Token Issuance Programs – the new structured finance?

We’ve known for some time now that Blockchain and Bitcoin were designed to disrupt the financial services sector. But I suspect that not even the earliest proponents of distributed ledger technology nor the most avid supporters of crypto-currencies anticipated how far and how quickly that disruption would spread. In addition to P2P payments and lending, alternative stock exchanges, and self-executing smart contracts, recent events suggest that digital assets issued on Blockchain infrastructure are themselves the new source of venture capital, that they may even come to be seen as the new form of structured finance (albeit with less complexity and more transparency).

Image: Maria’s Cakes founder issues her own record…. (Source: Maria Lee website)

In the past few weeks, we have seen Token Issuance Programs (sometimes referred to as ICOs – “initial coin offerings” – or token sales) raise extraordinary amounts of capital – $53m for MobileGo, $150m for Bancor. Even allowing for the fact that VC funding rounds have been increasing in recent years, these results are quite staggering – given that the sellers of these tokens have not had to relinquish any equity, or incur any debt either. Because tokens do not represent shares in a company or units in a corporate bond. Nor are they securities in the usual sense, as they do not create any interest or obligation other than an entitlement to be granted a given number of tokens at a predetermined price.

Of course, these tokens may carry the right to use proprietary software or access marketplace platforms, and even acquire future products. In this way, they also resemble crowdfunding projects. But because of the potential returns generated by the increased value tokens may accrue (a combination of network effects, scarcity and market appreciation), there is buyer demand for new tokens backed by the right project.

These token sale results have also benefited from the increased price of Bitcoin, Ethereum and other leading digital currencies – or perhaps the other way round? – as investors get more comfortable with this new asset class. That’s not to say there isn’t talk of a market correction, or even a bubble. But despite the apparent risks, and the occasional exchange outage, new token issuance and crypto-currency trading are generating growing interest – not just from currency speculators, but also asset managers and traditional investors. No doubt helped by developments in markets like Japan, where crypto-currencies are now a legally recognized form of payment.

As for structured finance, some projects are looking to issue tokens that are linked to or represent an underlying asset, such as a pool of loans. In the case of securitization, for example, Blockchain technology can not only help to structure the token issuance (via smart contracts, for example), it can also provide better transparency on the underlying loan performance (using real-time repayment data from bank feeds, for example).

Of course, there have been some speed bumps along the way for Blockchain-derived assets, most notably the infamous DAO “hack” of last year.  Plus, the price of Bitcoin continues to display considerable volatility, which makes it harder for some investors to embrace. And if anyone is wondering why this week’s blog features an image of a Hong Kong cake shop owner, it relates to the Asian Currency Crisis of 1997-98. Maria’s Bakery was a famous chain of shops that sold coupons at a discount, that could be redeemed for cakes at any time in the future. It was a practice that spread to other retail sectors. But during the market jitters caused by failing currencies and a tightening of credit, there was a run on Maria’s coupons, which coincided with a 2% fall on the Hong Kong stock exchange. This may have been coincidental, but it also demonstrates that financial markets can be sidelined by the most unexpected events. Like, who would have made the connection between over-extended home owners in parts of the USA with the worst global financial crisis for 80 years…?

NOTE: The comments above are made in a purely personal capacity, and do not purport to represent the views of Brave New Coin or any other organisations I work with. These comments are intended as opinion only and should not construed be as financial advice.

Next week: Expert vs Generalist

The network(ing) effect

To paraphrase Metcalfe’s law, the value of a network is proportional to the number of connections, squared (n²). Which is why valuations on social media platforms like Facebook and networking services like LinkedIn are mainly calculated on the number of users and subscribers, based on the volume of transactions and a notional value of each member engagement that can be sold to advertisers and other third parties. But as a user, these networks are largely two-dimensional – you are either “connected” to someone (or not), or you “like” something (or not? – Facebook does not support “dislike”). Whereas, in the real world, our relationships and connections are more multi-faceted, and our preferences are more nuanced than binary.

I was recently reminded of the 1990’s dinner party game, Six Degrees of Kevin Bacon, and the notion that we are all connected to each other by no more than six degrees of separation. At a networking event last month, I was talking to a senior executive from a major bank, whom I had just met. Within 5 minutes, we realised we had a number of mutual connections. In fact, when I looked at LinkedIn, I discovered we had more than 20 “1st degree” relationships in common, most of them deep network connections I have maintained over many years. And although LinkedIn was helpful in confirming the “proximity” of our business and personal networks, it was only by meeting in person that these links would have been identified.

Similarly, at lunch last week, a business associate I’ve known for several years’ mentioned names of two people he had been working with this year, in completely separate contexts and in unrelated situations. Turns out that I knew both of them personally. Again, LinkedIn may have been able to “confirm” these relationships, but the “value” was in already being connected.

So, this may suggest that the true network value of Facebook and LinkedIn is overstated, because:

a) the number of potential network connections far outweighs the number of actual connections

b) the limitation of binary classification of relationships does not allow for the depth and complexity inherent in our networks of relationships

c) neither platform allows users to build contextual connections (apart from basic linear profile information).

In the end, the quality of relationships wins out over the number of connections. As Kevin Bacon so aptly put it:

If social media and networking platforms measure success only by the number of “likes” and “followers”, then they devalue the importance of building deeper connections and sustainable network relationships.

Next week: Token Issuance Programs – the new structured finance?

SportsTech and Wearables Pitch Night at Startup Victoria

Appropriately hosted within Melbourne’s Olympic Park, last week’s Startup Victoria pitch night featured four companies working in SportsTech. It was further evidence of the breadth and variety within the local startup sector even if, on this showing at least, there was a little less innovation than we have seen at other monthly pitch nights.

First, there were a couple of presentations from Catapult and Genius Tech Group, to help provide some context to the topic, especially helpful for people who may not be familiar with this sector. However, I’m not convinced that referencing Australia’s Olympic medal tally as a key rationale for building a sports technology industry necessarily set the right tone. For a start, despite some gold medal success in the 2000, 2004 and 2008 summer games, Australia has seen a rapid decline in medal performance at the past two Olympiads. Then there are the cultural and governance issues at the AOC itself.

Then came the pitches, in order of appearance (website links in the titles):

TidyHQ

With the slogan “tribes are everywhere”, this business is all about getting the off-field performance right. TidyHQ is supporting smarter sporting clubs and organisations by helping them with things like governance and succession planning, and by having all their back office operations in one place. Essentially a white label portal solution that offers branded websites (“SaaS doesn’t work in this market”), the service is designed to support grassroots clubs and associations, across all sports.

Using a freemium subscription model, the main sales channels are local and regional AFL leagues. Sales are helped by a viral effect – given that in small towns and regional areas, there is quite an overlap of club officers.

TidyHQ also takes a clip from sales of multi-stream products and services sold through their customer sites, which includes a diverse range of clients such as yoga studios, play groups, plus a number of US sororities, fraternities and law schools.

Competition comes from different quarters: vendors like TeamSnap and SportsTG; incumbent club officials and their spreadsheets; even social media. One challenge, however is managing and harnessing the “volunteer mindset” associated with community sports clubs, especially when it comes to budgets and adapting to change.

RefLIVE

This company has built an app for soccer referees that works on smart watches. Referees typically use stopwatches to record match time and stoppages which, with constant match use have an average life of 2-3 years. Yet referees also have to keep track of player substitutions, match scores as well as the yellow and red cards they hand out.

At a price point of $60 per annum for referees, and annual fees of between $5k and $50k for soccer leagues and associations, an ideal entry point for RefLIVE would seem to be local, short-form knock-out tournaments, where the full range of features can be deployed in one place.

Currently scaling to take advantage of international market opportunities, RefLIVE is currently receiving enquiries from youth soccer leagues in Japan, as well as Germany and China.

Considered to be (literally) a game changing app for the Apple smart watch, RefLIVE is
also seeing interest from AFL, Rugby Union, Rugby League and field hockey.

At the moment, the platform does not support a live back-end, and there are no real plans to distribute or commercialize the data. While live data could be pushed to a server via WiFi, a bigger obstacle is getting the refs themselves on board – even though it has the potential to enhance their on-field performance and help them with off-field administration.

Spalk

Spalk (“crowd-sourced sports commentary”) enables custom audio streaming for TV sports, via some proprietary technology to synchronise secondary content with traditional broadcasts. Due to the high costs and copyright issues associated with TV broadcast rights for professional sports (only made more complex by “over the top” platforms), Spalk is mainly licensed by broadcasters for coverage of amateur competitions.

The international basketball body, FIBA, sees an opportunity for Spalk to help drive international engagement, through the use of localised and translated commentary. However, in many cases, Spalk will need sports that retain their own D2C content rights. (Anyone familiar with the challenges of listening to overseas test matches will be aware of Guerilla Cricket, and its predecessor, Test Match Sofa.)

Part of Spalk’s “special sauce” is in integrating and synchronizing multiple audio tracks, which can provide better UX compared to social media streams and viewer posts, commentary and Tweets. Another key to success is the ability to integrate with existing broadcasting commentary technology and vendors.

SPT

Finally, SPT (sports performance tracking) is a GPS monitoring system aimed at amateur and grass-roots clubs and leagues. Offering analytics for all teams, SPT is cloud-based, multilingual and claims to be “efficient, simple, affordable”. So simple, that unlike the aforementioned Catapult, clubs don’t even need to hire sports scientists….

Currently supporting 800 clubs, and 65% of revenue coming from overseas (despite claiming to have spent only $300 on marketing), the main appeal is probably the $299 price point per device, and the core user base is amateur leagues.

SPT has so far relied on viral effects and referrals, plus an element of FOMO. While SPT may not be as sophisticated or as detailed as similar platforms used in professional sports, it has managed to demonstrate the data validation when compared to some camera-based apps. In any event, according to the founders, a 2-3% margin for error is OK for this audience. And if users can compare their own performances against those of professionals, that is an added bonus.

However, one issue facing the collection, use and sharing of sports analytics has recently surfaced in a spat between the England team manager, Gareth Southgate, and Manchester United boss, Jose Mourinho. Which may make some clubs reluctant to upload their data.

Following a tally of the judges’ votes, Spalk was declared the winner, but only by a margin of 0.25 points….

POSTCRIPT: While I think the decision to present thematic pitch nights was a good call, there are a few logistical aspects to the current series of events that the organisers need to address:

  1. Choice of venues: the room used for the sports tech pitch night had an unfortunate layout – there was a pillar right in front of the stage, which must have been off-putting for the presenters. (Also, there was only a very small screen to display the pitch deck slides, so most people in the audience wouldn’t have been able to see them.)
  2. AV tech: I’ve said this before, but organisers need to arrange for a second monitor in front of the presenters, so they don’t need to keep looking over their shoulders at their slides. And please, please check that clickers are working (or that presenters know how to use them!)
  3. Audience participation: At previous pitch nights, the MC would field questions from the audience. Now, no more. And the audience voting system (people’s choice) has gone awry. Makes it feel less engaging.

Next week: The network(ing) effect

Long live experts….

Along with “liberal, metropolitan elite”, the word “expert” appears to have become a pejorative term. Well, I say, “long live experts”. Without experts, we’d still believe that the world was flat, that the sun orbited around the Earth, and that the universe is only 6,000 years old…. Without experts we’d also have no knowledge of ancient civilisations, no comprehension of languages, no awareness of scientific phenomena, no understanding of how to prevent and cure disease, no patience to engage with the human condition, and no appreciation of nature, technology, art or culture.

Just a couple of “experts”: Marie Curie and Albert Einstein

I read recently that, “Marie Curie and Albert Einstein went hiking together in the Alps”. At first, I thought this was some fantastic fiction, because I wasn’t aware they knew each other, let alone went walking. But the line didn’t come from a David Mitchell novel – I came across it in Alex Soojung-Kim Pang‘s recent book, “Rest: Why You Get More Done When You Work Less”. It reveals something of the way knowledge seeks out knowledge – how great minds (experts) often get together to collaborate, or just hang out and shoot the breeze. The expert mind is also an inquiring and creative mind, open to new ideas and influences, unlike the hermetically sealed personalities of many of our current leaders.

(According to Pang, regular physical activity, creative pursuits, technical mastery and planned rest are among the key traits for many experts – so much for the 35-hour working week, 9-5 routines, and a couple of weeks’ annual vacation….)

Maybe one reason for this increased disregard for experts is the fact that many experts tend to make us feel uncomfortable (about our own ignorance?), they challenge our assumptions (and highlight our personal prejudices?), and they tell us things we’d rather not think about (even if it’s probably for our own good?).

And while I accept some experts can be patronising, aloof and even smug, there is a breed of experts, like Demis Hassabis, who are brilliant communicators. They can explain complex ideas in straightforward terms, and through their enthusiasm and natural curiosity, they show how they continue to wonder about what they don’t yet know. They also manage to bring us on their journey into difficult topics and uncharted areas, such as artificial intelligence.

Finally, and in the interest of balance, the only thing worse than a recognised expert is a self-appointed one…. (a theme Laurie Anderson explored in her satirical work, “Only an Expert”.)

Next week: SportsTech and Wearables Pitch Night at Startup Victoria