The recent rise in seed-stage valuation and funds raised could be to some extent a function of inflation but also one of the symptoms of too much optionality and competition in the crypto space.
Infinite money means infinite optionality and infinite optionality could be understood as “there is no urgency for a future to arrive”. The infinite optionality makes money more valuable than anything you could do with it.
It seems that optionality favors horizontal innovation over vertical innovation because that is the path of least resistance for financial capital. Horizontal innovation relies mostly on copy-pasting with an incremental distinction that could sometimes involve minor technological progress. Vertical innovation is the fabled “zero to one”; an invention of something brand new.
This does not mean that horizontal innovation is not useful as the horizontal integration of major advances delivers value (productivity gains, scale improvements, customization, etc.) to the widest set of applications and users. This propagates the value created from the vertical innovation throughout the economic engine.
But the more money trickles down into seed-stage investment, the greater the demand for a genius idea - a new invention. The high price on seed rounds signals that the project sees “resources” (capital) as a way forward, meaning they are planning to outcompete or outwork the competition.
Competition is tightly connected to resources. It’s an arms race. Competing is doing what the other is doing but trying to do it incrementally better. The struggle itself becomes the main attraction. This romanticized idea of the struggle is perhaps the origin of the myth that competition leads to innovation.
When in the 15th century Europe was locked in a zero-sum resource war, the Portuguese sailed beyond the edge of the world and founded a naval monopoly. They did not enter the intra-European struggle - they did not compete. They embarked on the “pay-as-you-go method of conquest and trade”.
Instead of participating in a well-resourced war of attrition, focusing on a few strategic victories against near-equal opponents, the Portuguese decided to play a different game. Skipping ahead a couple of centuries, in 2008 the best idea in finance was not to start a new investment bank or hedge fund but play a different game: get involved with bitcoin and cryptocurrencies.
Tying this to startups: If you have a great idea you don’t need an army of 10 to validate it in the early stage. If you have a mediocre idea you need an army of 10 to compete with other mediocre ideas. You end up playing the game others are playing; competing and at best innovating horizontally.
The limiting factor to growth in the early stages is rarely capital of any form, including the so-called human capital (“devs”). Celebrating the increasing number of developers in the Web 3 ecosystem ignores the fact that the human mind and its creativity are the main limiting factor for growth.
Can great inventions be forced into being? I believe more resources will not brute force the innovation. We are just more likely to confuse a show pony for real innovation. The pioneers are rarely gloriously window-dressed.
This goes back to Peter Thiel’s idea of monopoly. The great ideas - the monopolies are usually quiet about their advantage. But many seed round projects these days must go a really long way to explain how they are different from their competitors. More often than not, they pitch “we’re the Project X of Ecosystem Y” (e.g. We’re the dYdX of Avax).
The Resource Threshold
New ideas are mostly a result of abstract thinking and not a product of more computation. But the flow of optionality (money) incentivizes founders to go for the lower hanging fruit - add more compute.
Ideas make resources powerful. The opposite is also true; ideas are empowered by resources.
I would posit that there is a theoretical threshold of resources above which an idea can be tried. Maybe you have to buy time, access, resources, etc. Some ideas are expensive to try. Most are not. Especially in the world of information technology.
The “base threshold” is the minimum capital required for an idea to be functional. The level of inventiveness for an idea X is probably negatively correlated to the number of projects trying to build on idea X while being funded above their base threshold of resources.
One could argue that the more capital is committed to an idea, the more competition around that idea coalesces to a narrower vision. Good to keep in mind that “only similar people quarrel and the bitterest wars are over the slightest variations of purpose or belief”[1].
Large capital pools want higher probable outcomes for more concentrated commitments. Those investors are compelled to "horizontally" innovate from the most successful current model in an effort to decrease the risk of failure.
Small entrants can't get in to compete. The field narrows. Above a threshold, more money decreases the number of innovations in a given field.
Take an example of a “Layer 1” blockchain with smart contract functionality. It’s probably a genius idea that to get off the ground did not require that much capital in 2013 relative to today.
As this genius idea gets approval by either the market (price) or an adoption; either applications built, a number of developers, the revenue of applications built, etc., the more alluring it becomes to fund “Layer 1s” with incremental difference or improvement.
I do not claim that the market only needs one “Layer 1” blockchain. I posit that each new “Layer 1” becomes increasingly marginal in terms of inventiveness, while the resources intensiveness increases. Alas, competition is reassuring.
I can state with confidence that hundreds of millions spent on funding the development of various DeFi protocols is above the base threshold and has been for a long time. Again, there might be some good ideas, but the vision is narrowing.
The Great Ideas
If you are a guy with the greatest idea in the world but have no means to execute on it - that is not what is discussed here. I’m referring to an actionable plan attached to a dedicated human being capable of bootstrapping it from a garage with a friend.
To provide an example; I believe Gnosis had a prototype of xyk AMM ready in early 2017. However, in late 2018 most in crypto had no idea that smart contracts could be useful beyond raising capital permissonlessly.
Sometime in 2018 in his Williamsburg apartment, a random guy named Hayden built a prototype xyk AMM that became Uniswap. This was one of the major catalysts for DeFi innovations to take place alongside liquidity mining and a bunch of others.
On the other side, there is Gnosis, which successfully raised $12.5M in ETH (at $50) and managed the treasury well, multiplying their funds. It was a crypto powerhouse already in early 2017. Despite having actually built something that emerged as one of the key innovations of crypto, Gnosis never made a concerted effort to bring xyk to the market. (Granted, they have built other critical infrastructure products.)
They had too many options. Hayden had one; an idea he got from Vitalik Buterin. But why are ideas important if Gnosis had the same idea?
Hayden only borrowed the idea for Uniswap and he was no match to the resources that Gnosis controlled. Serendipity played a role but the resources and the underlying optionality did not help Gnosis capture users with what later turned out to be a crucial invention.
It’s not only about the idea. It’s about the urgency and the commitment to execute on the idea that happens to be great. In such a situation an overwhelming amount of resources, in other words - optionality, becomes a burden.
The old saying goes: “necessity is the mother of invention”. With abundance, there is no necessity and barely any urgency. Money could be a distraction. Sometimes it could be a good idea to unfollow the money.
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Musings of the optimist
Thank you Mattie. It is a widely observed issue, abundance of choice. It can lead to depression (apparently). I have been involved with many crypto startups. It became clear to me that the raises were getting progressively larger, and harder to justify or account for. I have come from a background of bootstrapping resourcefully, and I know the hunger most of these 'devs' lack upon securing the first tranche of their ludicrously easy to garner 'loot'. Needless to say, most of the 'teams' I walked from, early, still managed to raise absurd amounts of money - but barely a thing of use has come of any of it.
Add in the completely 'hands-off', cynical cash grabbing investors and the influence it bestows upon wannabe crypto projects, and there you have a big ol' waste of money and resources for the many, and something similar for the few who take the filthy lucre.