venture capital

ARTIFICIAL INTELLIGENCE: When it comes to Automation, executives get their priorities straight

It takes two to tango, and as per a report published on The State of AI and Machine Learning suggests, 82% of technical practitioners and 94% line-of-business owners believe that both humans and machines will collaborate in the future, rather than one dominate the other. The concept of such an idealistic future should instill some comfort in those whose jobs are directly threatened by automation i.e. an average of 63% of front office employees across banking, investment, and insurance industries. However, the journey to get there will be messy. With no greater example of this than Deutsche Bank's 18,000 workforce cut, complimented by a $14.5 billion IT budget injection by 2022. As noted in a recent blog entry, Deutsche's move can be viewed as the former of two possible outcomes of automation: "(1) remove $1 billion of cost by slashing your team, or (2) make your team $1 billion more productive". Amazon is undertaking an effort towards the latter outcome by spending $700 million on up-skilling its workers.

This raises an interesting point -- automation does not directly drive the loss of jobs, the priorities of c-suite executives does. In a briefing paper by The Economist on The Advance of Automation, less than half (47%) of all executive respondents strongly agree that automation is most effective when it complements humans, not replaces them. Whilst 57% believe automation will change the skills and requirements the workforce needs. Put simply, there seems to be no true preference between the two outcomes amongst the 500+ surveyed executives. Additionally, only 18% saw automation free up employees to take on higher-level roles, and 17% saw enhanced employee engagement and experience. But, is it too early to truly lean on these statistics?

Lastly, this week saw JP Morgan roll out a new digital investment service i.e. roboadvisor called 'You Invest' via the Chase mobile app. The service will target younger clients with as little as $2,500 to invest across a mix of JPMorgan ETFs, costing 35 basis points per annum. Similarly, an ex-Coutts banker has launched a digital wealth management platform called Rosecut Technologies. Combining artificial intelligence and human advice to provide a bespoke investment solution aimed towards high-net-worth clients. What we are seeing here is more evidence of automation not being the culprit behind looming job cuts. Rather its the B2B consultants promising automation solutions to executives, the pitched cost benefit of replacing workers with algorithms, and the prioritization of lean machine-driven profits, that are the true culprits. 


Source: Figure Eight (The State if AI and Machine Learning Report), The Economist Intelligence Unit (The advance of automation Report)

CRYPTOCURRENCY: Deciphering the $2.26B of Blockchain venture and the $3.39B raised via token offering projects in 2019 so far

According to reports by Inwara and the Crypto Valley Association, as many as 583 token offerings were launched during the first half of 2019, raising a total of $3.39 billion, whilst traditional venture funding into Blockchain-first companies raised $2.26 billion. We think the token offering figure is inflated despite our attempts at scrubbing it, and reserve the right to revise. Quality of the data continues to decline, and several projects self-reported raises in 2019 are suspicious. If anything, our intuition is that real (rather than aspirationally self-reported) ICO funding is below the venture number. 

Let's break down the token offering figure. The $3.39B is made up of 69% Initial Coin offerings (ICOs), 21% Initial Exchange Offerings (IEOs), and 10% Security Token Offerings (STOs) -- see figure below for the distinction between them. Projects stemming from China raised the lion's share ($1.18 billion or 33.2%) of the total, helped by Hong Kong based Bitfinex's $1 billion IEO raise. The USA, trailed behind China raising $255 million or 7.6% -- supported by Algorand's $122 million. Trading and investing (including crypto exchanges) has been the vertical receiving the majority of investor attention with $1.25 billion raised, and core Blockchain projects following within $338 million.

Unsurprisingly, the rise of regulator "friendly" IEOs and financial services "friendly" STOs, has meant that the number of ICO projects have declined 74% to a mere 403 in the last year. IEOs have grown from 6000% to 123 projects, and STOs 16% to 57 projects. The growth of IEOs and STOs "emphasizes a higher degree of institutionalization of large crypto exchanges around the world as cornerstones of the global Crypto Finance infrastructure – and may also be seen as a response to established exchanges moving into crypto".

So is this enough to maintain a consistent growth trajectory for the crypto industry as a whole? Hard to say, but it seems that tokenizing securities tied to real estate, and repackaged ICOs sold via exchanges may or may not result in better capital markets infrastructure, democratization and roboadvisor-led asset allocation. And second, the crypto economy needs non-financial activity to succeed. People should be building software using the global decentralized computer of Ethereum (or R3 Corda or Dfinity or soon-to-be-launched Calibra) and paying for it using the global decentralized currency Bitcoin. More crowdfunding ain't that.


Source: Crypto Valley & PWC (5th ICO/STO Report), Inwara (Half-Yearly Report H1 2019)

CRYPTO & VENTURE CAPITAL: The wild symptoms of paradigm change

Two extreme things just happened in the land of Crypto. The first concerns the Quadriga exchange, whose CEO has died while traveling in India -- while also being the only person with key access to $130 million of customer funds on various blockchains. This means the permanent loss of customer assets. Tactical comments like using multi-sig wallets or not trading on a subscale exchange are besides the point. The key takeaway is that this new-fangled crypto banking has a wildly unpalatable feature. The second extreme thing is Jack Dorsey, who loosely-speaking controls Twitter (millions in audience) and Square (millions in payments), participated in Bitcoin's "lighting torch". This is a process by which one Twitter user sends a few pennies worth of BTC to another user through the developing Lightning Network, facilitated by posting a lightning network invoice in a tweet (there's even a conspiracy theory that Twitter expanded its character limit to accommodate these invoices). So if Bitcoin is money, then it's moving like never before.

Let's pause for a moment to consider how innovations become reality. We recommend the following frameworks: (1) the book Why Greatness Cannot Be Planned: the Myth of the Objective and (2) Epsilon Theory's discussion about seeing change in the Zeitgeist, both linked below. Boiling things down, the book concludes that it is not objective maximization that gets us to great outcomes (i.e., let's develop a new money or a new artificial intelligence) but the search for novel, disagreeable, controversial outcomes. The more new or bizarre something seems, the more likely the discovery will open up a search space for entirely new directions. From that perspective, the examples of Crypto extremes above point to the most compelling stepping  stones to the future. That they are made through market evolution (from on-chain transactions to Lightning) and demonstrate some version of natural selection (exchanges without multisig wallets will die) is more promising than a corporate initiative into making practicable enterprise solutions to save cost.

On the Zeitgeist point, the essence is that an astute observer understands when the meta-game changes. We are certainly seeing this in politics, with the US pivoting away from a Bush vs. Clinton each trying to satisfy political donors, into a Trump vs. Ocasio-Cortez trying to satisfy their social media audiences and the machine learning algorithms that deliver information. More practically, we can see a zeitgeist shift in the role of technology. Whereas tech used to be the supporting Shield in financial services, today it is the aggressive Sword. This pivot is obvious when looking at Fintech's share of venture capital and comparing it to the share of the stock market in financial services companies. You can see below that what started out as 5% of venture and 23% of public equities has converged in the mid-teens. Once Fintechs started being built like Silicon Valley startups, the relative value shifted out of traditional financials into private capital. When we allow China and Ant Financial into the equation, private fintech venture is now over-indexed relative to the public markets. The soil in which things grow has become different. 


Source: Twitter (original lightning torch thread), Epsilon Theory (Zeitgeist), Youtube (Why Greatness Cannot be Planned), Bloomberg, Pitchbook

BIG TECH: The macro-scams of Fyre and Theranos & the micro-scams of Google and Facebook

Spoiler alert: Fyre Festival ended up being a securities fraud that cost investors $27 million dollars, left hundreds of workers unpaid and emotionally ravaged, and negligently put attendees in dangerous conditions. Even Blink-182 cancelled their performance! Another spoiler: Theranos ended up being a securities fraud costing investors (including Betsy DeVos!) $700 million, leaving hundreds of workers unpaid and pushing at least one to suicide, negligently putting users of the product in dangerous medical circumstances. In both cases, the founders were young and narcissistic, optimizing the story-telling about their company over delivering on the promised expectations. Billy McFarland used Instagram supermodels to sell a false vision. Elizabeth Holmes leveraged the Steve Jobs black turtleneck and VC group think to do the same.

This stuff is so easy in retrospect -- to point fingers and throw the stone. Having spent a lot of time in the early stage ecosystem, we can tell you that all founders have these devils inside them. These are the devils that let you take the risk, tell the story and defend your tribe (e.g., see Elon Musk). The issue is that these particular people could not and did not execute -- and any reasonable person in their situation would know enough to stop marketing and selling lies. We can look at crypto ICOs to date and say the same thing. Surely the people who raised over $30 billion globally, and burned nearly all of it, sold us a falsehood. Some -- like John McAfee or Brock Pierce -- had to know what was up. Or did they, perhaps believing in a zeitgeist change tilting the axis of human industry? 

The issue is asymmetric information and intent to profit from that asymmetry. When someone sells us a broken car claiming it works great, they are selling a "lemon" -- something the US protects against with "lemon laws" that remedy damages from relying on false claims. Let's shift from these obvious macro lemons, to the invisible micro lemons sold by Facebook and Google. It was revealed that Facebook was -- in the worst case -- paying 13+ year olds $20 per month to install a research app that scraped all their activity (from messages to emails to  web) and provided root permissions to the phone, misusing Apple-issued enterprise certificates. Facebook should not have been able to create these apps for anyone other than its employees on internal apps (e.g., bug testing new versions). But it did, and got its access revoked by Apple immediately.

Google did a version of this too, exchanging gift cards for spying on web traffic. As yet another example, Google's employees refused to help the company build a war-drone AI for the US Department of Defense. So instead, Google outsourced the work to Figure Eight (a human-in-the-machine company), hiring gig economy workers for as little as $1 per hour for micro-tasks like identifying images (teaching drones to see). These workers had no clue what they were doing -- and we imagine that some would exhibit the same ethical concerns that Google employees did in refusing the work. In all these tech company examples, the lemon is the un-revealed total cost. Compared to Fyre and Theranos, where we pay billions, and get nothing in return, here we are given $1 an hour or $20 per month (i.e., nothing), but we lose our privacy, agency and humanity (i.e., everything). 


Source: Wired (Project Maven), The Intercept (Google project maven), Gizmodo (Google micro-tasks), TechCrunch (Facebook, Google, Apple), Wikipedia (FyreTheranosLemon Law)

CRYPTO: Blockchain lands at $24B in 2018 funding, $1B in STOs coming

Crypto is dead, long live Crypto. We've tried to update our token offerings and blockchain financing figures to see the state of the market. On a monthly basis in December, there continues to be an almost even split between (1) weird internet crowdfunding at $490 million, and (2) traditional venture funding into blockchain-first companies at $310 million. We think the first figure is inflated despite our attempts at scrubbing it, and reserve the right to revise. Quality of the data keeps going down, and several projects self-reported raises in December that they may have finished earlier in the year. If anything, our intuition is that real (rather than aspirationally self-reported) ICO funding is below the venture number. 

As an example, take the largest December self-reported ICO: Jinbi, supposedly raising $47 million for a gold/blockchain token in China. The screenshot is below, but we are pretty sceptical. On the other hand, the $180 million raise from venture into institutional exchange Bakkt is well documented and known. So let that flavor the story for you. Still, when you zoom out on an annual basis, 2018 saw $5.2 billion of venture activity and $19 billion of token offerings -- not bad for a sector in decline. Future activity is indeed trending into Security Token Offerings, with several conferences focused on the space early in the year, as well as players from across industry types competing. Whether you are an equity crowdfunding platform, an ICO developer, or a Wall Street capital markets firm, chances are that tokenizing securities and distributing them globally in a solid regulatory framework is top of mind.

So will this be the saving grace of the sector? Hard to say, but it seems that tokenizing securities is about packaging (1) risky startup equity or (2) a share in some mall in Wyoming and plugging that into the equity crowdfunding theme. That may or may not result in better capital markets infrastructure, democratization and roboadvisor-led asset allocation. Or it may just be left-over junk that nobody else would buy. And second, the crypto economy needs non-financial activity to succeed. People should be building software using the global decentralized computer of Ethereum (or EOS or Dfinity) and paying for it using the global decentralized currency Bitcoin. More crowdfunding ain't that.


Source: Autonomous NEXT data sets, ICO Rating, Kepler Finance,, Inwara, among several others.

CRYPTO: $600 Million of both ICO and traditional venture funding in October for $1.2 Billion total

Some positive news for the crypto world, in the form of fundraising figures. The financialization of crypto assets, melding securitization with tokenization, continues to move forward. Based on our latest data, this year saw over 140 crypto investment funds enter the space. While that is below the 270 from last year, a couple of developments are notable. First, we continue to see new entities formed month over month, even though the narrative is that most crypto funds are 50%+ down this year. Second, there has been a healthy development of ecosystem funds, attached either to exchanges or at the protocol level. These entities are well aligned with funding projects that are adopted by consumers, which then would use the exchange or protocol to engage with the token. Circular logic, or lifting yourself up by the bootstraps -- you decide!

We also know that much of the focus in crypto fundraising has now shifted to STOs, with both enterprise blockchain success stories like BNP Paribas building out syndicates of financiers to provide large loans (e.g., Red Electrica), as well as public STO asset examples like the Aspen resort token from Templum. Similarly, many of the crypto funds are doing equity investing first, and getting tokens for free. With that in mind, we are encouraged by the October numbers in our ICO/token database.

ICO funding data listed on public trackers, and cleaned/confirmed by us to the extent possible, shows about $600 million in flows, which is higher than $450 a month ago. There were not any major unusual chunky raises like the Petro or RubyX. But there was a roughly equivalent amount ($600 million) of traditional venture capital activity in the space. Looking at the chart below, it is becoming a trend that VC funding constitutes 50% of the overall money flowing into the space. From an economics perspective, it is good to see institutional investors find the risks attractive again. From a decentralization perspective, it seems less likely that global crowdfunding will democratize the ownership of a future Internet. 


Source: Autonomous NEXT (analysis of various trackers for $1mm+ ICOs), Pitchbook Data

VENTURE CAPITAL: What Goldman-Backed Circle, VaynerMedia and Social Capital have in common

There's a feeling brewing out there, up in the atmosphere. Symptoms are starting to coalesce. And the feeling is: cash is king, venture capital is mis-configured. Maybe something about endless growth in the economy, or maybe a 10 year bull run in the financial markets makes people pause about the current environment. Here are 3 examples: (1) an interview with former Facebook exec and Social Capital billionaire Chamath Palihapitiya, (2) a video by media entrepreneur and centa-millionaire Gary Vaynerchuk, and (3) Goldman's crypto investment Circle. Let's start with the personalities.

Chamath talks about his increasing disillusionment with the VC world, pointing to the current model: encouraging founders to take highly niche bets, then overlevering them with equity capital, forcing unprofitable growth in order to create the narrative of growth, and leading to wild paper gains that subsidize the success of the money manager. Looking at the fintech IPO market, the fall from grace of the American digital lenders comes to mind. Or the private valuations of Robinhood or Acorns. His advice instead is to grow slow but consistently, instead of trying to grow fast.

Gary is not as down on the venture industry, but he does discuss why he is building a media agency rather than a tech company. VaynerMedia runs at several hundred million of revenue, which would be valued much higher at a tech multiple. But his plan is to capture market share in the coming downturn in the cashflow business, and then use that cash to go on an acquisition spree for assets that are now private and over-priced, but will desperately need cash and exits in a drought. A tech garage sale if you will.

Which brings us finally to Circle. We think that historically Fintech has been pretty disadvantaged: cash-cow incumbents were incented not to innovate, disruptors had no cashflow and were highly targeted bets at remaking particular products, mostly pivoting into partnerships. Non-incumbents could not afford to go full stack and remake the industry. Crypto has changed that by making some businesses -- like OTC trading, derivatives, exchanges, media -- incredible cash-cows with billion dollar revenue lines. These revenues won't stick, because they rely either on inefficiently high prices, or unusually high demand spikes. But the risk assets that smart operators -- like Circle and Coinbase -- buy with that cash, really matter. Circle has just bought SeedInvest, an equity crowdfunding platform that it will mash up with its other acquisition, crypto exchange Poloniex, to beef up its STO prospects. Cash is king! Maybe that's why Circle is also pushing that stablecoin with Coinbase. 


Source: Youtube (Chamath PalihapitiyaGary Vaynerchuk), Bloomberg (Circle), Websites (Circle, SeedInvest)

ROBO ADVISOR: UBS sells SmartWealth robo to its SigFig robo tech provider

This is an oddball, but first some context. UBS has two distinct businesses in Europe and North America. In Europe, they are a high end private bank that manages money for the extremely wealthy, in a market that can charge up to 200 or 300 basis points (i.e., 2-3%) per year. Roboadvice in Europe has not matured yet, despite the efforts of Scalable Capital and Nutmeg, which we believe are due to cultural factors that promote neobanks as the Fitnech app of choice. This means wealth management margins are not a melting ice cube yet. In the States, UBS is a tweener – not as big as Merrill, Smith Barney or LPL (15,000+ advisors), but not quite a lean boutique. Further, American wealth management in general costs about 80 to 150 basis points, with barely 50 bps for roboadvice. This implies that outsourcing roboadvisor technology is the right answer if you are subscale, or are not a technology power house.

Over the last several years, the firm has had a two pronged approach to digital wealth. In the US, they invested in SigFig and private labeled its third party tech. This implies dozens, if not hundreds, of implementation headcount from the startup to be dedicated to its gigantic client. In the UK, UBS built out a separate and unrelated service called SmartWealth. It was expensive for clients, simple by US robo advice standards, but integrated into the UBS stack. The item that hit the news is that this service is now being shut down, and the tech is being sold into SigFig. Here’s why we think this isn’t just a raw fail.

Having two approaches to deploying roboadvice across the organization is likely a logistical nightmare. You wind up with different data architecture, user experience, investment choices and pricing. Coordinating between an external vendor in which you have an interest, and a home-grown application (which is likely a lighter offering), is tough because they are competitors for the same management attention and customer business. The combination is a win-win, in that it allows SigFig to enter Europe, while letting UBS have a cohesive internal offering with a single counterparty responsible for tech delivery. End of the day, they should have just either gone all proprietary or all outsourced. Better late than never.


Sources: Reuters (SmartWealth), Company Websites

CRYPTO: $20 Billion in Cumulative ICO Funding, 300+ Funds

Let's start with our macro bread and butter. Through June of 2018, we saw $12 billion of funding flow through into token offerings. Our numbers track only those ICOs with $1 million or more raised, so the numbers could be slightly higher, but the magnitude is correct. That's still 4x the amount of equity investment from venture capitalists going into blockchain-related companies (a number that now includes Robinhood and Revolut's pivots into crypto). So overall the trend appears healthy, until you really dig into the deals themselves. As you can see on a monthly basis, EOS and Telegram have been the elephants in the room for token fundraising. Now that they have been pulled out from active fund-raising, the underlying trend is less enthusiastic, cutting the monthly numbers in half.


Both of those exceptions have something to teach us. In the case of Telegram, the lesson is that private institutional investors are now the major driver in pre-sales, and often lead to closed rounds. In the last 2 months alone, we see a $500 million raise for video production platform Tatatu, and another $750 million to a gambling company in Asia. That means that there is not an opportunity for a crowd to participate, which in turn has led to the prevalence of Airdrops as a way to get people to hold the token. See Tatatu giving away $50 million of its tokens; in our full paper we highlight the Airdrops trends. The case of EOS teaches about the cyclical nature of capital flows between these projects. Token offerings appear to be a fairly steady function of their parent networks, sitting around 2% of monthly Ethereum reinvestment. That was a surprising finding.

On the manager side, we see 312 crypto funds controlling approximately $7.5 to 10 billion in assets. If we add in traditional instruments, like the Bitcoin Investment Trust or Bitcoin Futures, that's likely another $3 billion of exposure. So while the absolute number of entities is not exploding like last year, the asset they hold do seem to be increasing (based on extremely selective self-reporting). This has been buoyed by the entry of ecosystem funds from exchanges like Binance and Huobi, or networks like EOS. In a sense, that's recycled money from offerings, but it may still fund the right entrepreneur to build her company.


Source: Autonomous NEXT (Crypto Utopia)

INSURANCE: Can $250 Million Get Insurtech WeFox Past Lemonade's Litigation


German insurtech startup WeFox -- backed by Ashton Kutcher and banked by Goldman Sachs -- is in the market for $250 million of fresh capital to finance international expansion. That is a meaningful amount of venture for any insurtech company, especially one that just raised its Seed round in late 2014. See the table from Coverager below for the largest raises in their database in the space -- though we would advise you to ignore Theranos. Since 2014, WeFox has changed its name from FinanceFox, acquired ONE Insurance, and intermediated deals with a number of large underwriter incumbents.

So what kind of service do you need provide to deserve a unicorn round? Well, WeFox gives customers the ability to manage all their insurance contracts across products in one place, supported by a personal agent. They act as a mobile-first broker for individuals, and provide an outsourced front office to incumbents that aggregates different insurance use-cases into a single app. The app can be free because large insurance companies pay WeFox to get clients, and then to manage those clients. Can you say B2C2B2C?

Which brings us to ONE. Whereas WeFox is the insurance supermarket, ONE is a proprietary product on that supermarket shelf. And it has just been sued by Lemonade, the radically transparent renters insurance startup, for copyright infringement and reverse engineering. Allegedly, WeFox created fake accounts and made fake claims on the Lemonade app to copy its workflow and process. And Lemonade has hired an expensive law firm -- White & Case -- to litigate. This makes us ask three questions. First, is user interface something that can be protected by copyright? There must be something deeper to this story. Second, are startup ventures now so well funded that they make worthwhile litigation targets? And third, if insurance is ripe for disruption leading to a massive market for new companies, isn't it better to spend cash on acquiring customers rather than lawyers? 


Source: Pitchbook (WeFox Raise), Coverager, (Insurtech Raises), LinkedIn (Lemonade vs One), SPGlobal (Lemonade Growth)

BLOCKCHAIN: Circular references in Crypto markets as exchanges: Binance and Huobi launch new ecosystem funds


Towards the end of last year, we noted that there was a circularity in the crypto, private and public markets. Large ICO launches were inspiring private companies to follow as well (e.g., Kik), public companies changed their names to blockchain pretenders (e.g, Long Island Ice/Chain), crypto companies pointed to this as progress and Bitcoin went up. It wasn't purposeful market manipulation, but a hype cycle reverberating in a small room. What we're seeing now is, well, kind of worse.

Tezos raised $232 million when the price of Ether was about 50% or less than it is today, so about $500 million now. The result is a lot of lawsuits, no product, and the formation of a $50 million venture fund. Binance raised $15 million through its ICO, which now trades at over $2 billion. The exchange is launching a $1 billion venture fund. Huobi raised $300 million, and though the token trades at a discount, it is also launching a $93 million venture fund. EOS, the largest ICO ever at $4 billion, is committing $1 billion to venture through partners like Galaxy Digital. Another example stuck out at us from a recent Coindesk article, where Meltem Demirors described this cycle -- "[Blockchain Capital invests in Ripple, which owns XRP currency]. Ripple took some of that XRP and gave it back to Blockchain Capital. Blockchain Capital then turns around and invests it in Coinbase ... Coinbase now created a venture fund investing in startups Blockchain Capital is also investing in, who are then turning around and investing in startups with ICOs."

This is billions and billions of capital that were invested for one purpose -- to help the fund-raising team build software products that investors want to use -- that are being re-purposed into another direction entirely. Hey, maybe you hired me to program this website, but I decided manage your retirement portfolio instead. One result is a skill mismatch: lucky coders are not professional investors. Another result is the loss of focus. And the last is the systemic risk to the whole ecosystem. If the investment returns are based on financial engineering and memes, rather than some real economic activity to underpin our excitement, then a regulator pulling hard on one thread will unwind the entire experiment.


Source: ICOs (Binance ICOHuobi), Venture funds (TezosBinanceHuobiEOS), Coindesk (Quote)

CRYPTO: 2018 ICOs at $9 Billion, But Definitely Slowing


Well, there doesn't seem to be another way to say it -- ICO activity is absolutely and unequivocally slowing down. We were optimistic that token offerings were independent of crypto currency prices -- in part because early stage technology venture activity should be separate from late stage market dynamics. But it was only a matter of time before the slowdown in crypto prices was reflected in a slow down of ICO funding and crypto fund formation. In fact, offerings as a function of crypto market cap, and especially as part of Ethereum's market cap, seem to be fairly stable as a percentage.

The numbers: if we look at all token offerings above $1 million in funds raised, 2017 saw $6.6 billion and 2018 YTD has seen $9.1 billion. So far so good, right! But, if we pull Telegram and EOS out of both numbers, we land at $5.9 billion 2017 YE and $4.1 billion for 2018 YTD. That's still a higher pace than last year, so let's drill down into the monthly figures. In particular, if we pull out Telegram ($1.8 billion) and EOS ($4.1 billion) on a monthly basis, the monthly trend look severely down -- to $560 million from a high of $1.5 billion in December 2017. So unless you believe in the continued presence of mega deals, token offerings have indeed been dragging due to continued regulatory uncertainty, tax overhang, and a lack of tangible progress in software adoption by the mainstream consumer.


That said, the uncertainty will get resolved. Even if Western regulators constrict the space into a narrow box, there are many legitimate jurisdictions that want to be crypto Delaware. Look at Japan: from Rakuten tokenizing $9 billion of loyalty points, to Mitsubishi bank talking about launching a cryptocurrency. Fear is worse than truth. And, we may indeed be entering the era of mega deals. Many of last year's token projects were built by new teams, like Seed stage venture. This year, more mid-stage companies (e.g., 50-250 employees) are tokenizing some asset of their existing operations. And next year, we may start seeing late stage companies bringing their own DLT projects to the market, and marrying them with public crypto. Just look at the Internet wave: March 2000 was the peak value share a percentage of market capitalizations. Despite the crash, the web has never been more present or important than today. Will crypto follow the same hype cycle curve?


Source: Autonomous NEXT (aggregated ICO data), Kleiner Perkins (IT as %)

ROBO ADVISOR: Can Robinhood and Acorns grow into their Valuations?

Source: Learnvest

Source: Learnvest

Microinvesting apps got a massive boost last week in credibility and funding. We've written before about the difference in model between web-born roboadvisors and mobile-born microinvesting apps, with the key being a focus on attention versus a focus on assets. How do you monetize $500 accounts? You get millions and millions of them. How do you do that? Give out free candy.

Take Robinhood, the free trading app just reached a $5.6 billion valuation, based on a $363mm round. Autonomous partner Vincent Hung looked at the stats: Robinhood has 4mm users, which is higher than E*Trade’s customer number of 3.7mm. But so far, the company's focus on Millennials, and potential for these accounts to eventually become lucrative, does not seem to have impacted any of the large e-brokers in terms of growth metrics or industry economics. This implies that Robinhood is comprised of low asset value / high turnover accounts. We also wonder whether the 4mm user figure is also the active account number.

The investment was led by DST Global, Sequoia and Kleiner Perkins. These are smart venture capital names, but we are starting to have doubts. Robinhood has been raising money like it's their only business, burning through that cash to fund growth, and raising again. This is the social network  growth strategy -- burn until you become a monopoly, and then control the market. But is that worth $1,400 per user, nearly all of which pay nothing to consume services that have positive costs to manufacture? If premium subscriptions costs $10 per month, then it will take more than 10 years for a user to justify the acquisition cost. Or perhaps this investment is just a probability-weighted bet on finding the next Coinbase, which runs at a $1B+ in revenue

Another example in Acorns, with 3.3 million users, which just received a $50 million investment from BlackRock. BlackRock has been explicit about building out a digital wealth platform of the future. They are owners of FutureAdvisor and part owners of European roboadvisor Scalable Capital. So it's not a surprise they continue to invest in digital wealth solutions that could distribute their products. Today, much of that distribution is done through advisors and financial planners, but this investment suggests they want to get closer to the consumer, directly through an app. It's a hedge in case Millennials change behavior and rely on apps and chatbots, instead of advisors. 

Source: Acorns

Source: Acorns

We like Acorns and the behavioral hack of how it helps people save intelligently, but such an investment has to be analyzed in context. And this context is the shut-down of Learnvest inside Northwestern Mutual -- several years after Northwestern bought Learnvest for $250 million. Attempts at changing investor behavior are difficult and expensive, as are attempts to integrate innovations into large financial institutions. So while the Acorns deal is not as absurdly priced as Robinhood, it still highlights the need for Fintechs to grow up and build out their own business models. Because raising money isn't it.

FINTECH: $5 Billion Week in Private Equity for Fintech

Source: Financial Engines

Source: Financial Engines

Where are we in the Fintech cycle? Two massive private equity transactions over the last week reveal the maturity of the space. It's not just startups promising a new world order, but cashflow investors making purchasing decisions to own tech-enabled financial services businesses. If even conservative firms like TPG, Carlyle, and Hellman & Friendman think that roboadvice and digital wallets are the wave of the future, good luck to the old guard banks still in the mode of disbelief.

Our first data point is the purchase of Financial Engines by Hellman & Friendman for $3 billion. Financial Engines had an early lead in digitally-delivered financial advice services, carving out a strong presence in the 401(k) market in the 2000s. After acquiring the Mutual Fund Store, they developed a large physical footprint across the country to target mass affluent investors. The acquirer will combine the firm with Edelman Financial, one of the largest independent Registered Investment Advisors in the US. Digitally enabled wealth management, driven by purpose and mission, supplemented by a physical presence across the diverse geography of the country is the right answer for the future of financial advice. Whether this particular mix of assets achieves that goal remains to be seen, but the rationale makes sense.

One could fault Financial Engines for missing out on the roboadvisor wave, while Vanguard, Schwab and others amassed over $150 billion of assets in low cost managed accounts. But a $3 billion price is a positive data point for startups like Betterment and Wealthfront, which have unicorn valuations with narrow exit opportunities. The largest roboadvisor exits to date were $250 million (Learnvest, a bust) and $150 million (FutureAdvisor), with much quiet since.

The second data point is the $1.9 billion sale of a majority stake in Baidu's financial services arm to to TPG and Carlyle. Western capital has long wanted access to Chinese tech companies, and Fintech especially. Unlike in the Western World, Asian tech combines personal data across social media, shopping, search, and finances to hone artificial intelligence on its users. Imagine if Goldman had all the data of Google, and offered payment wallets, money market funds, and wealth management inside the chat app with 100 million users. This is what regulation as a sword, rather than a shield, looks like. Of course, part of this are fundamental ethical questions about what kind of society we would like to live in, and whether a never-forgetting chrysalis of AI software controlled by a government aligns with our aspirations. 

Source: Baidu

Source: Baidu

CRYPTO: Growth Hacking with Airdrops and Forks


As we gear up for the next edition of Token Mania, one of the key issues to quantify are token airdrops and forks. While ICOs are still good for fund-raising, they are becoming less democratic as investment moves from crowdfunding towards large private pre-sales. So instead of a community-backed token, companies end up essentially raising a token version of early stage financing from venture capital. Airdrops, however, are a way of driving project growth and adoption without asking users to pay for access, or to prefund development. The model is reversed – the project may already be funded, and the team is distributing value to the community to incentivize adoption.

While there's nothing new about sign-up bonuses (e.g., $100 to open a bank account), this particular version of internet growth-hacking is quite different. First, some ICOs are reserving 5-10% of their raise to distribute back out to the community, compared to 0.50% per ICO advisor, or 1% for ICO law firms. Markets see this as a legitimate incentive because many investors value protocols on a ratio of Market Value to Transactions. This means that the more transactions within a network, the higher the relative price of the token. For example, EOS surged 45% in anticipation of a planned drop. And second, the application of a growth hacking to airdrops can tie "free" tokens to bounty tasks, like following a Twitter account, joining a Telegram group, or downloading a crypto wallet. An example of this is that people who signed up for the Ontology newsletter (project on the NEO blockchain) had received tokens which are now worth nearly $10,000. The biggest enabler of this growth hacking is, a recent $120mm+ acquisition by Coinbase and driver of much crypto community theater.



It's hard to find good data, but we were able to parse (so take this with a grain of salt). You can see in the chart past and planned airdrops by month. The rising tide signals that projects are in the mode of buying community, now that they've raised assets to fund development. Oddly enough, the projects want community before their software is finished -- perhaps to put pressure on exchanges to list the token, or to financially engineer positive sentiment and demand.

Two adjacent issues are worth mentioning – (1) taxation and (2) forks. Airdrops could be interpreted to be income, and taxed as such. You are receiving some value with a cost basis of $0, so watch out. And from a structural perspective, airdrops and forks both resemble dividends in some form. We had predicted 50 Bitcoin forks in 2018, which probably won't be far from the truth. Regulation, or at least economic normalization, of such financial engineering to remove scammy behavior is still desperately needed in our view. Too many opportunists are giving away free magic beans, persuading people those beans will grow, and then walking away with capital gains and no positive impact on the world.

CRYPTO: The Mega ICO and Future of Crowdfunding


Let's dive one more level deeper into the 1Q 2018 numbers. Our accounting methodology puts ICO funds raised into the latest  month in which the ICO was still active, which can make for lumpy data as the market becomes more institutional. This becomes painfully clear with EOS and Telegram, which we define as Mega ICOs and exclude in industry estimates. But what do things look like if we DO include these two projects?

Well, ICO fundraising jumps from $3.4 billion to $6.8 billion, which is the total amount raised in all of last year. According to this version of the story, there is no token fundraising slow down of any kind, whatsoever. We have already matched what happened in the past. And if we look on a monthly basis, instead of seeing a normalization in April/March that takes us to the levels previously seen in last September/October, the funding totals are accelerating to all time highs. What is going on?

Source: Autonomous NEXT, Token Report, Pitchbook, EOSscan

Source: Autonomous NEXT, Token Report, Pitchbook, EOSscan

Two things. First, the Telegram raise of $1.7 billion highlights the trend of outside venture capital money moving into the crypto economy to buy tokens. This is not the "crypto capital gains" thesis of 2017, where early winners wanted to diversify their holdings, but instead the "let's not miss out" thesis of venture chasing last year's success. The other side of the coin is that high-profile projects can lean into this fear of missing out and run pre-sales, rather than offer tokens to the public. In turn, this can minimize regulatory risk if done for accredited investors only.

Second, the year-long EOS token offering took in about $800 million of value in 2017, and 1.6 billion of value in 2018 according to EOSscan. Talk about a financial black hole! EOS is the opposite of Telegram, publicly open to the world for contributions of any size. One way to interpret its approach is a prolonged attack on Ethereum at the protocol level, pulling the currency of one "world computer" to fund a direct competitor.  Maybe it's some sort of futuristic M&A, where a decentralized Internet super-organism eats its own tail and rises anew. And last, we found the below chart on non-Ethereum token offerings very interesting. Meaningful competition for the use-case of launching an ICO are already out there -- NEM, Waves, NEO, Stellar. Ethereum is seeing over 100 monthly new projects, but the race is not yet fully won. Are decentralized networks a winner-take-all market? Are they a market at all?

Source: Token Report

Source: Token Report

CRYPTO: Initial Coin Offerings 1Q 2018 in Review


There's a bear narrative in the air about ICOs and crypto currencies. It starts out by suggesting that last year was a bubble around Bitcoin, that many unscrupulous parties tried to jump on the bandwagon and take naive investors' money. This spilled out in the fintech, crypto and public markets. See, for example, Long Island "Blockchain" being de-listed from NASDAQ. Or India cracking down on crypto currencies. Or the ban on Venezuelan crypto petro currency. And on top of this, regulators across the globe are recognizing Initial Coin Offerings for what they are -- unregistered securities offerings from unlicensed institutions. Not surprisingly, we don't quite agree.

We looked at $1 million+ ICOs over the first 3 months of 2018 for an updated set of charts (see below). But first, a review. 2017 saw $6 billion in token sales (non equity), as compared to about $1 billion of traditional and corporate venture equity going into blockchain companies. That means 6x the funding, 6x the human capital, 6x the interest. So far in 2018, the same pattern holds. Despite the macro crypto slow down, we see $3.5 billion of capital flow into tokens in Jan, Feb and March. Now, there is some underlying slow down relative to November and December of last year, and the number of projects starting fund-raising in March is lower. Some high profile companies are choosing to airdrop instead of ICO. But at a high level, the crypto economy is going to be far bigger this year than last year. This is because, we believe, the early stage ecosystem of company/project formation should be uncorrelated from large coin cap prices. The same can be said about -- for example -- the price of BAML stock and the number of startups raising Seed funding.

Further, there is continued differentiation in the projects across industries. The infrastructure layers of various currencies and protocols are still being negotiated, representing about 25% of the 2018 raises. Many investors continue to look for value in fat protocols (we think this is hard due to network effects). The financial infrastructure, like banks, investment tokens, and decentralized exchanges, are still being put in place, also about 25%. Real growth, however, is coming from things like Identity, Gaming, IoT and other decentralized applications. File that one under obvious.


As a last point, we're sharing our latest number of crypto funds: about 251, not including the 9 or so that shut down or pivoted. The number is not growing as quickly as we'd expect -- partly because it's a more difficult environment to raise, and partly because folks are being less vocal about what they're doing. Our intuition is that there's probably 60 or so vehicles we are yet to identify. And on the other side of the equation, many traditional venture funds are starting to buy tokens. Does this mean traditional venture should start being listed as a crypto fund? Blockchain is infecting all the capital markets, which is just what technology does.


ONLINE BANK: $275 Million from Experian for 6 Million ClearScore Users

Source: ClearScore, Banknxt / Atom Bank

Source: ClearScore, Banknxt / Atom Bank

Neobanks, like roboadvisors, are still trying to make sense of the wilderness. On the one hand, there are stories of fast, massive success. For example, credit bureau Experian just splashed $275 million on ClearScore, a 3-year old fintech startup with 6 million users that provides a credit tracking dashboard and refers users to financial products. How is this still a market opportunity that banks missed, when did personal financial management right in 2007 (and sold for $170 million) and Credit Karma, an American version of the same, has 70 million users and a reported $500 million in revenues? Or, as another example, Smart Asset, which offers financial calculators that help people decide whether to rent or buy, has 35 million monthly users. Other examples of clearly working neobanks are Revolut and Transferwise, each with over a million users benefiting from reduced pricing on international money transfers.

We are being loose with definitions on purpose. Anything digital- or mobile-first, customer centric, and related to personal finance and depository or lending products looks like a neobank in our book. This is because banks are supposed to help us with these functions. They are supposed to help people save for the future, have convenient access to their money, and pay quickly and easily. And instead, most banks are either buying fintech companies that manage to grab a large chunk of digital users, or are investing so much into challengers as to effectively own them. See for example, Atom Bank's £149 million round, where BBVA will own 40% of the company. Atom's got a loan book of about £1.3 billion -- does the financing makes sense on its own merits, or does it make sense when you apply Atom's customer experience across the entire BBVA footprint?

Source: ClearScore, Banknxt / Atom Bank

Source: ClearScore, Banknxt / Atom Bank

But something is off about the story. We know that the first round of neobanks -- Simple (also acquired by BBVA) and Brett King's Moven didn't really work out. Some, like Seed, are now focused on providing online account opening solutions to existing banks. This is the identical pivot we saw in digital wealth management, as roboadvisors turned into workflow automation tools for financial advisors. So what's the trick that makes some neobanks and PFMs worth hundreds of millions with massive traction, while others scrape at building a software-as-a-service business?

The answer lies in how clearly and quickly value accrues to the user. Credit tracking solves an immediate problem somebody is having, costs nothing, and has an engagement model. Cheap international transfers are instantly actionable, and immediately deliver value over what a traditional bank charges. SoFi's student loans sell themselves, reducing student obligations by thousands of dollars on sign-up. Building a pipe big enough that prospects know you exist is where the $100 million in venture capital has to come in, but then the product can have a positive viral loop. That's different from trying to sell an undifferentiated mortgage, or checking account, or retirement 40 years in the future. The benefits of such financial products are outweighed by the pain of having to interact with them. The questions to ask are: how much demand is there for this thing today, how bad is the current experience, and does your customer know the experience to be bad?

ARTIFICIAL INTELLIGENCE: Fintech AI Kensho Sells for $550M

Source: Kensho / Forbes

Source: Kensho / Forbes

Big news is big. Finance startup Kensho has just become one of the largest artificial intelligence acquisitions in history. What is even more impressive is that the acquirer S&P, is also a financial services firm, and not the ever-present boogeyman of Google, Apple, Facebook, Amazon. Forbes claims this is the most expensive AIacquisition to date, though we see you Otto (self-driving trucks) at $680 million in Uber equity.

There's a nagging question around the acquisition price. Pitchbook shows a bit over $100 million raised into the company to date, with the last check being $50 million, led by S&P, and with a post-money valuation of $595 million in March 2017. So the acquisition price is essentially identical to that of a year ago, with none of the investors taking a downround, and S&P effectively not paying for their own slice. Across all rounds, it looks like the company sold about 50% of the equity. Why exit now without an uptick for control -- the other investors from last March, like Goldman, JPM, Bank of America, etc., can't be happy to just get their toys back.

Anyway, wat does Kensho do that is valuable? According to Goldman, which was one of the original investors, the answer is not that the AI manufactures investment product. Instead, it augments human analysts so that they are more powerful and can get more done -- like running a quantitative analysis in seconds rather than days. "It never disrupted the underlying business model". That's a lot of exit money for something that didn't disrupt any business models. Also not a surprose -- very few fintech companies are standalone businesses, but many will work when levered up 1000 times on a large incumbent client base. This was the logic behind BlackRock's $150 million spend on FutureAdvisor, a company with about $3 million in revenue. And a similar logic must animate the need to have the industry's best known AI asset to distribute to thousands of S&P institutional clients. 

CRYPTO: $400 Million Acquisition of Crypto Exchange

Source: Circle

Source: Circle

Fintech startup Circle bought crypto exchange Poloniex, allegedly in a $400 million transaction. What's Circle? It's a mobile wallet / neobank that let's users text money to each other, with technology rooted in Bitcoin payments. Think about it as a combination of Venmo and WePay. According to Crunchbase, Circle has 50-100 employees and raised $136 million from Goldman Sachs, IDG China, Breyer Capital, Accel and General Catalyst. There is no way these guys have $400 million cash on hand, so we would expect this to be in large part an equity deal. And the latest Circle post-money valuation is about $500 million, so this was a big gulp if the reported numbers are correct.

What's Poloniex? Poloniex was an early exchange in the space that was quick to list new alternative tokens. It provided access to Ethereum before Coinbase did. In the process of getting popular, it acquired more users than it could handle. It was well known in the ecosystem that the company’s customer support took a very long time, and that conflict resolution processes were overwhelmed. This transaction should benefit Poloniex customers with new features and support services, while giving Circle a larger revenue base in the crypto economy.

One angle that gets lost in all the ICO talk is equity checks into blockchain and crypto companies by venture investors. About $1 billion was invested into the ecosystem from the venture side in 2017, of which $400 million was from Corporates; and over $300 million was invested in the first 2 months of 2018. In terms of the $400 million acquisition price, this would put the Poloniex below Coinbase’s $1.6 billion valuation, but well above that of enterprise blockchain unicorns like Chain ($130 million) or R3 ($250 million). So it is certainly motivational to see a transaction that bridges that public and private crypto worlds, and values tokens as an asset class rather than a mere operating improvement.

Some are also focusing on the fact that Goldman has a stake in Circle. As security tokens gather steam, with projects like Polymath raising $60 million and air-dropping their tokens to a large community base, traditional investment banks need to think about the future of their business. This is an existential question for the securities industry, and building correct exposure will be key over the next 5 years. Or the investment banks will end up like the music labels.

Source: Circle, Autonomous NEXT (Pitchbook data)

Source: Circle, Autonomous NEXT (Pitchbook data)