The Evolution of Blockchain Computing and Startup Growth: Exploring the Relationship between Composability and Returns

The Evolution of Blockchain Computing and Startup Growth: Exploring the Relationship between Composability and Returns

Introduction:

In the world of venture capital and blockchain computing, there are certain factors that contribute to the success or failure of startups and platforms. In this article, we will delve into the relationship between startup growth and venture returns, as well as the concept of composability in blockchain computing. By analyzing thousands of VC deals and exploring the four eras of blockchain computing, we can gain insights into how these factors impact the success and innovation of startups and platforms.

Startup Growth and Venture Returns:

When analyzing thousands of VC deals, it becomes apparent that seed-stage returns tend to be more extreme than later rounds. There are two primary reasons for this. Firstly, startups tend to experience faster growth in the early stages, which contributes to higher returns. Secondly, seed investments have longer to compound these higher growth rates. To increase their expected return, investors often diversify their investments by broadly indexing into every credible deal. Simulations on 10-year investing windows for seed-stage deals suggest that fewer than 10% of investors will beat the index, even if they possess the skill to pick the best deals. This highlights the importance of investing in every credible deal to avoid missing out on the best seed deal.

Furthermore, our analysis using AngelList data reveals that growth drops off in a startup's second year of funding and continues to decrease from there. This suggests that the early stages of funding are crucial for a startup's success and long-term growth. Investors should pay close attention to the first few years of a startup's life, as this period has a significant impact on its compounded returns.

The Four Eras of Blockchain Computing:

Composability is a key concept in blockchain computing, as it allows developers to use existing resources as building blocks and program them into higher-order applications. This enables more rapid and compounding innovation, as developers can do more with less. The four eras of blockchain computing, as described by Andreessen Horowitz, provide insights into the evolution of composability and its impact on the industry.

1. The Calculator Era: Bitcoin, the pioneer of blockchain technology, can be viewed as a calculator rather than a computer. Its limited scripting language prioritizes security over programmability. This limited functionality serves as a feature rather than a bug, as it ensures the security of decentralized money systems.

2. The Mainframe Era: Ethereum, built upon the key ideas pioneered by Bitcoin, introduced a Turing-complete virtual machine, making it a generalized blockchain computer. Developers can deploy and run any program across a decentralized network of machines. However, the current model requires each node in the network to execute every program function, resulting in slow and expensive operations. Despite these limitations, Ethereum's computations are trustless, making it unrivaled in terms of trust and security.

3. The Server Era: In search of scalability, some developers are moving away from composability and adopting application-specific architectures. This approach requires developers to own a slice of the infrastructure, similar to the early days of the web when each website had a custom-built server. The trade-off is that developers have more control over the end-user experience and the economics of the supply-side resources of the network. This era prioritizes control over composability, allowing for more granular control and customization.

4. The Cloud Era: The ultimate goal of blockchain computing is to achieve a scalable and generalized substrate for trustless computation. The "cloud era" represents a state where composition is only limited by creativity, not scale or communication complexity. This era fosters innovation that can compound without hitting diminishing returns. Researchers are also exploring new off-chain computation architectures that could revolutionize the industry.

Actionable Advice:

1. For investors: To increase the chances of finding the best seed deal, consider diversifying investments by putting money into every credible deal. By indexing broadly, investors can avoid missing out on potentially high-growth startups.

2. For startups: Focus on the early stages of funding, as these years have a significant impact on long-term growth. By prioritizing growth in the initial years, startups can establish a strong foundation for compounding returns.

3. For developers: Consider the trade-offs between composability and control when designing blockchain applications. Depending on the goals and scalability requirements, choosing the right era (mainframe, server, or cloud) can impact the success and innovation of the platform.

Conclusion:

The analysis of thousands of VC deals and the exploration of the four eras of blockchain computing shed light on the factors that contribute to startup growth and venture returns. Composability plays a crucial role in enabling rapid and compounding innovation, but it also comes with limitations. By understanding the relationship between growth, composability, and returns, investors, startups, and developers can make informed decisions and navigate the ever-evolving landscape of venture capital and blockchain computing.