Y-COMBINATOR
Hello everybody! This has been a wild few weeks. I’ve been busy with the YC W21 startup batch ahead of Demo Day on 3/23. There are now 233 publicly announced, and I’ve heard rumors there are even more, making this by far the biggest batch ever. Out of these, I reached out to twenty startups, and will probably end up running syndicates for about eight of them on DVC.
Here are a few trends I’ve noticed:
Startups outside the U.S. continue to grow their share of the class and are now a slight majority (51%). India has been hot for the last few years, and LATAM and SE Asia are especially prominent in this batch. A note for investors - most intl YC companies organize as a Delaware C corp to attract more investment.
The front-running trend continues to move earlier, with many startups engaging with investors 3 or 4 weeks ahead of Demo Day, and some closer to 8-10 weeks ahead. For many YC startups. Demo Day marks the end of the investing cycle rather than the beginning.
Rounds with multiple tranches at escalating valuation caps are ever more common. I don’t love the trend, although in some cases it’s partially justified by the rapid growth of the company during the 12 week YC period. For example, you might see an overall raise of $1.5M, with the first $500K at a $7-$10M valuation cap, and the last $1M is at a $12-$15M valuation cap. Designed to create FOMO, and quite effective.
Fintech is very popular. There are no less than four startups in this batch pursuing an offline version of Affirm (buy now pay later), and a healthy number of “Plaid for X” and “Stripe for Y” as well. Other popular sectors include dev tools, B2B SaaS, supply chain / e-commerce, biotech, online education, and AI infrastructure.
There were a lot less blockchain startups than I expected, which leads me to…
NFTs
NFTs (non-fungible tokens) have dominated the financial news cycle for the past two weeks, across the art, music, and video domains. Dapper Labs, which powers NBA Top Shot for collectible sports clips ($230M in GMV), raised a huge round at a $2B valuation. Beeple, one of my favorite Instagram artists, sold an NFT for a record $69M through Christie’s.1And Kings of Leon sold $2M worth of their NFT album.
NFT’s use blockchain technology, so let’s start there for context. A blockchain is a decentralized database that stores transactions in a way that is designed to be immutable, also sometimes referred to as a peer to peer ledger. Blockchain facilitates many great use cases that drive efficiency and cut costs (smart contracts for supply chain, home closings, foreign exchange). But cryptocurrency, in my opinion, hasn’t been one of them. Over the last decade, Bitcoin has failed to deliver on its initial potential to be a medium of exchange at scale (too slow), a stable store of value (too volatile), or anything else resembling a “currency”. It also replaces one problem (central banks devaluing fiat money) with another one (fraud and hacking that happens not on the blockchain itself, but on the exchanges and digital wallets that hold Bitcoin). And none of Bitcoin’s challengers have done any better.
Yes, I am a crypto-currency bear, which is not an easy thing to be these days.
BTC chart, which doesn’t care about my opinions:
Cryptocurrency is at worst, a bubble. Bitcoin has utility, I just don’t happen to think the price reflects the utility. I do, however, respect that it’s attractive to many people as a philosophical symbol of rebellion against centralized power, which is a topic for another post.
NFTs, on the other hand, are, so far, primarily a toolkit for committing fraud.
NFT’s are tokens traded on the blockchain with metadata (including a pointer) for some other media. It could be art, music, sports trading cards, and so on. They’ve been heralded as the next great innovation for the creative industry, and are bought and sold using cryptocurrency. I think of them as meta-tokens, because they’re using fungible tokens (cryptocurrency) to pay for other non-fungible tokens on the blockchain.
I’ve browsed through many NFT marketplace sites and articles2 on the topic.
They all say that you own something, and imply that the thing you own is the digital item that the token points to. You don't. You actually have a very limited license from the copyright holder. It’s non-exclusive and for non-commercial use only, so the copyright holder can continue to monetize their work.
They all say it’s guaranteed to be a unique type of right with respect to the underlying work (or limited supply, for NBA Top Shot). But the copyright holder could easily put two NFTs for the same digital item on two different blockchains and thereby sell it twice.
By focusing on the authenticity of the token transaction (i.e. future resale), they obscure the fact that the original “minting” of the NFT for a particular work includes no process for verifying proof of ownership. Already, complaints are starting about artworks being sold as NFTs without the permission of the copyright holder. And in some cases, there isn’t even proof of authenticity on future resales because the underlying artwork itself isn’t always hashed onto the blockchain.3
Here are some quotes from the top NFT sites:
“Buy, sell, and discover rare digital items” (https://opensea.io/ )
For the first time, you can own the NBA's most jaw-dropping highlights: nbatopshot.com (https://www.dapperlabs.com/)
Every night, an NBA star does something so amazing you need to watch the highlight on repeat. Now you can make those plays yours, all officially licensed by the NBA and minted on the blockchain in limited supply. (https://www.nbatopshot.com/about)
Nifty Gateway is the premier marketplace for Nifties, which are digital items you can truly own. (https://niftygateway.com/)
Now let’s take a look at the underlying terms of service:
NBA Top Shot TOS (Sec. 4) (emphasis added):
(v) User License to Art. Subject to your continued compliance with these Terms, we grant you a worldwide, non-exclusive, non-transferable, royalty-free license to use, copy, and display the Art for your Purchased Moments, solely for the following purposes: (a) for your own personal, non-commercial use; (b) as part of a marketplace that permits the purchase and sale of your Purchased Moments, provided that the marketplace cryptographically verifies each Moment owner’s rights to display the Art for their Purchased Moment to ensure that only the actual owner can display the Art; or (c) as part of a third party website or application that permits the inclusion, involvement, or participation of your Purchased Moment, provided that the website/application cryptographically verifies each Moment’s owner’s rights to display the Art for their Purchased Moment to ensure that only the actual owner can display the Art, and provided that the Art is no longer visible once the owner of the Purchased Moment leaves the website/application.
How can it be non-exclusive and non-transferable if the whole point of the NFT is that it’s unique and you can resell it on an exchange? Because the token is what the buyer owns. And that’s just a number on the blockchain with some metadata attached to it. The token provides no ownership in the copyright for the digital work referenced by the metadata, and only a limited right to display the work for non-commercial use. Want to create a museum of your image NFTs and charge entry to virtual guests in the metaverse? You can’t. Want to buy some NFT albums and then stream then to the public on your website? Nope. How about including NFT video clips on a site where you run banner ads? Sorry. The one and only thing you can do with it, per subsections (b) and (c) above, is put it on a marketplace to resell to somebody else.
It’s interesting to contrast this with the CryptoKitties terms of service and see how things have evolved. CryptoKitties was one of the earliest NFTs. Dapper Labs powers CryptoKitties, and also powers NBA Top Shot, so the NBA Top Shot license was adapted from the earlier Dapper Labs licenses. For CryptoKitties, Dapper Labs provided an express carveout for $100,000 of commercial use in Sec. (3)(c)(ii) here.
Now let’s take a look at the major resale marketplaces like Opensea, Nifty Gateway and Rarible. They all expressly disclaim any guarantee of the commonly understood principles of NFTs in their terms of service.
Nifty Gateway is an administrative platform that facilitates transactions between a buyer and a seller but is not a party to any agreement between the buyer and seller of Nifties or between any users. (https://niftygateway.com/termsofuse)
There can be no guarantee or assurance of the uniqueness, originality or quality of any Collectible or Collectible Metadata. In the absence of an express legal agreement between the creator of a Collectible and purchasers of the Collectible, there cannot be any guarantee or assurance that the purchase or holding of the Collectible confers any license to or ownership of the Collectible Metadata or other intellectual property associated with the Collectible or any other right or entitlement, notwithstanding that User may rightfully own or possess the NFT associated with the Collectible. (https://static.rarible.com/terms.pdf)
OPENSEA IS A PLATFORM. WE ARE NOT A BROKER, FINANCIAL INSTITUTION, OR CREDITOR. THE SERVICES ARE AN ADMINISTRATIVE PLATFORM ONLY. OPENSEA FACILITATES TRANSACTIONS BETWEEN THE BUYER AND SELLER IN THE AUCTION BUT IS NOT A PARTY TO ANY AGREEMENT BETWEEN THE BUYER AND SELLER OF CRYPTO ASSETS OR BETWEEN ANY USERS.
YOU BEAR FULL RESPONSIBILITY FOR VERIFYING THE IDENTITY, LEGITIMACY, AND AUTHENTICITY OF ASSETS YOU PURCHASE ON OPENSEA. NOTWITHSTANDING INDICATORS AND MESSAGES THAT SUGGEST VERIFICATION, OPENSEA MAKES NO CLAIMS ABOUT THE IDENTITY, LEGITIMACY, OR AUTHENTICITY OF ASSETS ON THE PLATFORM. (https://opensea.io/tos)
Lest you think I’m an NFT hater, I do appreciate that there are very creator-friendly NFT platforms in the art sector (deep dive here - see, e.g., Cryptograph), including those that share profits from future transactions with creators. But that doesn’t change the risks for buyers and sellers. We shouldn’t conflate a desire to support great artists, which anybody can do with donations or purchases of physical / digital media, with support of inaccurate advertising designed to benefit the cryptocurrency and tech sectors.
NFTs are a fascinating effort to use the blockchain to create digital scarcity for the arts. But the marketing needs to be overhauled and the press needs to dig deeper, because there is going to be a backlash when people figure out what they’re buying.
I’m not the only person to notice these issues, but our voices are lost in a sea of hype. Here are some other good articles on the topic:
https://davidgerard.co.uk/blockchain/2021/03/11/nfts-crypto-grifters-try-to-scam-artists-again/
https://www.cameronhuff.com/blog/crypto-kitties-nft-license-v2/index.html
https://fortune.com/2021/03/10/are-your-nfts-on-the-wrong-blockchain/
https://medium.com/geekculture/why-im-not-investing-in-nfts-yet-75a87f3b6acc
The party will certainly continue in this bullish market, because the bears are still hibernating.
Bears
Bearish sentiment is very low, and with a $2T stimulus coupled with low interest rates and fast vaccine rollout, will probably remain so for a while.
The CBOE put/call ratio is also on the lower side of averages, although not at historic lows.
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