Will Reality Have Its Revenge on Andreessen Horowitz's Giant New Crypto Fund?

We are successful the midst of a brutal downturn successful equity markets, successful ample portion due to the fact that ostentation has pushed the U.S. Federal Reserve to tighten involvement rates. The impacts person been peculiarly crisp for “growth” oregon “innovation” assets, including predominantly technology-focused equities specified arsenic Tesla (TSLA), which is down a brutal 42% since aboriginal April. Tesla is besides typical of galore specified entities’ reliance connected an ambitious, adjacent hyperbolic, communicative delivered by a charismatic figurehead.

Yet, successful the midst of each of this, the task superior money Andreessen Horowitz (a16z) is making immense caller bets connected swing-for-the-fences innovation and charisma-driven narratives, this clip successful cryptocurrency and blockchain.

This nonfiction is excerpted from The Node, CoinDesk's regular roundup of the astir pivotal stories successful blockchain and crypto news. You tin subscribe to get the afloat newsletter here.

This backing circular feels similar quality from an wholly antithetic era. In fact, it’s rather apt the rise was good underway earlier economical conditions got arsenic atrocious arsenic they are now. Because portion Neumann has proven highly bully astatine generating hype and press, helium has ne'er truly delivered the lone happening that volition substance present that involvement rates are ticking up: existent nett revenue, aka that long-forgotten show metric known arsenic “profit.”

As a little review, Neumann started a institution called WeWork successful 2010, taking vantage of a post-Great Recession existent property downturn to participate semipermanent leases connected bureau abstraction and past sublet tiny units to startups and contractors. Many observers pointed retired that this exemplary was fraught with hazard and mightiness not marque consciousness successful the agelong term.

Those skeptics were vindicated successful 2019 erstwhile WeWork attempted to spell public: Both the wide financials and details of the WeWork cognition were truthful damning the IPO (initial nationalist offering) was canceled and Neumann was pushed retired arsenic CEO. Investors mislaid billions successful insubstantial value, making for 1 of the astir catastrophic concern failures of the past decade.

In retrospect, it was a preview of the question of collapses we’re seeing close present successful overleveraged bets connected the future. The Dow Jones Industrial Average (DJIA) is down a punishing 14% from its coronavirus pandemic-frenzy peak, but that’s thing adjacent to the carnage successful tech. Chamath Palihapitiya’s flood of SPAC (short for special-purpose acquisition company) offerings are down 70% from their peak. Cathie Wood’s ARKK Innovation exchange-traded money is disconnected 60%. Netflix (NFLX) banal has dropped 73%, Uber (UBER) 56% and Coinbase (COIN) 81%.

The communal thread present is these are money-losing oregon hardly profitable operations focused connected gathering things that mightiness marque wealth successful the future. For astir of a decade, specified companies person been capable to enactment afloat due to the fact that borrowing was precise inexpensive and determination were fewer amended options for investors. But arsenic harmless investments commencement generating adjacent marginally higher returns, borrowing volition go harder, much costly and intolerable for the slightest profitable maturation companies.

Of course, it’s not each astir inexpensive money. To get radical to support loaning you superior you person to archer them a compelling communicative astir what you’re going to bash with it. This, for instance, has been the cardinal to occurrence for Tesla stock, with CEO Elon Musk’s cult of property helping thrust the stock’s price-to-earnings ratio arsenic precocious as 688-to-1, according to Ycharts. A banal with a P/E ratio of 20-to-1 is mostly considered expensive.

Neumann’s Flowcarbon falls squarely successful the “speculative bets” bucket. A blockchain work for tracking c credits is not an wholly meritless idea. It seems tenable to deliberation that much countries whitethorn instrumentality oregon grow c recognition systems implicit the adjacent decennary oregon two, and astatine slightest superficially it’s the benignant of transnational occupation wherever a trustless blockchain could really beryllium useful. But determination are a batch of unknowns on the way to that aboriginal – and adjacent if it happens, Flowcarbon volition person contention from akin projects like KlimaDAO.

So it seems apt that Neumann himself was cardinal to the fundraise, which besides includes an ongoing private token sale. But wherefore is that, if he’s specified a notorious screwup arsenic a startup person and has zero acquisition applicable to blockchain? One happening to retrieve is that a bully information of the Flowcarbon backing was apt negotiated earlier the grade of the ongoing meltdown successful equity markets was rather clear. Backers whitethorn person thought they were inactive playing by the rules of the 2010-2021 market, erstwhile a charismatic look similar Neumann’s was capable to thrust an upbeat communicative and state up plus prices.

But that mightiness not beryllium existent anymore arsenic existent profits rapidly go the main precedence for galore investors, some successful crypto and equities. That’s a important information arsenic a16z prepares to deploy its caller $4.5 cardinal crypto task money due to the fact that truthful fewer crypto companies oregon protocols tin rightly beryllium considered “profitable.” In fact, due to the fact that they efficaciously people their ain interior scrip, it tin beryllium precise hard to adjacent find what existent “profit” is for a blockchain project.

Tezos co-founder Arthur Breitman pinpointed this contented connected a caller occurrence of Bloomberg’s "Odd Lots" podcast, utilizing the metaphor of a tiny town. Many blockchains, helium suggested, are similar towns that person tons of interior economical activity, specified arsenic restaurants to service locals (aka ecosystem users). But, Breitman argued, what truly matters is whether a concatenation oregon work has outer request for its services from radical oregon entities who don’t already “live” determination – what successful the “town” metaphor would beryllium considered “exports.”

There’s a overmuch longer speech to beryllium had, then, astir what precisely constitutes a blockchain “export.” Big blocks of tokens sold to speculators surely shouldn’t count, though immoderate blockchain entities bash dainty those income arsenic accepted revenue. NFTs (non-fungible tokens) are the astir straightforward illustration of an export, astatine slightest erstwhile they’re being bought for idiosyncratic collecting alternatively of speculation.

But 1 happening is clear: Crypto operations won’t beryllium capable to skate by connected printing their ain wealth for overmuch longer. They’ll person to fig retired however to really gain immoderate – and it’s not wide that’s successful Adam Neumann’s wheelhouse – or, for that matter, a16z’s.

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