Identifying Diamonds in the Rough as Blockchain Enters the Trough of Disillusionment

Gartner Hype Cycle

According to Gartner research, 2017 is the year that Blockchain tech entered the so called Trough of Disillusionment. This is the time that comes after irrational exuberance has faded and technologies enter a long night during which the winners are separated from the losers.

Right now we’re still somewhere in the uncanny valley between the bubble and the moment it pops.  There’s hundreds of new ICO’s every month. Some have a viable raison d’être but there is a huge need to separate the wheat from the chaff.

Compared in both number and scale with traditional VC funded projects the Blockchain area has a long way to go. According to Venture Scanner Blockchain related acquisitions this year aren’t off to a great start. In total there aren’t a lot of firms making exits. In 2016 there were just 16 such events.

Blockchain Exits 2017
Photo Credit: venturescanner.com

Compare this to the number of exits and deals backed by VC firms and the immaturity of the market comes into focus.  According to tech.eu, among just EU Tech startups there were 783 VC exit deals in Q2 2017.

This underlines the Crowdstart Capital position. We don’t believe in huge exits with many competing industry buyers fighting for the next unicorn. We aim to be the adults in the room, the ones who know what industry actually needs and can push that dealflow number up by catering to those needs specifically. In order to do this we leverage both our experience building blockchain-based applications for a wide range of industry players and the industry specific knowledge gained from those collaborations.

We’re focused on the fundamentals as opposed to the hype.  We identify a need in a big market, learn how to serve it as well as customising the solution and finally sell that product to major industry partners to reshape existing processes. That’s how to make money in the Trough of Disillusionment. As hot as the ICO model of financing ventures is, the industry needs to have a clear eyed look at what real problems we’re solving and how sustainable our efforts will be over the next five years.

In Search of the 1% of Startups that Work on Products People Actually Want

Three out of four startups fail and 90% of those in the tech industry don’t survive. To become highly successful, good timing, a portion of luck, exceptional leadership and a high dose of resilience are needed.

We at Crowdstart Capital are convinced that these traits and contexts are necessary but not sufficient factors for success. Even within a positive context, the venture capital world remains a gambling game with so many startups working on products nobody wants. Missing market needs are the most common reason for startup failure, way before a lack of liquidity and other factors.

Is there a way for founding teams to better meet market expectations? How could they avoid choosing wrong development paths? First, they must make sure to work on a product the market needs or will need in the future. Second, they should stick very closely with the principles of the lean startup, and work in an extremely focused and agile way to detect any deviation from the optimal path. Third, they should closely watch the players in the market they aim for: do they still wait for the original product idea or have their needs changed?

Easy as it sounds, these requirements are tough to match. Here, Crowdstart Capital comes into play. During a period of 6-12 months, we support startups by guiding them through the above mentioned challenges. Based on our close relationships and working experiences with corporate clients, we make sure that all developed products meet the expectations of either a client’s business unit or broader market needs. In other words, we bridge the gap between the startup and the market.

Our colleagues in venture capital firms rightly point to a startup’s lower potential exit value if it closely aligns its fate with some corporate enterprise. That is true. The more open approach of traditional VCs maximises the exit value since several players in the target market could bid for the startup. However, a traditional venture capital investment phase takes 3-4 years, compared with 6-12 months at Crowdstart Capital. In theory, the Crowdstart Capital model should be as least as efficient as the traditional one, if not more. In practice, we will see first results in mid 2018. If theory and practice coalesce, CSC supported teams will belong to the 1% of startups making sense.

Guiding more startups to successful exits

Most of the new business ideas I have are nonsense. They come up; I instantly like them, I discuss them with whomever I can find – until I realize that they aren’t half as good as I thought they were in the beginning.

Having been an entrepreneur for more than 20 years, this insight is an easy one – in the late 90’s, that was much harder to accept. Maybe it’s a matter of wisdom of age, or just the fact that today most key performance indicators of the startup exosystem are common knowledge: VCs must agglomerate quite a bunch of portfolio companies until one of them proves to be the exit star that cross-subsidizes all others and pays for the complete fund. Then, there are well-known startup techniques, such as agile business development, that allow for a lean approach, minimizing costs and risks of wrong development paths.

In other words: the startup world has become more transparent, better known, more mature. And, yet. Despite these myriads of mentoring classes and acceleration programs and these libraries full of How-To-Found-A-Business-Books, it seems that the gap between a startup’s plans and expectations and the market’s needs has not diminished much. Each day, I read about startups with ideas I don’t grasp even after thinking several times about them. Sure, it could be my fault, lacking some fantasy like everybody before Steve Jobs presented us the iPod. But, I’m not alone: well-respected entrepreneurs and investors are telling the same story: the majority of startups produce useless products and services.

Since lamenting never makes any sense, there must be a way to change this imbalance. Some aspects of the typical startup process should be adapted to allow a more professional, streamlined way of leading a startup to a successful exit. This is exactly what my colleagues and I are trying to achieve: to bridge the gap between a startup’s precondition and the need of a real, existing consumer, or corporate business partner, respectively.

With Crowdstart Capital we combine our experiences as entrepreneurs, investors and top managers, as well as our existing business with leading industry companies and guide Blockchain startups in the fields of Industry 4.0, Energy, LegalTech, Helthcare and Space on their way to exit. We will ICO in November and start investing in Blockchain projects right afterwards. It will be a fascinating journey – if you feel addressed, come and speak to us.

 

Blockchain and Digital Tokens

Blockchain and digital tokens deliberately waste storage, which is cheap, to create something new that is valuable: virtual continuity. Continuity is a universal property of the physical world. If I pass an object behind my back, we can be reasonably sure that what reappears in my left hand is what disappeared from my right.

Continuity permits identity of both things and people; it permits property because a continuously identified thing can be owned by a continuously identifiable person. It therefore permits transactions—transfers of property. It permits trust. Continuity is not sufficient for property and contracts (you also need law), but it is necessary.

And the blockchain guarantees inheritance: the digital token used to perform transactions in the later transaction Y is the only “child” of transaction X. The coin cannot be spent twice – the double-spend problem has been solved.  This virtual continuity enables

  • digital identity
  • ownership
  • transactions, and
  • trust, and
  • contracts and markets,

among parties with no prior relationship and without intermediaries.

Virtual continuity leads to one final symmetry. Recent technology waves—notably the Internet of Things, the proliferation of smart mobile devices, and augmented reality—directly endow physical objects with information and intelligence: they make the real virtual. The technologies of token and blockchain, conversely, endow data with continuity: they make the virtual real. When the real and the virtual converge, it is as if our world and our map of the world become the same thing.

This article by  Philip Evans outlines how the economics of transaction costs and trust could be reshaped by tokens and blockchains and by the stacked architecture on which they are built.
Featured image by BCG

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