February '21 in Silicon Valley

SPACs and Crypto; the passion economy; Dispo; Twitter regains their mojo

Welcome to Silicon Valley Outsider, a newsletter for aspiring startup founders and investors who live outside the SF Bay Area.

🍎 Quick Bite of the Week: Coinbase (cryptocurrency exchange startup) has filed to go public at an >$100B valuation. Here’s the pitch deck they used to raise a Seed round in 2012.

✨What’s (not so) new in Silicon Valley

  • Hype Begets Hype: David Dobrik is a mega-famous YouTube star — and now the founder of a venture-backed startup worth $200 million. His company is Dispo, a new camera app that helps its user stay in the moment by not allowing editing, and forcing users to wait until the next morning for their pictures to “develop.” Dobrik’s fame and influence is a huge reason it has succeeded. (It’s really, really hard to compete with someone who has their own audience of millions of people, reachable at any time, for free.)

  • Next-Gen VCs: Li Jin is an a16z alumna who coined the term “passion economy” to describe the tools that enable creators to earn a living doing what they love — think Substack, Patreon, and Shopify — and recently created her own VC fund dedicated to that idea.

  • Big Companies Moving Fast: Twitter has historically been maligned as a Silicon Valley behemoth resting on their laurels, but the company regained its product innovation mojo. In just the past month, they have acquired Revue, a newsletter service startup that competes with Substack, released a Super Follow feature to fight against Patreon, and started rolling out an audio-chatroom product called “Spaces" to compete with Clubhouse.

💭 Pop Goes the Market?

The biggest story in Silicon Valley this month has been the next financial bubble: whether it exists, when it will pop, and how much of the world’s economy will come crashing down with it if it does.

Most people in Silicon Valley are convinced that we are indeed living through a bubble.

A “SPAC” is a Special Purpose Acquisition Company, or a simple (and cheap) way for private startups to go public.

Silicon Valley has railed against the normal way for companies to go public — Initial Public Offerings — since time immemorial. Traditional IPOs are slow, highly regulated, and costly to companies due to systemic underpricing.

SPACs, in contrast, are simple and come with a substantially lower cost of capital. (At least for now.) The basic SPAC model works like this:

  1. Investors raise money to create a “blank check” company, whose sole purpose is to merge with a (to be identified) startup

  2. The blank check company (the “SPAC”) goes public

  3. The publicly-traded SPAC searches for private startups that are looking to raise money and become public companies

  4. Once they find a match, the SPAC merges with the startup, and — viola! — the startup is now a public company

(The full process is slightly more complicated, including a step where the SPAC and the startup go out to raise money together.)

The SPAC model is clearly enticing. In just the first two months of 2021, 189 SPACs have gone public, raising about $300 million on average in the process — which compares to just 59 SPACs (avg. $230M) in all of 2019. And, as if that sheer volume wasn’t enough, SPACs have escaped from Wall Street:

Crypto is similarly hype right now, but there’s one key difference: everyone knows there will be a crash, and it’s just a question of magnitude and timing.

We’ve seen this story before: four times, to be precise.

(Source: Coinbase S-1. Note that the y-axis is on a log scale.)

The price of Bitcoin skyrockets, growing multiple orders of magnitude in months, then crashes. As risky as it is to say so, however, this time feels different.

  1. Wall Street is starting to take crypto seriously. Many of the world’s biggest names in finance — Blackrock, Goldman, JP Morgan, Citi, etc. — have announced crypto financial products, issued $100,000+ target prices for Bitcoin, or both.

  2. Real companies are starting to invest: Tesla bought $1.5 billion of Bitcoin (and Elon Musk tweeted up a storm afterwards).

  1. The last crypto boom and bust had folks speculating on the purchase of digital kitten collectibles; this time, the same blockchain company has partnered with the NBA to sell collectible highlights. (A few have sold for >$100,000.)

But beyond all of that, Bitcoin has now proven that it can survive crashes. This fact has not gone unnoticed. We’re now at a stage where there is a non-negligible chance that a major world government will adopt a digital currency — my bet is that China does it first, but in a weird way that prompts other governments to create “the real thing” in response.

My takeaway is that the hype around SPACs and Crypto are short-term overreactions but long-term underreactions.

Some SPACs will fail and Bitcoin will crash. But the influence of both on the global economy will linger through the rest of the decade.

The IPO system was in desperate need of some competition. There are real use cases for crypto, including everything from serving as currency hedges for Fortune 500 balance sheets to helping consumers combat hyperinflation in failed global economies.

And, when there are long-term use cases, there are long-term business cases to be built. That’s the lesson that folks often forget about the dot-com boom. Yes, it was an overreaction in the short term. But even at its peak, it massively underestimated the long-term value of the internet.

🌍 The Outsider in February 2021

On January 1st, I had 128 subscribers. Today, there are 202 of you! Thank you so much for tuning in.

My posts:

  • Uncanny Valley: A review of Anna Wiener’s beautiful, honest memoir that details her life working for Silicon Valley startups

  • Here Comes the Boom: An overview of the diverse set of startups building next-generation supersonic airplanes

  • What is Silicon Valley?: My take on what makes this place special. Spoiler alert: it’s the people.

My most-clicked links: