforce that it is important to approach companies and ICOs in the crypto space with a healthy dose of skepticism.

Next in the series will be a review of protocol coins and how to assess value in them.















I got frustrated by people being unable to explain crypto to me, so I wrote this.

A simple an explanation for crypto, why it is a currency, and what are the beliefs that drive value.

Next year cryptocurrency will celebrate its 10 year anniversary. It has jumped from being a fringe “something” supported by anarchists, to an investment category for VC and hedge funds to something that your average Uber driver is likely to bring up on a trip. It has grown from nothing to >$300B in market cap making countless millionaires in the process. And, yet its still really hard to get a simple, understandable explanation of what is it and why should it be important?

I’m a rationale s-o-b. The only times I got detention in primary school was when I kept asking “why” questions in class. I want to know why things work the way they do or why people hold the beliefs that they do. This doesn’t mean that I need to know the future with perfect clarity.  In the investing world, if something is 100% crystal clear then you are typically too late. But I find that if you ask enough “why” questions you will at least arrive at a clear fork in the future road and as an investor you can at least make an informed choice about which future you want to invest in.

So this is my evolving take on crypto. I hope it helps you in your evaluation of the space.

What is crypto?

Most confusion about crypto stems from the fact that it is actually not one thing but two.

An alternate currency system

Crypto-currency started around the time of the global financial crisis primarily as a reaction to two things. First, the fact that governments control the monetary system and the means to debase the currency through printing more of it. At the time, governments around the world had just lowered interest rates to record lows and there was a lot of fear that this would spark inflation, thus inflating away the value of the currency you held. Second, the financial system was seen as getting increasingly complicated with an intricate web of lending, leveraging and so on (often referred to as the fractional lending and (re)-hypothecation system ). There was a fear that if things really went south, the money that you had stashed in a bank may not actually be there when it came time to withdraw it.

Crypto developed as an attempt to solve these two problems.

First, it avoided the problem of inflation because the rate of growth in the crypto money supply is often predetermined or fixed. In the case of the bitcoin market there were two predetermined constraints on growth in the money supply. First, new bitcoins are created when bitcoin miners (actors who are also responsible for maintaining the bitcoin transaction register – more on this later) successfully solve a mathematical problem that gets increasingly more difficult as more miners and processing power is added to the bitcoin network. Second every 4 years the reward for solving this mathematical problem halves until a total of 21 million bitcoins is reached and new mining is stopped.

Second, it avoided the problem of assets not being there when you wanted to withdraw them by creating a distributed ledger to record exactly who owned which bitcoin (or fraction of a bitcoin). That the ledger was distributed made it much harder (basically impossible) for your bitcoins to be moved without your consent/knowledge. The same could not be said about the traditional banking system in the 21st century. This ledger is what is referred to as a blockchain, an endless linked set of transaction blocks through which you can determine the provenance and ownership of bitcoin.

It was not surprising that early adopters tended to be the same sorts of people who believe that we should return to a gold standard for much the same reason. Physical gold would hold its value because you could only mine it so fast and you could hold it in your hand. But unlike gold, crypto was more easily transferred between parties and didn’t require a vault to store its value. It was, for all intents and purposes, a digital version of gold.

A trust system

Not long thereafter, it became apparent that this distributed ledger was itself an important innovation. Traditionally, any successful exchange between parties requires trust. There were typically three sources of trust – you either had a history with the other party that mean you knew you could trust them, you relied on an objective/impartial third party (like an escrow or custodian service) or you relied on the government (for example, a government land title registry to certify title to property). All three of these trust methods is expensive to establish (as measured in either cost or time).

Trust is even more important in a digital context. Digital assets can in theory be reproduced infinitely. The use of a blockchain removes this characteristic and confirms that each unit of value was transferred only once, solving the long-standing problem of double spending. Thus blockchain itself could be seen as a fourth trust alternative. One where the system itself by design creates trust between parties. And because transactions on the blockchain can be verified inexpensively, this should be competitive cost-wise against other approaches to trust.

A number of applications have been proposed that take advantage of this potentially lower cost trust based approach. For example, the Sweden Land Registry is currently piloting a blockchain-based approach to registering land sales, with the aim of demonstrating the effectiveness of the blockchain at speeding such land transfers. Another company, Publiq, is using blockchain to validate authorship of content to help combat fake news. Other solutions have been proposed that track provenance of goods, ensure diamonds are conflict-free, track food as it moves through the supply chain. The list goes on.

The hype about such solutions is real and it is fueling, to a large extent, the smart money that is moving into this space. Attend one of this talks and you’ll find most “commentators” on the space will refer to the trillions of dollars of enterprise value that Facebook, LinkedIn, AirBNB, Alibaba and UBER command for “essentially providing trust networks”. I’ll let you judge how much you believe this assertion. While it is clear that “trust” would seem to be a necessary condition for the success of those businesses, is it sufficient on its own or are there valuable features to each of those products that have made them successful?

The judge is still out as so far none of these blockchain based solutions has yet been commercially adopted.

Why does the “currency” in crypo actually exist?

This is a great question that I don’t think gets asked enough. In its purest form, crypto currency exists mainly to compensate those companies that maintain the ledger for the service that they provide for doing so. And to some extent the fee that is set depends on the scaleability of the underlying algorithms that power the currency. Bitcoin, one of the earliest protocols, is also one of the most expensive to maintain, with each transaction costing on average $23 dollars to process. Later protocols are less expensive to maintain and therefore in theory cost less to transact with. For example, Ethereum (or Ether) costs $0.33 per transaction.

As no actual currency is exchanged, that transaction cost is allocated in units of cryptocurrency. And for that cryptocurrency to be converted into dollars so that  companies that maintain the blockchain can power their servers, there needs to be a market  for converting crypto-currency to actual currency.

At least until the entire world runs on crypto-currency and you can pay those bills in bitcoins. So the proponents would dream!

What is the market value of a cryptocurrency?

So now we know why it exists, the next question is how do you value what it is worth? This turns out to be a not an entirely impossible question to answer.

“Mining” a new bitcoin requires a tremendous amount of electricity and computing power and that can be measured in dollars and cents. For example, it is under $4,000 in Louisiana and over $9,000 in Hawaii. (Sadly the entire bitcoin mining industry is now consuming the power required to supply 2 million houses. This is not a clean tech.) So there is something of a supply curve for bitcoins that are mined, that is a range of miners who have different mining costs based on the equipment that they use and the cost of their electricity.

Thus, if the value of a bitcoin goes up, low cost miners might add more computation to mine more bitcoins or higher cost producers of bitcoins can come online. If the rate of mining increases then the computing power required to mine a bitcoin also goes up (recall that this is a feature of bitcoin to ensure that the upper limit of of 21m bitcoins is not exhausted before 2040). If more bitcoins are mined then this should add supply and create downward pressure on the price of bitcoin.

Said differently, whenever the price of bitcoins exceed significantly the cost of mining a bitcoin, there is a natural tendency for the two values (price and cost) to converge. Such a relationship also holds when the price falls below the cost to mine.

This is not a feature unique to bitcoin. As the gold price or the oil price increases it becomes economical for gold or oil producers to mine more fields or increase production. As that increased supply hits the gold or oil markets it tends to create downward pressure on the market price.

Unlike gold and oil however, it is infinitely easier to hold bitcoin. While large hedge funds can afford to fill oil tankers and float of the coast of the US waiting for such a convergence, such strategies are generally not available to ordinary investors.

So what are the risks of investing in crypto-currencies?

While easier to hold, crypto-currency has a few disadvantages that are no immediately obvious.

First, crypto-currency doesn’t have the same sort of stopgaps that exist in those other commodity markets. There is not a natural demand for bitcoin in the way that there is for oil or gold. The price of oil will never fall to zero simply because (i) we need oil to power our economies and (ii) the cost of oil production will always have a floor above zero. The same can be said for other commodities and precious metals. Bitcoin is really only intrinsically worth as much as people value it (more on that point in a second).

Second, bitcoin mining supply can be increased or decreased relatively quickly. Certainly more quickly than oil fields can start or stop production or gold mines can ramp up or down their mining. It would follow that this would tend to increase the speed of convergence between price and cost. And if the velocity of convergence is sped up, this would tend to lead to overshooting in either direction. Hence, much more volatility.

But does bitcoin really have no intrinsic value?

You got me. I wasn’t totally accurate when I said that bitcoin is really only intrinsically worth as much as people value it. There are a few possible sources of intrinsic value. So lets investigate them.

1) Cryptocurrency as a solution to people wanting to do illegal things

While the bitcoin blockchain is public – that is, you can see which bitcoin address owns which bitcoins – the bitcoin system does not require that the identify behind each address be public. It offers relatively anonymity.  Banks on the other hand, in most jurisdictions are required by law to KYC their customers and often are required to report unusual transactions and customer identities to tax and criminal government authorities.

Being a global system, bitcoin facilitates the international movement of illegal money that otherwise wouldn’t be possible without professional money laundering. Think planes flying lower over borders carrying bearer bonds, gold or good old fashioned greenbacks. Why take all that risk when you could simply transfer bitcoin?

For sure this creates demand for crypto-currency, but how sustainable is it?

Governments are very actively trying to close down this money laundering route. How might this affect the price of crypto-currencies? Well, when the Korean government announced a crackdown on crypto-currency on 23 January 2018, the price of bitcoin dropped 25%. So it is pretty clear that either actual illegally-derived demand (or the perception of it) is helping drive the value of crypto-currency.

But it is also clear that the value crypto as an effective way to launder money will decline over time.

2) Crypto-currency as a tax-free investment class

In 2017, people who were early in crypto-currency made a killing. Ether was up 13000%, while bitcoin notched close to 1400% returns. Now if crypto-currency was actually a currency then these returns would essentially be considered tax free and most jurisdictions don’t tax currency gains and losses unless you are a professional trader! Not having to pay tax on your gains is a pretty cool source of intrinsic value.

Unfortunately, in recent months the IRS (and most other tax jurisdictions) have indicated that they are treating crypto as a tradeable asset and thus subject to capital gains taxes. They have also indicated that they are stepping up enforcement activities. Large crypto-wallet companies are being made to verify the identity of their customers and report users who make excessive gains.

So the tax-free window on crypto-currency is rapidly closing as will its contribution to intrinsic value.

3) Crypto-currency as a way to transfer money internationally with greater ease

The argument goes that the international monetary system is a slow and costly drag on the international movement of money. As an entrepreneur who has run a multi-national startup (as opposed to a multi-national!) I have felt viscerally the pain of having to transfer large sums of money. Even the latest generations of international payment companies like Transferwise charge 0.5-1% in fees to facilitate a currency transfer when the underlying spot FX market spread is barely 5 basis points (0.005%). Surely crypto-currency can help with that?

Well, we are soon to see as there are a number of new crypto-backed money transfer startups. My hypothesis is that this will fizzle. Why? Well the majority of costs for a money transfer company are customer acquisition, compliance/fraud and treasury management. All of these would exist for a similar crypto-backed company, especially if governments require the same diligence on such money transfers. Those costs ultimately have to be born by consumers.

Then to be effective such transfers would either have to be denominated in crypto-currency or else someone is taking a significant cross-currency risk. Take for example a money transfer from USD to EUR. If the transaction was conducted sequentially then there would be USD-to-bitcoin and bitcoin-to-EUR risk; if it was conducted simultaneously then there would still be USD-to-EUR risk. And you would still be able to move only as fast as the networks you use to move currency to and from the user’s bank.

Layer on top the fact that crypto-currencies tend to move more rapidly than actual currencies. If that risk is held by the consumer then that adds significant variance to a money transfer; if held by the transfer company then they would have to pass that cost on to the consumer. There is no such thing as a free lunch when it comes to exchange risk – someone always has to pay.

4) Crypto-currency as a lower cost “trust-based” transaction method

Recall that trust is built-in by design in a crypto-currency, and this surely has value. In the future, I possibly won’t need to pay for a land title search or engage an escrow company to facilitate a transaction with a party. Valuable, yes!

So what is that worth? A report by Allied Market Research indicates that this market could be worth $5.3B by 2023. Small fees received for transactions in blockchain distributed ledger apps, the elimination of third parties escrow/custodians in business deals, and a reduction of fraud & identification costs will be the main factors driving growth, the research said.

$5B is not small by any means!

It does, however, pale in comparison to the approximately $300B market cap of the global crypto-market.

5) Crypto-currency as a way to profit from growth in demand for the underlying protocol

The last argument is that crypto-currency should be seen less as a currency rather as a way to essentially monetize underlying protocol. Think of it as more like equity.

Let me take a stab at explaining. Say I create a crypto-ledger to track property ownership and transactions. Lets call my currency BRICKS. As I created the protocol, I can set the rules as to how many BRICKS there are, how they are created and how companies that help maintain my ledger are compensated. If I can become the defacto blockchain for real-estate transactions, then any real-estate transaction would need to be registered on my blockchain.

As registering each transaction would require some amount of BRICK, more transactions would require more BRICKS. As I control the supply of BRICKS, if the growth in transactions exceeds the growth in BRICKS, the price of BRICKS would increase.

Say you like my company and want to invest in it. There are two ways you could do that – first you could buy equity in my company for $$$ (the traditional way). Second, you could exchange another crypto-currency  for some of my BRICKS. Either way you profit if my protocol gets adopted.

The same argument is true for companies focused on building a crypto solution as a source of stored value (eg. bitcoin) or building a trust solution (eg. my BRICKs company). The main difference is that in the former your bet is slightly more based on animal spirits while the latter is a bit more based on features that might help drive commercial adoption.

So what is an ICO?

An ICO is an initial coin offering. This is essentially the the second case described above – the case where you are investing in my crypto-currency because you believe my solution will be adopted and therefore the price of the token you are buying will increase. So an ICO has equity-like features but is not strictly equity.

But like equity it will rise of fall based on the adoption of the underlying protocol. In the end, many of these currencies will be worth little to nothing and there will be several winners. Given the significant overlap in value propositions across many offerings, expect a shakeup.

I plan to follow up this article with an analysis of some of the different ICOs and tokens.

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I’ve learn a lot in simply writing this short article. I hope that you find it helpful. Feel free to comment if you think I have missed anything or am misrepresenting anything. Like most of us, I am still learning about this space.





How to hire great product managers and learn something about your company in the process

Probably one of the most critical roles in a technology startup or project is that of the product manager. In a startup, this is typically the first hire that wrestles some responsibility away from the startup founders who, until then, are typically responsible for driving product development. In a larger company this is often the informal CEO of a new product, tasked with taking an idea or powerpoint strategy and turning it into a viable product.

As someone who has built from scratch and managed large teams of product managers, I am often asked for advice one how go about finding and hiring a great product manager or building out a great team. And if you have worked in technology for a long enough period of time you are going to have run into CEOs/founders/executives who have really strong and diverging opinions about product managers.

Lets start with some facts.

First obvious fact: there are wide range of product managers out there. If you look at a broad cross-section of product managers you’ll find people with engineering degrees, others with design degrees, others are mathematicians, and many with no degree at all. Some will have been doing the job for many years, others seem to have walked into the job yesterday. Why?

Second obvious fact: there are a wide range of opinions about the impact product managers have on the success of a technology enterprise. I am talking about beyond the general mistrust of product managers by engineers. Even more curious, I frequently run into product managers that previous managers rave about that I wouldn’t think to put into one of my ventures. Why?

Third obvious fact: most folks consider product managers as one of the most difficult roles to hire for. Like success rate well under 50%. They can comfortably spot a great engineer or financial controller or marketer, but not a great product manager. Why?

There is only one way to reconcile these views — that the challenge posed by each company is not the same, that the skillset and competencies that each product manager brings is not the same and that, most importantly, this is likely to change over the live of a product/business.

This leads to three core questions:

  1. What challenge is driving the need for a product manager?
  2. What type of product manager best meets that need?
  3. How and where can I find that person?

The product management challenge driving the business

Most every entrepreneur has heard of the term product/market fit, though most of us would struggle to define it or recognize it when we see it. Partially this is because it follows a somewhat circular logic (each define and influence the other) and because markets and products are constantly changing and evolving — they never stand still. Typically the growth of a product or startup is an exercise in figuring out this fit —and the challenges posed of the company, and therefore the product manager, change as the fit gets tighter.

Exploration stage. In the early stages of a company, the product that you are planning on developing defines the addressable market, while at the same time the market and its particular characteristics similarly define the product. This bouncing around the product/market dance-floor is characterized by rapid iteration, a need to confirm or validate hypothesis as quickly as possible through all available means — research, interviews, technical proofs of concept, customer validation tests, etc. This is the stage where epiphany probably plays the most important role in the company’s success, often coming from the interplay between what engineering is capable of delivering, what customers/market is saying and what various business models might enable.

Growth stage. There comes a point where a sufficient number of early users of the product enjoy it, however that is defined — retention, engagement, surveys showing customers would be disappointed if the product ceased to exist. The product may not be very well fleshed out, there could be manual hacks behind the scenes, and the product will probably provide only a small subset of its desired feature set. But it has a good idea of what it need to be and there is a relatively plausible set activities spanning months that helps deliver that. Here agile becomes more important and a well functioning product team relies on epics, stories, and scrum meetings to ensure that the product progresses in a methodical fashion. Once the product has launched, the company begins to focus more attention on high level metrics of lifetime value versus acquisition costs as a way to arrive at the point where the product can scale.

Optimization stage. With the formal product launch in the background and core metrics of the business at or close to breakeven acquisition, the attention often turns to optimization. To thrive at this stage the company needs to have a deep understanding of business drivers, registration and purchase funnels, segmentation and the performance of different customer cohorts by time, market channel or geography relative to the average. There is a lot of number crunching. Identified problems are often attacked through a process of hypothesis generation and rigorous A/B testing. Gut feel is not worth anything unless it passes a live experiment.

The best product manager given the challenge

Experience has shown me that, while there is a core set of capabilities that all product managers may have (more on this later), typically product managers have environments in which they excel and those in which they do not. This is not that different to engineers – some are very good at “hacking” while others are very good at refactoring and building for scale. There is no right answer — just what is right for your business or product at a given time.

Most product managers fall into several of the following profiles.

Innovators. This type of product manager is naturally curious, full of energy and extroverted. They get excited talking to others about their ideas for a product, and thrive in researching a market and taking to as many people as possible in order to find promising “angles” with which to shape a product or define a market. Their job is to solve unknowns, and prioritize their efforts and those of their team on formulating and then proving/disproving hypothesis as to the problem the product is trying to solve. Fast failure and pivoting is typically embraced by innovators — a necessary learning step on the path to success. Innovators tend to make decisions based more on intuition and customer research than rigorous process. Innovators, more often than not are former (or future) entrepreneurs. This profile is a natural fit for the hectic early days of a product where the most important exercise is rapidly seeking out the product market fit. At that stage, too much process and project management can often lead to overlooking the most critical question — is what we are going to build something that will sell?

Architects. This type of product manager is more traditional, the type of person that probably would have attended an agile course or two and is able to “agile” speak with the wider team. They are adept at meeting with and taking in requirements from various parties, turning those into epics, stories and sprints for the team. A project will not run completely off the rails with this product manager at the helm, and you can expect dashboards and burn-down charts that will keep the team and the company informed on the current state of development. This product manager is most likely to insist on QA testing, staging/release servers and other procedures that make sense once moving beyond beta. This profile is a natural fit for companies that are in a growth stage. Enough is known about the product/market that the emphasis shifts to solid execution. And solid execution requires someone who can make the different contributors to a product’s success — engineers, designers, marketers, finance, etc — all work together behind a plan that delivers a launch in a predictable, though not necessarily precise, timeframe. For start-ups this is particularly important, because that predictability is probably what is most needed in order to hit the next milestone for funding.

Optimizers. Optimizers prioritize everything they do with reference to the data. Highly adept at slicing and dicing Google Analytics, they strive to understand why customers are doing what they are doing and how this can be tweaked to improve overall performance. They get excited by their ability to make small changes to highly trafficked websites that drive big changes to the bottom line. They often do not feel the need or comfortable in relying on gut instincts, instead insisting that A/B testing is the only way to ensure that the overall product moves in the right direction. Optimizers, as you can probably guess, are ideal for better established products where product economics might have slowed after all the early obvious wins have been realized.

Just as companies often find themselves moving between more than one stage (eg. the market or technology changes that leads to the need to re-invent) or occupying more than one stage (eg. one product feature might be quite mature while another is experimental), so to are product managers not necessarily falling strictly in one of those definitions. In fact, I have found that the top 10% of product managers actually can be very effective across all situations — they adapt to the demands of the situation. Having said that, it’s often not difficult in an interview to figure out where their sweet spot is based on whether they get most excited talking about exploration, process or analytics.

How and where can I find that person that I need?

The search

The million dollar question is how to find a great product manager for your company. The above discussion highlights probably the most important aspect which is finding the right type of product manager for the problem you product or business is facing. The where is somewhat derivative of the what.

Innovators. To find and assess innovators, I look almost exclusively to people that have founded or worked in very early startups. They will know and understand the energy and time pressure required to test, assess, iterate, repeat until product/market fit is clearer. I’m not particularly concerned about the success or failure of their venture (lets face it, it probably failed if they are looking to be a product manager) but what they learned from that experience and what they want to learn from this one. The right answer is usually that they eventually want to go an built their own company and if they will give me 2-3 years of fully committed time, I’ll typically even support them when they eventually head off.

Architects. To find architects, I tend to look for folks who are already working in the role in another startup. They will have already done product management for 2-3 years and will be able to hit the ground running. Sometimes, a transitioning consultant (especially after business school) is good for this type of role especially if they will be working with a more senior product manager. If anything, I tend to be slightly wary of folks that have been product managing for a long period of time, especially in the same industry. That for me is typically a red flag — and unfortunately a profile that you see in 80% of recruiter referrals — because ambitious product managers often graduate to other roles. I find that product management is almost exclusively a functional skill (problem solving) — good product managers can excel in any domain and typically want to switch between different fields during their career. I would much rather take a smart product manager from a totally different industry and bring them across that someone who seems to be hopping every 2 years between companies in the same industry.

Optimizers. To find optimizers, I tend to look for people who have a strong quant or finance background, even if they haven’t previously been product managers. It really is incredible how many product managers are driving paid acquisition and revenue without really understanding anything about segments, conversions, virality, etc! I’m also really excited if a candidate can do some basic front-end coding or is eager to learn because there is nothing more powerful than a product manager who can optimize on their own.

The interview

Before the interview, I will typically have done a pretty brutal weeding of candidates to find (i) those that match the type of product manager I am looking for, and (ii) those that just look driven and ambitious (good school, fast progression in roles, self-taught programmers, etc). I often also do a very quick 15 minute interview with the candidate to tell them about the role and to prompt them with 2-3 questions to check that they are switched on.

For those that come to an interview, I tend to spend 80% of the interview doing case studies with the candidate. Because product management is a functional skill and because it depends so heavily on the candidate’s problem solving skills I like to stay away from spending too long a candidate’s past history or my job opportunity. This gives me a better read on the candidate’s core skills, rather than their level of preparation.

I’ll often try and brainstorm wth the candidate a hypothetical product/market issue. For example:

  • Imagine we started today to build a business-only airline between London and New York. What would the product be and how would we make money?
  • Given the rise of app-based food delivery, I want to start a chain of high-quality kitchen that make food for delivery-only. How can we figure out if this is a good idea?
  • Imagine you could reprogram the lift in my apartment building. What would you do so that the average occupant waits less time for the lift?
  • I have a website that is a marketplace for tutors but my acquisition costs are too high. What can I do?
  • I took an Uber the other day and the driver was an accountant from Ghana. What business can we do to help immigrants work in fields for which they are qualified?

I tend to make this question up on the spot, based on whatever musing I have had that day. There is never a right answer to the problem (and frankly the variability keeps me engaged across multiple interviews on the same day).

The key to the interview is to get a better sense of how the candidate thinks. If I’m looking for an innovator, I hoping that they get excited, have ideas, check-themselves when they imagine roadblocks, and intuitively figure out points of leverage that the business would depend on. If I’m looking for an architect, I’ll dive deeper into the how of building the business to try and see if they are structured in their thinking and can apply agile principles to case at hand. If I am looking for an optimizer, I’ll steer the conversation into PIRATE metrics and make sure they are comfortable solving basic maths on the fly, identifying breakeven points, etc.

My experience is that after that interview I have a pretty good idea of whether I can work with the person and they probably have a good idea of my energy levels and whether they want to be a part of what I am doing. I’ll then follow up with a sell-interview where the candidate can ask as may questions as possible and I can understand better how the role can be best shaped to leverage the skills of the candidate and best further their career ambitions.

* * *

Hope you found this helpful. Drop a note if you have any suggestions or thoughts on what works or doesn’t work for you.

How to decide what company to found and what is the role of passion in all this?


“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.” Steve Jobs

“Bezos first got the idea to start an Internet enterprise in 1994. While surfing the Internet in search of new ventures for D.E. Shaw & Co. to invest in, he came across the statistic that World Wide Web usage was growing by 2,300 percent a month. Bezos immediately recognized the expansive possibilities of selling online and began exploring the entrepreneurial possibilities of developing an Internet business.”Entrepreneur.com biography of Jeff Bezos and Amazon

So who is right? Do great businesses naturally arise out of passionate tinkering with a problem in your garage or out of finding a great market opportunity through a process of elimination? This is a question I am often asked by wanna-be entrepreneurs and I have always found the trite answer – follow your passion – to be a pretty unsatisfying one and one that doesn’t really bear out with my anecdotal experience of what drives success.

Why do we care so much about passion?

For sure, the majority of start-ups that I see as an angel investor are start-ups that were founded out of some personal passion. This makes sense. Starting a start-up is hard emotionally. People will tell you that what you are working on is crazy. Potential investors will not return emails. Friends will question whether it wouldn’t be better for you to go work at a big company for a while first. Family will lament that you are throwing your life away. In those early days before you have traction, customers, revenue – objective measures that there is something there – it is frequently passion that will sustain you.

But watch out! Passion happens to also be a very useful tool of persuasion – people want to join endeavors, partner with and invest in founders that come across as passionate. Passion, as they say, is contagious. As it is a useful tool, it is often co-opted by founders and CEOs in a useful way to drive the success of their business. From early days in a startup accelerator, there is often coaching provided to startups that they need to articulate their passions front and center when it comes to pitching their startups. We are encouraged to “talk up our passion” for an area, and it typically finds a home on page 2 of a pitch deck, right behind the title page.

At some point down the road, a company typically will work on a vision or mission statement that becomes the embodiment of the organization’s reason for being. This is almost universally understood to be a critical, if not “the” critical, ingredient for success. Without exception, all successful companies have strong visions. Internally, a strong vision leads to team conviction that helps set direction, creates a framework for decision-making and broadly aligns an organization to execute in the desired direction. Externally, a strong vision helps customers see themselves in your product or service and hence helps you build fellowship and traction in the market.

So, why is passion a possible red flag?

There are three errors we make as observers looking outside in at successful startups.

First, we assume that the articulated passion today was present at the founding of a company. Amazon’s mission today is “to be earth’s most customer-centric company”. But Amazon wasn’t founded because Bezos was particularly passionate about customer-centricity. Or, that at the inception of the company, Bezos believed that customer centricity was an important problem to be solved. If anything, it was that Amazon wanted to be the largest bookstore in the US. The rest would come much later.

Second, we assume that passions cannot change and evolve over time. As Amazon grew, entered new markets and came to be seen as a trustworthy place to buy goods online (at a time when trust was a bigger issue) this customer focus became the “true north” of the company. When you hear Bezos talk today about the company he has built and where it is going he exudes passion for this customer mission. But that doesn’t mean it was in the furthest reaches of his mind when the company was founded.

Third, we assume that “passion” at the founding of a company is not subject to revisionist history. The canonical example here is Facebook. It is possible that the world’s most successful social network was founded “to give people the power to share and make the world more open and connected” or to “give people the power to build community and bring the world closer together”. Or, if you believe the movie, it might have just started as a lark to rate women at Harvard. Start-ups start for lots of reasons that don’t make for a very good narrative, it’s easy to see the temptation for embellishing it a little.

Many times, one can observe a combination of all three. At the end of the day, what passion drove someone to start a company is largely driven by the story they tell. Be careful in comparing your unmasked thoughts, dreams and desires against the PR- release-like veneer of others.

What does the empirical evidence tell us?

Here is a thought exercise. What you care about as an entrepreneur is probability of success. Which if you could observe it is the number of “passion” startup successes divided by the number of passion startups compared to the number of “rational” startup successes divided by the number of rational startups. Unfortunately what we tend to see is just the absolute number of successes of each (and even then probably are overgenerous in putting startups in the “passion” bucket for the reasons above). So imagine that 80% of startups are “passion” driven and the average success rate is 5%, while 20% of startups are rationally-driven and their success rate is 10% (ie. double). You would still end up running into many more passion startups just because of the sheer overwhelming number of passion startups that start.

I see a lot of startups but can really only speak anecdotally from my own observations. It would be great to be more empirical. If someone can suggest a way to do this, or has seen a report on this, then let me know!

Passionate about what?

Domain versus function

Let’s not forget that when we talk about passion most folks naturally think about passions for a particular domain. For travel, for making architects more efficient, for making the best cup of coffee. But there are also “functional” passions. You might be passionate about sales and marketing, or for reverse engineering machines and making them more efficient or for finding valuable applications for machine learning (merely a functional tool after all)?

The passion that has driven me is to build impactful things. Early on in my career impactful meant eyeballs and money, as I mature and grow I have learned that impact tends to mean also positive impact on people and society. Within the context of that, I feel just as at home helping launch a digital bank for the migrant population as I do building an insights platform for free genetic tests to help people understand their health.

Many entrepreneurs are, at their core, builders first and foremost. Their energy comes not from solving a particular problem but from problem-solving.

It’s time to celebrate that.


One thought I recently had as I tried to parse the common wisdom about “passion” was that perhaps when VCs talk about this they are not talking about just any sort of passion but really that counterintuitive, non-sexy passion. You know, the thing you are really passionate about but no one else is.

For example, the startup ecosystem is so very overweighted in music, dating, travel startups and new social networking ideas. We are all passionate about dating, about listening to music or following bands, about spending time on Facebook and going on great vacations! Those passions don’t separate you from anyone, they just make you human. The don’t give you some sort of unique advantage.

Final thought

It goes without saying that if you are lucky enough to be passionate about a space that is transforming, disrupting or structurally growing fast, then this is the best outcome.

The question is what if that alignment doesn’t happen. Do you follow your heart or your mind? And how do you go about evaluating this. There is an answer but you’ll need to wait for my next article!


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