Disruptive technology is often accompanied by idealists who see it changing the world for the better. The actual result is usually a mix of good and bad. Technology is amoral and only people can make a difference. Blockchain idealists hope that “do not be evil” (the Google founders mantra) gets replaced by “cannot be evil” in the Blockchain Economy (code governs behaviour automatically). Whether we invest cash, intellectual capital or our time, how we invest and what we invest in determines whether we improve our world or not.
This is Part Three (Chapter 5) of The Blockchain Economy book.This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index/table of contents of The Blockchain Economy book please click here.
This chapter covers:
- The Millennial rage from the Global Financial Crisis
- Big change-the-world markets among the 89.1%.
- Three reasons why serving that 89.1% market has been neglected
- 4 examples of opportunities which are a challenge for Legacy VC
- Why it matters how something is financed
- Who gets what: data that is transparent and immutable
- Buying Tokens without any profit motive
- Eyore’s warnings about philanthropic scams at the Blockchain Corner event
- Pooh Bear has the last word
The Millennial rage from the Global Financial Crisis
Most Baby Boomers did well from the 40 years of Financialization from the 1970s onwards. Not so, for Millennials (Gen Y). They came into their work years just when the Global Financial Crisis hit and it has been bad for them since then. So it is not surprising when they ignore advice from their elders lecturing them that Bitcoin is a dangerous bubble and they should stick with the proven paths to financial success.
Many Millennials are inclined to believe that the current system is corrupt and rigged, because their life’s experience has made them wary. Sadly many then got caught up in the age old “get rich quick” mirage and bought into Bitcoin in the crazy price run up in the last few months of 2017. That led many Baby Boomers to nod complacently and say “I told you so”; now those same Baby Boomers are leading their institutions into crypto asset trading. Less reported is that many other Millennials bought in early to Bitcoin and Ethereum and made a fortune. However, that is a small number of people. Statistically, most Millennials have been as burned by Bitcoin as they were by the Global Financial Crisis and by College Debt. This could be a lost generation. Tools to enable Millennials to prosper, to bring them back into a fairer financial system, is one of the big change-the-world themes we explore below.
The next generation, born after 2000, dubbed Gen Z, does not come with that same feeling of being burned and wary. To them, Blockchain and Bitcoin is not a foreign concept it is just the norm. It is ideas such as Fiat currency with unlimited supply, or wealth lent to Banks in the hope they will return it, or Banks being able to create money at whim (Fractional Reserve Banking) or wealth measured in something you dig out of the ground (gold) that seems weird to them. You can imagine a Gen Z person in middle age entertaining their kids by telling them about how their grandparents had used something called a Bank. It is this Gen Z who will define the future of Blockchain.
(What will we call the next Gen after Z; will it by like car license plates in UK and start again at A?).
During the second wave of Fintech (usually dubbed Emergent Fintech to differentiate it from the first wave of Fintech when we sold technology to banks) the mantra was that Millennials were hip/cool and would adopt this new hip/cool mobile UI that entrepreneurs were putting on top of Legacy Finance. That was based on a misunderstanding. Millennials need radically different services at dramatically lower costs; a new UI on top of the old way of doing things was just lipstick on a pig. For that transformational change, Millennials need Wave 3 of Fintech based on Blockchain where value exchange is online and permissionless (as opposedWave 2 which used Internet for content exchange and Traditional Finance for value exchange).
Big change-the-world markets among the 89.1%
The political rallying cry around 99% and 1% obscures a more nuanced narrative around 89.1% and 10.9%. The 10.9% do pretty well; lets call them the “well off” because the “wealthy” label tends to be applied to the 1%. The 0.1% do ridiculously well and the 89.1% struggle. You can quibble with the stats at the margin, but this version of reality is better than two myths:
- Myth 1: a big bell curve middle class with relatively few rich and relatively few poor. This was true for a few brief years in the post war era in America (1950s and 1960s) and a bit later in Europe (and much later to Japan). Baby Boomers grew up in this world and still instinctively cling to this myth.
- Myth 2: The “one tenth of 1% who control everything”. This populist cry resonates with millions, but misses the reality of the 10.9% of professionals (such as doctors, programmers, executives, creative class) who do pretty well.
Programmers live in that 10.9% world and so they naturally build products and services for the people they know. They do not understand the 0.1% or the 89.1%. This leads to an oversupply of products/services for the 10.9% well off and an undersupply for the 89.1% poor. (The 0.1% are fine; the market for yachts etc is doing well).
The law of supply and demand is an immutable law – which is useful when everything else is changing. Businesses that serve the 89.1% poor are on the right side of the law of supply and demand – plenty of demand and lack of supply.
The 89.1% includes segments such as:
- Those in West crushed by globalisation. Inequality may be falling on a global basis, as millions in the Rest of the World (China, India, etc) join the global middle class, but inequality is rising in the West as the factory worker in Ohio loses to a factory worker in Shenzen or a call center worker in Cornwall loses to a call center worker in Gurgaon. Long term, the rising tide in the Rest will lift all boats, but short term the dislocation to human lives is terrible. What may sound short term to an academic economist, is life destroying to the people behind those statistics.
- Millennials in the West crushed in the GFC aftermath. Consider a Millennial who has played by all the rules, who worked hard to get a college degree, but was just unfortunate enough to come into the workforce in the aftermath of the Global Financial Crisis (GFC). Saddled with a crushing load of college debt, unable to buy into a property ladder where prices are determined by a wealthy global elite moving assets around the world, and kneecapped by job insecurity (aka the “sharing economy”) so that banks run a mile from lending to them or do so at punitive rates which makes it much harder to escape the poverty trap.
- The global on ramp to the global middle class. This is sometimes referred to as the “unbanked” or the “underbanked”.That defines the market primarily as lacking banks, which does not make sense as banks lose their centrality in the Blockchain Economy. Google simply refers to this opportunity as the next billion i.e the next billion consumers. The emergence of billions out of subsistence living into a global middle class is the biggest story of the 21st century. This will create wealth for Gen Z, even if it is too late for Gen Y.
Financial Inclusion tends to refer to the latter market. In the West we can feel good about helping the poor “over there” but is more uncomfortable facing the reality of the poor right here at home (the first two markets described above).
Three reasons why serving that 89.1% market has been neglected
- Getting the economics right is hard – but not impossible. This is the fortune at the bottom of the pyramid that some companies have found. Yes you have to get the price right and that means getting the cost right, but Moore’s Law sure helps.
- The seed gap in Impact Investing. Helping people while making money is the province of Impact Investing. Many Family Offices do Impact Investing. They have the capital and the long-term orientation and many want to use their assets to leave the world a better place. The problem is they want to invest in models that are proven at scale. This makes it very hard for new models to get out to market. This the seed gap in Impact Investing.
- The problem measuring Impact. Measuring profit is simple, but if a venture says “we made X profit last year while improving financial inclusion” how do you measure that last claim? If you can profitably serve the 90% at the right price point you are automatically improving financial inclusion. Your financial statement is your impact proof – providing that you serving the poor at the right price point – that is the issue that we look at in the next section.
4 examples of opportunities which are a challenge for Legacy VC
Most Legacy VC run a mile from these business models. They are harder to get right than serving the 10.9%; it is easier to get one more dog walking service financed, even in a really crowded market.
Here are 4 examples of opportunities which are a challenge for Legacy VC:
- Importing really, really cheap products from the Rest. Look at something as basic to healthcare as a Fetal Heart Rate monitor. You can assemble these from PC spare parts for 90% less than commercial products. This is happening in the Rest because “necessity is the mother of invention” and it is a blue ocean market (better this dirt cheap version than nothing). Bringing these products to the West will meet massive resistance from incumbents – in the West, this is a red ocean market and advertising by incumbents will tell customers that the cheap version is dangerous.
- P2P Education. The worst gap is the education gap. If you are well educated you have a shot at moving from the 89.1% to the 10.9%. Does that mean you should saddle yourself with a lot of college debt? Broadcast digital knowledge is mostly free; if go to YouTube or Kahn Academy the worst you will have to pay is your “attention” on some advertising. However that is only one part of the flipped classroom model. The other part is interactive, custom Q&A. This is particularly critical in markets where the Certificate matters less than the learning and where Legacy Education has failed such as:
- P2P Health Education. This is likely to include preventative knowledge but also how to navigate both the traditional Healthcare system and the mass of free but often wrong and conflicted online advice. This is the sort of wisdom that in ye olden days might have been passed down from generation to generation, but which is lost and devalued within the incumbent Healthcare system.
- P2P Financial Education. Imagine getting Financial Education from somebody who is totally on your side, with no agenda to sell you anything. This can be as basic as how APR works or how to read an income statement or how car leasing works. P2P Financial Education is the key to democratised investing – so that we no longer have to ask “where are the customer’s yachts?” Advice to buy a cheap Index fund or an undervalued stock and hold it for decades may be the right advice but will never make an intermediary rich, so it won’t get financed by Legacy VC.
- P2P Trade Education. For example, would you prefer to learn plumbing from a trade school that wants your money in return for a certificate, or from a plumber nearing retirement who may also introduce you to his/ her customers?
- Genuine P2P Lending. What was called P2P Lending, was really applying a digital marketing process to lending done by institutions. Look at a segment like PayDay lending wth it’s egregious interest rate and imagine a real P2P alternative. Fred who gets paid on Friday lends some cash to Joe who gets paid on Monday. Fred gets some small amount for his two day loan, Joe has a better weekend and knows that if he stiffs Fred he both loses a friend and knows he won’t ever get a loan from him again (or from other friends who will hear about his non-payment). Or imagine Fred, who has been ultra frugal and has some spare cash, lending money to Joe who he knows is working hard to escape poverty but needs cash to buy something in bulk.
Funding science/technology risk
Most Internet businesses were very, very low tech. The science/tech innovation behind Facebook was virtually zero. Even Google took a simple idea from academia (the credibility of peer reviews) and brought it online. That is why Legacy VC loved these businesses – no technology risk.
However there are some problems that require hard core science/tech innovation and these ventures that are too risky for Legacy VC. Think cure for cancer, clean energy or technology that will safely reverse global warming.
The sort of ventures getting funded through ICOs would never have got through the Legacy VC gauntlet (with endless VC chants of “come back when you have more traction”). Legacy VC would never have funded Ethereum for example. In the traditional funding model, ventures with a risk profile as high as Ethereum (both technical and market risk) would have either not got funding through the traditional Angel/VC route or would have got $100k Seed and then fallen into the Series A Chasm due to lack of capital to execute properly. That all changed in the Long Hot Summer of ICO in 2017, when a new breed of entrepreneur raised more money Pre MVP than ye olde entrepreneur used to raise in an IPO (Tezos, Bancor etc). The market jury is still out on the class of 2017 ventures, but the market has given its verdict on the class of 2014 led by Ethereum.
You can say that the people who bough ETH in 2014 were crazy or just dumb lucky. They could reply that they are at least rich as well as crazy/dumb lucky. The fact, uncomfortable as this is for Legacy VC, is that they were not crazy or dumb lucky. They could evaluate technology/science risk, in this case the technology/science risk of building a decentralised operating system far better than “professional” investors.
Imagine a high risk Biotech venture. Biotech Scientists can evaluate risk better in an early stage Biotech venture better than a bunch of finance guys on Sand Hill Road. Ditto for clean energy and reversing climate change and other things that really matter to us.
Why it matters how something is financed
The old mantra was “Internet changes everything”. That mantra was repeated by the VCs who funded businesses on the Internet. The reality was that Internet changes everything – except how Internet businesses are financed.
That all changed with ICOs.
The crowd is less risk averse than Legacy VC. You can argue that the crowd is dumb, but the evidence that the crowd is less risk averse is blindingly clear from the ICO data.
The stunning growth of ICOs is a simple reaction to the growing risk aversion of Legacy VC. Entrepreneurs, fed up with that growing risk aversion moved into ICOs.
Legacy VC became risk averse for two reasons:
- technology became such a big part of the economy that their portfolio companies became the incumbents that needed to be protected.
- VC General Partners became more about Finance than technology. In order to get more Assets Under Management (2% AUM on $1 billion fund is $20m revenue to “keep the lights on” before making a dime of Exit profit), there was a tendency towards closet indexing (making as much as another Fund, and better by a % than other asset classes).
When you look at Impact Investing it gets worse. VC GPs have a single mandate – profit. So Impact Investing gets ignored.
The crowd is made up of humans who don’t have those artificial distinctions. The crowd can make a decision to:
- buy a Token without any profit motive. For example, if the Token entitled you to a new cancer drug if it successfully came to market, you might buy it in the hope of giving it to friends and family suffering from that dreadful disease.
- buy a Token from a company that has no viable business model. Grameen Bank, which changed the world for millions, started with tiny amounts of money and without any business model that could make anybody rich.
There is a problem with NonProfit Tokens. Scammers love exploiting people with naive optimism and good intentions. That is where the transparent and immutable nature of Blockchain data is so critical.
Who gets what: data that is transparent and immutable
Those types of non-profit, early stage, change the world models could be funded by people with a philanthropic motive. They want the business to have revenue, so that it is self sustaining, but the primary objective is to help people. Those donor-investors need the confidence that the intended people are getting the advertised services through a Blockchain database that is transparent and immutable.
You could trust an institution. For example, in the philanthropic space you could decide to trust the Red Cross. Or you could trust to the math/tech in Blockchain that makes for a database that is transparent and immutable, so that somebody will actually take the time/trouble to verify that what a philanthropic ICO is claiming is really true. If they find something wrong a simple search for philanthropic “ICO X scam” will reveal that data.
Eyore’s warnings about philanthropic scams at the Blockchain Corner event
There was a great panel at the Blockchain Corner event at the 100 Acres Wood hotel, with Pooh Bear moderating two of the keynote speakers Tigger and Eeyore.
Tigger’s keynote entitled “Lets change the world – NOW!” got a standing ovation. The audience loved it. It kicked off the event in fine style.
Eyeore’s post lunch talk on “Why cannot-be-evil is a dangerous mirage” left many people a bit stunned and despondent, but his comments were picked up by reporters and got a lot of press attention.
In his customary monotone, Eyore explained how:
- scammers exploit people’s good intentions.
- the theory that everything is transparent and immutable rubs up against the reality that most people really don’t actually take the time to verify data.
- some Swiss Non Profit Foundations were misused in ICOs.
- there is no such thing as a moral or immoral machine, only moral or immoral humans who program the machine.
Eyore ended by explaining why the idea of “cannot-be-evil” is not just a mirage but a dangerous mirage. Addressing the audience with uncharacteristic intensity, Eyeore pointed out that an AI machine programmed by an evil person is lot more dangerous than simply one evil human.
Pooh Bear has the last word
Pooh Bear, after asking some good questions to draw out the opposing views of Tigger and Eeyore, ended by reminding everybody that this Blockchain wave of innovation is like all the ones that came before in one key aspect;
“The scams come first, real innovation that benefits people takes time”.
What people where really waiting for was permission to get up and network over refreshments, which Pooh Bear gave everybody when he announced that it was time for a honey break.
Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).