I’m writing from the old mining town of Virginia City which is near to Lake Tahoe. So why not discuss the modern version of mining… the blockchain.
Bitcoin is backed by millions of computers around the world called “nodes.” Today, the Federal Reserve, VISA and MasterCard back the current currency system but only THEY have access to the data. THEY also control the system. Bitcoin is open source to everyone and NO ONE controls it. Bitcoin mining is highly uncertain like mining for gold. Miners solve complex math problems to verify transactions in a block performed by high-powered computers.
Blockchain seems to be that hot topic that everyone talks about but no one seems to understand.
The luck and work required by a computer to solve one of these problems is the equivalent of a miner striking gold in the ground. So the miners insure both privacy and security. For example, the miners make sure that bitcoin transactions are not being duplicated (aka “double spending”). So if you have $100 in your crypto wallet, the miners verify that you didn’t spend the $100 on a music festival ticket for $100 AND on buying a $100 skateboard online. If the miner solves the complex math problem, then a new block is added to the blockchain and the miner is rewarded a block reward in bitcoin. This is the only way that new bitcoins get issued.
The block reward is halved every 210,000 blocks, or roughly every 4 years. In 2009, it was 50. In 2013, it was 25, in 2018 it was 12.5, and sometime in the middle of 2020 it will halve to 6.25. At this rate of halving, the total number of bitcoins in circulation will approach a limit of 21 million, making the currency more scarce and valuable over time but also more costly for miners to produce.
(1) A party requests a transaction.
(2) The transaction is broadcast to all on the entire network.
(3) The transaction is validated using validation rules set up by the blockchain network.
(4) Validated transactions are kept in a block and sealed with a hash algorithm.
(5) The block approaches the blockchain for authentication and specifically the hash is authenticated.
(6) This process is very secure because if a hacker tries to change the hash algorithm, the block will be rejected by the blockchain. Only after every computer on the blockchain network validates the block via a hash authentication, then the block becomes a part of the blockchain.
Prior to the 2000 Dot.com collapse, startups were racing with time to go IPO (Initial Public Offerings) to gain huge exits for their investors. During that time as a 23-year-old tech entrepreneur and world traveler, I remember getting my Aussie ex-girlfriend’s mom Bernie all excited about buying Cisco, Microsoft, and Amazon stocks. Bernie ended up buying a ton of tech stocks in the frenzy, but she like many other amateur investors ended up selling it in the “tech bloodbath” that was to follow.
I lived in Geelong, Australia for two years while working diligently on my first software startup. If the tech market kept it’s franactic pace, I never would have jumped ship into real estate. After 9-11 and the tech bubble collapse, the herd of investors looked for safer places to park their money… namely real estate.
During the Dot.com era, companies raised massive amounts of capital from their IPOs and used it to try to buy traffic to jumpstart a network effect. Today, I see the same exact phenomenon occuring with two notable exceptions. The first difference is that the source capital is not coming from IPOs but rather from institutional investors and sovereign wealth funds. The source of the capital is 20:1 leverage with low interest rates. In fact, corporate leverage alone now exceeds $8.8 trillion usd. The second difference is a valuable lesson that VCs learned during the Dot.com debacle… the importance of getting to product-market fit quickly.
Silicon Valley has also formulated it’s “winner-take-all” strategy. Dot.com startup Amazon exemplified the “winner-take-all” approach of that era. Jeff Bezos believed that losing money could be the ultimate competitive advantage if you can raise enough capital to sustain it, as it prevents others from entering the space or gaining market share. When competitors are wiped out, then you can raise prices back up to profitability.
Examples of no-revenue companies are Uber valued at $120 billion usd and Lyft valued at $15 billion usd. It doesn’t matter to Uber that it lost $4 billion usd in 2018 and $4.5 billion usd in 2017. First, Uber raised over $22 billion usd. Uber has made a ton of money for it’s early stage investors in it’s recent IPO. Second, Uber’s traction is such that it will be “bailed out” by an acquisition. It’s possible that Uber will survive the market collapse that I forecast will be coming soon.
But here is the problem with a company like Uber… it lacks sustainable differentiation.
Network effects have no value if they don’t create monopolies. Uber will never make a profit in the rideshare business because it has no sustainable differentiation over competitors like Lyft. Raise rideshare prices and customers migrate over to Lyft. To win, Uber must beat Lyft and this doesn’t seem feasible or realistic. Alternatively, Uber needs to use it’s capital to create secondary models in markets such as supply-side logistics (aka Uber trucking). As a side note, I think Uber is trying to scare riders with “sexual assault” stories with the goal of allowing Uber to record driver / passenger conversations (obviously valuable data and a major violation of consumer privacy rights). If I were Uber, I would use Uber’s higher market valuation to buy Lyft. All the drivers who drive for both Lyft and Uber will then be working for the same company!
Uber is an example of a unicorn… defined by venture capitalist Aileen Lee as a startup who exceeds a $1 billion market cap. The number of unicorns has been on the decline since 2014. So here are the numbers… 42 unicorns in 2014, 43 in 2015, 16 in 2016, 33 in 2017, and 35 in 2018. In addition, a recent study by the National Bureau of Economic Research argues that the average unicorn is 50 percent overvalued.
Silicon Valley’s “winner-takes-all” approach works great in bull markets. However, I believe that the “winner-takes-all” fails miserably in bear markets. In a bear market, startups with free cash flow will survive. Ironically, free cash flow during bear markets may win the “winner-take-all” as no-revenue companies fight for their survival.
I think the groupthink in the Bay Area is missing another major blind spot. Prior to the Dot.com bubble, IPOs for tech companies took an average of 4 years. Today in our current “app bubble,” it’s taking 11 years for tech startups to IPO. Ladies and gentleman, this is a math problem. If you visit the history of American financial markets, bull markets tend to last either 5-7 years or 11-14 years. If IPOs for tech companies take an average of 11 years, this is like playing Russian Roulette. Better to look for 5-7 exits and being mindful of the economic credit boom and bust cycles.
So I am sharing my insights as to why VC tech investing is super risky in 2019. However, I don’t see the makings of a real estate collapse. Keep in mind that after the Dot.com Recession, tech workers lost their jobs and it temporarily effected the real estate market. But from my perspective, real estate “megacrashes” like 2007 have economic indicators such as subprime lending, mortgage fraud and over-construction. In a nutshell… I am expecting a 2000 Dot.com crash and not a 2007 real estate crash (well unless the currency collapses).
In 2001 with my first software startup on the ropes and hanging on for dear life, I shifted my focus to real estate investing. After the “app bubble collapse,” I’d bet that people go back to speculating on “hard assets” such as homes. In others words, I am expecting a two year bear market proceeded by a 5-6 year record breaking bull market.
From this discussion, it’s pretty clear how risky venture capital investing can be. Even if you pick the right founders in the right market, you’re still rolling the dice on market timing and competitor risks.
If you’re tech investing in 2019, find experienced founders who can quickly get to product-market fit, change your paradigm from “winner-take-all” to free cash flow as a near term survival strategy, and do your best to time the markets (which can be nearly impossible to do). Beware!
When living in a brand new apartment complex in Tacoma (WA) over fifteen years ago, I frequently visited their state-of-the art movie room with surround sound and theater seating. In this cinematic setting, I could really feel, hear, see and experience the movie “The Secret.” In fact, according to “The Secret,” you unlock the Law Of Attraction by feeling a desired outcome as if it already existed. For the last 27 years of my life, I’ve also been a huge disciple of SMART (Specific Measurable Actionable Relevent and Time Sensitive) written goals.
But here’s the problem. Have you tried written SMART goals and/or invoking the Law Of Attraction but have NOT gotten results? In today’s post, I will share with you a better approach based on neuroscience that works better than written SMART goals and/or invoking the Law Of Attraction.
In the last ten years, widely held old paradigms in neuroscience have been disproven with scientific research. For example, it was previously believed that we had a subconscious mind in our brainstem (aka the Reptilian brain). This is the bottom of the brain area. Neuroscience has now discovered that conscious corticals and subconscious corticals occur in the same regions of the brain. In other words, there is no such thing as a subconscious area of the brain.
Let me explain how the brain actually works. As humans, the auditory cortex, the somatosensory correx, the visual cortex and the smell cortex all wire together as they fire together. The brain through neuroplasticity gets shaped and reshaped through sensory experience AND imagination. As a side note, modern fMRIs show that the various cortexes fire from just visualization and imagination. During subconscious dreaming, whatever we focus on gets the reinforcement attention. We tend to give attention to stimuli that match our self-identity. For rewiring your “self-identity” spindle neurons, the best system is to review your Habit Goals (to be explained below) right before sleeping and right after waking.
In addition, neuroscience now shows that feelings don’t come from the limbic system. It turns out that there is no limbic system. For example, it used to be believed that fear and the “fight or flight” reaction derived from the amygdala in the limbic system. Neuroscience now understands that the amygdala executes the signals coming from the cognitive areas of the brain. In other words, the emotion of fear is a cognitive activity. Interestingly, we don’t even know that the emotions experienced by other animals resemble the human emotions because animals and humans process cognitive functions differently.
Finally, neuroscience has discovered spindle neurons that form our self-identity ego. Humans are born with spindle neurons and the 200,000 to 400,000 spindle neurons fully develop by the age of 8. The spindle neurons function like a symphony conductor. The sensory input is like the brass, the emotional inputs is like the percussion, the thinking inputs is like the woodwinds, and the subconscious cortical inputs are like the strings. The self-identity spindle neurons are the sum total of the combination of emotions, thinking, subconscious habits and sensory data collected by the age of 8.
The problem with invoking the Law Of Attraction and/or SMART goals is that it insufficiently rewires the spindle neurons that have been hardwired by the age of 8. Written SMART goals won’t rewire your “self-identity” spindle neurons. Feeling like you’ve manifested your desired outcome (by invoking the Law of Attraction) is not enough to rewire your “self-identity” spindle neurons.
I’ve developed a goal-setting process called Habit Goals that might help you rewire your spindle neurons and allow you to put your attention during subconscious reinforcement memory and learning in alignment with your desired outcomes.
Liz Demarco used my Habit Goal method to lose 35 lbs. Robin Lee described a transformation in her relationship with money. Bobbi Schwartz says that Habit Goals allow her to sleep better and make her happier and more joyful. Heather Perdelwitz says the Habit Goals helped her to replace victimization with 100% radical responsibility.
Why do you have a business? Perhaps, your “why” relates to having more money to travel or funding a cause that you’re deeply passionate about.
Watch this step-by-step video on how to develop your Habit Goals to master the art of rewiring your spindle neurons.
What would it cost you if you continue to fail to achieve your goals? Are you frustrated of falling short? Who are you hurting by your inability to attain results?
You cannot afford to skip the link that I posted above. The Habit Goal system could be the missing master key to transform your money, relationships and health.