As we build a blockchain solution to fit a new model for the music industry, we face a number of challenges — technical, societal, logistical, and more.But perhaps the biggest hurdle to climb is entirely abstract: perception.There’s an unfortunate but powerful truth about any project that uses the word blockchain — it sounds too good to be true.As we assembled the founding team, wrote the whitepaper, and raised $5.5M from investors including General Catalyst, Lightspeed, and others, we frequently came across some of this (well-justified) skepticism.
We need to combat these preconceived notions so that artists, music lovers, and everyone else can focus on the solution we’re building.
The purpose of this post is to confront these issues head-on — but we wanted an outsider’s point of view. To get that, we talked to two of the best investors in the Valley: Niko Bonatsos of General Catalyst and Adam Goldberg of Lightspeed Venture Partners.We asked them to candidly share their biggest reservations about blockchain companies and distilled their thoughts into the six major points below.
1. No Real Customer Problem To Solve
“A lot of companies focus on ‘blockchains are immutable, blockchains are censorship-resistant, blockchains represent open protocols’, but they don’t talk about the end-user benefit. It would sort of be like talking about TCP in previous generations of Web 1.0 or 2.0, and saying “Hey, look, I can send bits over a wire in a guaranteed manner.” And that’s really cool, but that’s a feature. That’s interesting because it lets you sell things online, because now you can accept payments and have databases.To an end-user, that secular trend ends up being commerce. You can say something similar about storing graphs and making inferences about which of your friends are friends with your other friends. That ends up being social.”
Blockchain is no different — we need to ask ‘What are those benefits to end-users?’
It could be regulatory arbitrage (and that comes from censorship resistance), it could be disintermediation or re-intermediation, putting something in between the middle of the value chain.”
“A lot of the companies in the crypto space are started by founders who do not have a customer in mind. Many are focused more on predicting future problems, rather than solving a problem for current customers today. It’s much more hypothetical: In the future, when as the world matures, this problem will develop, and we’ll have a solution for it.”
2. Capital-Heavy Markets Cause Bad Behavior
“When the market is hot, and the whole space is becoming hotter overall, a lot of bad actors come in. A lot of dubious characters saw that it was easy to get going with a token sale or ICO. They then raised money, but never delivered — and defrauded a lot of people in the process.A lot of these fraud cases have been covered in the press, creating a negative perception around the entire space. It creates a sentiment among casual observers that nothing real will ever develop.”
3. Doesn’t Actually Need Blockchain
“If you take out the word ‘blockchain’ and you put in ‘database’, and the opportunity becomes less compelling, then you can see that the benefits are not secular in nature. It’s riding off of the blockchain hype.
In most cases, decentralization has a scaling penalty. So you have to ask, “What am I getting in exchange for being decentralized?”
There are some cases where it’s really, really compelling. Maybe you’re able to simplify a value chain, or you’re able to do something that normally would have a lot more regulatory red tape around it. But using it as a replacement for a database when you don’t need the tradeoff, is not going to make a lot of sense.The way I think about a lot of businesses in the blockchain space is similar to how I think about businesses that use AI. I think you hear a lot of “Hey, we’re doing X with AI”. Now if you take away the term AI and substitute in the word ‘statistics’, and the business becomes a lot less interesting, then you know the idea has a lot less merit. AI is an enabling technology, a tool, not a standalone solution. And I think you could say the same thing with blockchain.”
4. First Generation Crypto Founders Often Lack Experience
“I always look for founders who think like their customer — or even better, are solving their own problem.
With Audius, Ranidu is a customer himself. He’s been in the electronic dance music space and experienced many problems that he’s now working to solve. Roneil and Forrest have been tinkering with the technology for years. They have the experience to say that they can build an initial product, something of value, in 6–12 months — and they have the credibility.”
I’m looking for people who can go the distance: start small, nail product/market fit, and then go build a big company. Founders who can articulate who their customer is, and why the product they’re building requires blockchain technology.
I have not seen many of those founders in the crypto space.
“Everyone talks about product/market fit and I think that’s very important, especially in blockchain, but people don’t as frequently talk about founder/market fit and sort of the authenticity that a team brings to a space.I think what’s really exciting about the Audius team is that you have someone that comes out of the music world who’s felt the pain first-hand, and that’s Ranidu. And you have a team of engineers that have been building things on the blockchain for several years in Roneil and Forrest.
The questions to ask of any founder: “Is someone authentic to the problem? Have they felt this first-hand? Do they have the ability to resonate well with the space?”
I think what’s really exciting with this team is Ranidu brings incredible access to the music world and you can see that already by the impressive advisors they’ve put together. And Roneil and Forrest resonate really well with the engineering, technology, and venture worlds — as evidenced by the team they’ve put together.”
5. Volatility Of Cryptocurrencies
“The volatile pricing of BTC and ETH drives the market sentiment to a large degree. When it’s high, everyone’s excited; when it’s low, the world is collapsing!As a result, a lot of the companies in the blockchain space are affected by that.As a VC, we’re investing in companies that are building products that are used by consumers and enterprises to earn revenue.
We’re not traders. We don’t care that much about the currency.
We invest in companies.
We know that a good company takes 5–7–10 years, so the volatility between now and then is irrelevant.”
6. Unproven Solutions At Scale
“At this point, we haven’t really had any dApps achieve true scale. It’s really hard to battle-test something that really has had, at best, a couple thousand users. There aren’t many things battle-tested in the blockchain ecosystem as a whole. I think Bitcoin is the primary thing that’s been battle-tested.I would make the case that in order for users to put up with initially what is probably a sub-optimal experience, as any early stage software product will be, there has to be a burning need for the blockchain aspect (which I discussed earlier).”
“If there is one sentence to sum it up: it is really early.We are very optimistic that there are going to be companies that can get adoption, particularly the ones that actually solve existing customer problems.
Our job as a VC is to partner with the most ridiculously ambitious founders. Right now, many of them are in the crypto space.
For one, big companies don’t know how to play the game. Back in the day, if you started a mobile app company, no one knew how it worked. Big companies had a core business (probably web-based) that they needed to continuously make money from — and their ‘cash cow’ didn’t necessarily translate to the new space (previously, apps). Now, that new space is crypto.Another important factor: there is an amazing amount of smart engineering talent aggregating in the space. So the process of building a team much easier. Since the technical challenges are interesting and provide ways to solve problems that previously weren’t available, smart people want to get involved.If you were to start a company 10 years ago in consumer, most likely you would have started an app — if enterprise startup, you would have started cloud-based SaaS. Today, a lot of the best talent is moving into the crypto space — especially when you factor in the point about many big players not pursuing the same opportunities.”