When infighting and resignations threaten to tear apart the startup you’ve backed, most investors would chalk up the loss and move on.
Not so for Jamie Burke.
When Burke’s Outlier Ventures made its first public token investment last year in IOTA, a distributed ledger technology focused on transactions and communications between Internet of Things devices, it was tipped as crypto’s Next Big Thing.
By the end of 2017 interest in IOTA peaked as big-name corporates including Volkswagen and Bosch signed on to develop IOTA-based applications, sending IOTA’s total market value soaring from $1 billion to over $12 billion.
IOTA’s windfall was short-lived.
After Ethereum founder and crypto poster child Vitalik Buterin outlined concerns with the project, the IOTA Foundation’s refusal to work with security researchers was revealed in leaked emails and most recently board-level infighting among the project’s founders was made public, the price of IOTA tanked. The token’s valuation fell back to $1 billion in early 2018 as a wider crypto rout sent currencies sinking.
For Outlier and a new generation of crypto investors this is the first real test of their thesis that not only are the rules of technology being rewritten by blockchain, but so too are the rules of venture capital.
“Andreessen isn’t going to be the Andreessen of crypto”
VCs traditionally use other people’s money to buy stock in private companies, which they’ll eventually cash out at a profit when the startup is acquired or goes public.
Cryptocurrencies like bitcoin, ether or any other still-being-developed token would be unusual and in some cases illegal for a VC to hold.
But as token values rise, a new generation of venture investors—like Metastable Capital, Blocktower Capital, Placeholder and Burke’s Outlier Ventures—have launched, open to the idea of taking token stakes in new blockchain protocols.
A recent regulatory filing revealed that crypto investor Polychain Capital, founded in 2016 by Coinbase’s first employee Olaf Carlson-Wee, has turned $4 million into over $1 billion in such token assets.
At the same time even traditional VC heavyweights, like Andreessen Horowitz, are launching their own dedicated crypto funds.
a16z Crypto announced in June that it will “invest in traditional financial instruments like equity or convertible notes, and new instruments including the direct purchase of coins/tokens”.
Burke isn’t too concerned, “I don't think Andreessen is going to be the Andreessen of crypto,” he says.
Instead, he’s confident that this new generation of token-native investors will have a unique advantage versus their shareholding peers.
The advantage of a token stake?
At first glance, owning a startup’s currently worthless token, rather than a share in the company, seems fairly absurd.
When Outlier backed IOTA last year with a “seven-figure sum” before its tokens were listed on a public exchange, Burke walked away with just a handful of then-worthless crypto, not even a seat on the Foundation’s board.
But today that strategy is poised to pay off, even if a project like IOTA fails.
“IOTA has issues, largely around their communications … but we believe in the vision and we believe in the innovation,” Burke told Forbes.
“Whether they will or won't be the ones that will fully realize the vision, is impossible to say, but we remain long-term investors.”
Because the IOTA protocol is partially open sourced, his commitment remains as even if the Foundation falls apart or is unsuccessful, Burke’s hope is that another group could always pick up the project and continue developing it.
“When you’re investing in equity-based startups, inevitably 90% fail, and all that know-how, IP, experience and development is lost forever.”
In the kind of protocol investing that Outlier and its peers are doing, the value of their holdings has the potential to rise infinitely, long after the protocol’s creator has vanished—much in the same way that the value of bitcoin has grown exponentially since its creator Satoshi Nakamoto disappeared.
On the flip side, taking a token stake is hardly a guaranteed win.
The risks of a token stake?
With backing new blockchain protocols there’s no guarantee they’ll ever find successful “protocol-market fit” and take off like ethereum, Stellar or even IOTA.
Token investors also have less oversight and control over the development of the protocols they’re backing.
While a VC might be able to steer its portfolio company’s decisions or direction, Outlier is at the mercy of the developers and the wider open source community working on the project.
The final risk that professional crypto investors face is being written out of the blockchain story entirely.
Today Outlier’s added value is in ecosystem development, whether that’s with connections to the corporate world—Burke helped Bosch invest in IOTA—advice on M&A or the upcoming launch of Outlier’s own protocol developer conference.
However, the latest blockchain protocols are already working to replicate and exceed these offerings.
When EOS raised a record-breaking $4 billion from sales of its tokens earlier this year, it placed $1 billion aside in cash purely for ecosystem development, acquisitions and supporting developer conferences.
The question Burke and his peers will soon face is whether, with so much funding sloshing around, venture investing can still add value for crypto startups.
