Part 4 = Creating A New Venture In The Blockchain Economy

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The lead actor in the Blockchain Economy is the entrepreneur. Or as Teddy Roosevelt put it, it is the man in the arena that counts (updated = the woman in the arena). All the other actors – investors, customers/users, employees/contractors – depend on the entrepreneur’s willingness to work so hard against the odds. So we devote this chapter to the entrepreneur.

This is Part Four of The Blockchain Economy serialised book. Part Four is where we focus on creating a new venture in the Blockchain Economy. Part 4 only has one chapter because we refer back to Parts 1, 2 and 3. Also we have no ambition to write generally about being an entrepreneur; this is specific to building a venture in the Blockchain Economy. For the index/table of contents of The Blockchain Economy book please click here.

This chapter covers 6 key questions that entrepreneurs need to ask

  • What is your market entry space that nobody else cares about?
  • Where in the Blockchain stack do you want to work?
  • Where is your market in Creative Destruction 7 Act Play?
  • How will you fund your MVP?
  • Is your Blockchain use for real?
  • Is fundraising your core competency?

Before you do anything else, you need to figure out what is your market entry space that nobody else cares about

What is your market entry space that nobody else cares about?

This is not specific to Blockchain. The basic idea is explained by Peter Thiel in Zero To One. Given how many pitches still show a plan to get 1% of some massive market, it is clear that the idea is not widely understood. As Peter Thiel puts it, it is better/easier to get 90% of a $10 million market than 1% of a $1 billion market – as long as that $10m entry market is adjacent to a much bigger market. So you need a market that sits at this intersection:

  • Tiny market that nobody cares about
  • The entry market is part of a much larger market
  • You know that the opportunity is for real

The two iconic examples are:

  • eBay Power Sellers for PayPal
  • Book Buyers for Amazon

You need the intersection of all three. If you just have a tiny market that nobody cares about, be prepared to bootstrap the business; you may have a very nice lifestyle business but investors won’t be interested. If the entry market is part of a much larger market (such as eBay Power Sellers being part of a market of people wanting to sell online and Book Buyers being part of a market of people wanting to buy everything online), you will have two options after you have proved your market entry:

  • raise a lot of money and become the dominant player in a  huge market (what PayPal and Amazon did)
  • Sell your venture (exit) to a company with that ambition.

The idea is similar to what you find in Crossing The Chasm and The Lean Startup. These ideas are not specific to Blockchain, they are golden rules for entrepreneurs in any market. The rest of this chapter guides the entrepreneur through the Blockchain specific questions, starting with where in the Blockchain stack do you want to play? This is where you focus on the third circle in that venn – you know that the opportunity is for real.

First you need to decide where in the Blockchain stack do you want to work

Where in the Blockchain stack do you want to work?

If you are technical, the natural inclination is to work at the infrastructure layer. You will be building solutions for other developers and delivering via an API. If this is your focus, Part 1 of this book is mainly for you. You will need to understand Part 2 for your Go To Market phase, but mostly you will leave that opportunity to partners. Before leaping into this part of the market, ask yourself these two questions:

  • Do you care about how many competitors you have? As most digital products are built by technical people, the supply of new ventures in this area is massive. You can still win by being better even in a crowded market (think Google search, Facebook, Gmail), but that is a tough bar to jump over.
  • Can you really bypass the niche market end user phase? Developers like working with developers so it is tempting to just publish an API and hope other developers use it to build end user facing applications. The problem is that platforms evolve by serving end user niches. PayPal is a platform today, but they started by serving an end user niche. Ditto Amazon. if you serve many niches, partners will emerge who want to serve other niches and you will become a platform. However few ventures start by being a platform.
  • Has the network effects law really been repealed? Network effects tend to lead to a power law distribution with one winner and many losers (eg Facebook did not leave much room for other social networks). Maybe this time is different  is a famously dangerous phrase. Ethereum could be an exception to the rule. Ethereum is a story of build it and they will come. The only people paying attention in the early days were other developers and they used their tech knowledge to build DAPPS that validated the platform.  and we will have lots of platforms. Although Ethereum did not know which end user niche would emerge when they launched in 2014, the riche that emerged, the initial “killer app for Ethereum” was early stage capital raising via ICOs.  If you are going to market as a a platform you need to be comfortable that EITHER you are super early and have real technology advantage (Ethereum) OR this is one market where there will be no dominant network effects platform and so your platform stands a chance.

If you have experience in an end user market,  work at the Application layer (and read Part 2 of The Blockchain Economy.  Blockchain changes everything. Part 2 looks at the impact of Blockchain on 22 markets that together are worthy of the tag “everything”; they pretty much account for global GDP.   You may use one of the platforms at the infrastructure layer to build your product but your focus is 100% on that end user market.

If that is your focus, the first question is where is your market in Creative Destruction 7 Act Play?

Where is your market in Creative Destruction 7 Act Play?

Timing matters more than any other factor in startup success. If you are not convinced, watch this 6 min Ted Talk for the data.

Although history does not repeat, it often rhymes. You can spot these patterns throughout the history of disruptive waves of change. Please refer to Part 2/Chapter one describing the Creative Destruction 7 Act Play.

Think about which Act  your market is in. Then think about tIming:

  • Act 1 The Old Guard Dominate: too early to enter the market. This is a good time for some background research, conceptualisation and hacking; but markets like this can stay impenetrable for a long time so be wary about investing or entering now.
  • Act 2 Straws In The Wind: this is a great time for  first time entrepreneurs. If you don’t have a bankable track record to take to investors, you need to take the risk of being too early.
  • Act 3 Denial: This is a great time to raise capital. Although many investors run from early stage risk, they are paid to get in early enough. So if investors  are willing to look at data points that are still being formed ie where there is a lack of quantitative certainty, this is a great entry point.
  • Act 4 The Weird Turn Pro: This is the time to either do a Mega Round or Exit. Which option you choose will depend on your temperament and risk appetite (Mark Zuckerberg turned down a $1 billion offer from Yahoo in 2006), but this is the time you get offers pouring in.
  • Act 5 Blow Up: This is the time when the mainstream see the disruption, so it is a great time to do an IPO.
  • Act 6 Reconstruction: Now you use public currency to scale to dominance
  • Act 7 The New Incumbents Emerge: If you are one of those new incumbents – welcome to the front page and prime time. If you are a new entrepreneur, this is when we go back to Act 1. It is unwise to compete with these new  incumbents – as many who competed against Bezos or Zuckerberg or Gates or Jobs discovered. At some point the cycle changes and we move to Act 2, but this can take decades and a year is an eon in startup time.

How will you fund your MVP?

Shhh, don’t tell anybody. This is a secret – MVP risk is minimal. You would not know that from the legions of VCs who run a mile from funding product risk. The cost of building an MVP product has fallen about 100x since the Internet brought us open source, open APIs, minimally priced cloud/SAAS services and decentralised development teams.

As Legacy VC don’t want to fund MVP risk, 5 types of people who understand that MVP risk is minimal have jumped into that open window:

  • Serial entrepreneurs using capital from last exit. Rather than being Angel Investors they fund their own venture. Entrepreneurs pitching Angels need to be wary here; that “angel” may be a determined competitor. Many great entrepreneurs win big with their first and third venture, but bomb with their second; reasons for second ventures failing include hubris and a desire to do it this time with less struggle. So first time entrepreneurs who need external capital should not be daunted by competing with them. 
  • IT services firms using bench time. The rationale is that it is better to get developers who are not on fee paid projects to build a product.  This often ends badly as the best developers are not usually on bench and when a fee paid project arrives they are reallocated. If a firm is committed to the project and are not scared of cannibalising their own custom projects, this can work.
  • Moonlighters with a passion project. Developers get back from their day job and hack away at nights and weekends. Choosing the right time to turn your  passion project into a business is critical and difficult.
  • Legacy executive with budget for a spin-off. This happens when a Legacy firm sees the disruption coming and creates it as a spin off rather than incubate in-house (where anti-innovation antibodies will seek to destroy it) or waiting for a suitably scaled venture for their Corporate VC arm to fund (when everybody else wants to invest ie when your capital has less advantage).
  • Legacy executive turned entrepreneur. This happens when a Legacy firm does NOT want to do a spin off but one senior executive takes his/her experience and connections to the job of creating a new venture. The Legacy executive turned entrepreneur can fund the MVP using a small % of their salary.

Is your Blockchain use for real?

Unless there really is an urgent and big need in your market for a permissionless transactional network without any institution in control, drop this idea. Do not make the mistake of using Blockchain to build a very, very slow and expensive distributed database. 

Or are you using Blockchain as a buzzword to unlock funding? That is OK if your core competency is fundraising. 

Is fundraising your core competency?

There are many who mock those who use a hot trend (Blockchain, AI, IOT, etc) to unlock funding. To those with an engineering mindset or a passion for building something of long term value is the mantra. If fundraising is your core competency, there are many opportunities to be a source of capital when the market turns bearish. This sounds cynical, but it is quite practical and can be quite transparent if done well. If you partner with investors, you are doing the hard work to make them money while being honest that there maybe a lot of experimentation (“pivots”) before you get to Product Market Fit). 

Bernard Lunn is the CEO of Daily Fintech and provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).

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For the index to Bernard’s serialised book, The Blockchain Economy, please go here.

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