Build pyramids, not casinos
Principles of picking founders and companies in a hyper speculative market.
With each cycle the very nature of the crypto economy changes and expands. What started with idealistic cryptographers caught fire in libertarian circles before scammers, speculators and Wall Street started dominating the space. The drivers of such shifts are obvious: increasing wealth gaps and massive currency devaluation motivate people to lean into speculation. They want to catch up. Technologists jump on the (pretty large) opportunity by leveraging crypto technology. The broad based ethical erosion of the industry left us with over-funded incrementalism, the highest scam per capita quota of all industries and a pretty bad public reputation.
Yet, at Inflection we are of the belief that some of the most important technologies of the 21st century will be developed out of this vibrant idea-melting pot. Our LP Chris Dixon is dividing the industry into the casino and the compute camp. We identify strongly with the latter and believe to be in the early innings of creating a universal state- and time machine that will empower humanity to find truth and document history like no other tools before - besides democratising finance and data ownership.
We are not here to fight ethical battles and swim against the current. We hare here to tune down the noise and spot the signal - people who are building things to last. Here are some simple filters we apply to find them:
1/ novel ideas
We are not interested in incrementalism. The companies we back typically do something fundamentally novel or different. Funding high risk pioneers making a dent into the universe is our raison d'être. Greatness doesn't come from companies following playbooks or companies that fit themselves into boxes - we stay away from those.
2/ obsession, purpose
We try to find founders who are obsessed with a problem for a long time - either through their own experience dealing with it or through previous (failed) attempts of solving it. Without a deep sense of purpose founding teams won't survive the incredible pain the market is going to expose them to. People can move mountains if they just care enough. Purpose increases mental resilience like nothing else.
3/ resilience
Besides purpose, previous hardship makes founders more resilient, it’s like muscle memory and puts things into perspective. We actively seek to work with founders who have been through the ups and downs of life (and crypto cycles) before and got on their feet after defeat.
"I don't know how to do it [but] for all of you Stanford students, I wish upon you ample doses of pain and suffering. Greatness comes from character and character isn't formed out of smart people, it's formed out of people who suffered."
Jensen Huang, CEO Nvidia
4/ skin in the game
We play infinite games and expect our founders to do the same. We are not here to win zero sum competitions but to survive long enough to see the compounding results of our work come to fruition. Locking up financial resources (high opportunity costs, low salary, long vesting) and social capital (hiring long term co-workers, taking investment from friends & family) are strong proxies for that. Skin in the game drives accountability and accountability drives greatness. Burn the boats!
5/ build first, narrative second
Some of our peers have been making the case for narrative investing in crypto. Hire a team, create a narrative, launch a token, dump it on retail, repeat.
Here is an elegant playbook:
Such an approach is fundamentally at odds with what we would like to achieve with Inflection - building things to last. Early liquidity for funders and founders incentivise laziness, reduce productivity by distraction and create a lack of accountability. Strong narratives are a necessity for every business to attract capital, talent and customers but they should be a means to an end: the creation of a differentiated product or service. Narratives without fundamentals are vapourware propaganda and will collapse sooner or later.
6/ tokens as distribution tools, not products
In principle we disagree with the idea of tokens being products. A product is characterised by providing some kind of utility to its owner like a pair of (virtual) shoes, a piece of software to write blog posts, IP Rights and data attached to an NFT etc. Tokens that are merely representing ownership in a network or access and governance rights are not a product; they are are a distribution and loyalty tool. Focusing on the attraction of attention and liquidity towards a token without a clear path to how it can be embedded into an actual product is a red flag for us.
Short term speculation is a powerful tool to drive innovation and experimentation but it isn’t sustainable and comes with extremely high opportunity costs for the entire space. At Inflection we play infinite games and build things to last. Join us.
Yes!!!