Decentralizing Growth Capital: Part 1
The ABC Model for Blockchain Adoption
Overview
The new capabilities of blockchain systems are fundamentally replacing legacy systems and outdated financial models one by one. Next on the chopping block, as I’ll explain below, is the old “growth capital & private equity” model. A model once centralized to a few wealthy decision makers and backroom deals, I rehaul the model to fit the needs of our industry.
As many of you know, I formed a family office, Yeoman’s Capital, in 2016 after running VC and angel investor groups. These past 6 years of investing have felt like a few full lifetimes in crypto and yet we’ve stayed true to my 2013 thesis on decentralization. A family office was a welcome change, investing my own money, running my own bets. It helped me refine my investment model and draw closer to my vision.
And yet, I couldn’t be a passive investor. As Bill Gates states in The Road Ahead, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”
The incredible promise of decentralized tech that I wrote about in 2013 was tarnished by 2017’s irrational exuberance. Teams lost their focus as their tokens shot up, many lulled into inaction or scattered efforts from the newfound wealth creation. We as an industry confused speculation for valuation. And so at the end of 2017, I dug in, rebalancing my portfolio to focus on growth and fundamental blockchain adoption.
Knowing the heavy lifting ahead, I recruited a strong team to my family office. Henry joined first, having led network growth at Facebook for many startups. Then Mark, after running thousands of companies through his due diligence frameworks at the most active US angel investment network. Finally, Gavin joined us, bringing his expertise in helping industries coordinate, commercialize, and grow.
We’ve aligned as a team with a common belief. We believe blockchain is at a key adoption point. Never has there been more potential even if there has never been more skepticism. It now requires a different size of capital deployment to hit the transformational growth levels needed to take blockchain companies ready for commercialization and then carry them into enterprise, industry, and among consumers.
Today’s crypto funds focus on earlier stages and are not well positioned to seize later stage growth opportunities. They are focused on trading, short term token picking, or indexing.
In order for blockchain to gain institutional adoption, it requires a different type of capital. And it takes a different type of team. One that has experience actively growing companies in the blockchain industry.
We spent this past year working hands on, creating valuation models, testing economic drivers, and initiating business development plays for my portfolio. Something clicked. Our portfolio projects including Factom, CoinText, Abacus and others started seeing more traction and growth.
We call this new methodology the ABC Model, and it promises a new chapter for decentralized growth capital.
The ABC Model
The old private equity model is characterized by a firm buying shares in a company and then deploying its own operators into that company in order to ramp up its growth metrics (sales, market share, earnings, etc.) In this paradigm, investors trust their money to a growth equity company and rely on the firm’s intelligence to find companies it sees the potential to grow.
Under our new model, operated by our new growth equity fund, YGC (Yeoman’s Growth Capital), we break up and rebuild that paradigm using what we’ve learned about decentralization.
First, this isn’t about Factom, or Civic, or Binance, or any other protocol’s growth alone. YGC has a macro view of the blockchain world. That means we’re making a bigger statement about these projects: our industry, blockchain and decentralized protocols, will beat out conventional practices in many sectors.
YGC’s stated mission is to drive the next trillion dollars of enterprise systems adoption.
As we fulfill that goal, almost all of the computing you touch over the next 10 years, from this phone or computer you’re reading from, to the data provider who sent you this article, will be hosting services from our blockchain portfolio companies.
To speed adoption in our growth capital model, no longer do we rely on outside operators replacing founders. We find the best niche experts in fields like API design, search marketing, pricing, behavioral economics, and many other fields. We staff them across multiple projects as part of a comprehensive growth play to complement existing visionary founders. These founders and YGC work together to set growth goals, receive new investment from YGC towards building value in the project, and pledge incentives for their community and contracted YGC niche experts.
We’ve read a lot of whitepapers. We’ve worked with very early projects. That’s not YGC’s domain today. Incredible ecosystem funds, gifted angel investors, and early stage VCs are accelerating new projects and presenting enterprise-ready tech to YGC’s growth team. We have a 47-step review process for vetting technology readiness. Once mainnets are launched, live code is running, and ops are active, I add these companies to our roster and we put them in play.
The other side of this market is incredible. Enterprises have heard about blockchain. Goldman Sachs, IBM, Fidelity, NYSE have made major announcements already and have set aside large budgets. Many more are coming. Others are very skeptical. And with good reason. Enterprise change is hard, and doubly hard when new technology means changing more than just code. Blockchain projects often disturb existing business practices, monetization models, core efficiencies, and other sacred cows. This requires broad buy-in from executives. And much like the internet itself, there are executives who believe blockchain is a fad, that it will go away. We know differently, don’t we?
We’ve learned some lessons, especially this past year of 2018, of how to sell-in blockchain to enterprise adopters. We owe a huge debt to many internal advocates who held the door open for us and drove for change to fund these projects. The incredible opportunity here is that these open doors aren’t for 2–3 players. Instead, we’ve found that we can bring multiple teams into customized “tech stacks”. For example, a consumer facing enterprise project may need a custom wallet, the cooperation of an exchange, and a blockchain data layer.
This is how the ABC Model emerged at YGC: Activation, Buy-In, and Commercialization.
A is for Activation
Starting in 2013, I had an incredible early seat at the table in the bitcoin community. Possibilities and hope abounded. However, as many know, building the future is hard. Projects delay, lose focus or funding, and infighting has damaged many promising projects. It was incredible to see Ethereum march forward, often at a jagged pace, as they made huge leaps ahead. When projects meet their milestones and are ready for adoption of their tech, we call this Activation.
Among the top 100 projects in the blockchain space, there are 23 protocols that meet our YGC Activation metrics today. Several more are in the final phases of technology readiness. Many of our early stage investors, ecosystem funds, and co-investors bring us updates on activation milestones.
Once activated, I whitelist these projects and we coordinate with their teams for the next phase, Buy-In.
Activation offer: if you believe your team is ready for the whitelist, send me a note and I’ll share our checklist and some resources on getting ready for enterprise scale. Activation request: if you have experience with cybersecurity, IT infrastructure or other enterprise consulting, please share your availability to work with our YGC growth teams.
B is for Buy-In
Buy-In inside of YGC means a dual investment from our fund. First, we invest our capital (the fund target is $200M, including my own holdings) into projects that have achieved Activation, targeted to help them through the next growth phase. Second, we ask for a mutual investment from founders, team, and early investors alongside YGC funds to create growth rewards.
Many in the crypto community are familiar with the practice of “staking” their tokens. Often this is a function of governance (voting weight as is done in the case of Binance) or used in distributing block rewards (new tokens entering the system, as is done in the case of Decred) to committed long term holders of the tokens.
For growth capital we propose a similar approach to staking, we call “Token Pledging”. This is the framework of how we work with our growth experts. The benefit of which, instead of voting power or block rewards, is the project reaching a series of growth milestones completed by subject matter experts.
I’m open sourcing this Token Pledging model beyond just YGC’s teams. Partially in hope that we can re-purpose some of 2017’s “Advisors” into productive, outcome-driven members of 2019’s real growth phase for Buy-In. (Did I mention that Yeoman’s naming in YGC comes from “doing the yeoman’s work”, which stands for hard labor?)
This new model works well for sophisticated early stakeholders & the treasuries of decentralized protocols who already have large positions they want to hold for longer terms and are willing to pledge a portion of those tokens for the growth of the project.
Buy-In offer: YGC will fund many of these growth teams directly and offers to share these contracts for trust allocations. Buy-In request: Please send me founders, investors, and visionaries who wish to add their pledges to the model described for growth rewards and we will discuss benefits and milestones.
Note on free riders: I often get the question of what about the holders of a token who choose not to make a pledge and effectively act as free riders, and let the founders, foundation, or community treasuries carry the cost of fueling growth. As with Berkshire Hathaway followers, Warren Buffett’s team gains an indirect benefit of outside firms mirroring his trades. While that activity does not benefit the fund’s economics directly, Buffett’s value investing has been reinforced by followers holding similar positions and boosting the holding value of his equity choices.
C is for Commercialization
Massively boosted by the dual funding of growth from both the protocol Pledging as well as YCG’s new investment, we seek to embed these projects into enterprise use. Our team measures the number of announced enterprise pilots inside the portfolio, the amount of enterprise compound growth month-over-month, and total contract value signed as the 3 major traction benchmarks of Commercialization.
As mentioned, I’ve been able to bring multiple teams into a joint tech stack in these enterprise contracts, so each announced pilot often means new contract revenue flowing to several projects. In addition, some enterprise projects are beginning to activate token utilities, which will drive further adoption as their ecosystem is enriched.
In order to drive massive changes in the industry, both from an enterprise appetite as well as from institution investment entry, we will need 2019 to bring 365 days of enterprise traction coverage. Less hype, more hyper-adoption.
Commercialization offer: YCG will lend growth expertise to help with enterprise leads, closing sales, securing NRE, and other funding buckets. Commercialization request: if you can help us open a door to an enterprise customer, we’d appreciate adding you to our growth rewards pledge above, or having you join YGC’s growth expert teams.
Conclusion: Now Is The Time To Disrupt The Growth Capital Model
With a return to fundamentals, the ABC Model seeks to establish unstoppable integrations into some of the most entrenched industries. We need this growth. Many allies and helpers are needed. There is an incredible amount of progress already, a good amount of low-hanging fruit, and a whole pipeline of tech behind this.
We need a season of solid base hits to get our industry closer to decision makers, get revenue flowing into our projects, and to start posting efficiency gains. Bad markets removed a lot of speculation. Good. A lot of nonsense washes away when production code moves into real-world applications, and we’re seeing tokens starting to reflect the true utility of their platforms.
These proposed milestone-based pledges will drive away many “advisors” seeking easy gains. Good. We need all hands on deck, but skilled and earnest hands that will do the real work — the yeoman’s work — of driving activation, buy-in, and commercialization.
If I can spend my New Year’s goal and my Christmas wish at the same time, it would be this: let’s discover our industry’s indomitable strengths alongside its current limitations. With the launch of YGC, I’m incredibly excited to open this new year and new chapter, serving the good of the industry as I have for the past 6 years.
Thanks to friends and YGC team (Henry Liu, Mark Thorsen, and Gavin Gillas) for reviewing versions of this post.
Continue to: Decentralizing Growth Capital: Part 2
