As I discussed with David Sacksrecently, the rise of cryptocurrencies is going to bring about the "tokenization" of a number of illiquid (as well as liquid) assets.
Today, the main way investors put money into start-ups is through a VC firm. You hand over your money to the firm for a 10-12 year period. You trust them to invest it in start-ups (like Uber) on your behalf and see it through. You hope that, far away in the future, you'll get a good profit back on top of your initial investment. But the investment is illiquid. For the next decade, you can't tap that cash for some emergency need. It's theirs.
In the future, almost any private investment — from a limited partner's investment in a VC firm down to the mortgage in your house — could be "tokenized" and traded.
This means the day-to-day (and even minute-to-minute) value of a privately held company will be public for all to see and potentially trade via the blockchain. You might hold your investment for its natural lifetime. Or you might decide to sell it after six months or a year.
In turn, private companies that sell any shares at all — including selling shares directly to venture capitalists or allowing employees to sell shares on secondary markets — will no longer only have their valuations set by a small clubby group of self-interested investors.
The interests in these companies will be tokenized and fluctuate every day on the blockchain, just as public companies see their valuations change every day the stock market is open.
With Uber, its last valuation was set by investors, founders and its board at $68 billion. Since then, the company has been beset by numerous scandals, lawsuits, and management changes. Yet, its valuation remains $68 billion, or about 4.5 times the current valuation of Snapchat, until the next sale of shares happen. (A report from The Information suggested that one potential investor, SoftBank, is looking to buy shares at a price that would value it at $40 billion to $45 billion.)
But once Uber's private shares become tokenized, the valuation will change constantly based on the trading prices and all employees, investors and outside observers will see that.
This will immediately change behaviors inside private companies. Investors such as Benchmark and its former board representative for Uber, Bill Gurley, will easily be able to sell their interests in private companies if they want. They won't need to wait for an IPO.
That will impose market-driven discipline on CEOs of all private companies.
What would the effect of seeing Uber's valuation drop from $68 billion to, say, $45 billion in a matter of six months have done to the way the company runs itself at the board level and management level? My guess is that this drop would have forced much bigger leadership changes much earlier.
It would be irrelevant whether Uber board member Arianna Huffington supported Kalanick or Gurley. If Uber's valuation dropped $23 billion in six months, there would be enormous stress on the board to take corrective action to get the valuation back to where it had been just a short time ago.
There's a myth in Silicon Valley that Wall Street investors are short-term oriented and greedy, while the tech world — with its longer-term and clubby approach — allow companies to mature slowly and as they should. It turns out that Wall Street provides a more accurate current assessment of a company's valuation because it is a deeper market with more participants. This greater accuracy won't allow companies to avoid problems that should be dealt with sooner.
This won't stop great companies from being founded and reaching their full potential. One of tech's greatest founders — Jeff Bezos — has grown Amazon in full glare of the public markets since 1997, always with encouragement from those markets through a high stock valuation that ignored current losses.
Bitcoin will make all private companies public companies in the future — and that will be for the better of everyone.
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