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“Why do you hate crypto, Jason?” (I don’t, but… )

29 January, by Jason Calacanis[ —]

“If you are right, that 90% of crypto projects are scams or incompetent, what do you gain by taking that position publicly?” asked a close friend.

I took a moment to think it through.

[ Click to Tweet (can edit before sending): https://ctt.ec/3a1P0 ]

Why was I sounding the alarm on Twitter, my podcast, and CNBC, that civilians should be very careful investing in virtual currencies that are unregulated, anonymous, easily manipulated, phenomenally hackable, global, and often run by bad actors or the incompetent?  

“To protect people from losing their money?” I answered.

I’ve got a complicated relationship with crypto, having monitored early projects like Bitcoin with enthusiasm.

Six years ago I wrote a piece called “The Most Dangerous Project We’ve Ever Seen,” that introduced many in the investment community to Bitcoin.
http://www.launch.co/blog/l019-bitcoin-p2p-currency-the-most-dangerous-project-weve-ev.html

Full disclosure, while I don’t trade cryptocurrencies, I have a lot of exposure to it by investments in startups like Robinhood, Abra, and Talla.com (to name a few notable projects).

Here are five important points I would like to state for the record:

  1. This Will End Badly For Most

It would take me ten articles to catalogue all the risks and scams in this emerging space, but to give you the broad strokes here are the critical issues that most savvy people — including those with large positions in crypto — all agree on.

Billions of dollars in crypto have already been stolen, and *most* of the ICOs I see are horrible ideas run by people who have no track record or ability to execute.

Bitconnect is an instructive example that you can read about here:
http://nymag.com/selectall/2018/01/ponzi-scheme-bitcoin-site-bitconnect-shuts-down.html

Most importantly, you should watch this hilarious video:
https://youtu.be/lCcwn6bGUtU

And read about these pump and dump chat rooms, where thousands of people (it seems) are buying crypto coins before marketing them to the next group of suckers.
https://theoutline.com/post/3074/inside-the-group-chats-where-people-pump-and-dump-cryptocurrency?zd=1

Now, it is *possible* that while most projects fail, most of the money in crypto could wind up going to a smaller number of higher quality projects that become long-term successes — but that is obviously not guaranteed.

In fact, it’s possible that Bitcoin could go to zero (which I talk about below).   

  1. ICOs are insanely speculative investments/donations

ICOs are initial coin offerings and they are the black eye of the crypto industry for a number of reasons. Most of them have untested teams, but that doesn’t mean that those teams won’t eventually build very successful companies, but it does mean that you are taking serious risk.

When you look at an ICO, understand that there are multiple levels of significant risks stacked on top of each other. Most ICOs share most of these risks:

a. Untested teams — some are scam artists, others are just wildly naive.
b. Top projects are raising far too much money before they hit any milestones — overfunding is a very dangerous thing.
c. A large number of bad or derivative ideas with crypto slapped on them (“Uber with tokens!” and “a decentralized Twitter!”).
d. You’re not buying stock in these companies, you’re buying tokens or, even worse, tokens that might show up, some day (i.e., the SAFT: “a simple agreement for future tokens.”)
e. You’re investing in a white paper, which is a fancy way of saying “a bunch of ideas described in a PDF.”
f. There is little legal framework for these offerings, and the SEC is a very serious organization — and they have started to sound the alarm.
g. You have zero rights with your tokens — because they’re not equity!

If you compare this stack of risks to a startup, here is what I do for a living in terms of taking risk:

i. We typically invest in startups when they have built their MVP or a product in market with some early traction (as opposed to white papers, which are typically no more sophisticated than the back-of-a-napkin idea).
ii. We get equity in the companies (as opposed to Chuck E. Cheese’s tokens that have never even been actually used).
iii. We have protective provisions in our investor agreements that keep us from being diluted, give us information rights, pro-rata, anti-dilution, and other important legal concepts that keep bad actors from absconding with our money.
iv. We have five decades of legal and regulatory stress testing of the system.
v. We meet with the founders of these projects multiple times and do due diligence (as opposed to shipping Bitcoins to their wallets).

Now, I’m not saying I will never buy tokens, but it’s very clear to me that tokens are most often either a Kickstarter contribution (you know, without the product being sent two years late), a donation, a gift to incompetent people, or a scam.

There are probably 10% — a guess on my part — of these projects that are going to see the light of day and have a similar chance of success as an angel investment.

So, of that small number — which I put at 10% — maybe 10-20% will succeed.

This leads me to believe that 98% of these projects will result in people losing their money.

That means you have to make ~50x your money on one of 50 token purchases to break even. That might happen; I had a 3,000x+ investment, and a handful of 20-50x investments as an angel (which I talk about in angelthebook.com).

  1. Bitcoin itself could go to zero

The Bitcoin HODL crowd (a play on words for “hold,” as in hold your coins, never sell them), think this is insane, but we’ve watched many times as the early projects in a promising vertical go to zero and the 10th goes to the moon.

Many of us used Ask Jeeves, Lycos, and LookSmart before seeing Google show up in 1998.
https://en.wikipedia.org/wiki/Timeline_of_web_search_engines

Many of us used SixDegrees, Friendster, LiveJournel, and MySpace before Facebook in 2004.

Bitcoin is facing massive challenges around speed of transactions, the size of the blockchain, transaction costs and governance.

Governance could be the thing that takes it down. If you want to jump down that rabbit hole, you can watch this video: https://www.oii.ox.ac.uk/blog/the-blockchain-paradox-why-distributed-ledger-technologies-may-do-little-to-transform-the-economy/

The majority case in my mind, is that Bitcoin will, as the first technology out of the gate, be supplanted by a much better technology. This could be a fork of Bitcoin or simply a new, much better product.

As time moves on, consumers get savvier, and that means they recognize a better product quicker and move to it faster and faster. We’ve seen this with people jumping from Hotmail to GMAIL, BlackBerries to iPhones, and dialup to broadband internet.

Consumers will not have the loyalty to Bitcoin that they have to their email account and BlackBerries, because they don’t actually use Bitcoin for anything other than speculation. The switching cost will be zero, as opposed to switching your phone, which requires backing up your data, moving your phone number, and setting up your new iPhone and selling your BlackBerry.

We could see a run on Bitcoin that happens in days or hours, not years like the decline of RIM (BlackBerry’s parent company) and AOL.

  1. There will be an Amazon and Google in the Crypto space

I’m guessing we will see an Amazon, Google or Netflix-like company come out of the crypto space. When we do, there will be a ten-year window to buy their stock and be rewarded. As such, if you are in love with the crypto space, my advice to you is:

a. Spend 50% of your time learning.
b. Invest no more than 5% of your net worth in a basket of projects.
c. Be prepared to lose 100% of your investment in this basket of projects.
d. If you do hit a massive winner, say a 50x investment, make sure to sell some along the way as “idiot insurance.”

That last part is the critical one. I’ve had to have a heart to heart with a number of friends who bought Bitcoin early and who are “crypto rich and cash poor.”

If 90% of your wealth is in any one currency that is a very bad idea — unless you control that currency, i.e., if you were Jeff Bezos, owning a lot of Amazon stock isn’t a huge problem because you control the company and have massive insight into it.

  1. Founders should be very careful doing ICOs

If you take people’s money for a token that you hope will someday have utility, understand that the person buying it believes — 99% of the time — that this is a security.

If people buy your token to make money it is no longer a utility token, even if those buyers signed a document that says, “I’m buying a utility token not a security.”

Why? Because some percentage of our legal system and regulators will side with retail investors. You will get dragged into court and be forced to explain why you did a countdown clock to sell your utility tokens and why you hired promoters to sell them around the world.

Even if you win, it will be a horrible victory. Just ask the people who were sued after the dotcom implosion. It took the brutal part of a decade for most the them to clear their names even if they were in the right — others got lifetime bans.

Also, as Rob May from Talla points out, there can be additional costs to ICOs that founders might not consider:
https://www.coindesk.com/hidden-trade-offs-icos-entrepreneurs/

Summary
  1. I don’t hate crypto, but I do hate seeing people get scammed out of their money.
  2. The space is now driven by scams, FOMO, and FOCO, which means it’s going to end very badly for a lot of people. (FOCO is the fear of cashing out.)
  3. Feel free to invest a lot of your time, if so inclined, but be very careful with your money.

Best @jason

PS – We are giving 1,000 founders a free ticket to LAUNCH Festival Sydney, June 19 and 20. http://launchfestivalsydney.com Please spread the word!

PPS – We are hosting the next LAUNCH Incubator class starting on March 8. If you know of a company in our “Goldilocks Zone” (GLZ) please hit reply and introduce me to them. The GLZ means not too hot and not too cold, which for us means the startup doesn’t have a Series A yet, but does have a product in market with some traction (even modest traction, like $10,000/month in revenue or 10,000 daily users).  http://www.launchincubator.co/

PPPS — We are just wrapping Season 2 of my podcast ANGEL. It’s free and you can listen here: angelpodcast.com & http://bit.ly/angelpodcast

PPPPS — If you’re an accredited investor and you want to see what I’m investing in, and possibly invest alongside me, you can apply at jasonssyndicate.com.

PPPPPS — The book is doing great. If you’ve read and loved it, please consider posting a review, which I understand really helps!
https://bit.ly/5starangel
https://www.angelthebook.com/audible
https://www.angelthebook.com/goodreads

 


ANGEL in Miami 1/29-1/30/18

19 January, by Jason Calacanis[ —]

Friends,

I’ll be in Miami, FL, in a couple of weeks to talk about my book, “ANGEL.”

I hope you will join me at Refresh Miami on Tuesday 1/30 for a fireside chat and raffle. Raffle winners will join me for brunch the following day, Wednesday 1/31. Agenda & book tour itinerary are below.

Hope to see you there.

Best,

@jason

MIAMI ITINERARY: 1/30 & 1/31

TUESDAY 1/30:

12PM-2PM Private Lunch with Gramercy

6:30-8:30PM Public event: Refresh Miami fireside chat & raffle. Raffle winners to join Jason for brunch following day.
Purchase tickets HERE.  AGENDA:

6:30pm – 7:15pm: Networking, drinks and light bites
7:15pm – 8:30pm: Fireside Chat and audience Q&A. Jason will be interviewed by Melissa Krinzman, Managing Partner of Krillion Ventures

WEDNESDAY 1/31:

10:00AM: Brunch with raffle winners.

ANGEL Book Tour Dates (frequently updated)


The Seed Slowdown

December 2017, by Jason Calacanis[ —]

My pal Fred Wilson wrote about the “Seed Slowdown” today. The numbers show two clear trends:

1. 2015 was the peak of angel investing in technology startups in terms of dollars and number of deals.

2. 2017 is crashing in terms of the number of deals closed, with dollar amounts off significantly — but not as much.  

[ Click to Tweet (can edit before sending): https://ctt.ec/CmkbL ]

Fred points out some of the reasons for the boom and bust, and I’m in agreement and expand a bit on what happened — since I lived it and recently wrote about it in my book (angelthebook.com).

There were two major trends contributing to the 2014/2015 boom:  

1. Facebook created a crazy number of new investors (e.g., Dave Morin, TWIST #216 and Chamath Palihapitiya TWIST #238 & #776), who were added to the legions of Google angels running around town (e.g., Andrea Zureck, ANGEL #3).

2. Coordinated seed efforts: These started after Web 2.0 (the 2002-2006 era) and created a professional class of early-stage investors. These efforts include stuff I was working on like TechCrunch50/LAUNCH Festival, Sequoia Scouts & the Open Angel Forum (where Uber Pitched), and notably, Naval’s work on AngelList (TWIST #244) and Paul Graham’s scaling of YCombinator to mind-blowing heights (TWIST #421).

The reason for the decline? I would sum that up in 3 points:

a. Indigestion
When you break into the 30, 40 or 50 angel investments like Matt Brezina (ANGEL #10), Joanne Wilson (TWIST #358 & Fred’s better half) and I have, you need time to digest these deals. As I describe in the book, your startups will start coming back to you 9-12 months after you give them money, and most will not be able to clear market with other investors. This leads to dozens of founders needing your help to raise funds or come to terms with the death of their startups. It’s exhausting, and most angels take breaks investing.

b. Startups Staying Private
By now everyone knows that startups can stay private indefinitely, and this is a bad, bad trend for the entire ecosystem — but more often than not it’s worst for the company, which loses the discipline and the maturation that going public cause. My pal Bill Gurley (TWIST #722), considered by many to be the best VC on the planet right now, outlined this in his infrequently– but poignantly — updated blog, “above the crowd” (he’s tall, he’s a brilliant strategist): http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/  

c. Angels Moving Downstream
Many angel investors learn their craft and get picked up by major firms. Cyan Banister was a frequent guest at the Open Angel Forum, and invested in Uber and Thumbtack at the events. Over the years she became one of the most respected investors in the world and Brian Singerman at Founders Fund recruited her. Joining a big firm is a better life for an angel investor because, well, you do fewer deals at larger dollar amounts. This leads to the opposite of the indigestion in point (a) above! Fewer, more meaningful bets is simply an easier life than being an angel, which at times feels like being a hospice worker — which it obviously isn’t! In fact, that’s a big part of the job of being a great angel investor: explaining to distraught founders that this isn’t life and death.

As Fred points out, being an early-stage investor is hard and some people are leaving to do later stage investing which means…it’s a huge opportunity!

My team and I are doubling down on the early stage with the help of jasonssyndicate.com. Since my book came out, our syndicate grew from 1,100 members to 2,000. It will be 3,000 in the next year I would guess.

This has led to us having a new set of challenges, including our deals closing too quickly and with two out of three interested syndicate members not being able to get an allocation (due to the 99 partner limit of SPVs/LLCs). We are working on solutions to resolve these high-class problems.

At the same time as everyone is leaving, we’re ramping up AND taking steps to make our investments more sound. Those steps are, generally speaking (and we try not to have hard rules):

1. We focus on investing in startups that have product/market fit and some traction. This could be $10,000 to $150,000 a month in revenue, or tens of thousands of daily free users.

2. We focus on founders who are cash efficient. We want founders that get $1 in value from a nickel or a dime, not those who burn a dollar and get a penny in return.

3. We want founders to have 12 to 18 months of projected runway after their fundraising. If you are cash efficient and embrace “low burn culture” you will have time to figure out who your customers are and what they want, while not having to waste time fundraising for a nine to 15 months on average.

4. We try and find teams that have technical co-founders because they tend to be the most cash efficient (point #2) and because they tend to figure out their customers quicker (see point #3!). Startups with technical co-founders also don’t have their products stall in a cash crunch, because the founders can write code themselves.

5. We focus on founders who have reasonable valuation expectations. We don’t do uncapped notes, and we will negotiate valuations fairly.

6. We focus on founders who want to have proper governance at their startups. This includes doing monthly updates, having information rights and starting board meetings sooner than their peers. We want founders who want to put on the “big boy/big girl pants,” as my pal Chamath says.

7. We obtain and protect our rights in future rounds of financing. We insist on a board seat option if we own over 5% of a company, and we take that board seat if the company gets their Series A. We have pro-rata rights and when a Series A or B happens, we follow on. This is one of the delightful aspects of our syndicate being oversubscribed.

Open For Business

Bottom line, we’re open for business and we’re going to do 40+ deals a year in 2018. If you want to “do the work” as my TWST coffee cups encourage, as a founder looking for funding or an angel investor looking to lead the industry, visit jasonssyndicate.com.

I am writing a follow-up piece for founders titled: “Surviving the Seed Slowdown” on my email list. Sign up in the sidebar at Calacanis.com.

Best, @jason Calacanis

PS – Read the book and let me know what you think — please! Angelthebook.com.

PPS – If you read the book, please consider a review:  

https://bit.ly/5starangel

https://www.angelthebook.com/audible

https://www.angelthebook.com/goodreads

PPPS – Angel University will be taking place two times in 2018. At it, 50 angels learn from each other and collaborate. Sign up at Angel.University.  

PPPPS – Angel Summit will take place for the third time in Napa in July of 2018. At this 2.5 day event we do business in the AM, activities in the afternoon and play cards, video and board games at night. Launchangelsummit.com

PPPPPS – We just finished Season One of ANGEL, the podcast. Our ten guests:

1. Cyan Banister, Founders Fund

2. Gil Penchina, angel investor & syndicate lead

3. Andrea Zurek, XG Ventures

4. Ed Roman, angel investor & syndicate lead

5. Zach Coelius,  angel investor & syndicate lead

6. Ben Narasin, previously Canvas (now NEA)

7. Dave Samuel, Freestyle Capital

8. Pejman Nozad, Pear.vc

9. “Ask an Angel”

10. Matt Brezina, angel investor


ANGEL media hits so far… thank you.

September 2017, by Jason Calacanis[ —]

Wanted to say thank you to everyone who has had me on their podcast/networks/etc. to discuss my new book ANGEL.

Podcast/Radio: Guest Appearances on Angel
2CentDad: Interview by Mike Sudyk
Bloomberg Markets: Interview by Carol Massar and Cory Johnson
Educate Yourself: Interview by Ryan Carson
Forbes: Interview by Steven Bertoni
The Full Ratchet: Interview by Nick Moran
Inside Outside Innovation: Interview by Brian Ardinger and Josh Berry
Intercom: Interview by Des Traynor
The James Altucher Show: Interview by James Altucher
KindredCast: Interview by Alex Michael
The Learning Leader: Interview by Ryan Hawk
The Matt Report: Interview by Matt Medieros
The Meb Faber Show: Interview by Meb Faber
Mixergy: Interview by Andrew Werner
Success! How I Did It: Interview by Alyson Shontell
The Twenty Minute VC: Interview by Harry Stebbings

Media Hits

7/18/17: Cheddar TV (1 hour 35 min)
7/19/17: CNBC Squawk Alley
7/23/17: Salon
7/25/17: Bold TV
7/26/17: Fort Knoxx
8/25/17: Live Talks LA

If you would like to have me on your podcast to talk about the book, tech, angel investing and life, email me [ jason at calacanis.com ]











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