DIFFUSION OF INNOVATIONS

Blockchain Coinvestors Newsletter

Vol. 3, No. 17, August 2021

DIFFUSION OF INNOVATIONS

September is shaping up to be a busy month for us at Blockchain Coinvestors with the next closing of our open fund of funds, the launch of our new early stage token vehicle, and other projects underway. As always, let us know if you want to participate or learn more by just emailing us directly or at ir@blockchaincoinvestors.com.

Meanwhile, August has given us time to reflect on where we are with blockchain global adoption. Partially in preparation for our investor annual meetings which took place last week. Partially, because the summer months often seem to be a good time to stand back and see the big picture.

So this week in our newsletter we summarize the BIG SO WHAT of the diffusion of the blockchain innovation.

THE BIG SO WHAT

From a diffusion of innovations theory perspective, blockchain now has critical mass and is moving towards the steepest part of its adoption curve. As investors, it's not too late to catch the big ramp up.

DIFFUSION OF INNOVATIONS THEORY

Alison and Matthew first met the 'Diffusion of Innovations' theory while studying as undergraduates at Cambridge and Oxford respectively.  Everett Rogers had written his classic book on the topic the year they were both in nappies, but it had aged well. The concept was a simple one.

Innovations diffuse through a population in stages based upon the influence of four main drivers:

  • The innovation itself;

  • The modes of communication;

  • Time and;

  • The social system within which it is getting traction.

The process is itself driven by human capital and diffusion dynamics. For an innovation to become self-sustainable, it needs to be widely adopted, and there is a point of critical mass after which the innovation will enter its steepest period of growth as it reaches the largest possible audiences of users.

Rogers made a very useful categorization of users by the stage within which they trial, use, and then firmly adopt the innovation. He named them:

  • Innovators

  • Early adopters

  • Early majority

  • Late majority

  • Laggards

The steepest part of the innovation adoption curve (S Curve) occurs as the early majority starts coming on board in large volumes

The following exhibit summarizes Everett Rogers' view on the adoption through the population.

As strategy and innovation management consultants at places like Booz, Kearney, McKinsey, and Monitor we found the model simple, usable, but most importantly - accurate.

Let's demonstrate by turning to the diffusion curve for the largest global innovation that we have collectively lived through - the Internet.

PAST IS PROLOGUE: THE INTERNET

It was around 1986 that Alison and Matthew first learned about the Internet. As students at Stanford Graduate School of Business, we were made to log into the mainframe at the business school to bid for classes. The screens were black and green. The interface text only. It was painfully slow. But it worked. Most probably because the future founders of Cisco were working at that time in the IT department at Stanford experimenting with the TCP/IP protocol to enable this type of digital communication.

A handful of years later, around 1990, Matthew worked on the 'What to do about Prodigy?' project for Sears while at McKinsey. Few had heard of Prodigy, and even fewer knew what an Internet ISP was. But the concept of dialing up and accessing the world's information was so compelling that our household became early AOL users and advocates, and we invested in AOL as soon as we were able. Soon after, while working with Bank of America rolling out bankamerica.com we met Omid Kordestani who was pitching netscape to enable search and more lightbulbs went on. We invested in Inktomi but missed Google.

By then Internet adoption was still in the world of Early Adopters. It was beginning to work, but most of the world did not see its power. Many were actively trying to resist it or at least were in denial. We worked on many client projects in the nineties with Kearney in which the sole objective of the project was to convince the executive team and the board that electronic commerce was a reality and that it could be applied to the client's own business.

By 1999, the dotcom boom was in full force, and there was clearly massive value capture occurring as new dotcoms raised ever larger sums at higher and higher valuations. Here is the cover of Fortune that summer.

In the case of Fortune, they chose to feature Yahoo which at that time was on top of the world. Of course, success was not assured. As with all enabling technologies, not all start-ups will succeed. Indeed, even if the innovation is widely successful, the old venture capital maths typically still apply with more failures than successes, but with a small percentage of outcomes being 10x and better driving very high average returns. Diversification is a requirement to play as an investor in early stage technology.

Forbes took a slightly different approach. Arguing that the Internet was now with us for the long term and that the winners were beginning to be apparent. They called them 'Masters of the New Universe' on their cover. In retrospect they captured quite a few of the best ones in their photoshoot including Jeff Bezos.

It is easy to look back in hindsight and see that Everett Roger's model was playing out perfectly. By 1999:

  1. Innovation. The Internet innovation had proven itself to be competitively advantaged over traditional ways of doing communications. Real time, low cost communication was a global reality and paper could not compete - nor could version 1 digital communications like radio or faxes.

  2. Modes of Communication. Importantly, while traditional communication channels like Fortune and Forbes were all talking about the Internet and its power, the innovation had itself turned the entire world (or at least the 400 million or so people at that time online) into a global echo chamber.

  3. Time. It was at least 10 years since the first powerful commercial applications had been built on top of TCP/IP and that had allowed the momentum to build.

  4. Social System. People were using the Internet as a cool conversation starter, and the proverbial New York taxi cab drivers were all talking to their passengers about it.

However, in 1999 we had only just begun to climb the Internet power curve of adoption. In Rogers' model, you can see that with only 400m people online, we were not yet into the Early Mover phase. Those of us who were buying online were still the Innovators and Early Adopters.

Of course, success was not that clear. In 1999 it was confusing, chaotic, and there was resistance everywhere. Let's not forget examples like:

  • Powerful government voices arguing that the Internet should be banned because of the widespread use of the Internet for porn and dark activities

  • Leading corporations arguing that electronic commerce should be banned because of the high credit card fraud rates

  • Content based industries trying to slow down adoption by suing disruptive companies that were moving content online

  • Everyone arguing for new regulations and/or the application of old regulations that had not been built for a digital age that was coming fast

  • CEO's arguing that at best this was a bolt on website (clicks and mortar) rather than something that would transform their core businesses

  • Etc.

But we all know what happened next. Today we have about 5 billion people online, every industry and every business has been transformed by digital communications, and all of the world's most valuable companies are Internet based innovators like Alphabet, Amazon, Apple, Facebook, and Microsoft to name but the top 5 most valuable companies by market capitalization.

GLOBAL BLOCKCHAIN ADOPTION CURVE

What does all of this have to do with blockchain?

Past is prologue. The blockchain protocol is rolling out just like the TCP/IP protocol did back then.

Consider.

  1. Innovation. The innovation has proven itself to be competitively advantaged over traditional ways of doing commerce. Just as one example, you can now transfer money in almost real time at almost no cost to anyone in the world. In comparison, a bank wire still takes 3 to 5 days to clear and if you send $100 abroad, the bank will take at least $25 of it in fees.

  2. Modes of Communication. With 5 billion people now online the news of blockchain has gone around the world at lightning speed and at least 10x the number of people are talking about blockchain as were talking about TCP/IP in 1999.

  3. Time. It is at least 10 years since the first powerful commercial application (Bitcoin) was built on top of the blockchain protocol and that has allowed the momentum to build.

  4. Social System. This time around, half the world are now digital natives and they are fully onboard. They don't want traditional approaches to money, payments and investments that are paper based, slow, costly, and complicated. They want mobile-first, simple, quick, and cheap solutions based upon digital monies and digital assets. And they don't trust the traditional providers at all.

So there is ample evidence to suggest that the blockchain adoption curve will be steeper than the Internet adoption curve.

The following exhibit from Coinanalysis shows the penetration rate of bitcoin (as a proxy for blockchain) on a common indexed scale.

The takeaway is that this is a global phenomena. But conversely, when you consider that there are perhaps only 100 million users with a digital wallet or storage device that contains their own bitcoin, you can see that like the Internet in 1999, we are still in the Early Adopter phase of the innovation. The power curve is still ahead.

Just like in 1999, it is confusing, chaotic, and there is resistance everywhere. Let's not forget examples like:

  • Powerful government voices arguing that blockchain should be banned because of the widespread use for dark activities

  • Leading corporations arguing that blockchain should be banned because of the high fraud rates

  • Financial industries trying to slow down adoption by suing disruptive companies that are moving financial transactions to crypto and DeFi

  • Everyone arguing for new regulations and/or the application of old regulations that have not been built for a digital age that is coming fast

  • CEO's arguing that at best this is a bolt on (Let's give Bitcoin access) rather than something that will transform their core businesses

  • Etc.

We could keep going.

IMPLICATIONS FOR INVESTORS

From a diffusion of innovations theory perspective, blockchain now has critical mass and is moving towards the steepest part of its adoption curve. As investors, it's not too late to catch the big ramp up.

Thank you for reading.

Alison Davis
Matthew C. Le Merle

ABOUT BLOCKCHAIN COINVESTORS

Launched in 2014, our goal is to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and crypto projects. The strategy is now in its 8th year and has to date invested in more than 25 pure play blockchain venture funds in the Americas, Asia and Europe; and in a combined portfolio of 300+ blockchain and crypto projects including 30+ blockchain unicorns. Our funds rank in the top decile amongst all funds in their respective categories on both Pitchbook and Prequin. Headquartered in San Francisco with a presence in Grand Cayman, London, New York, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle. 

FUND PERFORMANCE

Blockchain Coinvestors Funds are continuing to generate strong returns. To date, over 80% of the funds we are invested in are performing as top quartile funds against the Cambridge Associates benchmark. This remarkable performance results from powerful tailwinds driving the world towards a future in which digital monies and digital assets are ubiquitous and the businesses and projects providing blockchain and crypto products, services, and infrastructure benefit disproportionately.

BLOCKCHAIN COINVESTORS FUNDS

Blockchain Coinvestors’ goals are to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and to capture superior returns from investing in the leading blockchain venture partnerships:

  • Fund III is open only to investors who meet the Qualified Purchaser definition with a minimum subscription of $250,000.

    • A “qualified purchaser” is an individual or a family-owned business that owns $5 million or more in investments. The term “investments” shouldn't include a primary residence or any property used for business.

  • Fund III Parallel is open to investors who meet the Qualified Client definition with a minimum subscription level of $250,000 at the discretion of the Manager. Please contact ir@blockchaincoinvestors.com if the minimum is of concern.

    • Currently, an individual or entity is a qualified client if he, she, or it: (i) has a net worth of $2,200,000 prior to investment in the fund (excluding the value of his or her primary residence).

While the two funds are substantially the same, there may be some funds and investments that are only available in the Qualified Purchaser vehicle. Blockchain Coinvestors funds can take investments via IRAs. We support several providers, including AlgoIRA, Kingdom Trust, Millennium Trust Company and Pacific Premier Trust Company (Pensco).

Please visit the Blockchain Coinvestors website to learn more about our offerings. You can also reach our Investor Relations team directly at ir@blockchaincoinvestors.com.

BLOCKCHAIN COINVESTORS SWISS

We are excited to announce that Blockchain Coinvestors Funds are now available through Swiss certificates for those of our non-US investors who prefer this approach. The underlying fund is the same, however, our Zurich based team at Blockchain Coinvestors Swiss, who will introduce in future weeks, can provide detailed information regarding this investment option. Email us at mlemerle@fifthera.com to learn more.

LINQTO
'Private Investing Made Simple'

While our funds are only available to Accredited Investors who are also Qualified Clients we believe in the democratization of investment access to all investors and look forward to that day. In the interim, we have partnered with Linqto which is an easy to use Mobile and Web app that makes it exceptionally easy to invest into attractive opportunities. The provide access to Accredited not Qualified Client investors as well as much lower minimums. Go to Linqto.com or download the app from your App store to use this approach.

LINQTO LEARN
Join Matthew and other guests for the Linqto Learn program on Tuesday, August 24th from 9:00am-10:00am Pacific Time. The discussion focuses on private investments in pre-IPO fintech companies. Register for free to learn more about how to become an early investor.

BLOCKCHAIN COINVESTORS ANGELLIST SYNDICATE

Continuing the theme of the democratization of investing, we have a rapidly growing Blockchain Coinvestors syndicate on AngelList providing access to selected coinvestments. Please join us and our partner Lou Kerner on AngelList.

Click here to receive the insightful weekly crypto newsletter and webinar invitations from our Blockchain Coinvestors partner Lou Kerner.

REGISTER NOW FOR UPCOMING WEBINARS AND CALLS

Our investment team hosts bi-monthly webinars and calls to help educate our community about the Fifth Era, fintech, blockchain and crypto. We discuss important trends, tailwinds and investment themes including what we have learned and how we are using our knowledge to inform our own investment thesis and actions. Below is a list of upcoming webinars for which you can register by clicking the links:

Blockchain Coinvestors Investment Thesis

- August 30th, 7:00am PST
- August 30th, 12:00pm PST

Investing in Early Stage Tokens

- September 13th, 7:00am PST
- September 13th, 12:00pm PST

Options for Investing in Blockchain & Crypto

- September 20th, 7:00am PST
- September 20th, 12:00pm PST

Institutional Investors - Making the Case for Blockchain

- September 27th, 7:00am PST
- September 27th, 12:00pm PST

Meet the Blockchain VCs

- October 4th, 7:00am PST
- October 4th, 12:00pm PST

Options for Investing in Blockchain & Crypto

- October 18th, 7:00am PST
- October 18th, 12:00pm PST


Recordings of past webinars and calls can be found at www.fifthera.com/webinars.

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