Weekend Reading #178
Photo via Unsplash
This is the hundred-and-seventy-eigth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 23rd July 2022.
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What we're thinking.
One of the most exciting things about the crypto ecosystem is the level of energy and enthusiasm that we encounter. Relatively young founders with great ambitions to take over the world set the stage for unfettered creativity when it comes to formulating business models and ideas. Often, it is true that the “old ways” are due a reset – perhaps some things can be done differently, processes can be optimised, costs can be cut, operations made more efficient. And it is also often true that coming in with a fresh pair of eyes allows founders to be unencumbered by some of the stereotypes that bind companies to their “old ways”.
There is nonetheless a thin line separating idealism and naivete. For all the faults and shortcomings of the incumbents, most incumbents are incumbent because they are profitable and cash generative. Their businesses, established over decades and perhaps even centuries, are champions in their field. And while they may be seen to be ripe for disruption, the deep foundations of their businesses – in terms of operations, supply chains, business models, financial market access, technology etc – still keep them in good stead when faced with a up and coming new competitor. Most importantly, being internally cash generative means their survival is independent of the whims of the capital markets, while fresh startups with young businesses still require external financial support from their investors and backers.
And while the past week has seen an impressive episode of numba go up in the crypto space, perhaps driven by news around Ethereum’s upcoming merge, perhaps in line with the broader recovery in risk assets especially tech equities, the reality is that for all the promise in crypto land in terms of what the technology can bring (which we are undoubtedly bullish on), every project needs to also consider how they function as a business that is first and foremost superior to what already exists, in terms of the product delivered to the client and in terms of the ability of the proposed new business model to generate outsized earnings. As we’ve alluded to before, reflexive business models that rely on “numba go up” to make “revenues” aren’t sustainable, whether it’s from cashing out on tokens left in reserve or consistently returning to markets for fundraises (applicable to stocks as well).
But even where business models are intrinsically sound, the tendency for founders to approach large brand names for advice is turning rather problematic. Advice that is given by an executive in a Fortune 500 company, which may well be industry best practice or what is desirable from that position of power, is not necessarily relevant or even appropriate for a startup that is working on growing into a viable going concern. The line between having things that are “nice to have” vs only having what businesses “need to have” could well be the line between “dead” and “alive”.
Operating within the confines of a corporate behemoth, helped by its brand and the beast that is their internal operations, is very different from hustling in the trenches and building from scratch, and founders need to be conscious of the context in which advice is given and discern if that advice is relevant and applicable, even if most likely given in good faith. To borrow a term from the All-In Podcast gang, the main goal for a startup is to move from “default dead” to “default alive”. Industry best practice isn’t any good if a business is “default dead”.
What we're doing.
As I round up my trip this week to Greece I want to bring attention to a significant typo in last week’s newsletter! The beautifully penned description of the Ionian side was written by our chairman, Lupo (LM) about his holiday but had my name (DC) next to it in error. My vacation is much more mundane and has mainly been time spent with family and friends near Thessaloniki. The baking sun, swimming and great food and drink while chasing after a near-2 year old most of the day, has provided great respite from the heat of the market. Recharged and ready to roll again as the market challenge continues unabated. DC
London had its hottest couple of days on record this week and unfortunately, I was suited and booted for both of them. Whilst I generally avoid networking-type evenings, I was invited one at the Ironmonger’s Hall close to the Barbican and consequently attended. With analysts and associates from many of the big banks and funds, the evening was a great chance to connect with like-minded people across the industry with discussions fortunately avoiding the typical banking spiel. It was a good night and perhaps I will go to more things like this in future! HS
What we're reading.
This piece appeared this week in foreign policy by William Taubman. He is the author of Khrushchev: The Man and His Era, and of Gorbachev: His Life and Times. For his biography on Khrushchev he won a Pulitzer Prize.
It’s a great piece for anyone who hasn’t read about Putin’s history and a speed read of the events that Taubman identifies as significant in both Putin’s personal and political life. He lays out 5 possible paths too going forward for the Ukraine War, the last of which is rather grim. But the real value here is the historical nuggets in such a concise format. DC
If there was one chink in China’s strategic armour, it was their reliance on the west, specifically Taiwan, for semiconductors to power its economy. Essential in everything from cars to smartphones and everything in between, the west has long used its control over the semiconductor supply chain, including the high precision lithography machines (mostly made by dutch firm ASML) to attempt to stymie China’s rise. This week, an article released by semiconductor research firm TechInsights reported that SMIC “appears to have used 7nm technology to manufacture the MinerVa Bitcoin Miner system on chip (SoC)”. As cries of “copycat” echo out, it is really little surprise that this has come to pass: SMIC has been poaching talent off TSMC for years, and as is often the case with China, the combination of state-funded and state-driven determination gets to the desired outcomes, one way or another. Technologically and strategically, this development is interesting on two levels: firstly, while 7nm is arguably 2 generations behind the “cutting edge” where TSMC is pushing the coal face (at 3nm, with the bulk of their high end production currently being at 5nm), being able to push into sub 10nm geometries is a huge achievement. TSMC themselves took years to master the move from 9nm to 7nm, and if SMIC is realistically able to produce at scale and at good yield (important!) at 7nm, it is only a matter of time before that production handicap vis-a-vis the west narrows. The caveat here is that not all 7nm processes are made equal as transistor density varies, but to put things in context, TSMC has on average a 2 generation process gap lead over Intel. TSMC is now pushing the limits at 3nm after starting mass production of 5nm in 2020, while Intel only started mass production of their 5nm equivalent in 2021. If SMIC is indeed able to produce 7nm geometries at the same density at scale now in 2022, this puts them only 1 generation behind Intel, a gap of 3-5 years to close, although probably less so when catching up. Secondly, it is also interesting that the application of 7nm is for a Bitcoin miner ASIC, especially in the context of China banning Bitcoin mining and use in the mainland, and SMIC being a state-owned foundry. One can only speculate as to the strategic plan for deploying their latest cutting edge technology in this manner. The bottom line here is that catching up on 7nm geometries especially without the use of ASML’s machinery suggests that China is much closer to removing the Damocles’ sword of being cut off from global semiconductor supplies as a containment policy than the US would like – and that is probably not something they’d be delighted with.
What we're listening to.
This episode of Invest Like the Best featuring Matthew Ball dropped at an opportune time, coinciding with our conversations with crypto metaverse projects and our ongoing pondering about where the Metaverse can find sustainable (and profitable) purpose and value proposition, aside from being “cool”. We’ve touched on some of the topics discussed in this week’s blog post, even if we have differing viewpoints on some aspects of the broad metaverse subject, but there is much more food for thought to be garnered from the conversation that he has with host Patrick O’Shaughnessy. Matthew Ball is encyclopaedic when it comes to his knowledge of the Metaverse subject matter, and this podcast is well worth a listen.
What we're watching.
After watching “Gogglebox” this week (one of my guilty pleasures), I took interest in current episode of “Stranger Things”. Now into its 4th season with the 5th and final instalment already announced earlier in the year, I was keen to see what all the fuss was about. More importantly, the real reason it had come onto my radar was the fact that a teacher told me that some of their early teens kids had start viewing it. Stranger Things is a mix of investigative drama and supernatural elements portrayed with horror, science fiction and childlike sensibilities. I don’t believe its child/teen appropriate by any means but I'm oddly intrigued to start the series and seeing how it got to the current episode. Heads up, this will not be everyone's cup of tea.
This year's edition of the Tour De France comes to a close this Sunday and baring any accidents or a horrendous time trial tomorrow, Jonas Vingegaard will be crowned the new champion of cycling on the Champs-Elysees. It's been a titanic battle that’s had everything from thrills and spills, to mountain stage duels, to team head to heads... It's been the most epic chess game of who has the stronger legs, versus who has the stronger team. Some would argue, Vingegaard had both, but most will know that his team played a massive part in catapulting him up the mountains and giving him the best shot of being the “Maillot Jaune” this Sunday! DK