a16z's worldview and investment perspective on blockchain

Hu Tao
2020-12-13 20:49:15
Collection
a16z is one of the most prestigious investment institutions in the world. Since 2013, it has invested in well-known blockchain projects such as Coinbase, Ripple, and Dfinity, becoming one of the heavyweight investment firms to aggressively enter the cryptocurrency technology investment space. Currently, it manages over $7 billion in assets.

This article was first published on April 28, 2019, on the Chain Catcher WeChat official account, by author Hu Tao.

"Software is eating the world." This is a classic quote from Marc Andreessen, co-founder of a16z, who was also a founder of Netscape. The Mosaic browser he developed once held over 80% of the browser market share, and technologies like JAVA, SSL, and cookies were significant contributions from Netscape to the industry.

After Netscape was sold to AOL, Marc Andreessen founded the venture capital firm a16z in 2009, alongside fellow co-founder Ben Horowitz, who also came from a tech entrepreneurship background. They both brought a high level of technical acuity to a16z.

In the early years of investment, a16z invested in well-known companies like Facebook, Twitter, Groupon, and Skype, quickly gaining recognition in the industry. Subsequently, a16z accelerated its investment frequency and volume, completing over 400 investment cases in ten years, with total investments reaching the tens of billions of dollars, placing it among the top investment institutions.

In June 2018, a16z announced the launch of a fund called a16z crypto, with a size of up to $300 million. This fund operates as an independent legal entity, with a16z general partners Chris Dixon and Kathryn Haun serving as general partners of the fund. However, prior to this, a16z had already been involved in cryptocurrency investments for nearly five years, investing in projects like Coinbase, Ripple, and OpenBazaar.

In April 2019, a16z announced it would abandon venture capital exemptions and register as a financial advisor to allow for a higher proportion of investments in "high-risk assets." This means that a16z will continue to increase its investments in the cryptocurrency field.

1. a16z's Blockchain Worldview

On its official website, a16z clearly articulates its intrinsic logic for being optimistic about blockchain technology. Historically, new computing paradigms tend to emerge every 10 to 15 years: the mainframe in the 1960s, the PC in the late 1970s, the internet in the early 1990s, and smartphones in the late 21st century. Each computing model supports new categories of applications based on the unique advantages of the platform.

The unique feature of blockchain is the trust between users, developers, and the platform itself, which arises from the mathematical and game-theoretical properties of the blockchain system, rather than relying on the credibility of independent network participants. Trust can also enable new governance methods, where the community collectively makes significant decisions about how the network evolves, what behaviors are allowed, and how economic benefits are distributed.

a16z believes that "the next generation of computing platforms, AI, and digital currencies" will intersect and enhance each other, just as the three major trends of the previous era—"mobile phones, social media, and cloud"—did.

On multiple occasions, several partners at a16z have elaborated on their understanding and views of blockchain. Chris Dixon, a general partner at a16z crypto, stated in an article for Wired magazine that he values blockchain technology primarily because it transforms the principle of internet governance from "do no evil" to "cannot do evil."

In his view, internet users' trust in open protocols has been replaced by trust in corporate management teams. Companies like Google, Twitter, and Facebook have created software and services that surpass the capabilities of open protocols, drawing users to these more intricately designed platforms. However, the immense power of these platforms has led to widespread social tensions, with heated debates surrounding issues like fake news, astroturfing, privacy laws, and algorithmic bias.

By introducing financial incentives into the open-source model, it can transcend the previous open-source software model and further expand into the cloud service model. The currencies or tokens issued on blockchain networks provide incentives for individuals and organizations that maintain and service the blockchain, allowing them to continuously uphold the blockchain network and provide ongoing services. In the long run, internet platforms controlled by large companies will be replaced by network services owned by the community.

a16z partner Chris Dixon also remarked that today's internet resembles Disneyland. If I open a restaurant in Disneyland and the park thinks I'm making too much money, they might raise the rent or change the rules. This is similar to what Facebook, Google, and Apple are doing. They are destroying creative business models, and if they don't change this situation, they will pay a huge price and miss many opportunities in their respective fields.

"For me, the most interesting aspect of blockchain technology is that it can provide richer and more advanced protocols. They have the best features of Web 1.0—decentralized governance: the rules are fixed, and people can create and invest based on that." Chris Dixon continued, stating that blockchain projects are akin to community-owned databases, where developers can build more powerful services on this rich database.

a16z crypto partner Jesse Walden divides the evolution of blockchain computing into four eras based on "composability." Composability refers to a platform's existing resources being used to build blocks that can be encoded into higher-level applications; such a platform is said to have "composability."

The first era is the "Calculator Era," primarily represented by Bitcoin. Beyond simple functions like tracking account balances and currency flows, the Bitcoin blockchain also provides a coding language that can be used to build more complex functions. However, due to its low composability, some projects attempting to extend the performance or functionality of the Bitcoin blockchain are hindered by the intentional constraints of Bitcoin's scripting language.

The second era is the "Mainframe Era," primarily represented by Ethereum. Ethereum features a Turing-complete virtual machine, meaning developers can deploy and run any program on a decentralized blockchain computer network. These programs serve as reliable, neutral building blocks that developers can combine into higher-level applications.

Due to the composability of blockchain—security, user base, data, and running code—there are certain early network effects. However, as the user base approaches the throughput limits of mainframes, marginal returns continue to decline, simultaneously increasing the costs for platforms to attract each new user and developer.

The third era is the "Server Era," where some developers completely abandon composability and shared network effects in favor of "application-specific blockchains." Projects like Polkadot and Cosmos aim to create multiple hybrid blockchains, each corresponding to a specific application.

The "Server Era" blockchains explicitly trade composability for control, which manifests in two dimensions: control over user experience and more precise control over the economic conditions of network supply-side resources. Additionally, unlike the "Mainframe Era," where blockchains run a single virtual machine, "Server Era" blockchains require new standards for communication between them to achieve cross-application composability.

The fourth era is the "Cloud Era," which signifies the realization of scalable, universally applicable trustless computation. In this era, compositional work will only be limited by creativity, rather than by scalability or communication complexity, though specific scenarios have yet to be clearly defined.

Developers view this as a world with many "mainframes" that share a secure pool but separate state and computation between isomorphic virtual machines. Furthermore, many developers are exploring new architectures that shift computation off-chain.

2. a16z's Investment Strategy and Philosophy

After nearly six years in the cryptocurrency investment industry, a16z has invested in no fewer than 40 blockchain projects, covering investment stages from seed-stage pre-release projects to fully developed late-stage networks, including public chains, stablecoins, exchanges, and payments. Most of these projects are well-known, reflecting some of a16z's investment styles and strategies.

Some of a16z's investment cases are sourced from the website theblockcrypto.

The most notable characteristic of a16z's invested projects is that they are primarily "hardcore" technical projects, such as DFINITY, Oasis Labs, and Ripple, all of which have outstanding technical teams and relatively innovative technical concepts. This is largely due to the core team's keen insight into technology, especially since founders like Marc Andreessen have been immersed in the tech entrepreneurship field for many years before entering venture capital, making a16z particularly fond of tech-driven projects.

At the same time, a16z's investment targets are almost all infrastructure projects, especially those positioned at the "Server Era" and "Cloud Era" foundational levels, with almost no direct investments in application projects. However, this does not mean a16z has completely avoided the application field; it has also invested in Dapper Labs, the developer of the famous DApp CryptoKitties, to mitigate investment risks in the DApp sector.

a16z is particularly willing to place heavy bets on projects it is optimistic about, with over 50% of its investment cases in recent years being follow-on investments. For example, in the case of DFINITY, a16z participated in financing rounds of $61 million and $102 million in February and August 2018, respectively.

a16z also actively provides post-investment services to its portfolio projects, taking the idea of "providing additional value beyond money to entrepreneurs" to the extreme. It is understood that the a16z crypto fund has an operational team of over 80 people, possessing deep expertise in areas such as transaction execution, technical recruitment, regulatory affairs, communications, marketing, and entrepreneurial management, and will provide necessary assistance to the invested projects. According to a16z, they aim to be "responsible participants in corporate governance and network governance."

It is worth mentioning that a16z insists on referring to every employee as a partner, including the youngest talent or accounting managers. This team culture significantly enhances employees' sense of honor and motivation, encouraging them to fully engage in their work. However, some voices have pointed out that this title may limit employees' promotion and career development prospects.

a16z also strongly believes in the power of long-term value investing. According to a16z's official statement, it has never sold any of its investments in cryptocurrency assets over the past five years and has no plans to do so in the short term, expressing a desire to hold investments for over ten years. If a16z indeed achieves this, it would have missed the opportunity to cash out at the peak at the end of 2017 and the beginning of 2018, as Bitcoin, Ethereum, and most mainstream cryptocurrencies have since fallen several times or even dozens of times from their peaks. Opinions on these gains and losses vary.

Of course, due to entering the market early and primarily investing in mainstream cryptocurrencies, a16z's return on cryptocurrency investments remains quite considerable. Additionally, most of the cryptocurrency assets a16z has invested in have not yet entered exchanges, such as Chia, Celo, and DEFINITY, all of which are highly regarded projects with promising prospects. Furthermore, several blockchain equity projects a16z has invested in, such as Coinbase and OpenBazaar, also show excellent growth potential, with Coinbase's valuation reaching $8 billion by the end of 2018.

Unsurprisingly, a16z has also had some missteps, such as its investment in the stablecoin project Basis, which announced the cessation of development and operations and returned funds at the end of 2018. However, this blemish does not overshadow its overall performance and has had almost no impact on a16z itself.

3. Insights a16z Brings to the Industry

Compared to many domestic cryptocurrency investment institutions, a16z stands out significantly in terms of team background, historical performance, and resource networks, almost belonging to a different realm.

In any professional field, the stratification of players is a natural phenomenon; some players become industry benchmarks, while more players struggle for survival. However, the cryptocurrency investment field has its particularities, as investment institutions play a more complex and crucial role in the blockchain industry than in most other sectors. They largely determine which types of projects receive more support and the price trends of cryptocurrencies, bearing considerable responsibility for industry development.

In contrast, many domestic cryptocurrency investment institutions play a negative role in industry development, colluding with project parties to harvest profits, exacerbating the cryptocurrency ecosystem through speculative behaviors. Additionally, many institutions lack the technical and investment experience, leading to a wide variance in the quality of investment projects and allowing some inferior projects to enter the industry.

In this context, a16z's blockchain perspective and investment philosophy may provide inspiration and experience for more investment institutions. The cryptocurrency field undoubtedly possesses substantial long-term investment value; rather than extracting short-term value through speculation, adhering to long-term value investing may yield higher returns and greater significance for the industry. At the same time, in areas such as technical sensitivity, post-investment services, and team culture, most cryptocurrency investment institutions still have much work to do.

a16z partner Chris Dixon once described blockchain as the pirate flag rising again in Silicon Valley, leading everyone into interesting, slightly dangerous, and disruptive activities. Today, a16z and its portfolio projects are steering the pirate ship toward further horizons, and a new era may be gradually unfolding.

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