Will Reality Punish Andreessen Horowitz's Massive New Crypto Fund?

Personality and charm should take a second place to outcomes in an era of increasing interest rates. But Andreessen Horowitz is taking another chance on charm.

We're in the midst of a terrible bear market in the stock market, thanks in part to inflation forcing the Federal Reserve of the United States to raise interest rates. The effects have been particularly severe for "growth" or "innovation" assets, such as mostly technology-focused shares like Tesla (TSLA), which has down 42% since early April. Tesla is also indicative of many other companies' reliance on a charismatic frontman to create an ambitious, often extravagant, story.

Despite this, Andreessen Horowitz (a16z), a startup capital firm, is betting big on swing-for-the-fences innovation and charisma-driven storytelling, this time in cryptocurrencies and blockchain.

On Tuesday, it was announced that a16z led a $70 million investment round for a new firm founded by Adam Neumann, the disgraced former CEO and founder of WeWork (WE). The initiative is named Flowcarbon, and it is a blockchain service that will pretend to sell, trade, and track carbon credits. A16z also announced the launch of a new $4.5 billion crypto and blockchain investment fund this morning.

This round of money feels like it belongs in a different age. In fact, it's very possible that the rise was already begun before the economy deteriorated to the point that it is currently. Because, while Neumann has a knack for creating buzz and headlines, he has never truly produced the one thing that matters now that interest rates are rising: actual net revenue, dubbed "profit," the long-forgotten performance indicator.

To recap, Neumann founded WeWork in 2010, taking advantage of the post-Great Recession real estate slump to sign long-term leases on office space and then rent modest units to entrepreneurs and contractors. Many critics pointed out that this strategy was risky and might not be viable in the long run.

When WeWork sought to go public in 2019, naysayers were vindicated: both the general financials and the details of the WeWork business were so damning that the IPO (initial public offering) was canceled, and Neumann was fired as CEO. Investors lost billions of dollars in paper worth, making this one of the worst corporate catastrophes in recent memory.

In retrospect, it was a foreshadowing of the current wave of failures in overleveraged wagers on the future. The Dow Jones Industrial Average (DJIA) is down 14% from its high during the coronavirus outbreak, but that's nothing compared to the havoc in the IT sector. The torrent of SPAC (short for special-purpose acquisition company) offerings from Chamath Palihapitiya is down 70% from its peak. The ARKK Innovation exchange-traded fund, which Cathie Wood manages, is down 60%. Netflix (NFLX) is down 73 percent, Uber (UBER) is down 56 percent, and Coinbase (COIN) is down 81 percent.

The common thread here is that they are cash-strapped or barely profitable businesses focused on creating products that may or may not earn money in the future. For the greater part of a decade, such businesses have been able to stay afloat because to low borrowing costs and a lack of better choices for investors. Borrowing will become harder, more costly, and unattainable for the least profitable growing enterprises when safe assets begin to generate even modestly greater returns.

Of course, it isn't just about saving money. You need to tell folks a compelling tale about what you're going to accomplish with the money if you want them to keep lending you money. According to Ycharts, this has been the key to Tesla stock's success, with CEO Elon Musk's cult of personality helping to boost the stock's price-to-earnings ratio as high as 688-to-1. A stock with a 20-to-1 P/E ratio is typically thought to be pricey.

Flowcarbon by Neumann falls clearly under the "speculative bets" category. A blockchain-based tool for monitoring carbon credits isn't completely without usefulness. It seems fair to believe that additional nations will install or extend carbon credit schemes over the next decade or two, and this is the type of international situation where a trustless blockchain may be beneficial, at least on the surface. However, there are many unknowns along the way to that future — and even if it does, Flowcarbon will face competition from programs like KlimaDAO.

As a result, it's probable that Neumann had a key role in the campaign, which also involves a private token sale. But why is it, given that he's a well-known blunder as a company CEO and has no expertise with blockchain? One thing to keep in mind is that a significant chunk of the Flowcarbon investment was likely arranged before the full depth of the continuing equities market disaster was known. Backers may have believed they were still operating under the 2010-2021 market norms, when a charismatic figure like Neumann was all it took to create a bullish narrative and propel asset values higher.

However, this may no longer be the case, as many investors, both in crypto and stocks, are prioritizing actual returns. Because so few crypto enterprises or protocols can be termed "profitable," this is an important factor as a16z prepares to launch its new $4.5 billion crypto venture fund. In fact, because they basically print their own internal scrip, determining what a blockchain project's true "profit" is can be tricky.

On a recent edition of Bloomberg's "Odd Lots" podcast, Tezos co-founder Arthur Breitman identified this problem using the metaphor of a small village. He likened many blockchains to towns with a lot of internal economic activity, such as eateries that cater to residents (aka ecosystem users). What counts, according to Breitman, is whether a chain or service has external demand for its services from individuals or entities that don't already "dwell" there - what would be deemed "exports" in the "town" metaphor.

The question of what really defines a blockchain "export" deserves a much lengthier discussion. Large blocks of tokens sold to speculators should not be counted, while some blockchain companies do regard those transactions as regular income. NFTs (non-fungible tokens) are the simplest example of an export, at least when purchased for personal collection rather than speculation.

But one thing is certain: crypto enterprises will no longer be able to get away with creating their own money. They'll have to find out how to make some money, which isn't apparent to me whether Adam Neumann or a16z are up to the task.

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