Business of Open Source

Open source technology and infrastructure development is a very powerful way to make scalable software. Open source can also allow a more diverse community to build products that are flexible enough to solve for a broader set of use and edge cases.

Contrary to popular belief, many of these open source projects are developed in house at large technology companies (e.g. Google – Tensorflow, Angular, Android, Chromium; Facebook – React, PyTorch) and not all small independent groups collaborating on projects in the open (e.g. WordPress, Telegram).

In this post we talk about some of the advantages and issues of open source as well as some of the specific business models are built on open source projects.

Advantages & Issues

I spent a few years working on WordPress (at Automattic) and here were a few of the advantages and issues that I observed during my time there.

Advantages

The biggest advantages of open source exist in leveraging the community for product development, hiring and product distribution.

Product Development: The community can act as a decentralized product management function and help with QA, Localization (language, local integrations), and support.
Long Tail: Open source allows users with very specific requirements or use cases to build these themselves which frees up the core development community to focus on the core use cases and platform. Anyone can add customizability and depth to the product.
Diversity: Open source allows for more geo, cultural and variety of use cases for the same product which ultimately makes the product better for a more diverse and global audience.
Hiring: For businesses that are built on top of open source technology, they can access a pool of talent already engaged in the project from the community — richer data on potential candidates and better hiring funnels.
Distribution: Open source projects are typically free to try which leads to more bottoms up adoption. A single developer can make a decision to use open source technology which then ultimately propagates across an organization vs. relying on top down decision making.

Issues

The advantages that come with having a strong community can also lead to drawbacks as well.

Community building: A core part of building open source products is building the community of users, developers and supporters of the project. Building community takes time and many open source projects take longer to get off the ground (when not incubated in larger companies with specific use cases) but are often more resilient at scale.
Bar for completeness: New features in open source projects often have a higher bar for shipping, and it’s harder to run fast experiments and iterate (with data/feedback etc) – localization and accessibility increase the amount of product an development work to ship even for experimental features.
Decision making: With a more decentralized product management function it’s harder for smaller groups to hold a vision of the product and make significant product evolutions without alienating members of the community. This often leads to slower iteration, but better adoption once the community embraces the changes.
Bigger pie, smaller share: When building an open source product you’re often expanding the size of the addressable market but only capturing a portion of that for yourself. Closed loop companies that own all their technology, data, and users can monetize those users more aggressively but also may lead to divergent interests to their community of users over time.

For a product with as broad a use case as WordPress, I think that the advantages greatly exceed the issues and this is reflected in WordPress continuing to grow market share and now powering 42% of the web.

Business Models

There are also a number of examples of both widely adopted open source software and successful business models and here are just a few companies who’ve built successful businesses with open source products.

Company	Technology	Market Cap*
Databricks	Spark	$28bn
MongoDB	MongoDB	$32bn
Confluent	Kafka	$15bn
Hashicorp	Terraform	$5bn
Cloudera	Hadoop	$5bn
Elastic	Elasticsearch	$15bn
Automattic	WorPress	$7.5bn

As of September 2 2021

There are a few high level categories of business models built on top of open source projects:

Hosting

Hosting is one of the primary sources of revenue for many open source companies. Often, the creators of the technology have a brand halo effect around them can attract more users to their hosting service over others in the market.

Cloud hosting can make open source products easier to access over self hosting which requires more technical skill and investment. Hosting can include the following features (not a full list), which users are often willing to pay for:

Security/Speed
Authentication to allow for secure signon
Permissions/Roles for access control
Encryption (especially important in specific industries)
Backups and changelogs (to recover previous versions)
Analytics

Support and Consulting

Many successful open source projects have a rich community of freelancers, agencies and consulting services providers who are specialists in the technology and platform to help users most effectively leverage these tools. Open source projects are often more flexible but flexibility can come with complexity in set up and ongoing management, as the products are less streamlined for specific use cases. In the WordPress world there are many agencies that will help you set up and manage your site and provide ongoing site maintenance and support.

Even for do-it-yourself cloud hosted products like WordPress.com, support is an important part of the service that they provide and people are willing to pay a subscription fee for ongoing support for their site. WordPress.com has hundreds of support folks called “Happiness Engineers” to help users troubleshoot and perform light customization to their site.

Paid Extensions and Marketplace

Open source products often have an “open core” which has a base level of functionality that is immediately useful but for more complex use cases or advanced features users may have to pay for these as paid extensions. These extensions are often offered as in-house proprietary features to further differentiate the product (and the cloud hosted version paid tiers).

Some open source projects also have marketplaces where developers can build their own extensions for users. This marketplace can be free, but could also be monetized by the platform using revenue share or installation fees (much like Google/Apple do with their app stores).

Onboarding and Bundling

Finally, there are now more companies that are building streamlined products for more specific use cases powered by open source technology.

This could look like a full “bundle of products” tightly stitched together to solve a very specific use case (e.g. a site template for dental practices with all the right images, plugins, scheduling and payment systems with all the workflow and integrations totally templatized). This could also include very thoughtful onboarding flows, starter content and tutorials built on top of the open source technology.

Users are willing to pay for speed, ease of use and convenience of accessing their intended use cases right out of the box even if there is some sacrifice of flexibility to start faster.

Additional reading

Here are a couple of articles that I thought were thoughtfully put together on open source business models as well, in case you’d like to dig in further:

View at Medium.com

Angel Investing Areas

I’ve been an angel investor for over 10 years. I try to invest in areas where I have have some sort of asymmetric advantage; usually in specific areas where I have knowledge and experience or people who I know well.

Here are some areas that I’m super excited about and actively investing.

Crypto / Web3

I think crypto/Web3 is going to change the way we build and consume products in many different industries across the digital and physical world. It’s going to be a multi-decade long shift and I’m excited about engaging with and supporting the community at all levels (more here).

I’ve been investing in chains and tokens since 2013 (starting with BTC) and played a more active role in DeFi towards the the end of DeFi summer in 2020. I now spend time every day learning about new projects, buying tokens, yield farming and providing liquidity for projects that I plan to support over the long term.

I’ve also started started making equity investments in Web3 companies and I’m particularly excited about companies that are innovating in:

Future of finance (DeFi, Emerging markets)
Content creation and ownership (NFTs, marketplaces)
Gaming (collecting, competing, play-to-earn)
Community (DAOs, creators, contributors)

There is still much to learn and much to follow as more innovation happens — this is just a starting point and I’m sure this list will continue to evolve. I’m mostly chain agnostic, but particularly excited by some of the possibilities that are unlocked with faster, cheaper protocols like Solana.

Example companies include Ponto (backed by Polychain and General Catalyst), Mirror (backed by USV and a16z), Topos and Paysail.

Future of Work

I think that the way we work is going to change fundamentally; jobs will be unbunded, people will collaborate digitally (natively), and more creators will be able to monetize their passions. These shifts are being accelerated by Covid-19 and it’s incredible to see all the innovation happening here.

Tools for Work

As more knowledge work becomes distributed, more work will happen in the cloud. I believe we’ll look back in 5 years and be shocked at how inadequate our tools were in 202I. There are three areas of innovation that I think are especially exciting:

Communication & Collaboration: I think the best tools will seamlessly work in person, hybrid & remote as well as synchronously and asynchronously (Slack is a great example). If we reduce the mental load as to “which tool is right for which situation” work will be more fun and productive for us all.
Orchestration Layer: As we use more and more tools to build products together, each of these tools will need to communicate with each other better (using APIs) and we’ll need some common standards to make this happen effectively.
Community: We will need better tools to build genuine deep relationships for organizations (internally and externally) – people desire to find community and their tribes and invest deeply in these communities.

At Automattic, a fully distributed company for 15 years with over 1400 people across 85 countries I helped make P2 which is the internal tool we used to power distributed work at scale and so understand this space as both a user and a builder. I’m also a productivity nerd, tools enthusiast and product manager so love meeting startups innovating to make work better — although incredibly competitive, some new products will be built that we’ll use every day for work.

Example companies include Remotion, Aviyel, Claap, Playbook, and SkillMagic.

Tools to Create

Creators of all kinds, from all over the world are now able to make a living through (side) hustles/projects over traditional employment. There have been great improvements in creator tools (and reduction in cost) and access to large audiences through distribution channels (albeit through mostly closed networks – Twitter, Instagram, YouTube). I worked at Automattic on WordPress for the last few years and 43% of all websites in the world are now made using WordPress, an open source project to help folks create their online presence.

The tools that creators need to power their workflow, improve production quality and engage their audience are going through rapid innovation and improvement. The best creators will also want a more direct relationship with their community and want to capture more of the value they create over paying a large share of this value to these discovery and engagement platforms.

Example companies include Ribbon, Slerp, Contra and Mirror.

Tools for Gamers

I believe that making games is going to be as easy in the future as making a website today. There is a ton of innovation in both the tools both for gamers and game developers and I’m excited to support building this future. I tend not to invest in game studios but look for products that support the growth of the overall gaming industry instead. I spent five years making games at Pocket Gems, where our games reached hundreds of millions of users and it was one of the most fulfilling professional experiences I’ve had to date.

Example companies include Start Playing Games, Metafy and Vungle (sold to Blackstone in 2019).

Emerging Markets

I believe that there will be significant value created in global, and particularly emerging markets over the next decade. The data point to more and more entrepreneurs building businesses in their home countries (even after a tier 1 US education #novisas) versus trying to build their companies in entrepreneurial hubs like Silicon Valley e.g. over 40% of Y Combinator founders are now international, and the vast majority want to build their businesses in their home markets.

Africa

There is great potential for technology to power the growth of Africa – many young people ready to work (median age of 19), increased urban mobilization (45% living in cities by 2025), high smartphone penetration (50% and growing fast) with digital finance access, and increasing capital and talent flows into African technology hubs. I grew up in Kenya, worked in mobile money across Africa and have been an active investor on the continent for 7 years; it is now more than half of my seed investing activity.

I run a fund (with external investors) to support this thesis and have written about it here, if you want to learn more. It’s never been a more exciting time to invest in technology companies in Africa 🙂

Example companies include: Flutterwave, Sokowatch, mPharma, and Shara. Full list of 40+ companies here at https://www.mushaventures.com/africa.

Global (mainly Asia)

I’m also investing more foundational startups all over the world (mostly in Asia) and my general approach is to partner with a local seed fund or angel investor and build a strong relationship with them as both an LP in their fund and co-investor. I have started implementing this approach in Indonesia (Intudo), India (iSeed), and Asia (Iterative) and am learning more about the Pakistani venture ecosystem as well.

I believe that the best SAAS companies in the world can come from anywhere as long as product quality and sales (team with experience in western companies helps) is world class. If these companies are based in countries with cheaper technical talent they can offer products at lower cost and win sales against similar companies who are building in markets like the US. I’m also excited about foundational fintech rails in each market (where local norms and regulation are distinct).

Example companies include: Cashfree, Guidewheel, SalesKen, and Everstage.

Amazing People

As much as I enjoy investing in areas where I have specific understanding or theses that I’m exploring, incredible people are a trump card.

If I know the founders well or someone in my inner circle can vouch for the founders I’ll often invest as long as I believe that the market is big enough. Ultimately, and especially at the earliest stages, people are most important and amazing people are difficult to find.

Examples of companies founder by people I know well because I collaborated with them closely in the past include Heron Data, Rinse, ID.me and many others.

If you’re interested in talking about ideas in these areas please feel free to reach out on my website (https://www.mushaventures.com/contact). I often co-invest with a close group of angels, Village Global (where I’m a Network Leader) and Sequoia Capital (where I’m a Scout).

Three Thoughts (at 39)

I turned 39 this month and I had three thoughts / reflections that I thought I’d write down and share:

Great people, over long term: Meet lots of new people and be open, generous and curious. When you discover great people try to help them repeatedly without asking for anything in return. Relationships are built with consistent positive micro interactions (especially when you’re not physically present) and building deep ones takes focused effort. Collaborate with folks with the intention to have a 20 year relationship and share your whole self (family, thoughts, hobbies); you’ll build deeper, more durable friendships.
Own equity, don’t rent time: Whenever possible choose equity over renting your time even at a higher price. Even if you’re able to capture very high rent (law, consulting etc) I think it’s better to own a part of the thing you’re building and hold it for the long term as long as you believe in it. This is how real wealth is created, and it also helps avoid the trap of increasing your burn rate as your $/hour rent rate improves. If you don’t have a path to own equity, then take your excess money and invest it into assets you believe in, over consumption, especially when earlier in your life. As you get older and are responsible for your family (e.g. children or parents) it’s harder to keep your burn rate as low.
Healthy is simple, adherence is hard: The basics of having a healthy mind and body are pretty simple. Eat well (less sugar, more whole foods), sleep well (8 hrs a night), exercise daily (cardio and load training), and be present, focused and calm. I know all this, but I’m particularly bad at consistently practicing what I have learned. I go through phases of having good habits but then “fall off the wagon” and find it lower resistance to fall back into bad patterns where I eat like crap or check my phone the first thing when I wake up v.s. setting my intention for the day. Healthy habits have been a lifelong battle but now that I’m a father I can’t think of a more purposeful “why” to be better.

Welcome Note to Founders

As a small Angel Investor I aim to be a “friend to the founders” and an loyal supporter of the company throughout it’s growth.

Here is the note that I typically send to founders after making an investment in their company to share how I like to collaborate. I’ve gotten some good feedback on it, so thought I’d share it publicly.

Dear XXX,

It’s a privilege to partner with you – thank you for including me in your funding round. I’m excited to be on this journey with you and look forward to all you will accomplish.

Here is a short summary about how I hope to collaborate:

Push, not Pull: I’m rarely going to ask you for anything unless I’ve not heard from you for a long time. If you need anything from me, please reach out to me over email or WhatsApp and I’ll do my very best to help you.
Communication: It would be great to receive regular updates about the company. My preference is quarterly, as enough time has passed to show meaningful progress but many folks like a monthly cadence as well. I wrote a short post with a template that you can use as a starting point, if you like but if you already have one, please don’t change it for me. I recommend a short email with numbers, highlights, lowlights with any asks from investors.
Part-time: I invest part-time, mostly because I care about supporting early-stage entrepreneurs across the globe. I will try and help, but if I don’t have the relevant expertise, connections, or I’m especially time-constrained I may be unable.
Founder Community: I created a group for portfolio company founders to help each other out and for me to send stuff that I think might be useful. Please let me know if you or your cofounders would like to be on the list (although I’ve not been great at using it recently).
Development: Some of the best company builders are continuous learners and read a lot (e.g. Bill Gates, Mark Zuckerberg). Great books can incredibly useful, especially when I have a specific problem to solve or know that I have a development area. I read a lot (2019, 2020) and listen to a lot of podcasts. Please let me know if there is a specific area of interest, as I’d love to recommend and buy you a book.
Logo: Please send me a copy of your logo with a transparent background so I can add it to my website.

I’m looking forward to getting to know you much better (and learning from you) over the years and being in your corner through the ups and downs.

I’ll leave you with two of my favorite frameworks for over a decade – Manage your Energy, not your Time, and Maker and Managers Schedule (Paul Graham).

My very best,

Aadil

My DeFi Investment Strategy (2021)

I’m experimenting with Decentralized Finance (DeF) as I’ve been thinking more about unbundling of work and cash flow. I think that DeFi, and yield farming in particular, could be a viable mechanism to generate predictable cash flow, that is not tied to active labor.

I hope to be able to only commit a few hours a week to spot-check positions and harvest rewards and 1-2 full days a month to research new projects and rebalance the portfolio. I will track the starting point and try and calculate my effective yield but given the volatility of the assets and unpredictability of the rewards, I know the result will be difficult to replicate consistently.

It’s also worth noting that this kind of active management might not be significantly better than just buying and holding ETH (this article has some good data) which has much fewer fees and work associated with it – but where is the fun in that 🙂

This is the structure I use for my strategy:

Name	Description	% of Assets	APY Target	Risk Level	Active Management	Project Examples
Safe	Stablecoins that earn yield passively	40%	5-10%	Low	None	BlockFi, Celsius
Stable Pairs	High correlation long-only assets	30%	10-30%	Medium	Med (Weekly)	ETH-WBTC, ETH-DPI
Stable and Long	Stablecoin + long-only asset	30%	15-50%	High	Med (Weekly)	USDC-ETH, USDC-MATIC
Degen	High incent temporary reward pools	<1%	100%+	Insane	Very High (Daily)	Polycat, Pacake Swap (Polygon)

The core of my farming is liquidity pools with stable pairs and stablecoins (like USDC which is collateralized and pegged to the dollar) with assets that I’m long like Ethereum, Matic or Solana.

Everything that is outside the “Safe” section requires a wallet (or multiple wallets across multiple chains) to access and is all pretty confusing (even crypto native folks). You’ll need to use some aggregators like Zerion, Zapper or DeBank (better for cross-chain) to help you visualize your portfolio and your trading history. I try not to have more than 10-15 core positions at any point in time but curiosity, low friction, and lack of discipline usually get the best of me so I end up having to trim back every few months.

I’m not borrowing against my assets yet, but it’s something that I’m considering when there are good incentives for borrowing against “safe coins” like BTC or ETH. In traditional finance, this is one of the main benefits of using a financial advisor like Goldman Sachs or owning a primary residence — you can often get leverage against your assets so I will experiment more in this space in the future.

“Safe” Yield (40%)

A significant part of my exposure is in “Safe” US Dollar stablecoins that are passively generating 5-9% yield in BlockFi and Celsius. I am comfortable that BlockFi especially has very solid security practices. This interview with Zac Prince (CEO) is a good listen.

All you have to do is send in your money and pick how you want to get paid (I get paid in ETH on BlockFi) which makes it fairly easy to access for most people even those completely unfamiliar with crypto. Celsius has slightly faster withdrawal times than BlockFi which usually takes a few days.

Even though this is “safe” in crypto land there is still no FDIC insurance as crypto is not FIAT so you are mostly relying on the fact that BlockFi and Celsius are well run with strong risk management practices and will refund you your money in case of an incident. This is just a reminder that this is still a lot less safe than a bank or money market account.

Stable Pairs (30%)

Stable pairs are assets with high or 100% correlation which reduces the impermanent loss risk of exchange rate volatility. This strategy is reserved for assets that I plan to hold anyway.

Stable pairs are assets with high or 100% correlation:
- USDC-DAI (100% correlated)
- ETH-BTC (80%+ correlated)
- ETH-DPI (70% correlated).
As a farmer providing liquidity for stable pairs (usually in an equal ratio) you are usually rewarded in trading fees and special tokens as an incentive for providing liquidity.
When the market moves your assets will typically increase or decrease in value in synchronization which means you reduce your exposure to Impermanent Loss. Impermanent Loss occurs when a the automated market maker rebalances the pool to get to a 50/50 ratio of value and can eat into your expected gains significantly.
New projects especially on new chains (e.g. Polygon or Solana) will incentivize you to provide liquidity on their platforms. The “safest” ones have established projects moving to new chains – e.g. Balancer moving from Ethereum to Polygon feels safer than a totally new project on Polygon.
I generally avoid new algorithmic stablecoins unless there is a very good reason to trust it – eg. UST is probably fine on Terra as it has a $2BN market cap but still makes me nervous as it’s not technically collateralized.
You usually don’t make that great yields on stable pairs but I generally look for incentives that can get me to 15%+ yields.

Example Projects

I’ve been playing around a little bit with leverage for correlated pairs (starting with Alpha Finance), but this just adds more risk and most of the reward is in $ALPHA (degen coins) that I’m likely to sell as I harvest.
DPI is the DeFi Pulse Index and a good mix of all the main DeFi coins. I like the DPI-ETH liquidity pool with $INDEX rewards.
DFX is a decentralized FX for currency stable coins to allow for EUR-USD-CAD transfer which is offering 20-40% yields for providing liquidity with $DFX rewards.

Stablecoin + Long Assets (30%)

For this strategy, I usually look for pools that pay higher yields than the stable pairs because of the increased risk and margin erosion from Impermanent Loss (explainer video here).

For assets that I plan to hold like $BTC, $ETH, $MATIC, and $DPI I will often invest in a pool with a stablecoin. e.g.
- USDC-ETH
- USDC-MATIC
- DAI-ETH
I only do this for things that I would hold anyway and when the farming rewards are high enough so that I’m comfortable that they will offset the impermanent loss.
I think that a number of projects on Solana (e.g. Raydium) and Terra (Anchor, Mirror) are interesting and I’m able to execute this strategy on those protocols as well.
I target 25%+ yields here (higher than stable pairs) but they can often end up much higher.

Example Projects

I usually provide liquidity on the major exchanges like UniSwap V3 or SushiSwap which have high volume so good trading fee revenue, but often will move these pairs to new chains (like Polygon) where the token incentives are better. Revert Finance is a good tool to track all your liquidity positions and APY.
Projects like Balancer, Visor, and Charm are interesting from a liquidity management perspective and can help counter the effects of 50/50 pools that you would just let sit passively — I’ve recently increased my exposure to these projects.
Mirror is a decentralized platform to own public securities like ETFs, Apple, or Google and is a new project with token incentives to provide liquidity.

Degen Coins (<1%)

Here is where it gets really weird and this is a place where I don’t think most people should participate. It’s as close to gambling as you’re going to get in Crypto but the 1%+ daily yields can often be very enticing. I’m almost never planning on holding these over the long term unless I start to really get conviction on the project.

Holding and providing liquidity for Degen coins is extremely risky. I’ve already been burned over and over again with the allure of stupid APRs and had a front seat to the Iron-Titan fiasco where I almost lost my original investment besides being up almost 3x within a 2 week period.
I very rarely participate in Degen projects on Ethereum – the gas (transaction hash) fees are so high that it’s usually not worth it. Most of my degen activity is on Polygon but also play around on Solana as well.
However, It’s a lot of fun to play with these projects so if you do dive in, pick projects that seem legit and put in a small amount of money into the pools (or farm with stables) and then sell off the LP rewards as they come in to reduce risk.
It’s even more fun to be in Degen projects/pools with friends because it’s exciting and things move fast. It’s also helpful to have friends around to tell you when to get out!
I look for 200%+ APYs for this strategy and try not to stay in the coins for too long – if you do make gains, I’d suggest locking them at around 2-3x and then playing with house money. I’ve never really made any money on Degen, but I’ve never really made any money gambling at a casino either 😂

Example Projects

Note, these projects may not exist when you read this 🙂

Pancake Bunny: Yield aggregator with auto-compounding pools on Polygon. I’m in the ETH-Bunny pool at 1% yield per day.
Polycat: Yield aggregator with auto-compounding pools on Polygon I’m in the FISH-MATIC pool at 0.8% yield per day.
OHM: An algorithmic reserve currency. I’m staking OHM at 1% yield per day.

I hope this helps folks, and none of this (as with everything on my personal blog) is financial advice. I’m just sharing my own experiences in case it’s helpful to others and to refine my own thinking.

DeFi Set Up and Project Diligence

https://defi.cx/dyor-what-to-check-before-buying-a-token/

DeFi is evolving quickly and presents interesting opportunities to make money by investing in new projects. This is a summary of what I wish I’d done before starting to invest more seriously and my current diligence process before backing a project. As always, I’m writing this all up to be helpful to others, clarify my own understanding and get feedback to refine my approach.

DeFi Set Up

Before you get started I’d spend a bit of time getting set up — I did not do all of this in the beginning and am much calmer now that I have some of these bases more covered.

A sounding board: Build a network of friends who are more experienced that you can ask about projects and share experiences. All of this is incredibly confusing as a new person, and so it’s important to give and get help. It is also helpful to have early warnings if risky projects look like they are heading for trouble.
Start small: I usually start with a smaller amount for new projects and if the user experience with the DApp (Decentralized Application) after a few weeks is good, and I like the risk/return profile, I make it a “core position”. I aim to have no more than 10-15 core positions at any point in time or it it’s very hard to track.
Understand risk: Understand that there are layers of risk – new chains, new projects, new tokens all have compounded risk compared to established projects. For example, supplying USDC-DAI on UniSwap Liquidity pool (LP) on Ethereum is way less risky than a RAY-SOL LP on Solana. Another example is using multiple platforms like Beefy to autocompound your DPI/ETH LP on QuickSwap creates layers of risk vs. investing in a single token.
Secure your DeFi environment: Spent the time securing your wallets and trading platforms (See this article from the CEO of Nexus who had $8m stolen from him). I use a password manager (1PassWord, LastPass), MetaMask, and write down my codes on paper which are torn in half and kept in separate and secure places. I also use two-factor authentication for everything using products like Google Authenticator/Authy over text where possible. I also use a separate email and browser profile for all my crypto projects.
Impermanent loss: Understand impermanent loss before providing liquidity. Impermanent Loss occurs when an automated market maker rebalances the pool to get to a 50/50 ratio of value. Impermanent loss can mean that you actually make less money by providing liquidity than just holding tokens if the price of the underlying tokens changes. This video is great and this article from Bankless and this from Bancor are also excellent.
Fees: When executing on strategies especially in Ethereum there are often layers of fees involved (both putting money in and taking money out) – e.g. Token Transfers, Transaction Approvals, Swaps, Pooling Tokens, Staking LP Position, Claiming Rewards, Pooling and Staking to Compound Claimed Rewards. Each of these has a gas fee and can seriously eat into your returns. Good article on holding ETH vs. Active Strategies.
Portfolio trackers: You’ll need to use some portfolio trackers like Zerion, Zapper and DeBank (DeBank better for cross-chain) to help you visualize your portfolio and your trading history. The newer projects will likely be excluded so you may have to use a spreadsheet as well.

You need to get comfortable knowing that you’ll never precisely be able to calculate your expected yield – rewards are constantly changing, fees are hard to estimate, and you never know how impermanent loss will affect your returns.

Before Backing a (New) Project

New projects are riskier than established projects (higher risk of logic bugs, hacking risk or rug pulls) so do extra research before investing in these projects even if the yields are enticing. In particular, projects with very high XXX%+ yields are inherently very risky and need more work / or less capital at risk.

For thse newer projects, you need to do extra research and I usually go through the following steps to help you derisk:

Research: Read the medium/announcement posts, join the project Discord and follow their Twitter account — look for good English, signs of a strong community, and engagement from the project developers.
Hacks: Check to see if they’ve been hacked in the past (https://rekt.news/leaderboard/) and avoid projects that have been hacked.
Audits: Check to see if they’ve passed audits – Certik and Perk shield are common but this does not guarantee against hacks.
Understanding: Don’t just ape in (go in big, hard, and fast) to chase yield without actually understanding the project. If you can’t describe it in one sentence, don’t invest — I’ve been greedy and gotten burned many times including a front-row seat to Iron Finance where I just managed to get out with my original investment.
Rewards: New projects are particularly fun because you can get rewarded for being an early user and supporter in a very meaningful way, much like early equity investors (e.g. early UniSwap users got $12k of tokens awarded to them).

Understand the terms

For all your DeFi investments you should read through and understand the terms of your investment as well as the circumstances for each situation. Here are the things I usually look for before making an investment:

Fees: Deposit and withdrawal fees.
Lock-up periods: Some farms don’t even let you take out your capital or are subject to high fees if you pull out before the lockup.
Vesting: Vesting of rewards or hurdles before you get your liquidity provider rewards.
Source of Yield: Yield can come from trading fees, liquidity pool tokens, or additional third-party staking fees. All of these are usually volatile and require active tracking.
Total Value Locked (TVL): I only consider investing if there is at least $1M in pools and there is active trading in those pools else you expose yourself to more slippage and liquidity risk.
Liquidity to trading volume ratio: When Trading Volume > Liquidity that feels particularly dangerous (volatility/pumping/dumping etc.)
Price slippage: Particularly important for small pools where you are a significant % of the pool which impacts both your deposit and withdrawal.
Difference between APR and APY: APY assumes compounding which is usually inflated as most people are not manually compounding and rewards don’t stay stable over the course of a year.

This guide (Part 1, Part 2) is BSC (Binance Smart Chain) specific but the concepts are all solid in case you’d like to dig in further or get alternative perspectives.

The Depths of DeFi

Decentralized Finance could potentially change the way we interact with financial services forever and is a total rabbit hole. Here are some of the “levels of depth” that you can get into DeFi and roughly reflects my journey into the DeFi abyss (yes, I will be overusing this analogy!).

I don’t think that most people should move past the shallows unless you’re interested in the underlying technology, are comfortable with the significant risk, and want to follow the impact of DeFi on the financial services ecosystem.

Dipping your toe in the water

When starting your dive into cryptocurrency and DeFi, the best thing to do is to set up a regular order to buy Ethereum and Bitcoin (e.g. every two weeks) through an exchange like Coinbase to dollar cost average and hold. $BTC and $ETH are ~80% correlated to each other but neither are particularly correlated with the stock market.

BlockFi and Celsius are also great options to hold USD stable coins (USD coins backed by real USD) and make 5-10% in interest that can be paid out in cryptocurrency or stable coins.

Just these two things alone is probably more than 90% of the financial advisors know, which also makes me a little sad given that they are a gateway to investment products.

Wading in the shallows

Once you’re in the water and you have an account on an exchange like Coinbase or Kraken, you may start buying a few more tokens for projects that you’ve heard are interesting like Solana ($SOL), Cardano ($ADA), Polygon ($MATIC), or Polkadot ($DOT).

Once you’ve bought your cryptocurrency the natural next step is to consider what else you can do with it 🙂 You will create a MetaMask Wallet and install the browser extension to manage your currencies and make your first swap between cryptocurrencies. You’ll send some $ETH to your wallet and maybe buy something like the DeFi Pulse Index ($DPI) which is a collection of some of the most popular DeFi tokens like Uniswap, Sushi and Aave. The BED Index ($BED) is also a pretty solid choice.

You can probably get most of the exposure and benefits of participating in the crypto and DeFi ecosystem by stopping here. You’ll probably also save a ton of money on transaction fees and a lot of unwanted stress. It’s also probably simple enough to do your taxes by just exporting a file from Coinbase and a wallet CSV export.

Feet off the floor

If you’re wondering what’s next, this is when it starts getting more fun. Instead of just holding assets passively your coins start “working for you” and generating yield – much link investing your fiat (USD) you are investing your cryptocurrency.

The main things you’re going to start doing are:

Providing liquidity: You’re not just holding tokens for projects that you like but you’re providing liquidity in pools (LPs) on exchanges like Sushi or UniSwap.
Staking: You’ve discovered that exchanges or projects will provide extra incentives for providing liquidity (as LP tokens) or with the tokens directly by staking these tokens and locking up your assets for rewards.
Reading and learning: You’re reading more frequently and have discovered things like the Finematics Youtube Channel, the Bankless newsletter and podcast, and maybe Kevin Rose’s Modern Finance Podcast. You understand things like impermanent loss, rug pulls, and the difference between proof of work and proof of stake.
Joining the project communities: You may join a few project discords or telegram chats and potentially even participate in the discussions when you’re really excited about the project.
Friends: You probably have a group of like-minded friends that are at the same stage in their journey that you can bounce ideas off.

Deep waters

When you are in the deep waters you’re comfortable with the basics, you have a clear strategy and you’re switching projects regularly to try and find the best risk-adjusted reward across different chains. I’m here in my DeFi journey.

New Projects: You’re investing in totally new projects, reading whitepapers/announcements, and staying on top of the latest incentives so you can get the best rewards for your tokens.
Degen: You’ve invested in a few degen projects with high volatility – you’ve been burned by impermanent loss a few times and exited too early or too late.
Multiple Chains: You’re investing across multiple chains like Polygon, Terra, and Solana and complaining about the gas fees on Ethereum all the time. You’re scared to look at how much you’ve spent on gas. You go to https://fees.wtf/ and are sad.
Best Price: You’re using tools like Matcha to look up the best exchange rate for your swaps vs. going to UniSwap by default. You feel good when you save money on fees.
Portfolio Construction: You’re starting to think more about portfolio construction, investing discipline, and having some rules for when you invest and when you exit to improve risk/return.
Leverage: You’re starting to get loans on your stable assets and leverage for some stable liquidity pools but still nervous when you do this (and keep collateral around in case it goes sour).
Governance: You are holding governance tokens for some projects that you’ve been supporting for a while and actively voting on the future direction of the project (much like shareholders vote).
Trimming down: You’ve invested in too many things and constantly have to trim back and rebalance because you’ve collected so many useless coins that you don’t know what to do with them.
Portfolio Tracking: You’re using tools like Zapper, Zerion, and Debank for cross-chain — you may even get frustrated that all these tools don’t support all the projects that you’re investing in. You probably have a spreadsheet to calculate all your positions and daily yield because the other tools don’t support it.

This chart shows how other chains like Polygon and BSC have increased the overall trading volume significantly in 2021, due to much lower gas fees (cost per transaction).

*https://twitter.com/WuBlockchain/status/1401418884310200320/photo/*1

The Darkness

I honestly have no real idea what lurks in the darkness, and don’t really want to dive here if I can avoid it, but I can only imagine the following things exist:

Programmatic trading: Instead of manually moving around your money you’re writing code to programmatically make trades or execute strategies with specific logic.
Pre Launch: You’re in all the right communities and know when projects are launching, when exchanges will list tokens, and maybe even have tokens before the general public.
Arbitrage: You have a deep understanding of the incentives, risk, and arbitrage across chains and are able to systematically take advantage of these before retail investors (much like traditional finance).
Moving markets: You’re pooling assets, taking out flash loans, or in small communities of large investors to take advantage of scale and your trades are actually moving markets. I recently came across a tool called Furcombo which is a no-code tool to let users use flash loans to take advantage of price arbitrage across decentralized exchanges.
Stacked Leverage: You’re taking advantage of stacked leverage and incentives which is hard for normal retail investors to understand or access.
OTC: You’re not trading using conventional systems because your trades are so large that you can get better rates over the counter 🙂

Here is a similar take from the folks over at Finematics, who produce great content and I’m a supporter of theirs on Patreon.

I hope you enjoy your experiences throughout your journey in DeFi, but unless you want to dedicate a lot of time and mental space to it, wade in and just have fun the shallows and rest safe and easy 🙂

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

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

Finematics Youtube Channel – good explainer videos of projects, protocols and concepts with nice animations.
Bankless newsletter and podcast – DeFi maximialists, but normal folks.
Kevin Rose’s Modern Finance Podcast – True Ventures partner on DeFi and NFTs.
Invest Like the Best Episode with Chris Dixon – Chris is a partner at a16z and this is a great episode on the future of blockchain.

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 Purposeful Career

I’m starting to find more purpose in my career, and invest more time, energy and capital into activities that further this purpose (my 2021 goals here). There was a period in my life where I thought I only wanted to work on problems in emerging markets (particularly Africa) and although I still care deeply about this area, I realize that’s more narrow than where I actually enjoy spending my time and resources.

I’d like to build a career in service of entrepreneurs and creators.

Making software allows me to build tools that support entrepreneurs and creators at at the earliest stages and at scale.
Angel investing allows me to compound capital, relationships, and learning and ultimately make better software.
Investing and operating allows me to build both broad and deep relationships with people over a very long time horizon.
Investing and operating let’s me learn and writing helps me share my learnings with others which in turn refines these learnings.

Making Software

I’ve been working in software development for over 15 years. I’ve helped build products for consumers, enterprises, and small businesses. I’ve found the most fulfillment in building utility software to help entrepreneurs run their companies and help people collaborate.

I’m particularly drawn to building software that is ‘Free to Start’ as this allows users to get value even at the smallest scale. World class software can be used by people starting new projects without paywalls that prevents folks who are not well capitalized from participating.

I’m also interested in Open Source projects (e.g. WordPress) as they have all the benefits of ‘Free to Start’ but also allow users to contribute to the development and customize it for their own (possibly esoteric) requirements which is often necessary in emerging markets or emerging use cases.

Finally, I’m really excited about software that helps us collaborate better as humans especially as the way we collaborate evolves into cloud based and distributed work. I’m looking forward to spending my own time innovating in this area. I wrote more about this area in another post “A More Open World“.

My hope is these products can be helpful to entrepreneurs and creators.

Angel Investing

I’ve been angel investing for over a decade – I enjoy it and have learned a lot. Angel investing allows me to develop and cultivate new relationships with people I would not ordinarily meet, stay close to cutting edge innovation and compound capital over a very long time in a way that is very aligned with entrepreneurs.

I enjoy meeting entrepreneurs who are passionate about the problems they are solving and have a really strong ‘Why’ story. As a very small investor my role is a friend to the founder and cheerleader for the business and don’t have the same baggage that institutional investors need to consider (round dynamics, ownership targets etc).

I’ve found it helpful as an operator at scale to stay close to innovation in adjacent industries and adjacent business models. It helps me generate new ideas, recognize patterns across companies and ultimately makes me a better operator.

My hope is that these small investments can be helpful to entrepreneurs.

Building Relationships

Investing and operating has allowed me to build both broad and deep relationships with entrepreneurs and co-investors and colleagues.

I’ve found that more repetitions (over a concrete thing) with the same people or group builds lasting trust and rapport especially when I don’t have a formal relationship such working at the same company. If you are actively collaborating on a project together or evaluating an investment together over many cycles you can build deep, trusting relationships.

I’ve been spending time collaborating with a very small group of co-investors – many who I’ve known for 20+ years. In this strange time of physical distance I’ve tried to be more structured and disciplined in my approach to collaboration (more writing, more sharing) and it’s helped me build stronger relationships as an operator and investor.

I’ve found that broad relationships are very helpful for making connections / introductions which are important. The smaller set of deeper relationships are very helpful for refining synthesis and judgment (as these folks are much more direct and honest).

My hope is that these relationships can be helpful to entrepreneurs either directly or indirectly.

Learning and Sharing

I’ve been trying to compound my learning as much as possible – through operating, investing, and consuming content (mainly audio books and podcasts). The intersection of all of these activities helps me develop a perspective on the world that is unique to my set of experiences, which has the potential to have a lot of depth.

I’ve been trying to write and share more of this with others (in this public blog – now over 80 posts!) and some of the idas are ‘stubs’ and others are areas where I feel more confident in the subject matter.

Writing helps me synthesize and crystalize my point of view and also allows my thinking to be shareable at scale. I’d like to experiment with a newsletter next, even to a small private group as I think this could help me synthesize across a series of topics in a way that could be useful to a particular audience.

My hope is that this shared learning can be useful to entrepreneurs.

All this thinking may evolve, but it’s been consistently true over many years so I wanted to document it openly. I hope I can come back to this post in ten or twenty years and feel like I’ve had a career in service of entrepreneurs and creators.