We are in the midst of a brutal downturn in the equity markets, due in large part to inflation causing the Federal Reserve to tighten interest rates. The impact has been particularly drastic for "growth" or "innovation" stocks, including especially technology-focused stocks like Tesla (TSLA), which has seen a brutal 42% decline since early April. Tesla is also representative of many of these companies that rely on an ambitious, even exaggerated, narrative delivered by a charismatic figurehead.
But amid all of this, venture capital fund Andreessen Horowitz (a16z) is once again betting big on innovation and charismatic narratives, this time in the cryptocurrency and blockchain space.
On Tuesday, it was reported that a16z led a $70 million funding round for a new startup from disgraced former WeWork founder and CEO Adam Neumann. The project is a blockchain service called Flowcarbon that will reportedly sell, trade and track carbon credits. This morning, a16z also announced a new $4.5 billion crypto and blockchain investment fund.
This round of funding seems like news from a very different time. In fact, it's quite likely that the raise was already underway before economic conditions became as bad as they are now. That's because while Neumann has proven extremely good at generating hype and press, he's never really delivered the one thing that matters now that interest rates are rising: actual net revenue, aka the long-forgotten performance metric known as "profit."
Quick review: Neumann founded a company called WeWork in 2010, taking advantage of the post-Great Recession downturn in real estate to sign long-term leases for office space and then sublease small units to startups and contractors. Many observers pointed out that this model was risky and did not make sense in the long run.
These skeptics were vindicated in 2019 when WeWork attempted to go public: Both the overall financials and the details of WeWork's operations were so damning that the initial public offering (IPO) was canceled and Neumann was fired as CEO. Investors lost billions in paper value, leading to one of the most catastrophic corporate failures of the last decade.
In hindsight, this was a foretaste of the wave of collapses we are currently seeing in over-leveraged bets on the future. The Dow Jones Industrial Average (DJIA) is down a whopping 14% from its peak in the wake of the coronavirus pandemic, but that's nothing compared to the carnage in the tech sector. Chamath Palihapitiya's spate of SPAC (short for Special-Purpose Acquisition Company) offerings is down 70% from its peak. Cathie Wood's ARKK Innovation exchange-traded fund is down 60%. Shares of Netflix (NFLX) are down 73%, Uber (UBER) is down 56% and Coinbase (COIN) is down 81%.
The common thread is that these are companies that are losing money or barely making a profit and are focused on developing products that will make money in the future. For almost an entire decade, such companies were able to stay afloat because credit was very cheap and there were few better options for investors. But when safe investments begin to generate even slightly higher returns, borrowing becomes more difficult, expensive and impossible for the least profitable growth companies.
Of course, it's not just about cheap money. To get people to keep lending you capital, you need to tell them a compelling story about what you plan to do with it. This has been key to the success of Tesla stock, for example. The cult of personality surrounding CEO Elon Musk has helped push the stock's price-to-earnings ratio to 688:1, according to Ycharts. A stock with a P/E ratio of 20 to 1 is generally considered expensive.
Neumann's Flowcarbon falls squarely in the "speculative bet" range. A blockchain service for tracking carbon credits is not an entirely unmerited idea. It seems reasonable to assume that more countries will adopt or expand carbon credits over the next decade or two, and at least on the surface, this is the kind of cross-border problem where a trustless blockchain might actually be useful. But there are many unknowns on the path to that future - and even if it happens, Flowcarbon will have competition from similar projects like KlimaDAO.
So it seems likely that Neumann himself played a central role in the fundraising, which includes an ongoing private token sale. But why is that, if he's such a notorious failure as a startup leader and has no blockchain experience whatsoever? It's important to remember that much of the Flowcarbon funding was likely negotiated before the extent of the ongoing stock market meltdown was quite clear. Funders may have thought they were still playing by the rules of the market from 2010 to 2021, when a charismatic face like Neumann's was enough to spread a positive narrative and drive up asset prices.
But that may no longer be true, as real gains are quickly becoming the top priority for many investors, both in cryptocurrencies and stocks. That's a crucial consideration as a16z prepares to deploy its new $4.5 billion crypto venture fund, because few crypto companies or protocols can rightfully be called "profitable." In fact, it can be very difficult to determine the actual "profit" of a blockchain project, as they effectively print their own internal stock.
Tezos co-founder Arthur Breitman summed up this problem in a recent episode of the Bloomberg podcast "Odd Lots" using the metaphor of a small town. Many blockchains, he suggested, are like towns that have lots of internal economic activity, such as restaurants that serve locals (also called ecosystem users). But, Breitman said, what really matters is whether a chain or service is in demand from the outside, by people or entities that don't already "live" there - what would be called "exports" in the "city" metaphor.
So there is a much longer discussion about what exactly constitutes a blockchain "export." Large blocks of tokens sold to speculators certainly should not count, although some blockchain companies treat these sales as conventional revenue. NFTs (non-fungible tokens) are the simplest example of an export, at least if they are purchased for personal collection rather than speculation.
One thing is clear, however: crypto companies won't be able to get away with printing their own money for much longer. They need to figure out how to actually make some - and it's not clear that's in Adam Neumann's wheelhouse - or, for that matter, a16z's.