The Bitcoin Startup Ecosystem is Frail: Beware of the next Crash

I’ve been studying and following Bitcoin and crypto-tech for the past 16 months, and I’ve been in the tech industry for over 30 years, and I barely pretend to be an expert, and only in certain parts of what is going on. I’ve seen this movie before, during the Internet crash, and it reminded me that the single most important reason for that crash wasn’t its visible parts; i.e. high valuations, companies going public too early, average consumers losing money in the stock market, and VCs funding the wrong business models. Ignorance led to greed which led to misunderstandings, which led to a lot of money being poured too early, which led to a lot of people being hurt financially and psychologically. I love that, but I also feel for entrepreneurs when their dreams are shattered because they were being mislead. I’m all for the magic of entrepreneurship and what determined entrepreneurs can accomplish when the odds are against them. Bad ideas can kill you faster than good ideas will lift you. Bad ideas make us drunk and thirsty, as we clamor for their realization, but they can also cloud our thinking, and make us poor judges, especially as we pour good money and time after them.

It’s good to have lots of ideas, but not all ideas are great. OK, we haven’t had that irrational exuberance moment yet (except perhaps for a brief moment when the Bitcoin price reached $1,240 in December 2013), and I hope we never will, but we are entering a critical phase where germs for that hype are present in the system. But, if it happens, this crash will be about the crypto-tech startup ecosystem, not the currency’s price. But will they work in reality? Yes, many great ideas start by being ridiculed, (e.g. sleeping on someone’s couch, giving a ride to a stranger, publishing in 140 characters bursts, making an instant message disappear after it is received, and so on), but it takes some skills and hard work for the real things to emerge. There will be some hard work ahead before it really happens. And not all Bitcoin companies will be successful. And there are no standards of reporting practices for DAO’s or early crowd-sales companies. And what will actually crash will be the companies that are getting funded today by money or sweat equities, and with their entrepreneurial dreams. If we rush Bitcoin with hyperbolic promises, it will crash.

When you see actors in the ecosystem that want to rush it, call them on it. If they want to get funded before developing a line of code, run away. If the entrepreneur is dreaming of euphoria and quick gains, run away. If it sounds unreal, or if there are more questions than answers, run away. If it looks like a ponzi scheme, run away. This is like a big angel/seed round, but with no strings attached and loose diligence. So, when we see several seed deals at about $500K-$1.5M per round, that’s a lot of money. That’s the nature of the beast, but we just need to keep that in mind. Do we need experimentation and lots of investments in order to find gems and big ideas? To make things more complicated, professionals could be technically strong, but also ignorant about business experience, so that makes them amateurs when you sum it up. Clear heads were prevailing until the media started to hype things in 1999. Around that time, I was an opinion columnist at Business 2.0, after I had written my second book, Opening Digital Markets (in 1997), a management-style book on Internet business strategies where I specifically avoided hype.

Let’s not get a false sense of security and confidence just because the amounts being invested in crypto-tech startups are smaller than in 1999. Remember, it was a lot more expensive to launch products in 1999 than it is today, perhaps X10 or more. Today, these amounts enable teams of 5-8 engineers and designers to launch significant products, and with 12-18 months runway to comfortably do it. Today, we’re entering 2015, about 6 years after Bitcoin was launched. You might ask,- this is 2015, so aren’t we resilient and antifragile? The initial ramp-up often depends on how many people they can dupe into the crowd-sale itself. So, what can we do? Many of the Distributed Autonomous Organizations, platforms and protocols are fairly theoretical at their inception. The pre-mines, pre-sales and crowd-sales are just promises to deliver. Founders get money to develop stuff. There was no realistic sense about how long it would take for all of it to actually happen. It makes no sense to raise $10 million to create a new protocol with marginal differences from the two dozen that already exist. At the heart of this increased risk is the self-booted, crypto-enabled, crowd-sale phenomenon which is gaining popularity.

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