David Gardner is an angel investor and the founder of Cofounders Capital in Cary
I am often asked why we don’t invest in cryptocurrencies or technology ventures based on the success of such currencies. We certainly see enough of them. We tell our presenting crypto entrepreneurs that our fund thesis centers around value creation i.e. demonstrable better, faster cheaper solution and unfortunately, crypto companies create no such value. In fact, they don’t make anything. The crypto buyer’s only upside is the hope that someone else will think that their bits are worth more than they did when purchased.
The reasons we avoid crypto are, however, more complex. To start with, we fear pending government regulation. Governments don’t tend to deal kindly in the long run with businesses and transactions that can’t be audited and taxed properly. Many early crypto-based commerce businesses were actually shut down by the FBI because of the rather nefarious tax-free business transactions they were facilitating. When Warren Buffet was asked if the success of crypto had changed his investing strategy he jokingly replied, “Yes...we no longer invest in people who make those little briefcases that used to be used for laundering money!”
Equally important is a government’s ability to control inflation via it’s control of the money supply. I can’t see the Federal Government just rolling over and giving up these powerful tools once those in government fully understand the consequences of privately controlled currencies. I’ve seen businesses legislated into oblivion and can tell you that there is no new sales or marketing strategy that can save your business from this kind of torpedo in the night.
For clarity, we are big believers in the future of digital currency. In a world where it costs two cents to make a penny (seven to make a nickel) and paper money is constantly wearing out and having to be reprinted, the rise of digital currency is a sure bet. If our cell phone manufacturers were working together rather than competing with each other to be “the digital currency”, we would all be using our phones today rather than our wallets for every purchase. The real question is, will private industry control and regulate the money supply or will the central government? Knowing that digital currency is in all of our futures, some major retailers are experimenting now by accepting various crypto as tender, but I would not interpret this as an endorsement of any particular private cryptocurrency.
By the same token (no pun intended), I’m a big believer in blockchain technology, although we are tired of seeing it as the buzz-word underpinning every business plan we evaluate these days. It most often only serves as an overly elaborate and expensive architecture to a simple business problem but there are some applications for an elegantly secure and anonymous distributed ledger. We find ourselves constantly reminding entrepreneurs that blockchain is a technology and not a business plan.
As early stage software investors my team and I are more comfortable than most with calculated risk but the private industry’s long term control of cryptocurrency is a magnitude beyond what we would consider acceptable risk. We have confidence in our ability to help our portfolio companies navigate typical business challenges but we would be helplessly exposed in the face of a government mandate to cease and desist.
I’m impressed by those who can make money timing a market but that is the art of a day trader not a venture capitalist. No doubt, money is being made in crypto today just as it was in subprime lending a few years ago but eventually, the music will stop, someone will be left holding the bag and some kid will point out that the emperor is not wearing any clothes.
