Bitcoin: A New Kind of Startup?
Ever heard of an idea whose time has come? A few minutes ago I read this comment by Paul Buchheit on Hacker News:
Here's another interesting (though imperfect) way of thinking about bitcoin: it's a decentralized corporation, where bitcoins are ownership shares and the business is money transfer, like a decentralized Western Union.
I have had this article in my drafts folder for a while, I reckon if I don't publish it now, I never will. So here it is.
Bitcoin seems to be exploding, with a huge ecosystem and passionate defenders popping up everywhere. Love it or hate it, and people do both with the heat of a thousand suns, it's gone much further than most thought it would when it got started. How can an un-owned good behave so intelligently, navigating legal, social, and physical constraints with gusto?
User netcan on HN hit the nail on the head:
Early adopters become like investors. There never was an explicit quid quo pro, but overall people involved early in bitcoin ended up owning a bunch of bitcoin.
The answer is that it's not really un-owned. Early adopters own large amounts of Bitcoin, and are therefore incentivised to advertise it, steer it to safety, and offer services that increase adoption. What's more, someone who creates a successful Bitcoin service, gathers more Bitcoin, becoming more and more invested in it by that fact.
If this were a startup, we might be seeing a generally similar pattern: Early investors and founders having a large share, new hires getting increasingly smaller shares but at increasing valuations, and star performers getting rewarded with equity. And this pattern results in a very well balanced incentive structure that has served many a startup well. Bitcoin takes this further with mining: Early adopters can earn a share in the startup, therefore becoming invested in its success. Another interesting point is that this 'startup' was being floated on the 'public market' since day one. Only, it's not a company, and it's unclear if anyone controls it at all. But you've never needed accreditation to buy a piece of it.
This post however is not about Bitcoin as such, but rather about the class of things that are like Bitcoin. Passions run wild on both sides of that debate, and I consider myself as an observer, along with the masses, waiting to see which way this will go. But interesting it definitely is, and what I am interested in is whether the BitCoin pattern could be adapted to a more traditional startup.
The nature of the Firm
Ronald Coase, was an economics professor who became famous for his 1937 work "The Nature of the Firm". In it, he posed a simple question: If markets are so great a coordination mechanism, why do we even have firms at all? Wouldn't the logical conclusion be that everyone would be a freelancer, arbitrarily configuring themselves into whatever shape the market commanded today? Surely large firms with the large coordination overheads they impose are a waste that should have been eliminated a long time ago. The fact that this has not come to pass was the question Coase grappled with and his answer was this: transaction costs. Yes, it would be great to have all that flexibility, but creating and destroying connections ad-hoc imposs a transaction cost. And that is where the reason for the existence of the corporation stems from. Corporations get economies of scale in the use of the pre-existing connections which they are composed of. And the harder connections are to create, the larger a corporation can become before its own diseconomies of scale catch up to it.
Here's where it becomes interesting. The Internet cuts down transaction costs, almost by definition. Want to meet people to work with? Google for them. Or join Meetup.com. Need infrastructure? Amazon. Accounting? Xero. One by one all the generic functions of a company have been getting factored out. But the structure of the corporation remains intact, as if from a different era. Shares, investors, founders, employment contracts, limited liability corporations, etc.
Bitcoin may be the first financial organisation of a new kind altogether. Transaction costs themselves have been wiped out. About as structured as Anonymous, but with everyone incentivised and motivated to help it grow. A thousand flowers blooming, with the internal BitCoin economy rewarding the winners. Even agility poster children, startups, can't match this level of incentive alignment and dynamicity.
Can this pattern be used in other startups, or is Bitcoin one-of-a-kind? While I can't immediately see how to connect the dots, something tells me the future looks more like this and less like your typical Big Corporation. Whichever way this goes, it's looking more and more exciting.