Cryptocurrencies for Investors and Entrepreneurs

Cryptocurrencies for Investors and Entrepreneurs

How ICOs and Cryptocurrencies Work for Entrepreneurs and Investors

With Bitcoin and cryptocurrencies all the rage, I was recently invited to participate in an ICO (an “initial coin offering”). Warren Buffett made his fortune by limiting his investments to businesses and investments he understood deeply. That seems sensible, so I’ve been delving into the ICO world to understand if it’s for real, if it’s a scam, or if it’s something genuinely new.

Much to my surprise, it doesn’t seem to be a complete scam. ICOs are a fund-raising play for a business. Coin-based entrepreneurship has aspects of equity, and aspects of … something new. It decouples the value of the organization from profit. If it’s sustainable, coin-based organizations could become a way to create markets whose bottom line is genuine societal value. The “triple-bottom line” could be an actual market reality. That’s exciting!!

Or, it could turn be unsustainable, and a fancy way for unskilled or unethical entrepreneurs to walk away with lots of investor cash and no obligation to do anything with it.

As you’ll read below, while the ICO mechanism has been invented in the context of crypto currencies, there’s no inherent reason that this has to be done with cryptography. The same structures could be put in place in the physical world, without needing to buy into blockchain or virtual currencies.

What I’ve Learned so Far About ICOs

Here’s my current understanding of “coins” and initial coin offerings (ICOs). While the concepts are being developed in the context of crypto currencies, as I mention below, they can be (and have been) implemented in ways that are totally independent of crypto, or even computers.

PLEASE CRITIQUE AND COMMENT! This understanding is about two or three hours old, so it’s my very first attempt to understand.

ICOs make a different bet than stock investments

The ICO model is fascinating. Instead of betting on the success of a company, as you would with a traditional corporation, you’re betting on the creation of a market. The entrepreneur is then pitching their ability to create a market for the coin, which can be done in many different ways, depending on the company issuing coins.

This means that an ICO has two cases to analyze. While a traditional startup only needs to make a business case, an ICO needs to make a case for the creation of the coin market, and a case for the success (however that’s defined) of the organization being funded with the ICO.

There must be a market-making mechanism

The entrepreneur needs to present a compelling case:

  • that their endeavor can create a market
  • that the market created makes sense (that there’s a reason want the coin)
  • that there’s a way coins are exchanged for dollars or other value that is valuable enough that people will want to trade the coins

The primary function of the business being financed with the ICO is to create a market for the coins, rather than to make an economic profit. For example, an organization issuing an ICO may not do anything on an ongoing basis, as long as they can kick-start the market for their coin.

(There’s no inherent reason that any of this has to involve blockchain or crypto, by the way. You could be issuing frequent flyer points that are tracked in a spreadsheet in an “IFFPO” and it would basically be the same thing.)

For example, an airline could simply rename their frequent flyer points as “coins” and sell a bunch of those coins rather than issuing stock. People would want the coins because they could be exchanged for flights. If the only way to fly were by paying in frequent flyer points, then the market for the points would be created by anyone who wants to travel by air. Frequent flyer points would then be convertible to and from dollars based on the price in coins the airline charges for a flight, and the overall market demand for air travel.

But the airline would not rise and fall based on its ability to generate a profit; it would rise and fall based on its ability to keep the market for FFCs boosted. It would then presumably pay its employees in FFCs, which they could convert to cash.

Coin-based financing may resemble ongoing equity financing

This scenario resembles a company that is financing itself on the strength of its equity, by selling stock to pay any ongoing expenses, rather than financing itself on its underlying business fundamentals.

For an airline, which needs to pay salaries and has high ongoing expenses, it probably wouldn’t work. But as Amazon shows, a company can consistently generate lackluster business results and have its “coins” (shares of AMZN stock) continue to be valued quite highly.

Coins can fund one-time projects as long as they create ongoing markets

The thing about coins is that the organization that did the ICO might not be an ongoing business at all, but a one-time fund raise, as long as it kick starts the market. For example, if the coins created are done so as the only currency that can be used to access some resource, like time on the Hubble telescope, then one organization can create the coins and the protocol that requires them, while completely separate organizations accept the coins and thus generate demand for them.

[One historical example that comes to mind is the currency of green stamps, which survived for decades but eventually failed. An ICO could be likened to an Initial Green Stamp Offering.]

Coins dilute … the market

Coins are like equity in that issuing additional coins dilutes the value of the coins already in circulation. The one ICO I’ve seen closely puts a cap on the number of coins that can ever be issued, to preserve the coin scarcity. That makes sense for an ICO that finances a one-time, transient organization. But if coins will be used, rather than profit, as an ongoing source of an organization’s funds, then having a hard cap on the number of coins will put a cap on the total amount the organization can raise over its lifetime.

In the social enterprise world, coins could be issued to finance social good, as long as there were some mechanism to drive the demand and market for the coins. Rather than having social enterprise rely on constant begging, a social enterprise could drive demand for their coins by striking agreements with businesses or other organizations to use the social coins as a currency. To fund a social enterprise for years on coins, however, would require a substantial initial ICO or the ability to keep issuing coins when funds are needed, so the coin used for the funding probably shouldn’t be capped.

It’s fascinating! And I have no idea how to value a coin, or whether this will prove to be sustainable in any meaningful way.

Safety warning: if you use Skype, your contacts may now be exposed

A quick public service announcement for anyone who uses Skype. Executives, VCs, journalists, researchers, and anyone who cares about the privacy of their contact list should read this.

I don’t usually post about computer security, but in this case, it seemed quite serious. It’s also the kind of thing we’re used to from Facebook and LinkedIn, that could have very serious consequences given that people use Skype very differently from those social platforms. People use social media with an expectation of public transparency, while many use Skype with an expectation of privacy.

As of a couple of days ago, the new Skype tells other people how many contacts you have in common. It also offers your contacts as potential new contacts to everyone else in your contact book. This is a surprisingly serious privacy breach.

This means if you use Skype for anything where your contact list is sensitive (conference calls with clients, planning a protest over the skyrocketing price of kitty litter, coordinating your monthly meeting of people relax by knitting exciting underwear), your contacts can quite possibly deduce who other contacts are. Furthermore, if they know about this new “feature,” they can make some smart deductions.

For example, you’re a mergers & acquisitions consultant. You are in talks with MergeMe, Inc. A prospect from WeMergeToo calls you. Immediately after you accept their contact request, they start seeing suggestions that they might know the MergeMe Inc CEO. They don’t, but they know they just connected to you —> they can quickly figure out MergeMe Inc is talking with you also.

I also just discovered I can look up a profile of someone I don’t know (they’re neither a contact nor a friend), log out and back in, and Skype will start suggesting their contacts to me as potential contacts of my own. (I can tell because those contacts have the same last name, physical resemblance, etc.) So this can be used by stalkers, bullies, harassers, and people who wish to research someone and learn who they know.

(This feature can be used for much more targeted research. I won’t go into details here. Suffice to say that you can get pretty specific.)

Microsoft’s support page says they’re considering changing this behavior someday. Of course, by that time, much damage will have been done.

I went through and deleted some of my contacts by hand this morning (it takes forever… in a triumph of “good for Microsoft who cares if the user gets screwed” they make it super easy for you to give them your social graph, and super hard for you to take it back). Even deleted, Skype kept suggesting prior contacts to me. That suggests that they continue to keep that data — and probably call history and chat history as well — for use in “helpfully” building their social graph.

Important note: deleting your contact book isn’t enough. If your associates have you in their contact book, someone can still use the same mechanism to figure out the connection.

My reaction was to cancel my Skype account altogether. But because Microsoft cares SO MUCH about me, the best I can do is schedule it to be closed in 60 days. So for the next 60 days, like it or not, my contacts are going to continue to be exposed.

See: the Microsoft Skype support article

Also note Danida_U’s response from Microsoft: there’s no way to disable this short of opting out from being contactable at all, and there are not yet plans to remove the “feature.” They want to make it easier for friends and family to find you. My suggestion: if you want your friends and family want to find you, you tell them your Skype ID. Problem solved.

I recommend http://zoom.us or http://appear.in as alternatives that don’t “help” you by exposing your contacts to the world.

Ten Cultural Career Lies

Things “they” told us that just might not be true.

Related article: How to write a good cover letter.

Download Ten Cultural Career Lies as a PDF

In April 2008, I gave a talk at Harvard Business School on the Ten Cultural Career Lies. These are things I believed for most of my life. Recently, the conventional wisdom started seeming suspect. I called several of my classmates who are all mid-career and asked what had led to their successes and failures. Upon close examination, much of what I had believed to be true about careers did not seem to hold.

This is one man’s experience. I invite you to decide if it matches your experience.

1. You can plan your career (or would even want to).

  • That’s not my experience, nor is it the experience of anyone over 35 I’ve talked to.
  • Maybe it worked in the 1950s…
  • Maybe it works in careers driven by successive degree requirements (e.g. medicine)
  • We get trained to think in terms of one-step-leads-to-another by 18 years of linear schooling.
  • So: plan less and be more. Hang out with good people doing good stuff and grab opportunity as it passes by.

2. Being the boss makes for a good life.

  • Have you ever worked closely with a CEO? It can be a great job, but it can also suck. Like any job, it requires a certain temperament and set of skills.
  • So: find jobs that suit your skills and temperament, don’t assume that the “oooh! isn’t that amazing” jobs will be good for you.

3. “Self-made” people exist.

  • The most self-made person alive still relied on millions of others to provide financial markets, schools, sewers, and the infrastructure that allowed them to go off and become “self-made.”
  • So: Recognize interdependency and build your life around positive interdependency. And when you want to learn to emulate a “self-made” person, pay attention to all the ways they weren’t self-made; that’s where the learning is. (And by the way, they may not be helpful in pointing out ways that contradict their myth.)

4. Hard work and skill will be appropriately rewarded.

  • Bear Sterns CEO cashed out for “only” $60 million. Cleaning lady @ $8/hour must work two jobs just to pay rent and still doesn’t make enough to save anything. ‘Nuff said.
  • So: understand what is rewarded (by money, power, respect, affection, time off, flexibility, freedom) and do that. If you want money, finance is the surest way to get it.

5. Do a good job and you’ll get ahead.

  • So: See #4. Pay special attention to what the people who will promote you want to see. Don’t assume it’s results.

6. I’ll work now and do what I love when I’ve made my first million, cured cancer, etc.

  • Management consulting firms and investment banks use this lie as a recruiting tool.
  • Dangerous strategy, and I know very few who’ve pulled it off. If you don’t do it, you’re left at mid-life trapped in a career you don’t like, with a non-transferable resume, and a network composed of people who are the last ones in the world who could help you do what you love. But boy, could they help you get even further in the career you despise.
  • So: Factor in your passions and ideals from day one.

7. Intelligence matters.

  • Up to a point. After that point, it can threaten people. It’s only useful insofar as you have the people/political/marketing skills to get your ideas in play. Even then, unless you’re perfect, you run the risk of overconfidence.
  • So: take classes when you need them, but stop assuming more knowledge is the answer to every problem. As a Fortune 500 ceo once confided: “business really just isn’t rocket science. In fact, to a smart person, it’s kinda boring…”

8. Achievement matters.

  • Actually not. Who you know and who thinks well of you probably matters at least as much as what you’ve achieved, if not more.
  • So: don’t get too caught up in building that great company, finishing that piece of art, or whatever. Yes, getting things done can be good. But if you enjoy and learn from the things that don’t get done, that may be enough.

9. We can control our lives.

  • Sickness, death, lotteries, luck, and love all happen. My friend just moved from Washington D.C. to Las Cruces, NM, where his snuggle-bunny has a job. That sure wasn’t planned for.
  • So: go with the flow. Learn to accept the things you can’t control. Be o.k. with that. Enjoy the process and don’t sweat it if you don’t reach the outcome. (That said, give it your best shot if you really want it.)

10. Success (money, power, achievement) brings happiness.

  • This has been disproven by tons of research. See the books Happy for No Reason by Marci Shimoff, Are You Ready to Succeed by Srikumar Rao, or Authentic Happiness by Marty Seligman.
  • This lie causes great unhappiness. See The Happy or Successful diagram below.
  • So: orient your life around happiness and look for success, not the other way around.

Happy or Successful Decision Tree

Click to view the image in full-page size.

Decision tree showing the difference between a life based on happiness and one based on success.

Decision tree: living for happy vs. living for success.

The ongoing joke that is Silicon Valley Privacy

SnapChat just revised their privacy policy. I decided to read it. It looked pretty good. Then I got to the section How We Use Your Information. How does SnapChat use the information? To provide services. To communicate with me. To monitor trends. And so on.

The final bullet point? Carry out any other purpose for which the information was collected.

In other words: SnapChat has no privacy policy, and places no limits on what they can (and presumably will) do with your information.

Google’s privacy policy is similar. It sounds really grand, but if you read it carefully, in critical areas it exempts Google from any actual restrain on behavior by including similar clauses to the SnapChat clause.

Please face it: Silicon Valley, that supposed bastion of libertarian respect for individual rights, is no such thing. It’s a collection of disingenuous, deceptive, liars who are happy to write multipage privacy policies for PR purposes, which have no teeth whatsoever.

Be very, very careful of anything you put on a computer you don’t own. And I’m sure that the license agreements we agree to when we buy our computers and install Windows or Mac OS X will contain similar escape clauses if they don’t already.

If a policy does not have genuine, real teeth (“Corporation agrees to pay $1,000 for every violation of our privacy policy”), then over time, all such policies that supposedly protect consumers will be eroded. It seems to be a natural law, and it makes me believe more and more in regulation. I would rather slow progress than have process come at the expense of the well-being of consumers. Business was invented to serve us, not the other way around.

Corporations seem to be nothing if not explicitly immoral. It is very sad to watch.

Brainpower boosters? Not so fast…

Happy BrainBeing in the self-help space to some degree, I see an awful lot of products designed to “boost your brainpower.” This is an interesting value proposition, but it’s incomplete. You need to ask: how will you use the boosted brainpower? What will you expect it to do that your current brainpower isn’t doing?

This is an extremely important question. In my experience, brainpower is NOT what holds people back. What holds people back is not brainpower, it’s how the brainpower they have is organized. Brainpower is secondary to the ability to take action, align actions in mutually reinforcing ways towards a goal, and use feedback from the world to make mid-course corrections.

For example, if your primary attitude towards life and the world is a “victim mindset,” do you really want to boots your brainpower? You’ll be that much more effective at finding ways to explain why you’re a victim and not in control of your own life.

Boosting brainpower without making sure you’re using it for something worthwhile is like putting in a high-horsepower engine without making sure your car is pointed in the direction you want to go. What determines where you end up is the direction of the car. The horsepower only affects how fast you’ll get there.

FIRST choose a worthwhile direction.
THEN boost your brainpower.

Social Media and “The Good Life”

I just spent a week camping at a festival. We were in a far away place, with no power outlets and only spotty cell phone coverage. It seemed best to put my iPhone away and spend the entire time disconnected.

Logging into Facebook, checking my email, and returning to the online world, it’s once again glaringly obvious how little it seems to add to my life. The quiet and serenity was lacking in reaction-driven seratonin hits, but it was wonderful for just enjoying being in the here-and-now.

Try disconnecting for a while. It’s really fun!