Why Decentralized Finance?

One of the movements I’m most excited about is decentralized finance. Here is the description is taken directly from the Investopedia article which sums it up nicely. 

“Decentralized finance is a system by which financial products become available on a public decentralized blockchain network, making them open to anyone to use, rather than going through middlemen like banks or brokerages. Unlike a bank or brokerage account, a government-issued ID, Social Security number, or proof of address are not necessary to use DeFi.”

One of the better crypto funds I’ve come across, 1kx, estimates that 35% of the cost of the labor market is driven by establishing trust – legal, tax, accounting, auditing, KYC, etc. DeFi refers to a system by which software written on blockchains makes it possible for people who have no established relationship or confidence in each other collaborate without going through a middleman or central authority with a trustless transaction. It puts established centralized institutions such as banks, clearing houses or governments at risk and as such is one of the most disruptive ideas of our generation. 

The blockchain is enabling a shift from the “internet of information” to the “internet of value” where information and value transfer can be written into the same protocol and the incentives of users and developers are more closely linked than ever before. 

We are still in the early innings of decentralized finance; even though there is ~$75BN locked in the ecosystem, the global financial system is close to $100TN (1000x the size). DeFi only really saw the volume pick up a little over a year ago in May 2020 (the start of the “DeFi Summer”). 

Source: https://www.coingecko.com/en/defi – About $75BN in total value locked in July 2021. 

This evolution from traditional finance to decentralized finance is not going to be a smooth ride — the incumbents are centralized institutions like governments, banks that are deeply ingrained in our politics, economics, and culture. The disruption is all bottoms up and global by design and these central institutions are not going to embrace change or give up control quietly.  

Traditional or Centralized vs. Decentralized Finance

Centralized (traditional) finance gives control to a small number of organizations (banks, governments, clearing houses) which users of those organizations are supposed to trust. In many developed markets we trust these central organizations but it’s not true in many emerging markets, with good reason.

Centralized finance excludes many people in the world. Almost 2BN people in the world don’t have access to the banking system and almost 40% of Americans under 25 are underbanked.  These systems are built on outdated infrastructure and process which have very high fixed costs relative to decentralized finance and lack interoperability. Another thing that we cannot control as individuals is the leverage ratio of central banks, the supply of money (governments can print new USD causing inflation) and this gives us less control of our finances in the long term. 

DeFi, has many structural advantages – better technology, faster, cheaper and no reliance or expense needed for central institutions which operate with much higher costs — physical locations, expensive employees and rigid systems.

For example, international wires using traditional rails can have multiple intermediary banks, complex processes, unpredictability of the final transfer amounts (FX and fees) long wait times, and high transaction cost. It’s expensive, slow, and feels awful compared to crypto rails. When you first send USDC to a friend in another country using their wallet address instantly, which is fully trackable and is a fraction of the cost it’s so obvious that the incumbent technology and process is broken.

Here is some high level data on two lending platforms on traditional vs. decentralized rails; Lending club (-60% margin) vs. Maker Dao (+99% margin) and decide which is a better business  🙂 

Source: https://newsletter.banklesshq.com/p/defi-is-eating-finance
Source: https://newsletter.banklesshq.com/p/defi-is-eating-finance

Even though decentralized finance has many structural advantages and I’m very bullish on the bottoms up shift towards decentralized finance, the products and experience are still in their infancy and not appropriate for most people.

It is complicated to access, requires understanding of the underlying mechanisms (which are in turn, complicated) and you have almost no protection as a user. There is constant risk of getting hacked, logic bugs in Distributed Applications (DApps), rug pulls, user error and no FDIC insurance to save you if the sh*t hits the fan. If your wallet or the projects you’re investing in gets compromised you lose your money and there is no way to get it back. The tax code in the US also treats cryptocurrency like property which means that every time you swap currencies it’s a taxable event which is also no bueno for your taxes. The attitude of many enthusiasts in the ecosystem is one of “do your own research” not one of protection or support – proceed with caution even if you are curious.  

Intro Articles

If you’re interested in digging in further, here are a few articles that I think are worth checking out:

Podcasts


I’ll be writing a series of posts on DeFi and my experiences over the next few weeks — the next about the depths of defi and the different levels I’ve experienced personally over the last year.

Reflections on Angel Investing

This month marks my 10th year of angel investing so I synthesized a few learnings as a complement to the more tactical “Angel Investing Learnings” post from last year.

This post is broken up into three parts; dissecting the why behind angel investing, understanding your asymmetric advantage and how to apply this advantage in the investing process.

Why Angel Invest?

I don’t think that you should angel invest if you care most about compounding capital — there are probably better ways to achieve this goal with lower time commitment. Angel investing has been one of the most fulfilling things I’ve done in my career, and has the following benefits many of which are not tangible or easy to measure:

  • Relationships: You will meet amazing people along the way; entrepreneurs, co-investors, and limited partners. Each of these connections has a chance of becoming a meaningful professional and personal relationship — collaborating with more people gives you the chance to both expand and deepen your network and relationships.
  • Learning: You will get an insider’s view into the positioning and evolution of a wider range of businesses that are successes and failures. You get to talk to founders making hard decisions and learn during the investing process and throughout years of partnership — this can help you become a better operator and / or investor through pattern recognition.
  • Paying it forward: You get the opportunity to support former colleagues, friends and folks earlier in their career or with less access to capital. It’s a wonderful way to leverage your own learnings, relationships and capital to help pay it forward.
  • Compounding capital: Your money will typically be tied up for a long period of time (illiquid) unless the company does well and has some sort of outcome (sale, IPO, secondary transaction). By definition this makes you a long only, value investor as you are forced to compound your capital without “messing with it” like you can with liquid investments especially as an angel.

If you’re going to make just a few investments then accept that you will likely lose it all, but if you are going to make 15+ investments then take a portfolio approach and expect at least one company to “return the fund”. Your choice here will depend on your personal situation and risk tolerance.


Asymmetric advantage

Angel investing is all about leveraging your asymmetric advantage — you need to know something that the market does not know better than the market in order to make good investments. I think of asymmetric advantage in three buckets:

  • People: You know the people involved in the business better than the market – for example you personally know the founders (ideally you’ve worked with them) and/or know some of the other co-investors well. If you’ve known and collaborated deeply with these folks then you have data that is hard for other investors to easily replicate. Abe Othman (AngelList) refers to these as “credible deals”.
  • Industry: You know the business model or the industry really well. If you’ve been an operator in the space you’ll have a good understanding of what it takes to build a successful business. I’ve made the mistake of knowing the pitfalls of an industry “too well” and not being able to see past these risks for some good investments that I’ve missed, but mostly more industry knowledge has served me well.
  • Market: You know the market/geography (e.g. I invest in Kenya because I grew up there) better than the other investors. If you understand cultural, economic and political nuance about investing in the market you will make better decisions. This is why many venture capital firms are “local”.

I’ll occasionally make small investments in companies where I have no asymmetric advantage but I try and make these as small as possible and with founders that I have a strong connection with and feel like I will learn from them throughout their journey.


Where can you leverage your advantage?

As an angel investor you should try to leverage any asymmetria advantage across the investing process, which I think of in the following buckets:

  • Seeing: If you have great deal flow and see a lot of quality companies through your personal brand, network, writings/media or your affiliations (e.g. where you work) it helps you pick from a larger sample set. Being in the “flow” of quality deals is very important to be a successful angel as you have more to pick from.
  • Picking: Picking is very hard and often separates the great angels from the good angels. This ultimately comes down to judgment, repetitions and a long time horizon built from successes/failures and great mentors. I still write memos (and post mortems) for every investment that I make, even if no one will ever read them but me as it helps me get better at picking.
  • Closing: Once you’ve picked a company to invest in, you need to “sell yourself” to get into the round which is now getting harder and harder for quality companies as more capital and angel investors flood the market. This is often a function of your connection with the founders, your personal brand or affiliations or very specific knowledge you can bring to the company.
  • Building: Once you’ve invested, how can you help the company? Are you an expert in a particular area, have specific biz dev or fundraising connections, or could you ultimately even join the company to help them scale? I’ve been most effective at helping build with very specific point in time asks such as specific intros or meeting a senior potential hire.

Angel investing is multifaceted craft that will likely take many lifetimes to master and involves a healthy dose of luck. I find it intellectually stimulating and personally fulfilling and I expect it will continue to be an important part of my life 🙂

A More Open World

I’m excited to bring my children up in a world where anyone can learn anything, anyone can invest in anything, where world class software/tools are free to use and customize, and where anyone can contribute to software development regardless of their physical location.

We have made progress on all these dimensions and we’ll see even more foundational progress over the next decade. I hope it will lead to a more open and connected world and empower more diverse groups of people to create amazing things together.

Caveat: To participate, people need access to an internet connected device, and this is still only <60% of people in the world. As internet becomes more widely available and the cost of devices and data goes down substantially, more people will have access to these opportunities and be included.


Open Finance

I hope that everyone will be able invest in anything.

New projects will have (near zero cost) legal entities automatically spun up in the background, regulations will allow all of us to invest in products with any amount of money and own equity (with drastically simplified legal agreements). These micro pieces of equity will be liquid and easily to other people and there will be clear, immutable record of all these transactions (probably powered by cryptocurrencies).

People of any age/location will be able to contribute to projects with their friends with both their time or capital. They will all be able to create and capture value without the need for angel investors or venture capitalists (who currently have to meet accredited investor standards). They will not be excluded from early stage investing. People in any country will be able to buy fractions of securities in any other country, diversifying their exposure (particularly important for emerging markets).

Syndicates (groups making an investment) are still really expensive and has high friction, despite the progress we’ve made. SPVs on AngelList cost about ~$10k to set up and run over their lifetime and so only make sense for investment rounds of a few hundred thousand dollars (which is a lot of money). Rolling funds can accept much smaller amounts of capital than traditional funds, but are still expensive to run and require capital scale to make sense.

Software will power the legal and financial framework for investing (combined withj adoption of cryptocurrency and smart contracts) and will be able to reduce the overall cost and hide the underlying complexity.

Ultimately, this will provide access to more asset classes to more people at any quantum of capital. This will lead to more projects getting funded, and more people generating wealth through owning equity vs. renting their time.

Open Learning

I hope that anyone will be able to learn anything.

Access to the highest quality teaching materials will no longer be locked in walled gardens and this content will be completely open. Many leading universities are already opening up much of their teaching content (e.g. Harvard, Stanford) and this is the mission statement of the Khan Academy which has helped people learn all over the world, for free.

Students will be able to learn (at their own pace) using whatever format works best for their preferred method of learning (e.g. watching videos, reading text, listening to audio). They will easily be able to then test their mastery with interactive problems and real world applications at no marginal cost. I, personally, learn better visually and orally and that is why I found lectures in college so useful (and why I watch a lot of YouTube videos).

Schools and higher education will need to adapt (culturally and practically) to asynchronous learning, and a more diverse mix of students in each class. One of the main benefits of school and college is the ‘cohorts’ of students who go through the shared experiences (much of which happens outside of the classroom) and I still think it’s important to try and create opportunities for young people to have shared experiences and work in groups.

I hope that higher education, in particular, will preserve the cohort and community aspect but there will be specific focus (v.s. community as a byproduct) on collaborating in groups, building lasting friendships, and creating stuff together.

Open Software

I hope that anyone will be able to build anything (software) and getting started with the best tools in the world is free.

Open source is a very powerful movement and, at scale, encourages global collaboration and development so that software can easily modified to meet local expectations and standards. One of the best examples is WordPress, which powers 39% of the top 10 million websites in the world with tens of thousands of contributors working together asynchronously.

Software is now being developed in the cloud first and new projects are powered by more self serve SAAS tools than ever (Slack, Notion, Figma, Asana, GitHub). I hope that all of these tools start free to reduce the barrier to try out these tools, and also reduces the barrier for projects to start and for people to collaborate. It also puts more pressure on SAAS software developers to build quality products, have quality customer service and continue to improve their products over time.

In order to build a sustainable business SAAS companies will need to charge for features that become necessary when projects evolve into businesses that scale. This could include customer support, security, performance, connectivity with other applications, hosting and payments.

I also hope that more SAAS tools expose more of their information via API (in addition to building integrated solutions) and give project owners more ownership of their data own (so they don’t remain locked into these tools). This will also be better for the ecosystem as more tools will be able to talk to each other and less information will be lost across different tools which will improve the quality and efficiency of software development.

Open Work

I hope that anyone can work from anywhere.

The Covid-19 Pandemic has catalyzed mass adoption of distributed work especially for technology companies. If companies can hire globally it significantly increases their accessible talent pool v.s. the constraint of hiring locally (along with many of other benefits). I’m a big fan of distributed work for software development, and write about it on my blog.

With more open work, people of all ages, races, nationalities will be able to collaborate on projects together, bringing more perspectives to the table. These products will end up being better suited for global audiences, as these perspectives and empathy will naturally make it into the product development process.

Workers will be more focused on collecting skills and knowledge vs. collecting brands. When we recruit now, we use proxies to infer skills or background; where we went to school, what companies we have worked at, or how we were brought up. This should evolve into showcasing our specific skills backed up by actual contributions to specific projects that roll up into a more accurate picture of our whole self. Companies will also become better at assessing skills, knowledge and experience over relying on brands as a proxy for the requirements for jobs to be done.


I’m excited raise my children in a more equitable world where less of their fate is decided at birth and I’m inspired and hopeful at the progress we are making globally.

We will see continued improvement in social and economic mobility, better products from more diverse people and more collaboration across groups with different ages, genders and countries. 

Decentralized Game Development

There has been a movement towards decentralization of content creation in many industries (Youtube for video, WordPress for writing, Podcasting for radio). These creators and storytellers now have the tools to deliver high quality experiences (without massive budgets) and have access to distribution platforms to find and grow audiences, which was very hard to do in the past. I think there will be a movement towards the decentralization of game development next.

The power of games is in the mechanics, the stories and the world. Even for large game studios, the visionary is usually one or two people (also true for Pixar Movies – see Creativity Inc for more). However, most of the cost and the time for games is spent in the ‘production phase’ for AAA studios which means many independent game makers cannot compete with large franchises.

If small, independent teams had access to free/cheap and high quality game engines, reusable off the shelf content (entire rule based worlds + logic), asset libraries (textures, photogrammetry, user generated) and common game mechanic libraries (leaderboard, ELO) then their focus can be on the story, the world, the core gameplay.

Flexible, cross platform game engines like Unreal and Unity are not quite good enough yet to realize this vision although I think we will get there very soon. I spent some time in 2017 making a VR film entirely in Unity and was really impressed by the power and flexibility of the platform.

My mind was blown when I learned that The Mandalorian was made in a single room and all the worlds were created in Unreal and rendered in real time during filming on massive LED screens (short video below).

Game distribution platforms like Steam, Google and Apple App Stores (and communities like Discord) are going to become even more powerful and influential for creators to find players and engage with them (and each other). Franchises will still be very powerful, but independents will be able to access (niche) audiences much more easily than ever before. I think there will be a lot of pressure on app stores to reduce their take rate as 30% feels much too high. Epic and Unreal have the most developer friendly agreement I know (free to use and then 5% after $1M in sales)

I’m particularly excited for young people (even children) to be able to have access to the tools that will allow them to conceive, create and publish games the same way we publish a blog, podcast or youtube video today. Roblox is a great example of a game creation tool that embodies these principles (30M DAU, 7M Active Developers & $600M Revenue) and has exploded in popularity over the last few years, especially with young people. It still lacks the power of Unity and Lua is not that easy to learn for non-technical folks.

There is a lot of innovation on both creation and distribution that will continue to empower creators. Combined with the general trend in ‘no code development’, this will democratize game development which, I hope, will continue to become more mainstream. The game engines and distribution platforms are very well placed to both create and capture value over the next decade if they build for the long tail of creators.

Finally, more of our social lives are now lived online and combined with lasting effects of physical distancing (from Covid-19) this will accelerate the development of games where people can have meaningful, deeper interaction online. For example, I play Fortnite with my nephew in Paris (he’s 9), from America and it’s a really nice way for us to have fun together and hang out.

My family and friends live all over the world, and I’m rarely physically present with them. If we had more options to socialize over games (both simple as well as immersive) maybe even made by us together, that would be pretty dope.

Creating Liquidity in Private Markets

Two of the most significant issues with private market investing are their inherent illiquidity and the unpredictable nature of exits. It means that you need to ‘invest and forget’ when investing in private markets, and is particularly true for angel investing. This problem also applies to equity based compensation for employees at startups, where employees are unable to realize value even when the business has increased in value.

I believed this problem will be solved over the next few years. There will be a number of new options for liquidity in the private markets and early stage investing is going to become even more attractive to even more people. I also think that the US government will make further relaxations to the accreditation rules that restrict investors from making certain investments based on their net worth or income (originally intended for their protection).

For late stage (pre-IPO) private companies there are a number of platforms (e.g. Forge, EquityZen) working on the liquidity problem, but very little is automated. Typically ‘blocks’ of equity become available either in secondary offerings (existing holders, like an early employee selling their stake) or when early investors have pro rata rights to a future fundraising round and can’t fill it themselves. I’ve used these platforms from a buyer’s perspective (and explored as a seller) and it’s all fairly manual right now, and the products are mostly a nice user interface. There are also more traditional alternatives like Setter Capital who don’t claim to be a technology platform.

In real estate, companies like Cadre are both providing access to large real estate projects to small investors (breaking up allocations into smaller chunks), and providing “windows” where investors on the platform can sell portions of their positions (every 6 months or so). This both increases the number of investors who can invest in the asset class (lower minimums) and improves the exit options for investors who would typically have to hold their equity position for 5-10 years.

In the future, I expect platforms like Carta and AngelList to lead the way in creating a true ‘marketplace’ for private securities. Carta just announced their new liquidity platform CartaX, a private stock exchange which is an awesome innovation launching in January 2021. It’s a natural extension of their business model, and I’m excited to try it out. Angellist will also continue to innovate, especially because of their SPV and fund offerings, as they hold a lot of private company stock (and have access to a lot of data).

There are some problems that need to be solved such as restrictions on employee stock, rights of first refusal and companies at the early stages desiring control of their cap table. I think these are all surmountable, and most of the trading will start with late stage private companies first, where these concerns are less relevant.

Overall, these developments make me even more excited to continue angel investing; as private company stock becomes more liquid, it’s value will increase (in addition to normal value creation through growth). Ultimately, it means that more investors will invest in private companies and they can have more of their capital ‘working’ (and need less of a cash buffer) because they know that there will be a liquid market in case they need the capital.

Trends Accelerated by Covid-19

Covid-19 has led to significant changes in how we live, work, and interact with each other. In some cases, they have accelerated trends that were already in motion, and in other cases forced changes that we did not anticipate or expect.

In the next few years, I think we will go through a rapid pace of innovation and re-imagination powered by entrepreneurs, and here are a few trends I’m excited about and interested in exploring further.

Distributed Work

The best summary I’ve read on the acceleration of distributed (not in person) work is this one from the CEO of Automattic, Matt Mullenweg where he talks about change happening slowly, and then all at once driven by this catalyst. Automattic has been fully distributed since its inception, and Matt has been a champion of distributed work for years and the benefits of accessing a global talent pool, and working asynchronously.

The #WorkFromAnywhere Podcast series led by the folks at Greylock is also excellent and CEOs of companies like Box, Quora, Okta, Figma and Zapier speak about their transition to working from anywhere.

I’m particular excited about the tooling that will be developed, both in terms of specific software as a service products to drive much better distributed collaboration, but also the underlying plumbing that ties all these tools together.

ECommerce

This article from Ben Evans on the growth of eCommerce is a must read. The UK went from 20% to 30% eCommerce penetration and analysts say that Covid has accelerated the growth of eCommerce by 5 years. This is dramatic, and will change the way may of us purchase, discover new products, and how creators distribute their products.

This also changes the nature of distribution/logistics and the entire supply chain. Companies like Shopify and Amazon have doubled their market cap (adding over $60BN, and $850BN (!!) of value respectively to shareholders since mid March 2020).

Major Cities

The nature of major cities and concentrated urban areas is going to evolve. I wrote about my thoughts on megacities recently here, and I also liked this piece from Fred Wilson about how a reset was much needed in NYC and how the city could evolve into something better. Many of my friends have ‘accelerated’ moving to their ideal living areas and and left places like NYC and London. My wife and I, having just had our first baby, are asking ourselves the same question – is it worth staying in NYC if we don’t intend to stay longer term? The pandemic has forced a conversation we likely would not have had for a few years.

Flexible Work

I believe that the best creators and experts are no longer going to need a ‘normal job’ and will be able to work flexibly and monetize their unique skills talents much better than before, and this will be socially acceptable and maybe even celebrated. I like the writing from Li Jin (Atelier Ventures) about the Passion Economy and Unbundling of Work from Employment (which I also opined on here).

Startups will create innovative tools, and platforms to help craftspeople to discover projects, collaborators and showcase their work (e.g. Contra). Much of the benefit that we get from a ‘normal job’ (e.g. competitive healthcare insurance plans, retirement accounts, etc) will also be available to creators through saas products.

Building Relationships

As humans, we yearn to build new relationships and deepen relationships with folks that we already know. Traditionally we’ve built these relationships in person with repeated interactions and meaningful collaboration on projects. Being forced into lockdown has forced us to explore alternatives.

I’ve personally been experimenting with platforms like Enrich (curated network of similar executives), Fractal (1×1 matching with other product people), Village Global Events (with startup founders and investors), and am starting the On Deck Angel Fellowship soon. These are all digital communities with fairly niche audiences, which I think will become more common.

I’m hoping that these will lead to meaningful relationships and collaboration and also improve the chance for serendipity despite not being able to spend time with folks physically. I’m excited that these platforms could open up the possibility of meeting interesting people all over the world, and not just limited to my place of residence.

I’m not sure how this will play out with larger conferences, where most of the value is in relationship building and improving the probability of serendipitous connections often through extended hang out time (often over meals and drinks). I expect that recreating much of the value will be possible, but will require some first principles thinking.

In my own recent experience, I wrote about how the funeral for my grandfather was actually much more inclusive and rich because it was virtual and allowed for more people to attend that were close to him (like his sisters).

Personalized Services

Folks who provide coaching, classes or specialized services are all going through a similar, accelerated transition.

Companies like Peloton have successfully taken spin classes and made them virtual, allowing both synchronous and asynchronous (on demand) classes with world class instructors. Each class can now be attended by step function more people which greatly improves the ROI for each class.

Experts providing specialized, personalized services like physiotherapy, child psychology, lactation consulting can all increase their addressable customer base and people who are in need of very specific services can access a larger pool of specialists which is better for both groups. They both need tools to make it easier to discover each other, and improve the experience of booking and transacting (e.g. Ribbon Experiences).

Digitial Payments and Services

Digital payments and digital services (e.g. digital hr, or payroll) to help businesses transact with their customers and run their teams will also see more new users, and increased adoption. I think these products will be ultimately sticky even after Covid-19 because they function better both in person and remotely, and allow for more flexible customer and employee interactions. In my personal investments in these areas I’ve seen increased volumes and good retention through the pandemic.


These are just a few areas where I’ve personally observed changes in my own life or with folks close to me, and I’m excited to learn more and closely track how these trends evolve.

Evolution of Megacities

I live in New York City, and have been thinking about how I think large, densely populated cities (in developed markets) will evolve after Covid-19. I don’t think the soul of the city will change, and reading Here is New York (by E.B. White) from the 1940’s affirms this, but I do think the city will go through an evolution over the near to medium term.

New York City has gotten more and more expensive which has resulted in it shrinking (net population loss). The growth of the suburbs continues to be good (across the US) particularly from immigrants who tend to have less disposable income and seek better value for money. This podcast episode with Alex Danco and David Perell also is a fun discussion on the subject that is worth checking out if you’re interested in the subject.

The continued rise of eCommerce/delivery, distributed work and autonomous vehicles, are all shifts that are likely going to accelerate changes in megacities (some of which were catalyzed by physical distancing).

Fully distributed or partially distributed is a particularly powerful trend as many technology and finance jobs may no longer require living in places like NYC as a prerequisite but can still pay the same wages.

Here are a few of my predictions:

  • Offices centered around collaboration, not individual contribution: Office in the future will look different. I imagine they will have more meeting space, and more collaboration space versus single person desks designed for individuals. These collaboration spaces will be shared, and only a portion of the company will be in the office on any given day.
  • Less office space, more (and larger) residential spaces: Individual contribution work will happen outside the office, and much of it from home or other flexible work spaces (coffee shops, shared office space). Office space will be repurposed into residential space or other gathering (e.g. bars or restaurants) or ‘multipurpose’ spaces. Homes will be larger to accommodate flexible working spaces or dedicated offices.
  • More young people, more old people and fewer families: Young people love densely populated places, and so do healthy empty nesters. Megacities will have more of them particularly as empty nesters are fitter and healthier for longer. The food, culture and nightlife scene will become even more vibrant.
  • Growth of the suburbs around megacities for families: Families all move outside the city epicenter, where dual-income parents can still easily go to their offices for occasional collaboration sessions (e.g. 1-2 times a week) but spend most of the time working from their home. The quality and comfort of these homes becomes even more important for families. The transport from homes to offices becomes even easier and faster because of driverless cars (5-10 years away).
  • More pedestrianized, car free zones, and even more delivery: Purchase of ‘staples’ happens more and more via delivery vs. in person and ares of the city (e.g. Flatiron) become fully pedestrianized and cycle zones with delivery permitted during certain windows.

I don’t have any real unique insight into this topic, beyond personal interest. I’ve spoken to a number of business owners who are not extending their office lease, and also a number of friends (particularly with families) who are leaving the city for the suburbs.

I would personally not invest in real estate in Manhattan over the next few years until we see how it’s going to shake out. I think that investing in the city suburbs, and in ‘up and coming’ cities with net population growth, growing income/capital and with great culture but lower cost of living is likely still a solid call.

Angel Investing Learnings

In this post I’ll share some advice and learnings from my experience angel investing for about 10 years to help others get started or improve their own process. In general, I’d advise investing in companies where you have some asymmetric advantage – either because you know the founder(s) well or because you know the space well.

I’ve been investing in startups for about 10 years through Musha Ventures, after learning the ropes at Index Ventures. I’ve made ~70 investments (around 40 in Africa), and realized around twice my total invested capital (Distribution to Paid in Capital – DPI). Most of the companies in my portfolio (~55) continue to operate without a realized liquidity event.

I love meeting and learning from founders, and being exposed to different business models. When I support a company, I am able to learn from observing its journey and build relationships with the founders beyond my small investment. I think that early stage investing has made me a better product person and operator, and I hope to continue to keep investing in entrepreneurs throughout my life.

Investing Frameworks

Ben Holmes, Index Ventures

I worked with Ben Holmes at Index Ventures, who led their investments in King, iZettle, and Just Eat. He helped me with a simple framework, which is still the foundation of my investment evaluation process. At least one dimension of Team, Technology or Traction should be an A+, and a big enough Market (now or in the future) should be a precursor to making the investment.

  • Market: Is the market big enough ($1Bn+) and can you see this company being a leading player (with 10%+ market share) in the next 3-5 years? If you think that the market now or in the future is too small, then don’t make the investment.
  • Technology : Is the product or technology differentiated and sticky within their market? How difficult is it to replicate?
  • Team: Is the founding team both individually exceptional and complement each other? How deep and long is their professional relationship?
  • Traction: Is the business growing and do they have positive unit economics? Do they have paying users? What does customer retention look like?

Brian Singerman, Founders Fund

I don’t know Brian Singerman personally but I really enjoyed this episode of “Invest Like the Best” with him. He’s invested in companies like Oscar, Affirm, Wish, and AirBnB. Here are a few of my takeaways from the conversation:

  • As a startup market, moats and execution are the only things that matter.
  • As a VC, seeing, picking and closing are the only things that matter.
  • You learn to invest in startups by actually investing, not by observing.

Investing Advice

This is a collection of advice when you are starting to invest, in no particular order:

  • Learn with small investments: Optimize for learning per dollar invested if you are just getting started, have limited capital and hope to build a portfolio. If you invest $1k with the same diligence process as if you were investing $100k, then you will learn by making less expensive mistakes early on.
  • Take it slow: Start early in your career but start slow, and invest more frequently as you improve your judgement – I made too many investments in my first year. It takes a long time to calibrate your gut because it can take 10-15 years to figure out if you are a good investor (but you’ll get some validating and invalidating data points along the way).
  • Asymmetric Advantage: Invest in areas where you have some asymmetric advantage. If you know a founder super well, or know a space really well and can invest in a related company (without conflict) these are sources of asymmetric advantage.
  • Time vs. Money: Invest money in companies that you would be willing to spend your time on personally, but may not be the right personal trade off for you. When you are earlier in your career you can think of time and money as interchangeable. If you don’t have the capital to invest, then try and join these companies and get some equity for your time.
  • Deep Relationships: Invest in great teams who’ve known each other a long time and even better worked together for a while – it reduces the risk of founder issues (65% of company breakups are for this reason).
  • Founders you like and respect: I invested in a few companies that I did not have the best rapport with personally, or had an unexplainable ‘gut’ reaction to avoid even it if looked good on paper. Most of these companies did not work out, but I have a small sample and so this still needs more data.
  • Company first, then terms: Terms are less important than believing in the company and the founders. Don’t make an investment because of a low valuation or tax incentives – these are all bonuses, and never a reason to make an investment. I made a number of mistakes here early on and regretted them.
  • Valuation: If you are going to negotiate on anything, negotiate on price although this is mostly supply/demand driven and you may not have leverage if you are a small investor. There is a common belief that valuation does not matter in venture capital, but if you are investing your own money then overpaying consistently will hurt your returns.
  • Get written answers: When I have follow up questions, I usually send them over email and look for an email response. This is an indication of how clearly they think, and communicate. It is also more efficient for me and I have a permanent record.
  • Cap table: Look for ‘clean’ cap tables (equity split) in early rounds. If the founding team has an unexpected equity split, or there are early inactive employees/ investors significant equity it can affect the company’s ability to raise money in later rounds and if founders are too diluted, then they may lose motivation.
  • Discipline: Founders who are structured and regular with investor communication are often also good operators. If they show discipline with investors, they are likely applying the same discipline to running their companies. I often ask for the last investor report to get a sense of their communication quality.
  • Metrics: Founders should be super on top of their key metrics, growth rates, revenue distribution, burn rate etc. This shows that they both track them carefully, and review them frequently.
  • Pace of iteration: At all stages look for pace of iteration and product development. Teams that ship more often and test more hypotheses are likely to have better products and build long term sustainable advantage.
  • Sleep on it: Even when I really like a company, I always sleep on the decision and never commit after a meeting. If I still feel good about it the next day, then I’ll message the founder to invest. Try not to get pressured, or react to FOMO and make a decision too quickly or without conviction.

Practical Tips

This is a collection of more practical/tactical things to do when you are investing:

  • Track your portfolio: If you only make a handful of investments, then think of it as money spent and a nice bonus if one of them is successful. If you have a portfolio, then keep a strict record of your investments and track their progress and returns (I use a simple Google Sheet). I track key dates like fundraising events and summarize the status of each investment about once a year.
  • Write Memos: Your memory is less reliable than paper record, and so I recommend writing short 1 page memos with the ‘why’ behind your investment. I’d start with the structure I outlined from Ben Holmes up above and expand it over time.
  • Customer References: For software as a service businesses in particular, do some customer reference calls. I always ask the following three questions: What was it like before the product? What is it like after the product? What would happen if you took the product away? If they get very upset at the last question happening, that is a very good signal.
  • Post Mortems: If companies fail, write a few bullet points down about why the company failed (I just add them to my original memo), and see if you identified the risk when you made investment. Learn from this, and don’t repeat mistakes.
  • Intro Email: I’ve just started writing an ‘intro’ email to founders which founders seem to appreciate. It allows you to clearly express how you can help, how you operate as an investor, and share some of your expectations as well.

I’ll continue to add to this list as I learn more, and please send me any thoughts or feedback!

A Virtual Funeral

My great uncle, Taher, passed away this weekend at the age of 98 years old in my childhood home in Mombasa. He was more like a grandfather to me, as I grew up in the same house as him and saw him every day and my paternal grandfather died many years before I was born. He lived a long and loving life, I will miss him and always think of him when I have soft serve ice cream (his favorite).

Current conditions made it impossible to travel to Mombasa but we were able to have a virtual service for him (over Zoom) a few days after he died. Around 100 people attended from many countries around the world to celebrate his life and one of our family members even organized a priest to come and officiate.

In many ways the service was more inclusive and better than an in person ceremony. We were able to welcome people who would not have been able to attend – because of the distance, cost, time, or their ability to travel (age, health or dependents). Both of his surviving sisters in their 90s were able to brave the technological challenges to say a few words in his honor and we were able to share some photos and memories by sharing our screens and taking turns to speak.

I missed some of the tactile elements of being together (like giving folks a hug), and the longer in person time after the service. However, the positives outweighed the negatives given how quickly it all happened, and how difficult this kind of situation is for people to plan for.

Zoom Service

In a time where most of the focus of the web is how we can adapt to working in a distributed way, it’s also wonderful to see us use these tools for bringing our communities together for a shared purpose as well.

Seeking Leverage

Leverage allows us to amplify the impact of our creations and decisions. If we apply leverage to these things we can create more value for the amount of time invested. Leverage is not easy to attain, and the different forms of leverage either don’t scale easily or require specialist skills and the ability to distribute creations effectively. I’ll summarize the inspiration behind this post, and then go into the different types of leverage below.

Inspiration

I listened to Naval’s Podcast Series a few months ago – I don’t love the title of the series, but I agree with many of his principles. Here is a link to a set of Tweets from him which are a little faster to digest, which catalyzed the podcast.

Here are a few of my favorites from the Tweets:

  1. Seek wealth, not money or status. Wealth is having assets that earn while you sleep. Money is how we transfer time and wealth. Status is your place in the social hierarchy.
  2. Pick business partners with high intelligence, energy, and, above all, integrity. Don’t partner with cynics and pessimists. Their beliefs are self-fulfilling.
  3. Learn to sell. Learn to build. If you can do both, you will be unstoppable. (Aadil Note: The two things we were never taught at business school).
  4. Leverage is a force multiplier for your judgement. Fortunes require leverage. Business leverage comes from capital, people, and products with no marginal cost of replication (code and media).

Gated Leverage

Gated leverage requires an outside party to agree to give you leverage and does not scale without additional marginal cost – for example, raising money from an investor or recruiting a new person to your team still takes incremental time and effort.

People

If you have people working for you who are able to execute your ideas you can (in theory) make more decisions for greater output versus doing it all yourself. This is not costless leverage as recruiting is expensive, developing trust and high performing relationships is difficult, and alignment between people as you scale is challenging. People can be amazing to bring in new skills, different ideas and make a product or organization better but they are not my favorite source of pure leverage.

Capital

Let’s assume you spend 100 hours developing a well reasoned theory to pick an investment (e.g. buying Amazon stock in 2011). If you have $100 of your own capital to invest and it returns 10x, you make $1,000. If you have $1,000,000 to invest because you raised money from others (let’s assume you get 20% of the upside), you would make $2,000,000 in the same scenario. The amount of time you spent crafting the thesis remains constant but the returns are much larger if you have more capital. This is not costless, because you have to convince other people to part with their capital and trust you with it unless you are already wealthy.

Scaleable Leverage

Scaleable leverage has zero marginal cost of replication, and does not require someone else to agree to it. This is the best kind of leverage as it can create value even without ‘active’ involvement from you. Code and Media are both great forms of leverage but distribution and discovery of your code and media is still a requirement for success.

Software

A line of code can be deployed and distributed at scale with very little marginal additional cost. Servers are constantly available, and users can interact with your technology whether or not you’re actively working on it. Imagine, if like a doctors office, Google Search was only available from 9am-5pm, Monday to Friday.

Media

Books, Blog Posts, Podcasts, Youtube videos are all good ways of getting your ideas across at scale. The cost of creating the content is fixed but the marginal cost of a user downloading another podcast episode or viewing another blog post is essentially zero.


Scaleable leverage is both responsible for a lot of wealth creation for modern content creators and technology company builders, with very little invested capital for the relative impact. I think that this kind of leverage will grow in popularity and impact, whereas many companies of the past were built with Gated Leverage.

I would like to spend more of my career seeking scaleable leverage. Working in technology and investing in startups (for equity) will hopefully allow more passive wealth creation than purely ‘renting’ out my time.