Dialogue with Sequoia Capital Partner: How to View the Crypto Cycle and Future Trends?

Source: UnChained

Compiled by: Huohuo, ODAILY Planet Daily

Sequoia Capital was founded in 1972, marking exactly 50 years this year. In the global venture capital space, Sequoia Capital is the undisputed leader.

Since its inception, Sequoia Capital has successfully invested in tech giants like Apple, Cisco, Oracle, and Google, witnessing the shining moments of one legendary company after another.

This article is based on a conversation from UnChained with two partners from Sequoia Capital, Shaun Maguire, who has successfully founded three out of five companies, and Michelle Bailhe, who started at McKinsey and later led a team at a Silicon Valley creative lab.

The following is a整理翻译 and excerpt of the interview content.

Exclusive Interview with Sequoia Capital Partners: How to View the Crypto Cycle and Future Trends?

Interview Highlights:

What are Sequoia's long-term views and arguments on the crypto industry?

• How different our lives will be in 20 years due to blockchain technology
• How Sequoia decides whether to invest in the entities behind projects or tokens
• Does involving venture capitalists contradict the spirit of decentralization?
• Michelle's views on the macroeconomic environment affecting crypto assets and whether this cycle is different from previous ones
• What crypto projects should focus on and the business models they should pursue
• How crypto founders should always do the right thing even without clear regulations
• The future of the metaverse and how to define it
• The mental model of the crypto industry and the stages of achieving global implementation

What are Sequoia's long-term views and arguments on the crypto industry?

Host: I heard that Sequoia has launched a $500-600 million crypto fund, which is said to be aimed at positioning for crypto assets over the next 20 years. What exactly is it?

Michelle: The crypto industry is quite mature in terms of technology and application. Interestingly, we have been asked recently whether our beliefs have changed, and the answer is, of course, no. That is, crypto assets have created a whole new asset class and computing platform, and there will be business sectors emerging to serve these assets. You know, many financial businesses are developing Dapps on decentralized platforms in a way that combines centralized and decentralized approaches, so we continue to invest in these projects, including core Layer 2 infrastructure and applications, and we expect to see more good developments over the next 20 years.

What will life look like 20 years based on blockchain?

Host: What do you think our lives will look like in the next 20 years?

Shaun: First, I think it's hard to say. You know, predicting what crypto assets will be used in the next 20 or 30 years is similar to predicting how the internet would be used in the 90s back in the 70s.

Personally, I believe that in 20 years, all money will be digital. For example, the dollar may become a digital tool of the government, and the adoption rate of decentralized currencies will significantly increase, especially in developing regions around the world.

The current state of Uniswap is a great case, where you can run a high-volume business with just a few lines of code, without needing anyone to maintain it; you just publish the code, and it's there. I think there are many such examples that give me a glimpse of what the future might look like, but you know, it's hard to predict too specifically.

Michelle: I completely agree with Shaun. I think of something like the internet, which is fundamentally an information revolution, so it's hard to predict. Just like we couldn't predict how the internet would become what it is today, no one would have predicted that Google or mobile internet would happen, but they did.

Now we can book a taxi on our phones and reserve hotels anywhere, just like we couldn't comprehend back then. But one obvious trend is that billions of people will have access to more information than ever before, and the cost of sharing information/transaction information will be greatly reduced. I think this is consistent across all businesses, although it's hard to say exactly what form it will take. And you know, today's internet services are quite different in terms of censorship and regulation. I think this doesn't mean the old ways will disappear, but we will have more choices.

Sequoia's Decision on Project Entities / Token Investments

Host: Many successful venture capital firms currently come from old investment models. Now, these startups or VCs are very much like centralized companies. To adapt to this new decentralized world, they must undergo some restructuring and invest heavily in tokens. Are they really decentralized?

Shaun: I agree with your point, but the crypto industry has many differences. While there are many similarities between crypto and traditional businesses, such as needing to hire engineers and product people to help build the best PR and products, you need to pay them and manage them. Building a crypto company has many similarities to building a traditional software business.

However, it really isn't as straightforward as people think. You know, Sequoia has been around for 50 years, and our biggest early victories were with companies like Apple and Atari, as well as some other hardware companies. Then in the late 80s and early 90s, Sequoia's most successful investments were in internet infrastructure companies, with Cisco being a well-known example, and Oracle's core infrastructure being another. Whether it is truly decentralized isn't just about the surface model.

Host: Let's talk about your investment in crypto projects now. Many protocols have a centralized entity behind them, so you can choose to invest in the project's token or the equity of the centralized entity that launched this decentralized project. For example, I know you invested in Filecoin, so I’m sure you could choose to invest in Filecoin's token or Protocol Labs. How do you make that decision?

Michelle: Most of the time, the issue we need to resolve is alignment with the founders. We will require matching tokens, which is very important. There are many examples of inconsistent incentives everywhere, which can lead to undesirable outcomes. Of course, non-crypto assets are just broader technology applications, so we always try to push for equity shareholders while negotiating token shares, ratios, etc.

Now tokens are widely used in crypto assets, and in fact, I have many different things in mind. Some look more like commodity relationships, used to stabilize or secure networks (like Bitcoin or Ethereum or anything else), then you may have tokens related to the success of applications, and then you have things that just look like reward points, like they are basically airline miles, which are unrelated to the business but just a way to get discounts on transactions you like, or other supermarket points or airline points.

You have other things, like Dogecoin, or anything else you want. So what we call tokens really depends on the business and what they are building. If it is something like reward points, you know we might not care because they have no value to us since we are not necessarily users who will trade on them. So we might only care about being equity shareholders in other cases. We might genuinely care about the application or both, and then for Layer 1, it is just the rights of Layer 1, which is where value accumulates. So its scope depends on what is being built and how you handle the attitudes of some members of the crypto community.

Does Involving Venture Capitalists Contradict the Spirit of Decentralization?

Host: I have to ask a follow-up question because it’s clear that Sequoia has invested in startups like DoorDash or Airbnb. You might have heard some crypto entrepreneurs say that decentralization means they will have tokens to incentivize different workers. So when you consider what kind of product or service can be offered on the internet, how do you determine what makes more sense? Whether it is provided by a centralized entity or in a decentralized manner, or when you plan to invest in a crypto company?

Shaun: This idea has been prevalent for the past 20 years, so now it’s a bit uncertain. The main difference is whether to give ownership of the early network to users to help incentivize early program adoption. So there will be some differences at the beginning, but the end state doesn’t matter. Just like you know Airbnb, suppose you have a decentralized Airbnb, and you give up 50% of the equity as tokens to incentivize early users and early hosts, and everything you own after you reach a certain scale, but competition is also emerging. People love to use the best products, and good products mean having the largest customer base, the most liquidity, and better services, etc. So I just want to say the only difference is whether to give up ownership early to help incentivize usage. But ultimately, you have to have a better product because if your product is not better than the alternatives, people will leave and go do the next thing. So I think this is something many web3 companies have not focused on.

Michelle: I agree. This desire for unfettered decentralization is gradually becoming prevalent. I think when you really dig into it, running decentralized things is actually inefficient. It requires more computational resources and more coordination to ensure it works well. So over time, our expectations for its realization are actually quite extravagant.

You want to use it for the most important things, and this is like pursuing stateless freedom. You know, value storage and public information networks are equally important. You don’t want a government or a company you know to be the sole controller. So this is a bit like the common problem humanity has always faced. People have always sought how to best organize governments or people. Everyone can centralize democracy or make it more decentralized, but it requires a lot of costs and massive participation. So for the ultimate desired outcome, optimizing decentralization for convenience or speed in other things has adopted centralized business models.

To give another example, some say if you consider what Google is doing, or if the problem you are solving is changing the existing advertising business model, then you would know that some web3 startups pose a significant threat to Google. Billions of people access free information funded by advertising, which is a fantastic way, but it’s hard to do that by charging these people. If what you want is not to collect private information, not to sell ads, and you may need to have more security and control, then you won’t let billions of people access the same information they can’t afford to pay for. But it might be a smaller group that can access it. So it’s really just different choices. So we think it allows centralization, or this rigid tool of decentralization is always at all costs. I’m happy to use centralized things because they might be cheaper and more convenient.

Michelle's Views on the Macroeconomic Environment Affecting Crypto and Whether This Cycle is Different from Previous Ones

Host: There has been too much recent news, so let’s start talking about the bear market overall! Bitcoin was launched during the last global financial crisis in 2008. Crypto assets mainly exist in a roughly 0% interest rate environment in the U.S. So what do you expect to happen next year? At what stage do you predict we are in the crypto industry now?

Michelle: I think this is just to prepare people for what they see. In the crypto industry, the crypto tree has grown taller. So when it gets hit, it will also shake more violently. This doesn’t mean it will disappear, or that just like the number of dollars, maybe there are more of them but their value has decreased because they are more numerous. The changes and fluctuations of this period will feel greater than before, and that’s because we have more users, more dollars, more liquidity, and more regulatory attention, all of which crypto assets have never had before. So it’s really just trying to prepare people.

And crypto assets always go through cycles, but this one may have some unique elements that make it feel different, and prepare for it. I think it really depends on the business you are running in terms of how you should react. You know, some of them may have been very active in the massive retail trading activity over the past few years. You know they may need extremely low costs to plan for a future environment. The difference is that retail interest may decrease, but it won’t be zero, just less than before. And you’ve seen that many large publicly traded companies engaged in brokerage trading have seen their trading volumes drop significantly since last year, clearly because last year was a historical high. But that doesn’t mean it will disappear; you just need to plan for this difference. So this is what we have been trying to talk about with our founders, which is to recognize that this is a different environment. If you continue to do what you have been doing for the past two years, you may soon find yourself in quicksand. So recognize that the environment has changed and make corresponding plans for some people you will know, focusing on certain product areas or difficult transitions. This also depends on who you are and how you think, but the message we want to convey is that this is a different plan, a plan that can serve as a priority.

How Should Crypto Founders Always Do the Right Thing Even Without Clear Regulations?

Host: Then I want to ask your last point in your post, where you said to build a sustainable business token, but not a business model. What kind of business model do you think will work in decentralization?

Michelle: You know, tokens are really a cool invention, just like there are some very cool things in regulatory dynamics about finding this real way to get incentives. You know, rewarding users and rewarding early developers has a lot of very interesting aspects, and many people will use them again for real value, like Ethereum or Bitcoin and many other similar things. It is indeed useful for stabilizing and securing networks, and there are other areas where you know it works, but many other projects do not have real value.

In the crypto boom of the past few years, people were excited, and maybe things were moving in a good direction. Everything was trading, and you might see a lot of growth, and then you think, "Oh my gosh, we are doing something amazing, and it’s working."

But once the interest rate environment changes and liquidity starts to flow out of the market, you will see the value of projects disappear, which is the situation many projects are in now.

Just like you can’t just look at token price increases to see if there is a business model, just like in the case without tokens. If you are just continuously getting valuation growth from investors but many other healthy metrics are absent, it doesn’t mean the business model is genuinely valid. Therefore, to truly understand what the actual business model is, what people are actually paying for your product or service, how it works, and how it relates to the asset, this could be related to the business or not, which is an important question.

The Future of the Metaverse and How to Define It

Host: Do you have expectations for what the metaverse will become? Do you think VR and AR must be part of it, or do you think they are not needed right now? Everyone is talking about the metaverse, and I feel like there isn’t a good definition, so I’d love to hear your thoughts.

Shaun: Oh my gosh, you’re posing a tough question! When I think of the metaverse, I agree that there isn’t a good definition of the metaverse right now, except for reading Neal Stephenson’s book and loving the metaverse he describes, which is clearly the metaverse of our ideal life. Anyway, I think the metaverse could take two different forms. One is just the next big phase shift of the internet, which is hard to define, and we don’t even know what that will be. But just like when the internet evolves from today to an unknown future, I would call that the metaverse.

And I think some type of spatial component could be one of its important attributes. Just like we invested in a company called Gather, which can easily build maps, and you know you can link maps together like an office, so you can have a bunch of remote crypto companies. You know, just like they are teams headquartered all over the world, but their offices can be like digital Tokyo, where you can walk from one crypto company’s office to another, possibly like a shared game room. That kind of feeling connects people from different places on Earth, but they can walk digitally from one space to another and talk to people. So these organizations are organized not based on geography but on ideas in cyberspace. This is how I hope the metaverse finance will be very powerful in any field.

The Mental Model of the Crypto Industry and the Stages of Achieving Global Implementation

Host: At the beginning, we talked about having a 20 or 30-year vision for the crypto industry, but Michelle, in one of your blogs, you listed the S-curve of blockchain technology applications. Could you give a brief overview?

Michelle: The early stages of this curve look like not much is happening. As you know, crypto is an island, very disconnected from other resources, and still a cumbersome information flow just for asset entry. You know, it’s hard to get other internet data on-chain into smart contracts. So while this island has a necessity for existence, there are very few things that can be done.

Overall, as this island continues to grow in users and funds, more crypto-native applications will be built to serve this universe rather than elsewhere.

It’s more likely that the world of existing businesses will start to connect here and begin to meet these needs. Then we must enter the second stage because the infrastructure has improved significantly. You know, from dial-up to broadband to now 5G, we are now correct. Those core infrastructure layers have significantly improved, an order of magnitude faster and cheaper. And we are starting to establish more connectivity between on-chain and off-chain applications through the liquidity of assets and information. I think we are just at the beginning stage, making it hard to see future developments.

Because the core infrastructure must be solved first, it’s like the foundation of a building. You really have to start from the bottom, and then when we reach internet-scale users, you can start to get truly large applications. So what people often miss is that through that growth curve, you think, "Wow, this company or product has grown incredibly," but I’m sure it’s now been eliminated. When we have 4 billion or more crypto users, you might think it’s still far away, but when you start to see trillion-dollar companies or two trillion-dollar companies, it’s different because they indeed serve a population at internet scale in a very significant way. So we think we are still in the early stages of the first phase, possibly just hoping to enter the second phase, but this is still a truly early stage.