Nick: Thanks for joining me for part two of our interview on the blockchain. Today we will cover William’s thoughts on:
– What the future with the blockchain looks like in a much more decentralized environment.
– What Industries are most at risk of being disrupted.
– What he thinks is most often misunderstood about the blockchain and the impact it may have.
– How he’s seen smart start up investors approach early stage investing in companies with a blockchain focus.
– Williams’ advice for investors interested in the blockchain and his final thoughts from all his research and study of the block chain.
As always there after will wrap up with some key takeaways and a tip of the week. Here’s part two of the interview with William Mugabe are on blockchain investing.
Nick: So clearly the blockchain has some powers to decentralize. What are your thoughts on what the future looks like in a much more decentralized environment?
William: Sure. It’s all about intermediaries again. I remember when we talk about the Internet back twenty years ago, we used to say, “Well it’s about your intermediaries and those intermediaries were going to disrupt or replace or enhance existing intermediaries” and what the Internet was giving us back then were the online intermediaries like the #Amazons and all the websites that enable services. So now, we’re saying the same thing but those intermediaries are our trust intermediaries. Where they are going to replace some existing intermediaries but their function is going to change. They could be a note. Maybe the new going to be as a note. Now on the 1:45(unclear) network maybe they are not the center anymore. If you think of #e-bay today, e-bay is a central. E-commerce place. You have to go through them to make things happen. Amazon, we have to go through to make things happen but perhaps in the future and we’re going to see that fairly soon, one implementation is to do e-commerce on a peer to peer network. There’s a company on investor and #OpenBazaar who is developing a protocol for peer to peer commerce to occur between any two parties. So it’s like e-Bay without e-bay or even a slice of Amazon without an Amazon. So I can put any product I want to sell on the network and you can buy it in a trustworthy manner. So that’s one aspect I’d like to see… we’re going to see more intermediaries.
Another way that the blockchain is going to manifest itself in a decentralized environment is by getting married with what we call today has the ‘sharing economy’ and in a case where the participants in a sharing network, share also in the creation and get the rewards from their participation. If you recall, we had that discussion on Fred’s blog not too long ago. He called it ‘network equity’ where other participants are not just users. The participants are contributors to some kind of value with that other users that benefit from as well. So if you extrapolate into the future, there’s this concept called, “D.A.O”- Distributed Autonomous Organizations and the concept right now is could be a little bit science fiction and a little bit futuristic but the idea is that these organizations run in a closed loop manner where participants create value and others receive value from that organization and it all happens autonomously without the center being too much in control of anything except to make sure that it runs properly. So by what I mean by that is that the participants can share data, can share labor, can share service but at the same time they get rewards back from creating a bigger value for everybody at the same time.
So I foresee a not too distant future where the blockchain becomes part of the distributed autonomous organization. It’s a new sharing economy.
Nick: At a very macro level, are there certain industries that have tremendous reliance on intermediaries that are most likely to be disrupted by the future of blockchain?
William: Yeah and the one that comes to mind:
1) The financial services.
Nick: Right.
William: Specifically, what is called the Capital Markets or the post trade segment of it and that’s been labeled as a quadrillion dollar’s opportunity where they’re clearing houses in the middle right now. So a lot of these clean houses, they’re role will change. So that’s one industry that is disrupted by the blockchain.
Another one is in the government services and if you think about it, today we have a lot of e-services. That mean you can file your taxes online, you can claim refunds and you can do a lot of payroll stuff. Of course, that’s easy but there’s still a lot of other services that we have to go somewhere and go across the counter and check records or check titles or work with a real estate agent to check someone to be an escrow for an transfer or maybe work with a lawyer and then will verify some specific ownership. So these types of services as well that would be threatened by the blockchain because we’ll be able to verify all this.
Nick: What do you think is most often misunderstood about the blockchain and/or the impact it may have?
William: Yes. Well the most misunderstood aspect is when they see it as a one trick pony specifically thinking of it as a Bitcoin kind of cryptocurrency thing or on the business side, some companies just see it as 6:14 -6:18 (unclear) they see it just as that but that’s only the beginning. So the blockchain eight different things. It is not just one thing. I mean, if you want to see it as a want trick pony that’s fine but that pony needs to do more tricks soon after and that’s the big misunderstanding of the blog chain because you can go so far with one trick, with one thing like the Internet is not one thing. It’s not just information. It is a lot more. So I hope that people see it as a multifaceted technology.
Nick: William, how have you seen some of the better start up investors approach early stage investing in companies with a blockchain focus?
William: Sure. I mean in reality there’s nothing different from an investment perspective in terms of the blockchain companies than any other; a space that is new and just emerging. Of course now what we are seeing is that there’s a new breed of investors that are labeling themselves as just blockchain or Bitcoin investors and many of them are new investors and some of them want to rush innovation and you cannot trust innovation. If you fund more, it doesn’t mean that something is going to happen. I mean speed kills. It’s speed that gave us the first crash of the Internet to back in the 2000 where things start to get hyped. I prefer the slower approaches. I prefer as that if you’re going to disrupt, you need to disrupt it with a solid base and you want to build on that base. So I prefer to do work with start ups that realize that, you know. It’s a bit naive for startups think that they can pick partners for example with the banks. I mean, not everybody can become partners with a bank, with a big company. I mean there’s a difference between whether you are supporting their model or whether you are disrupting it. Nobody’s going to partner with you if you want to disrupt them but if you want to partner with them, well yeah it sells better but what they do is they put you in a box. They put you in their box and that limits your upside potential. So it’s a dilemma. So either you say I’m going to partner with you and then they will limit your you know evolution or if you want to disrupt them then don’t talk to them. It’s like syntax. Syntax is disrupting… We w can say it is eating into, it it’s taking a big chunk out of the business that the financial institutions on that day. So if the pie is getting bigger and the share that the current financial services institutions have is getting smaller. So that’s kind of the loss and then is the innovation that is getting there and because it’s got a very foggy, the whole environment is very foggy, it is not very clear right now who the winners will be at. I don’t know the winner yet, who the Amazon of the blockchain is going to be yet.
Nick: Yeah, is it fair to think that there’s going to be a killer app or a killer implementation such as cryptocurrency as well as others that become sort of the standard implementations of blockchain and gain the most traction?
William: It could be that. It could be many killer apps. There’s different ways of thinking about it. I mean, it’s easy to want to have one killer app because everybody can rally against or rally towards it but maybe it’s multiple killer Apps.
Nick: Sure.
William: In the case of the blockchain the cryptocurrency… each one of them, cryptocurrency, if you talk to the bank, it’s assets. They want to move assets now faster, cheaper but then I think there may be some new surprises. I love to see as I mentioned earlier, something like a Google service where you google for that for trust. You Google to verify trust based documents or trust based services or trust based ownerships. Maybe that becomes a new killer App. I would fund that 10:35 (unclear) by the way. I’m looking for one that does that.
Nick: So speaking of which you know as a start investor yourself, what advice do you have for investors that are interested in the blockchain besides buying your book which we’ll sure all do?
William: Sure. The advice is to take it easy, to not rush and to understand the space before rushing into it but unfortunately that’s not going to happen because when there’s excitement and there’s excitement, we always tend to overshoot and it’s a natural reaction and perhaps that is what’s going to happen and it’s happening already to some extent. 11:15 (unclear) to overshoot, we will invest and then that’s when you realize what the limits are and then we pull back but when we pull back, then the good stuff emerges; and that’s really what’s going to happen. Because you have to fund a lot of innovation a lot of early innovation before you can see what actually ends up emerging and that’s kind of the trick. Not only are we investing in the early stage startups, we’re also investing early stage the quality. The technology itself is not totally mature yet. So you get a lot of uncertainty there happening at the same time.
Nick: Is there anything that we haven’t covered that you’d like to touch on with respect to the blockchain?
William: Two points maybe we touched on a little bit I want to reemphasize. First of all is that it’s the database that is being disrupted with a blockchain. That’s a big deal because previously when we used to write apps it was really to the database and then when you had to do it transaction let’s say between one bank to another or between one institution to another, it was really one database talking to another database but the owners of that database is not you. The owners or the companies that we deal with. So what the blockchain does is it disrupts two things: It disrupts the fact that now we can write to the blockchain and number two, that you as a user, you have more say into what happens with that data. So you have the trigger, you have more trigger points about who can use the data and who can see it. The second thing is about back to the… related to what I just said is we want to own our own data and we want to make sure it’s going to be secure that when the data is travelling through the pipes between us and whoever we interact with as big companies and that’s not a given today… May have the applications today and not written with security in mind first. So I like to say security first now. The application that you are writing anything where there is back and forth between customer data and between user data and somebody who owns 13:27 (unclear) , everything should be encrypted from day one.
Nick: William, can you talk about what you’re currently most focused on?
William: Okay, I’m going to repeat myself now. Three things: The blockchain, the blockchain and the blockchain.
Nick: Right.
Williams: It’s true. I mean, right now there’s a lot of focus on it because I think there’s an opportunity to learn a lot about it and I have specifically at this particular time I am finishing the book and then as soon as the book is out then I think it’s going to help explain the blockchain’s potential to a lot of people and I think it’s part of the ongoing evolution. I think it’s misunderstood and it is partially understood. It’s even worse than being misunderstood. We only see one thing and there’s nine others that should be also paying attention to. So, I’m on a mission right now to educate the world on the blockchain.
Nick: If we could address any topic in Venture, what topic do you think should be addressed and who would you like to hear speak about it?
William: I think the sharing models. It should be interesting to see how it unravels if we’re going to have a new models of all sharing where there is economic value that goes back to the participants of the of that sharing. Not in terms of just transaction fees but beyond that and so today I mean, #Airbnb could say it’s a sharing economy but if you rent your place on the Airbnb, you’re just getting fee but you don’t get to participate in the greater economic creation that Airbnb is creating. Same thing with #Uber. You’re just like one note that just drives and you get paid and that’s it but in reality those people are sharing and creating more value for the owners. I think there are new models that will emerge where the sharing is more decentralized and going forward, I think a year from now, we’re going to talk about the impact of the blockchain in very different ways than we are today because we’re still at the beginning. So we haven’t seen anything really yet in terms of impact of the blockchain.
There’s a lot of work happening right now. A lot of test cases, a lot of proof of concepts but by a large, it hasn’t been deployed to the fullest extent. So I think this is one of the beginning.
Nick: Well, maybe we can have you back on the program to talk to in a year or two. Anybody in particular you’d like to hear talk about the sharing topic?
William: Yes, let me see that… You caught me off guard on that one. I am going to be speaking at a conference in Paris called #OuiShare and they have been specifically focused on that topic and now evolving it. So it’s a play on the words. It’s the French, O-U-I which means ‘Yes’ and OuiShare of course it’s ‘we share’. So that a conference focused on that topic so I would follow who ever is going to be there and pick out the best minds. I would be speaking OuiShare in May in Paris.
Nick: And just to wrap up here, what’s the best way for listeners to connect with you?
William: On Twitter, it’s Wmougayar or my blog, Startupmanagement.org/blog or just sent me an email at wmougayar@gmail.com.
Nick: Is there a pre-order link for the book, The business Blockchain book?
William: Yes, there is and right now it’s on the I want to #Shopping5 channel and it’s a The-business-Blockchain.shopping5.com but soon after it’s going to go on Amazon. So if you search, The business Blockchain book on Google, it’s going to lead you to where you can order it and I should say that order it in quantities is the preferred method.
Nick: Cool. Well, I’ve enjoyed your comments for a long time both on your blog and also the comments section of Fred Wilson’s blog so, it’s nice to finally get a chance to talk with you and learn more about the blockchain.
Williams: Thank you very much Nick for having me. It was a pleasure.
Nick: Let’s recap the key takeaways.
The first is called: Destruction vs. Construction
William described how it’s a tendency for big business to use the blockchain, or any new technology for that matter to strengthen what they already have. Most large power and profit centers are incented to raise entry barriers, consolidate and make things more difficult for competition. Everything ties back to their existing business model, which limits the scope of things that they can do. As an innovator, one should be wary of this. While partnering with a big bank can provide a lot of opportunity, William talked about how this can be restrictive and put the startup in a box. Those elements that help the entity optimize their existing business will be welcomed, while everything else will be killed. Clearly, innovation is not a zero-sum game; but there are winners and losers. Value construction for one, may mean value destruction for another; but at the end of the day, those being served (i.e. the customer) should always be receiving more value.
Key takeaway #2 is called: Intermediaries & Sharing Economies
William made the point in today’s interview, that the blockchain is a force for decentralization and it enables peer-to-peer transactions in a way that disrupts existing intermediaries. He provided the example of the internet and how it created a whole new class of intermediaries, such as e-commerce players like Amazon and eBay that were replacing old brick-and-mortar e-commerce giants. Similarly, because the blockchain enables consumers to transact directly in a trustworthy, secure and efficient manner, intermediaries may not only be disrupted but in some cases, may be removed all together.
Key takeaway #3: Not a One Trick Pony
Some people see the Blockchain as a one trick pony with a single application and while certain applications may become the killer app, it enables much more. The Blockchain is a value-exchange network. Blockchain enables Bitcoin but Bitcoin is just one application. A major reason why it works well for cryptocurrency, is that it solved the double spend problem. An asset can now be transacted from one person to another, like existing fiat currency. Whereas in the past, technologies would keep a copy of the asset on both ends of the exchange. Here William cited the example of pictures that people share. With existing digital technologies, both users have a copy of the asset, once it is shared. With the blockchain, assets can be sent from one party to another where the sender no longer retains a copy. William cited four major areas enabled by the blockchain of which this belongs to the first category;
-An Exchange of digital assets: With regards to this category, for many existing asset exchanges, there is currently a transaction delay for settlement and clearing. The blockchain can speed up the transfer of assets and also solves the double-spend problem.
-Verification of assets: This can be used as a way to timestamp a particular asset. That timestamp cannot be changed. Once stamped, it can only be verified.
-Smart Contracts: This refers to business logic and terms. If two parties agree on terms, like a wager on a sporting event, it could be created in a smart contract on the blockchain that will execute the asset transaction upon the result of the future event. Essentially you can have a bunch of ‘If this, then that’ rules with execution of the desired outcome.
-Authentication: Related to smart contracts, William talked about authentication and multi-signature. With the blockchain, one can have a third party that must authenticate transacted assets between two other parties, almost like an escrow service, but instead of holding the asset as a third party, they can handle the authentication of the transfer.
Okay, with that let’s wrap up with our tip of the week and this week’s tip is called: External drivers.
When I worked for my previous employer doing M&A, we were chartered with building a strategy for targeting companies within specific sectors or verticals but before we could target specific companies, we had to think about the sub-segments of that market in which we wanted to play and build a portfolio of companies around; and the exercise always began with what we called External Drivers. What are the Market, Legislative and/or Technology drivers that are going to cause major changes to the industry going forward? We’d then assess all of those drivers, try and discern the implications of those drivers and finally, what opportunities would exist for us to exploit.
In today’s tip, I want to focus on drivers. So let’s explore examples of market, legislative and technology drivers and we’ll use the healthcare sector to help illustrate how these work. We’ve been working on a deal in healthcare, so it’s pretty fresh in my mind, at the moment.
Market Drivers
One major market driver is the average cost of healthcare in a person’s lifetime, which is rising at an extremely fast rate. The reality of new treatment methods and medicine is that they come with a heavy price tag. What compounds this driver, is that these innovations in healthcare also allow humans to live longer lives. So, not only is the cost of treatment received in the average lifetime increasing but the average lifetime itself is increasing. This all results in the total cost of care in a person’s lifetime that is many multiples higher now than it was a generation ago; and the final market driver that I’d like to mention here that’s further exacerbating healthcare costs is population. An exploding global population, while increasing the tax base in their respective countries, is also increasing the healthcare cost burden. We can see the effects of these drivers in the immediate future with the aging demographic of baby boomers; they will live longer, have higher cost of care and come in large numbers.
Legislative Drivers
The most commonly cited healthcare driver that came out of legislation is the Affordable Care Act. This single piece of legislation is highly disruptive to existing healthcare organizations, health service models, and also the total population that has access to healthcare.
Another example of a legislative driver in healthcare is related to value-based-care. If you are not familiar with this concept; it is centered on aligning healthcare organizations incentives with the desired outcomes. So, the current model in healthcare is fee-for-service. The more service a health entity preforms and the longer they keep patients in the hospital, the more money they make. This is counter-intuitive of course because it means that the healthcare organizations do better, if the patients remain sick. The value-based focus attempts to reward health organizations for keeping their patients healthy.
So they focus is less on providing more service for financial gain and instead providing financial gain for achieving patient health outcomes. The legislative driver here is that the Department of Health and Human Services has mandated a switch to value-based care with a target of 50% of all health care organizations on this model by 2018. Clearly this is another disruptive driver, destroying value for some and creating great value for others.
Technology Drivers
There are far too many to cite here, so I will just mention a couple. Clearly the internet and emergence of mobile have allowed online collaboration and communities of medical professionals to interact and consult with one another on specific cases. We mentioned Fred Wilson in the discussion and, of course, Union Square has made a number of investments in digital health, of which Figure 1 is a great example of one that would not have existed, certainly without the internet and also likely not without the advent of mobile and smart devices. Of course, video streaming and advanced robotics have allowed the ability for world-class surgeons in one geography to conduct procedures on patients in completely different locations. Advances in technology can be an extremely powerful driver that enables businesses and possibilities that previously could only be imagined.
I’m going to reveal my geek-side here a bit, but one of my favorite things to cite is the Star Trek Tricorder. “In a way, we all have a version of a Tricorder in our pockets today, in the form of a smart phone. Yet, if I had told my dad, just two decades ago, that the majority of people in the United States would be walking around with a Tricorder by 2015, he would’ve been calling the people in the white coats.
Again, not healthcare related, but could you imagine Uber existing without the proliferation of smart devices? Absolutely not. The technological innovations around smart sensors, GPS, point-of-service have allowed one of the most valuable companies in the world, to exist where previously one couldn’t imagine how that could be possible.
Today’s discussion was a great example of a major technology driver and there were market drivers discussed and potentially legislative drivers, that will also motivate innovators to build applications utilizing the blockchain. The emergence of the blockchain will enable many companies, business models and companion technologies to generate significant value in ways that did not previously exist. Do we know what those are yet? Not really but it all starts with the external drivers.
As William explained, one must know what it is and how it works before they can imagine how it can be wheeled. So, whether you’re investing in the blockchain or another sector, what’s changed? What are the drivers? What are the strategic implications of those drivers? And finally, what opportunities exist because of those implications? If you’re a thesis investor and want to have focus, start with the drivers.
All right, that will wrap things up for this week. Huge thanks to William again for coming on the program and sharing his insight. Until next time, remember to over prepare, choose carefully and invest confidently.
What are your thoughts on what the future looks like in a much more decentralized environment?