kid mercury

Dedicated to solving poverty by re-building the world's money supply.

Mapping Out the Virtual Currency Revolution

As those who have been following me for years now will know, I'm all about the virtual currency revolution. It is, quite literally, what I live for. 

So I find it very frustrating that there has been almost no real progress on this front. 

Well, that's a bit unfair. We have seen some progress. Such as:

1. Paypal. The fact that we have a real Internet payments solution is step one. Props to "the Paypal mafia" -- Peter Thiel, Max Levchin, Elon Musk, Jeremy Stoppelman, etc -- for getting Step One of the revolution accomplished. It is worth noting that Thiel's original vision for Paypal was to create not just a payments solution, but rather an Internet currency. Regulation thwarted the dream so they had to settle for building a billion dollar payments company. Not a bad deal for them, but a warning for those who are interested in picking up where they left off: regulation is the big obstacle. If you're not up for the political challenge, you've lost already. 

2. Global sovereign debt crisis. The past 12 years in the US and even longer in other parts of the world have been characterized by significant price inflation, deterioration of savings, and obscene levels of debt that cannot be repaid unless the debt is formally cancelled (unlikely) or is inflated away (in the process of happening). This crisis is important because it illustrates the need for monetary reform. If it weren't for this problem, there would be no need for a solution in the form of the virtual currency revolution. 

3. Political tension. Related to the aforementioned point is that the political climate around the world is much more tense. Arab Spring, Occupy Wall Street, Tea Party, etc. Granted, none of these things have made much of a dent in anything, but the anger is there. And that's the first step. I will note that the banksters who own the nation-state currencies will not simply give away their empire easily. It will not be like, "oh, you guys want a fair currency.....okay fine we'll stop stealing via inflation and give you sound money." It will be more like, "Don't even think about complaining. If you try something we'll put you in jail. We own you." This is why I harp on 9/11 all the time, because that is the kind of non-violent political intensity that is needed. Much more than mere intensity is needed, though; the right political strategy is needed. More on that later, although the short answer is that you need lots of small organizations working together to take down a big centralized monetary system. 

4. Gold. Bitcoin will never work. Why? Three reasons, the first of which is electricity. What happens if the lights go out and stay out for a while? If we have a monetary system that is ENTIRELY digital, that means we're in trouble if the whole grid goes down. Moreover, try explaining Bitcoin to your grandmother, or to a pre-schooler. Actually, try explaining it to a cryptography expert, lol. Lastly, something can only be a viable currency is the super rich people -- richer than anyone reading this, and probably all the people reading this combined -- believe in it and are committed to it. Right now, the inventor of bitcoin, a guy allegedly named Satoshi Nakimoto who is suspciously anonymous, is the largest owner of bitcoins. So what happens if Bitcoins rally and he decides to sell? The same thing that happens to any asset when the major shareholders sell: the price goes down. The super rich are commited to gold and fine art. A digital currency that is somewhat relational to gold is needed. Moreover, though, the monetary policy that emerges out of virtual networks must be coupled with a fiscal policy as well. In other words, Facebook or whoever doesn't just need to have a currency that is relational to gold; they need to have a fiscal policy for how they are taxing users and what they are going to do with this tax money. This is how the major crisis in governance gets resolved as well, and how Internet companies do things like revolutionize urban transportation, end homelessness, and reform education. 

5. Game play. You can now pay for digital media with Facebook Credits. I'm not very bullish on Facebook, as recent blog posts illustrate, though if there is one hope for the company, it's in Facebook Credits. More importantly, we are now seeing how a virtual currency can be introduced that can get mass adoption. Game play is the meal ticket. 

The good news is that this is the plan and all the elements are within reach. The bad news is that we are still so far off, so much education is needed, and, most importantly, we need a lot more political will. 

Now that bubble 2.0 is popping, the real fun can begin

After fridays weak IPO for facebook it seems like bubble 2.0 is popping. Apple has also been tumbling and so did all the social media stocks.

I believe capital will begin to flow out of the tech sector. As the IPO window closes, expect the secondary market to get hit hard. The whole game is still designed to fuel the IPO ponzi scheme which simply is not viable. Dividends are the only real option.

As the IPO window closes, the secondary market will lose funding, and so will the whole tech VC sector. So what happens to startups?

Its simple: they have less capital and so they will need to focus less on scaling and more on immediate revenue. This is exactly what should have been done were it not for the temptation of easy money that always pulls folks in to bubbles.

So now we begin the transition to smaller, niche opportunities that require much less funding to get to profitability. Crowdfunding will also begin its ascent.

For those looking for the next bubble, my money is on the mining sector- - specifically gold and uranium miners, but also graphite, rare earths (again!), and eventually base metals like copper, nickel, and iron. Uranium in particular is the best opportunity I have ever seen.

Long Media, Short Software

I spent a year out in San Francisco -- I just moved to Chicago at the beginning of April. I spent a fair amount of time trying to weave my way into the tech scene, and to get the attention of investors. 

There were a number of reasons I had trouble fitting in, although one of the biggest reasons is that I'm not a software developer. There is this mentality in Silicon Valley and in the cities trying to copy the valley (New York) that software development is the be all end all. That is why there is this big shortage for developers and and developer salaries are very high. Designers are commanding a premium too. 

I'm not convinced in the value here. Great developers are great, but industry-wide, I see too much clamoring for anyone who can somewhat call themselves a coder. Instead, I believe a better focus is on media production. Media production, sometimes called content marketing, is the key to search engine optimization and social media optimization. 

Facebook is a software development company. Google is a software development company. Apple is hardware, and Amazon is a platform company. But I'm increasingly convinced that "the next big thing" is going to have its roots as a media organization. Such a company will have a marketing advantage that the big players cannot compete with. Media companies will also do much better relative to software-centric companies as we enter the Age of Fragmentation, in which it becomes understood that 1,000 niche social networks are collectively far more valuable (for all stakeholders) than one mega social network (i.e. Facebook and Twitter) -- and that the real way to build the mega-network is to combine a thousand independent small ones, not try to create one big one with 1,000 different sub-groups. 

Thoughts on How to Value Internet Companies

Today is the much heralded Facebook IPO. I expect the valuation to go to at least 150 billion, perhaps much higher. Not to say that I think the company is worth that much, only to say that I think the valuation will go there. 

But that is Facebook. Of far greater concern to me is my startup, which I'm in the process of selling. I have a meeting with a prospective investor today. (Wish me luck!) This is the fifth prospective buyer I've come across. The good news is that there is decent interest and I think I can get a price and terms that I like. Here are some thoughts I have on the valuation process and the process of selling in general:

1. Know your metrics -- daily unique visitors, recurring visitors, revenue, profits, etc. Then find comparable companies, find the metrics and valuation for them, and then apply that to your startup. For instance Yelp is worth 1.2 billion and has 66 million unique visitors; this comes out to about 18.20 per unique visitor. Of course, I think it is better to find companies from the same niche as yours. If you run a property that is largely about advertising, know what a lead is worth in your neighborhood. 

2. Know your options. The more options you have, the more leverage you have to negotiate. Having multiple prospective buyers gives you options. Having positive earnings and positive cash flow gives you options too. I'm fortunate that I have both, and so I have some options here. If I'm not able to get a price I find satisfactory, I can simply hold on to it. With many social media properties, valuation has potential to continue increasing as the property acquires more links, more registered users, and more user-generated content. 

3. Get help. I've got a company I work with, run by some close friends, that is managing the sales process for me and talking to prospective buyers. I found this to be very useful as sales is hard work and requires lots of contact to get in front of the right people. I think there is a great opportunity in being a web broker -- sort of like how there are many real estate brokers in the real world, and how it can be useful to work with qualified, honest, talented, diligent ones.   

I suppose these ideas are nothing new, and in fact can be applied to almost any business. 

Selling My Startup

In the five years since I co-founded InformedTrades, I've had a number of offers to buy the site, some of which progressed into fairly deep talks, but none of which came to fruitions. I'm now in the process of listing the site on Flippa.com to try once more to sell the site. I believe it's an outstanding property for the right owner, but as I'm just one person, it's too much work to grow it. I simply need more resources; without them, I'm not making meaningful progress, and so it is better to sell it to someone who has the resources to make it grow and live up to its full potential. 

The value of InformedTrades is that it is attracts community-generated content in the lucrative and competitive forex niche. If you're looking for an SEO/social media foothold in this space, I think a property that can generate quality user-generated content is valuable -- perhaps even necessary in light of how competitive the niche is, and how expensive alternate strategies are in comparison. 

Ideally the buyer would keep me on to help manage the transition, or would be content acting as an investor. 

I have a co-founder who is not involved though still a shareholder, so there is the option of buying him out and re-capitalizing the company.

If you're interested, please email me at actolearn [at] gmail [dot] com. I think this has potential to be a great opportunity in the right hands -- such as a forex broker or an established and ambitious SEO firm. It is not a big site (2,500 unique visitors per day, 30,000 registered members), so there is an opportunity to buy it at a fairly inexpensive price (a few zeroes shy of Instagram's billion dollar price tag :)), invest in improving and marketing it, and reap the rewards accordingly. 

Situations Where People Want to Pay

Situations where people want to pay more are something I spend a fair amount of time thinking about. 

One such situation is when hanging out with friends. For instance, last night I went out with a group of friends to a bar. The bill came and we went through the usual nightmare-ish process of dividing the bill. Because it is poor form to be anal about the bill -- doubly so in the group that I was a part of, in which many people were meeting for the first time through friend of a friend connections -- we all chipped in too much. So then we had to go through the process of giving cash back. We ended up in a situation where there was a $20 bill that no one felt comfortable taking because it would have met someone didn't pay enough. 

That was interesting. But it gets better!

I was probably the poorest person there, bunch of rich people I was rolling with last night. Not like I'm starving but I'm still working way too much for too little and they are all doing better than me financially. Anyway, one guy who knows me well enough to surmise that I was probably the poorest person there tried to push the extra $20 on to me; I'm not 100% sure, but I suspect he was doing this out of "hey, you're the poor one here, so you take it" -- of course it would've been bad form to say that explicitly, so he was trying to gently and politely suggest the idea (or at least that is how I interpreted it). I still felt uncomfortable taking it because it would've meant I got a bunch of drinks and food for a net cost of $5, which is simply too low. So, he ended up reluctantly taking it since no one else would, although vowed to buy drinks for folks next time. No one really cares and all suspect it will get worked out evenly in the long run anyway. 

I think this dynamic is worth considering when asking what types of revenue models will work in the context of social networking. Here are some ingredients:

1. Loose ties. When I'm hanging out with my older brother, who is much wealthier than I am, I don't even offer to pay. Because he's my brother so there is no shame and no expectations to the contrary, that is possible. With a loose social network, though, that type of behavior is uncomfortable for everyone. So incentives to spend more for reputation purposes are important in areas where there are loose social ties. I think that's an important idea for social networks.    
2. Small group. If this was a group of 300 million people, no one would care and people might feel more comfortable not paying because they could get away with it and because they do not have a connection to the group. Consider, for instance, tax avoidance. This is another piece of evidence suggesting that when it comes to social networks, bigger is NOT better. That's something Silicon Valley and those immersed in Bubble 2.0 do not really get. 
3. Bill complexity. It helps when there is bill complexity; when food is being shared, when one person only has a credit card, when some folks order more drinks than others, when meal prices vary, etc. The more complexity and ambiguity there is, the more people will want to make sure they cannot be accused of being cheap; they will put in extra as insurance. 

Three ideas is enough for now. I'm going to dwell on this a lot more. 

Slide Deck for The Business Plan That Saves the World

Well, I don't really think I'm appropriate for investors, and I've stopped making any meaningful efforts at securing funding. But I still dream of building a business that changes the world, so I thought I should at least put up the slide deck I made last year, and archive it on this site. It's extra bad ass to self-fund a revolution, but realistically speaking, external capital is usually required to do something world changing. 

Anyway. Some of the stats in the slide deck below are outdated, but the basic story holds true.

If you're an investor in the Internet space and are up for this challenge, please feel free to reach out. I don't fit into the Silicon Valley mold -- which is precisely what should pique your interest! But it will come with its own set of challenges, for sure.   

 

Crowdfunding Makes Venture Capital Scalable

JOBS Act signed into law today. So far it looks decent, people are
moving on the crowdfunding part and are excited about it. That's
important, that people believe in it and see the dream. That's what's
going to make it happen.

Dave McClure has a post saying he wants to make venture capital scale:
http://500.co/2012/04/06/scaling-venture-capital/

Crowdfunding is what does that.

Traditional VC cannot scale. It is a high touch business, they are
investing a lot of money and that is not something you can do
frivolously. That is quality, it is luxury, it is prestigious, it is
select. Crowdfunding, on the other hand, is none of that. Crowdfunding
is mass market, retail, generic. The right crowdfunding model makes VC
scale.

But what is "the right crowdfunding model"? It goes a little something
like this......

1. You still have general partners that are smart and know what's
going on. So this is not about some random person plopping down a
C-note on some stupid startup.
2. Rather, the general partner has a broad framework they operate
from. If a startup meets XYZ criteria, and if after a 30 minute
interview with the founder the general partner in the fund is feeling
a good vibe, they get funded. We see this is A LOT like the
YCombinator model. And that's all Crowdfunding ultimately is, just
YCombinator on steroids.
3. Well, there are a few differences. For one, the selection criteria
is going to be very rigid. It's not because they need super high
quality founders, but rather each fund will invest in a very specific
type of company -- this is needed to create network effects, which is
what ultimately enables scalability. For instance, my dream, and what
I'm ultimately hoping to build some day if I can get to that point, is
a fund that invests in subject matter experts. We give them very
standardized, rigid terms; for instance, they must use XYZ software,
they must incorporate game play in such a manner, etc. Basically, the
general partners in the crowdfund are responsible for crafting all the
scalable elements that each startup in the fund will use. For funds
making engineering investments, this means dictating API policies,
what software languages and databases are used, etc.

At this point there are likely to be a few gripes. Such as:

1. Doesn't this kill entrepreneurial spirit? Isn't this the Man
holding the entrepreneur down? Sort of. Crowdfunding will not be about
finding the next Steve Jobs or the next Jeff Bezos. It's going to be
about taking hardworking people and letting them be entrepreneurs.
Think more like a franchise operator.
2. Why can't a traditional VC fund do this? How does this relate to
Crowdfunding? A traditional VC fund is about investing in brilliant
people. Traditional VC funds are looking for the next Jeff Bezos. You
don't want to put too many rules on a genius like that. You want to
invest in only a few of them, and you want to invest a lot in them. In
other words, traditional VC funds are going to be the luxury, high
quality option for premium entrepreneurs. For your run of the mill
entrepreneur, they go to crowdfunding.

And crowdfunded entrepreneurs aren't going to get a lot of hand
holding. Ultimately, some may get as little hand holding as customers
of Amazon get. The general partners of the crowdfund, if they do it
right, will enable the funded entrepreneurs to solve their own
problems via peer production. That is, of course, how it is supposed
to be.

This will change the game for angels too. Right now an angel puts down
what, something like 50k in seed money? Now an angel is going to put
down 5k, and you're going to get 10 of them -- or maybe even 100 of
them -- in on a deal. So an angel who would normally put down 50k, or
25k, in a single company will instead put that same amount spread
across 50 or 100 companies.

Which leads to the next point: what's the exit here? There's only one
acceptable answer: dividends. Well, at some point crowdfunding will
lead to new financial exchanges designed to make shares liquid, and
that is a very important development. But first, these businesses need
to get to cash flow positive very, very soon. And when they do,
they're going to need to initiate a dividend policy. This is not like
Twitter or Facebook where you have a few bazillion rounds and you
raise a few bazillion dollars. You raise one round and you need to be
able to get users and issue dividends off that. Now, there may be an
opportunity for some especially promising crowdfunded startups to flip
to accredited investors, but I don't think that's the real opportunity
here. The Internet is getting fragmented and the real opportunity is
in creating lots of small markets. Crowdfunding will create less
flipping and more small businesses that get to modest profits and
positive cash flows quickly.

That's the dream. That's how funding becomes scalable. That's how jobs
are created and wealth is created, bottom up style. It's going to
change the world.