Category: Twitter Threads

  • 6 Measures to Correct VC Incentives

    6 Measures to Correct VC Incentives

    1. VCs taking public money (pensions, sovereigns, etc) must publicly disclose all deals, terms, marks and position changes.
    2. LPs managing public money must publicly disclose all fund positions and cash returns.
    3. Tax treatment for anything up to ~series A should be extremely advantageous to small managers.
    4. No passing public money through multiple layers (e.g. VCs acting as LPs to EMs).
    5. LPs managing public money should not offer bonuses to their allocators based on short-term performance.
    6. LPs managing public money should have something similar to polical rules around disclosing gifts, travel, hospitality, etc.

    This is just a start. The highest level changes that should be made to correct some of the perverse incentives in venture capital today, providing adequate accountability for public capital.

    There’s much more to talk about in terms of diverging small AUM and large AUM managers, or standards for valuation and reporting marks, but that starts to get deeper into the weeds.

    First, we need to be concerned with how pension money is being invested and the long-term implications that has on the startup funding and innovation.

    Giant pools of capital being awarded and invested in an unmeritocratic manner have a toxic influence on the venture market.

    Originally posted in response to a question by Brandon Brooks, here.

  • Yuga Labs vs Bungie – finding the Web3 delta

    Yuga Labs vs Bungie – finding the Web3 delta

    If the endgame for Yuga Labs (creators of the notorious Bored Ape Yacht Club) is essentially a Web3 videogame, and that does appear to be what signs point towards, it seems like an opportunity to examine the closest Web2 equivalent and see what can be learned.

    Bungie, who were acquired by Sony at a $3.6B valuation in February, seem like a reasonable comparison; not too far off Yuga’s $4B valuation from their Andreessen Horowitz-led raise in March.

    Bungie are responsible for building a few monster IPs. The most well known is Halo, established in 2001 and owned until 2010.

    Halo: Reach, their last title in the series – and not even their best seller, sold roughly 10 million units. However, while Halo helps illustrate the great legacy of Bungie, and the depth of their portfolio, it’s not that title that provides the interesting comparison. 

    Their more recent IP, Destiny, is a better example – as a ‘virtual world’ online role-playing game.

    Destiny 1 had around 30 million account holders. Destiny 2 has around 38 million, and the annual revenue from that title alone is estimated at $100-500 million.

    Yuga Labs has…

    • BAYC: 10,000
    • MAYC: 20,000
    • BAKC: 10,000
    • Otherland: 200,000

    That’s a theoretical maximum of 240 thousand account holders (people who own NFTs, though some may own multiple) producing a gross revenue of $138 million in 2021.

    You have to be incredibly bullish about Web3 to believe that Yuga Labs has earned a higher valuation than Bungie – based on those numbers. Or perhaps that Yuga is capable of doing something, thanks to NFTs, which Bungie is not?

    Where can we look for an answer to this? 

    Is it the fact that Yuga Labs is able to ‘leverage their Web3 brand’ to build a ‘transmedia IP’ spanning games, TV series and movies, etc?

    Unlikely. Bungie is also doing that with the Destiny IP.

    So what is it that drives the Yuga Labs valuation to such lofty heights, in such short a time? They have certainly yet to prove that they can provide value beyond their core audience of NFT holders. In fact, most of that value is stored in the theoretical value of those NFTs. 

    Beyond that, what is Yuga Labs offering? A wealth-gated community of crypto bros?

    I’m sure it’s a valuable network, and the events they host are wild, but does it indicate a scalable business model? Not so much.

    So is Otherside a virtual world designed exclusively for Yuga Lab’s community of NFT holders? Or is it for everyone? 

    If it’s for everyone they are competing on Bungie’s terms as a more traditional video game experience, and it seems like might struggle to be competitive there – even with the vast treasury.

    If it’s just for NFT holders, even if that pool grows in future, it isn’t clear how well that idea scales or what kind of further monetisation it will allow.

    Puzzling. 

  • NFTs – The Web3 startup investment vehicle

    Consider NFT/Web3 projects as startup investments, except the only fundraising mechanism is equity crowdfunding and we’re ALSO the customers.

    It incentivises piling into the biggest project, as investors, users and advocates, because ‘making money’ beats ‘better ideas’.

     Of course in typical startup investment, incentives are better aligned to the point that seeking out smaller, more innovative companies can be more profitable than backing the obvious picks.

    That is not the case in Web3, yet. Smaller, better projects are dying of starvation. The giants in Web3 are all promising that they will generate money for their investors, yet their only source of capital is those investors.

    If you’re scratching your head right now, don’t feel bad.

    @swombat explained it brilliantly:

    So what’s the solution?

    Fairly simple. Web3 projects need to consider two things:

    1) Providing a way for investors to eventually cash out which doesn’t kill the project.

    2) A way to replace those investors with customers which offer the project sustainable growth. This creates and recycles capital in the ecosystem which can then be deployed elsewhere, supporting other projects.

    Investors would be more likely to take smaller bets, rather than piling all of their capital into the frontrunner.

    A virtuous cycle that supports innovation. There aren’t many Web3 projects I can find which have this « investors ♻️ customers » conversion figured out.

    @fringedrifters is a frontrunner – I’m excited about what they are working on, and the use-case for NFTs they are building.