Will Reality Have Its Revenge on Andreessen Horowitz's Giant New Crypto Fund?
We are in the midst of a brutal downturn in equity markets, in large part because inflation has pushed the U.S. Federal Reserve to tighten interest rates. The impacts have been particularly sharp for "growth" or "innovation" assets, including predominantly technology-focused equities such as Tesla (TSLA), which is down a brutal 42% since early April. Tesla is also representative of many such entities' reliance on an ambitious, even hyperbolic, narrative delivered by a charismatic figurehead.
Yet, in the midst of all of this, the venture capital fund Andreessen Horowitz (a16z) is making huge new bets on swing-for-the-fences innovation and charisma-driven narratives, this time in cryptocurrency and blockchain.
On Tuesday it was reported that a16z led a $70 million funding round for a new startup from disgraced former WeWork founder and CEO Adam Neumann. The project is a blockchain service called Flowcarbon, which will purportedly sell, trade and track carbon credits. This morning, a16z also announced a new $4.5 billion crypto and blockchain investment fund.
This funding round feels like news from an entirely different era. In fact, it's quite likely the raise was well underway before economic conditions got as bad as they are now. Because while Neumann has proven extremely good at generating hype and press, he has never really delivered the only thing that will matter now that interest rates are ticking up: actual net revenue, aka that long-forgotten performance metric known as "profit."
As a brief review, Neumann started a company called WeWork in 2010, taking advantage of a post-Great Recession real estate downturn to enter long-term leases on office space and then sublet small units to startups and contractors. Many observers pointed out that this model was fraught with risk and might not make sense in the long term.
Those skeptics were vindicated in 2019 when WeWork attempted to go public: Both the broad financials and details of the WeWork operation were so damning the IPO (initial public offering) was canceled and Neumann was pushed out as CEO. Investors lost billions in paper value, making for one of the most catastrophic business failures of the past decade.
In retrospect, it was a preview of the wave of collapses we're seeing right now in overleveraged bets on the future. The Dow Jones Industrial Average (DJIA) is down a punishing 14% from its coronavirus pandemic-frenzy peak, but that's nothing next to the carnage in tech. Chamath Palihapitiya's flood of SPAC (short for special-purpose acquisition company) offerings are down 70% from their peak. Cathie Wood's ARKK Innovation exchange-traded fund is off 60%. Netflix (NFLX) stock has dropped 73%, Uber (UBER) 56% and Coinbase (COIN) 81%.
The common thread here is these are money-losing or barely profitable operations focused on building things that might make money in the future. For most of a decade, such companies have been able to stay afloat because borrowing was very cheap and there were few better options for investors. But as safe investments start generating even marginally higher returns, borrowing will become harder, more expensive and impossible for the least profitable growth companies.
Of course, it's not all about cheap money. To get people to keep loaning you capital you have to tell them a compelling story about what you're going to do with it. This, for instance, has been the key to success for Tesla stock, with CEO Elon Musk's cult of personality helping drive the stock's price-to-earnings ratio as high as 688-to-1, according to Ycharts. A stock with a P/E ratio of 20-to-1 is generally considered expensive.
Neumann's Flowcarbon falls squarely in the "speculative bets" bucket. A blockchain service for tracking carbon credits is not an entirely meritless idea. It seems reasonable to think that more countries may implement or expand carbon credit systems over the next decade or two, and at least superficially it's the sort of transnational problem where a trustless blockchain could actually be useful. But there are a lot of unknowns along the path to that future – and even if it happens, Flowcarbon will have competition from similar projects like KlimaDAO.
So it seems likely that Neumann himself was central to the fundraise, which also includes an ongoing private token sale. But why is that, if he's such a notorious screwup as a startup leader and has zero experience relevant to blockchain? One thing to remember is that a good portion of the Flowcarbon funding was likely negotiated before the extent of the ongoing meltdown in equity markets was quite clear. Backers may have thought they were still playing by the rules of the 2010-2021 market, when a charismatic face like Neumann's was enough to drive an upbeat narrative and gas up asset prices.
But that might not be true anymore as real profits rapidly become the main priority for many investors, both in crypto and equities. That's a crucial consideration as a16z prepares to deploy its new $4.5 billion crypto venture fund because so few crypto companies or protocols can rightly be considered "profitable." In fact, because they effectively print their own internal scrip, it can be very difficult to even determine what actual "profit" is for a blockchain project.
Tezos co-founder Arthur Breitman pinpointed this issue on a recent episode of Bloomberg's "Odd Lots" podcast, using the metaphor of a small town. Many blockchains, he suggested, are like towns that have lots of internal economic activity, such as restaurants to serve locals (aka ecosystem users). But, Breitman argued, what really matters is whether a chain or service has external demand for its services from people or entities who don't already "live" there – what in the "town" metaphor would be considered "exports."
There's a much longer conversation to be had, then, about what exactly constitutes a blockchain "export." Big blocks of tokens sold to speculators certainly shouldn't count, though some blockchain entities do treat those sales as conventional revenue. NFTs (non-fungible tokens) are the most straightforward example of an export, at least when they're being bought for personal collecting instead of speculation.
But one thing is clear: Crypto operations won't be able to skate by on printing their own money for much longer. They'll have to figure out how to actually earn some – and it's not clear that's in Adam Neumann's wheelhouse – or, for that matter, a16z's.
– David Z. Morris
