Bitcoin Will Disrupt Working Capital Management

I’ve been thinking a lot about bitcoin lately. And thus, I’ve been talking to people about it. Even some of the smartest people I speak with though are still skeptical. So I thought I’d write out why exactly I’m so bullish on the future of bitcoin.

Plenty of smart people have written about the potential of bitcoin across many fronts. They’ve outlined how the protocol works, the security underlying the blockchain, and detailed some of the relatively obvious and compelling applications that will create value in the short term.

These are all fine and well. I’m generally supportive of all of the above. But I don’t think the potential power of bitcoin has been articulated in a way that most people can appreciate or absorb. Here’s my attempt:

The foundational protocol of the Internet as we know it today is the TCP/IP (thusly to be referred to as “TCP”). For those who aren’t familiar with TCP, this protocol guarantees that content - specifically packets - makes it from point A to point B. Why is this important? TCP ensures that even if you have 1 bar of cell reception, that your email still loads without missing letters. If TCP didn’t guarantee delivery, then the web that we know today would be quite literally littered with holes. But at the end of the day, TCP is simply a means by which to relay information from point A to point B.

In the early 1990s, TCP was relatively new. It was just starting to take off, and people like Marc Andreessen started playing with TCP to build what would become Netscape. At that time, people felt that most of the good ideas were taken. Seriously.

Given that there weren’t many good ideas to be had, the world was nearing peak efficiency. Circa 1993, there just wasn’t much left to do. The world was humming along just fine.

Wrong.

With hindsight, it’s clear that the world was massively inefficient. Using the Internet, securities markets would grow exponentially in transaction and dollar volume to price assets as perfectly as possible given information available. Google, Expedia, Kayak, and others would disrupt travel agents. But none of these examples compare to the massive wave of efficiency that the sharing economy has ushered into society. Uber and AirBnB are predicated on information arbitrage via the Internet. These companies exist because they can use the TCP protocol to guarantee delivery of information from one person with a need to another with supply as efficiently as possible.

Now that the Internet is in widespread use for myriad commercial and consumer applications, it’s rather clear that the world has been massively inefficient. By leveraging the TCP protocol, we have found ways to optimize billions of decisions around the most up to date information.

Who could have imagined that TCP would enable Uber 5 years ago? What about 20 years ago?

And that leads us to bitcoin:

Bitcoin will be to digital payments was TCP was to digital information. Why and how?

In short, bitcoin enables near instant, near $0 transactions at near $0 cost. This is the killer app for bitcoin.

How much of the global economy is predicated on the fact that this isn’t possible today? A few examples:

Amazon Web Services (AWS) is predicated on post-paid billing even though they are investing in capital leases each month regardless of utilization. What if AWS billed you per minute, every minute, based on per minute usage? This would have a dramatic impact on AWS’s working capital, which it would then invest in future growth and lower prices.

Apple purchases >$100B / year worth of components, or about $270M everyday. I can’t speak to Apple’s agreements with its vendors, but it’s probably fair to assume that many of them need capital from Apple to finance operations. What if Apple’s suppliers could charge Apple per component as it’s delivered to the appropriate assembly plant? This gives Apple all of the leverage by only paying upon delivery, while dramatically helping ease the suppliers’ working capital.

There are hundreds of comparable examples. But the common thread outlined here is that bitcoin profoundly impacts working capital management by enabling true per / unit billing. You could pay for water/electricity, rental cars, rent, etc on a per minute basis for some discount. Asset owners and renters alike should be thrilled as this solves a huge market inefficiency: working capital management.

The total value of working capital across the S&P 500 is measured in the hundreds of billions of dollars. I wouldn’t be surprised if the total value of all working capital in all businesses is 100x more. Bitcoin can dramatically affect how we think about working capital manageemnt.

Bitcoin supply is intrinsically fixed, this single application can drive enormous demand. This is why I believe bitcoin can go up 100-1000x over the next decade.

Full disclosure: I am long bitcoin.

Cost is King

I recently listened to an a16z podcast about disruption theory. I’m a big fan of the theory and have been thinking a lot about it lately. The most important facet of the theory is cost.

Incumbents are disrupted because their cost model - typically measured by gross margin - is too high. When a smaller company devises a way to deliver the same value as an incumbent with a lower cost structure, disruption can occur. Thus the key to disruption is cost, or rather reducing cost.

Although we like to think about innovation in terms of novelty - think electricity, airplanes, or computers - the history of technological development over the course of human history can be more cohesively understood as a systematic removal of cost. Very few innovations were truly novel along a dimension other than cost.

For example, airplanes dramatically reduced the cost of long distance travel. However, human didn’t need airplanes to travel long distances. Millions of people travelled across large swaths of land and sea over the course of human history without planes. Airplanes just made long distance travel much more economical. I don’t mean to understate the power of this particular cost reduction - planes substantially changed how frequently humans could travel long distances, which has shaped every facet of business and personal life across the planet.

Even computers can be described through the same lens. Travel agents did what Kayak does. Telephone operators did what computers do. Analysts do what SaaS dashboards do. Uber drives do what computers will soon do. Because computers are programmed by humans, computers can only do what humans instruct computers to do. Through this lens, computers can be recognized as infinitely cheap “humans.” Electricity, silicon, and software costs pale in comparison to paying people’s wages - and thus mortgages, cars, meals, clothes, etc.

It thus stands to reason that the best businesses are those that methodically remove cost. Business cases to justify new innovations are by definition more compelling the more significant the financial impact of the innovation. For most companies, the largest source of cost is human labor. Thus the largest opportunities in business will be those in which technology can automate what humans used to do.

This notion that cost is the central challenge in humanity is perhaps best described by this quote by Jeff Bezos, founder and CEO of Amazon. “There are two kinds of companies, those that work to try to charge their customers more and those that work hard to charge their customers less. We will be the second.”

Cost is indeed king.

If It Can't Be Said In One Sentence, It's Not Clear

The most important thing I’ve learned in my 2.5 years since starting Pristine is the power of clarity. Looking back, it blows my mind how unclear I was with all of our stakeholders - employees, customers, and investors - and even myself in my first year.

I see a similar lack of clarity when I speak with super-early stage first time founders. There’s a simple litmus test to determine clarity:

If it can’t be said in one sentence, it’s not clear.

So my advice to early stage entrepreneurs is to have a one sentence answer to all of the following questions:

1. Besides raising capital, what are the 3 most important things that you need to accomplish in the next 6 months?
2. What are are the ideal strengths of your first 5 employees?
3. Based on the amount of capital you want to raise and assuming no revenue, how much runway do you have?
4. Are you default alive, or default dead?
5. What does your business do?
6. Why does your business exist?
7. Why are you going to be better than the next best alternative?
8. Why won’t the next best alternative copy and kill you?
9. How big is the market? Please provide a bottoms-up analysis.

Autonomous Cars Break Uber

As Bill Gurley (General Partner at Benchmark and board member of Uber) notes, Uber will be the dominant player in the ride-hailing business. Why? Because Uber’s business model is predicated on localized marketplaces of supply and demand for drivers. These localized marketplaces create strong network effects and “winner-take-most” markets.

The localized network effects are built on local liquidity of supply and demand for drivers and riders. This can be best summed up by this image that Gurley features in his post.

With this model driving Uber’s meteoric rise, tech pundits from Benedict Evans to Ben Thompson are asking the natural next question: What does the self-driving car mean for Uber?

The thing is…self-driving cars break Uber.

Indeed, with self-driving cars, we can just replace the “more drivers” element of the cycle with “more autonomous cars.” Drivers are intrinsically temporary. They are just people. They eat, breathe and sleep. They drive when they want to drive, and don’t drive when they don’t want to drive.

Autonomous vehicles are not temporary. Rather, they are permanent. Once they are on the road, they are available 97+ percent of the time to service riders (3 percent for gas, inspections, repair, etc.).

Autonomous vehicles break the “marketness” that makes Uber a market of drivers and riders. Supply will massively outstrip demand as vehicles become available 24/7 at dramatically lower marginal cost.

Autonomous vehicles will be much cheaper than human-driven vehicles. Today, humans are taking home 80 percent of the revenue (Uber the other 20 percent). Of that 80 percent, perhaps 30 percent is paid out for gas and vehicle maintenance, costs that autonomous vehicles must also incur. Thus, human drivers are taking home about 50 percent of the revenue they bring in; 20 percent goes to Uber, and 30 percent is the cost of servicing riders.

As Jeff Bezos of Amazon says, “Your margin is my opportunity.” Moreover, as Benedict Evans of A16Z notes, autonomous vehicles will be designed differently, with fewer features, thus making them even cheaper than cars that human drivers are using today to transport riders. With economies of scale, it therefore seems plausible that autonomous vehicles will be 60 percent cheaper than human-driven vehicles, even if Uber maintains its gross profit per ride.

Let’s return to Uber’s virtuous cycle. As outlined by Gurley, if we substitute “more drivers” with “more autonomous vehicles” and “lower prices” with “way lower prices,” it appears that the “market” breaks. You could argue that an aggressive company could accomplish the same task now by simply paying drivers a flat hourly fee, even if there’s no demand — but it doesn’t make any sense to do that because drivers are intrinsically temporary. Paying drivers now doesn’t mean drivers will service riders later.

On the other hand, paying for a car now, even if it’s underutilized, doesn’t mean it won’t be utilized in the future. Moreover, the marginal cost of a car sitting in park two miles from downtown approaches $0.

If it’s indeed possible to ever break Uber’s lock on the market, the shift to autonomous vehicles will be the disruptive force that enables someone else to win by beating Uber on asymmetric terms. Being first to market with the right vehicle will be paramount. Even a one-year head start could dramatically change the market dynamics now that Uber and its rivals have educated the market.

Google is best suited to productize autonomous cars for ride-hailing. Google invested in Uber and thus has access to useful, confidential information about the ride-hailing business; Google has the best mapping solutions in the world, the most advanced automated driving solutions and the first vehicles designed from the ground up to be autonomous. It’s hard to imagine any company that’s better poised to capitalize on this opportunity to break Uber’s impending monopoly.

However, as Benedict Evans notes, self-driving technology will commoditize. Given that Google is financing most of the R&D and their history with Android, it’s probable that Google wants to commoditize autonomous vehicles. At some point, it will not make sense for a single corporation to finance tens or hundreds of billions of dollars of assets. Rather, banks or public markets should finance these assets. It will be interesting to see.

P.S. Google named “Google Drive” a little bit too soon.

The Power of One

Over the last two years, I’ve learned an incredible amount about… well everything. Hiring, firing, raising money, selling, marketing, etc. But the most important thing I’ve learned is more meta than a specific functional area, tactic, or unique challenge. Rather, the most important thing I’ve learned is how to manage my time and the company’s priorities.

Jason Cohen from WP Engine does an excellent job explaining this idea with a specific emphasis on growth. But he’s right. A startup can focus on only one priority at a time. I didn’t absorb the magnitude of this statement until recently. But it’s really true. The business has to have a single, unilateral, unwavering focus, and everything in the business should be aligned around that. The opportunity cost of focus is tremendous. A single goal aligns the entire company and provides clarity to everyone.

What I’m proposing here isn’t novel. It’s just focus. But focus isn’t enough. Focus is ambiguous and soft. “One,” on the other hand, is concrete. There can only be one “one,” as the name would imply :).