Crypto Investing: Ready, Fire, Aim
"There are two ways of building a business," according to Jeff Bezos. You can either "aim, aim, aim and then shoot" or "shoot, shoot, shoot and then aim a little bit."
Bezos encouraged Amazon executives to do the latter: In the quickly evolving world of technology, if they spent much time aiming, they'd miss the opportunity to hit anything significant.
So, he asked them to fire first, aim second and let the occasional hit (like AWS) pay for all the misses (like the Fire Phone).
(They appear to still be shooting from the hip, per yesterday's NFT news.)
The same applies to investing: You can buy dozens of lottery tickets and hope one big winner pays for all the losers (the venture capital model). Or you can do a lot of nothing while waiting to take a swing at one fat pitch (the Warren Buffett model).
In his most recent shareholder letter, Buffett credits the "avoidance of major mistakes" while waiting for those fat pitches as one of the pillars of Berkshire's success: "Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years."
"It helps to start early and live into your 90s as well," he added.
Most of us do not have that kind of patience, however, so we're naturally attracted to Bezos's "shoot first, aim second" style of investing.
This disinclination to spend time aiming at least partly explains why crypto investing has proven so popular: Everything in crypto is a venture capital-style lottery ticket.
But unlike traditional venture investing, you don't have to be an accredited investor to participate.
This is a mixed blessing.
(At best.)
It's Getting Crowded in Here
When I question whether crypto is an investable asset class, the answer I always get is that crypto is not like equities, it's like venture capital.
I find this response less than reassuring because even venture capital isn't venture capital anymore — at least, not the way most of us think about it.
The popular allure of venture investing is the prospect of getting in early on the next Apple, Netscape, Google, or Facebook.
But as new money has poured in, venture investing has become the victim of those early successes: VCs now compete with angel investors, crowd-funding websites, accelerators, micro VCs, private equity, mutual funds, sovereign wealth funds — and even the US government.
The result is that Ivy League-educated analysts at VC funds have been reduced to spending their days cold emailing startups — it's a long way from the halcyon days of finding Jobs and Wozniak building PCs in a Silicon Valley garage.
And if that's too anecdotal for you, consider this from NACUBO-TIAA: "Endowments' allocations to private equity and venture capital at the end of FY2022 was 30% — higher than allocations to public equities, at 28%."
Higher than equities!
With that much money chasing a limited set of opportunities (how many good ideas from good entrepreneurs can there possibly be?), this generation of VC investing seems unlikely to match the eye-popping returns of lore.
When it's possible to raise $300 million with the elevator pitch, "Uber, but for dogs," you have to wonder how productively the VC industry is allocating the capital flowing into it.
Expecting crypto to do any better feels optimistic.
Crypto, for all intents and purposes, is liquid venture investing — an unfortunate combination of the high entry prices of public-market equities and the low hit rates of private-market VC.
Except that the entry prices in crypto are even higher than equities. And the hit rate might be even lower than VC.
How much upside can there be in an asset class that assigns a $10 billion market cap to Dogecoin and a $12 billion market cap to Aptos?
And what's the hit rate likely to be in an asset class missing some of the basic tenets of investing like legal status, valuation metrics, and shareholder rights?
It'll be fun to find out.
But in the meantime, crypto investors may want to be a little more Buffett and a little less Bezos: Aim before you fire.
No comments:
Post a Comment