Beakers of cryptocurrency coins
Illustration: Christopher T. Fong/Protocol

Crypto is bringing science back to venture

Protocol Pipeline

Hello, and welcome to Pipeline! This week: inside a16z’s crypto research strategy, avoiding the “winner’s curse,” and understanding Web3’s protocol wars.

The earliest stage of it all

Andreessen Horowitz’s move to create a research lab is part of the trend for investors to move earlier and earlier in the technology life cycle. Why wait for a startup to form when you can invent the thing that makes that startup possible?

The old model of large, quasi-academic research arms within companies has generally faded — and even with a16z’s resources, it would be tough to see how it could fund something like those. Instead, it’s modeling the a16z Crypto Research Lab on newer approaches like OpenAI and Alphabet’s DeepMind, with the goal of building open-source software and publishing discoveries that address tough crypto industry challenges.

Some VCs dismiss research-driven startups as “science projects.” That’s not how a16z looks at things.

  • The modern tech industry had its origins in solving hard technical problems like the semiconductor. In recent times, venture capitalists have typically been less interested in funding academic research, instead waiting to invest until an idea has a clear business use and outcome. But things have changed.

The venture landscape, especially in crypto, is more competitive than ever. Firms are raising billions, and capital is not always enough to win a deal.

  • Venture firms have been trying to invest earlier in a startup’s development: incubating startups, creating studios and even funding founders with just an idea.
  • Academic research is different. It’s about tackling broader, industrywide problems, often before there is a commercial use for the solution. But innovators tend to find ways to use them. Bell Labs is where the transistor emerged, and SRI gave us everything from the mouse to Siri.
  • Andreessen Horowitz has distinguished itself with a built-out services arm, providing help with everything from product design to recruiting. As other firms copy that approach, having its own research lab helps differentiate it. The research lab will help a16z portfolio companies through relevant research, but more generally, it could give the firm a halo effect in the eyes of founders.

There’s also the reality that Web3 and crypto are so highly technical that deep academic research makes sense. Unlike, say, semiconductors or networking technology, academia’s barely gotten a chance to delve into all the complexities of the blockchain.

  • It’s not unprecedented. Other firms with a focus on highly technical sectors have linked up with academics. Lux Capital has had a scientist-in-residence, and many of its companies work in technical areas and deal with academic disciplines, said Bilal Zuberi, a partner at Lux.
  • “Building capability in-house to bridge links across cutting-edge researchers, encouraging futuristic views while rooting deeply in science and tying publications and patents to commercial narratives is emerging as a key role for early investors,” Zuberi said. “So I am not surprised if more firms follow our footsteps and build more extensive in-house research and research-support organizations.”
  • Other crypto funders are making efforts in deep research. Paradigm, founded by former Sequoia partner Matt Huang and Coinbase co-founder Fred Ehrsam, has a large research team and engineers working on large crypto challenges that sound similar to what a16z’s team wants to tackle.

It’s increasingly clear that crypto startups simply can’t solve large problems like consensus mechanisms, Layer 2 scaling or next-generation NFT marketplaces by themselves, a16z’s Ali Yahya argues. So that calls for experimentation. Maybe the ultimate science project here is discovering what the VC-backed research lab of the future looks like.

Overheard

Sheel Mohnot has a new term for VCs’ herd-following behavior: “VERY common in this market: VC’s are waiting for other signal &/or trying to get a deal. There is a term for it: SHITS. Show High Interest Then Stall.”

People are still moving to Miami, “Chaos Monkeys” author Antonio García Martínez reports: “Guy just walked into this Venezuelan cafe in Brickell wearing a Y Combinator MAKE SOMETHING PEOPLE WANT shirt. I’m calling for a total and complete shutdown on California immigration to Miami until we figure out what’s going on.”

Jeff Richards open sourced” an in-house discussion at GGV: “‘This is going to be a very rough year. Arguably the roughest year since the [Great Financial Crisis]. Markets, geopolitical uncertainty, pandemic ending/not ending, elections, etc.’ Could be wrong. But a lot of smart animals [are] taking shelter.”

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Inside track

Paul Griffiths broke down Jared Kushner’s private equity fund pitch deck.

Just like past fights over technical standards, there will be winners in the Web3 protocol wars, says Tomasz Tunguz.

VCs can avoid the “winner’s curse” and make better decisions, Don Moore and Max Bazerman write in the Harvard Business Review

Need to know

Plaid co-founder William Hockey, who left Plaid as CTO in 2019, launched a fintech-focused bank called Column. He had previously bought the small bank for $50 million and “gut-renovated its operating systems.”

Stage is a new firm that buys out series A startups where growth has stalled. Other firms like Xenon Ventures also do this.

Venture funding slipped in Q1 2022. A drop in deals over $100 million, driven by public markets, weighed on the industry numbers.

From Protocol: Intel calls its AI that detects student emotions a teaching tool. Others call it “morally reprehensible.”

Your weekend reading: For mRNA, COVID-19 vaccines are just the beginning. HIV, Zika and more are in the pipeline.

A MESSAGE FROM PwC

ProEdge can help you conduct a skill gap analysis across your organization and gain insights you can leverage to develop forward-looking plans while taking into account the needs of the entire enterprise, including individuals, teams and functions. In an M&A scenario, an upskilling program like ProEdge can also be used to uncover employees’ skills that weren’t utilized before

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