Why decline VC?

Recently, Volky and I made the fairly difficult choice not to accept the 1.2m funding offer that BlueYard made. What I hope to very briefly do is to communicate why VC isn't the funding path we'll be pursuing.

Long story short, we feel that because of the particular thing we’re building, there are options for how to fund ourselves and make us sustainable that are better incentive aligned and more true to our values.

With the Network Goods Institute, Volky and I are interested in building new kinds of systems of governance that address the problems that we face in this age. Namely, we think there are broadly three problems that need to be solved:

1. our epistemics suck — humanity's really quite bad at collectively reasoning about things

2. at the task of pooling and allocating capital for collective goods, governments are inefficient

3. power seems to have a gravity of its own, and thus our governance systems tend to end in capture

We boil this down to three objectives:

1. enable collective intelligence with counterfactual reasoning
   (via an institution called the Negation Game)

2. price externalities & fund public goods
   (we're exploring a payment mechanism called Index Wallets)

3. design these systems with mechanisms to ensure diffusion of permission (e.g. by incorporating quadratic voting)

From a high level you can think of this as a prediction market-esque mechanism for reasoning about 'what would have happened', coupled with a payment method for stably valuing public goods — more or less by embedding public goods funding into the currency itself (this is how index wallets make the claim that they permit individuals to denominate their wealth in their community's health).

For now, if you're unaware of this work I'll spare you the details, you can learn a bit about each of them here:

• Negation Game: https://paragraph.xyz/@ngi/info-market-overton

• Index Wallets: preprint.indexwallets.org

And if you want to hear a long discussion hosted by BlueYard on how they might fit together into a new socioeconomic system watch this.

What we're excited about with this org and the combination of these two projects is that the Negation Game seems to offer us a tool for sensibly allocating capital, but lacks a source of capital. And Index Wallets seem to offer a source of capital but without a method to ensure it's allocated sensibly. Together perhaps they can both source capital and sensibly allocate it. Of course, we're in the early stages of exploring both of these mechanism sets, and it may be that we're entirely wrong about either or both of them and they don't have the great promise that we currently foresee — that's what we hope to learn over the subsequent months and years. It's what we would have used the venture funding for if we had pursued it.

If you're considering pursuing venture funding, it makes sense to do so if:

1. the opportunity you're pursuing could return 10x the invested capital to investors within 3-5 years (this implies both excellent execution and a massive market opportunity)

2. the values you hold and hope to propagate into the world are consistent with the incentives of the business you set up

If the only value you hold is "I would like to be rich" you needn't worry so much about the second one. But, if part of your mission and ambition is prosocial (which one can argue is also a competitive advantage) then you (and your stakeholders) will want to ensure that once your fledgling becomes a profit maximizing machine that its highest return actions are also more or less pointing in the same direction as those values.

Fortunately, both Index Wallets and the Negation Game have these properties.

Index Wallets are a payment method much like Visa, with the property that when adopted in a community they offer a selfish incentive for public goods funding. They have two prospective business models that could be quite lucrative:

1. Like Visa, Index Wallets can charge a transaction fee. Visa's 4% transaction fee generated $18b in profits in 2022

2. Index Wallets fund public goods through the minting of impact certificates, which are bundled in the payments the wallets make. If Index Wallets chose to take a percentage of minted impact certificates, this would ensure that the network's profit maximizing move would be to fund public goods (which is p cool!).
   It's a little harder to size this market but perhaps it's a bit like if Visa somehow got to take a % of all government expenditures.
   Between the two I'm not actually sure which opportunity is larger.

The Negation Game also has a beautifully incentive aligned — though more dubiously sized — business model:

1. As it's essentially a prediction market that can handle more ambiguous market resolution criteria, it can charge trading fees like other markets do.

2. The mechanism of epistemic leverage (which is still undergoing a research process) essentially provides reputation maintenance in exchange for paying out information bounties. This is cool because it means that the Negation Game network would earn its bread when people change their mind, a pretty cool positive externality to be incentivized to create.

Perhaps once under way the Negation Game network is comparable to the valuation of an EigenLayer ($7b FDV but probably only comparable to the data availability part of their business) or Polymarket ($350m) as it's also essentially premised on the assumption that "crypto ppl like to make bets" which itself seems a safe bet.

So, here we have both properties for both products. What's the problem?

Given these reasons you may think it's reasonable for us to pursue venture. After all, it offers a powerful lever for hiring talent and growing users and product. Given that, you may be coming up with your own guesses as to why we're turning the funding down.

It was a bad deal / bad funder

Perhaps BlueYard was a values misaligned funder. Or maybe they offered us a lousy deal and this is our way of saving face. Fair enough guesses.

First, I'm not sure what exactly counts as a good deal in this market and given our stage, but it seemed like a pretty competitive offer. They would have taken about 5% of our token allocation and 10% of our equity, which is on the pretty sweet side of ownership, and it would have placed us in the some ballpark valuation as other talented teams raising in the space. (I'm 80% sure I'm clear to speak about the terms, if a BY person reads this and corrects me I can retract the information).

Second, BlueYard is maybe the optimal funder we could hope for. My sense of them is as being highly values aligned in terms of the projects they try to advance, they fund not only interesting but also important work, and they're not crypto space myopic I also know founders in the bio and AI space working with them. Not only that, but their CTO Chad is a genuinely talented engineer with time in the trenches, they cultivate great community and talented founders around them, they have a clarity for the systems and infrastructure that will be necessary to meet what's coming. I'll stop there because now I'm feeling regret — but all this to say if you have the opportunity to work with them you should take it.

If we were going to say yes to anyone, we'd have said yes to them.

It is scary to take on the funds

Yes. It's scary to take the funds. When you have spent a decade plotting the course, and then you finally get your ship and your crew and you're to set to sail on the morn', that will definitely dry your mouth out. I felt those nerves. But I also think fear is intelligent. And after sitting with that fear for a time, and also sitting with the fear of not accepting the funding (how will I afford rent?), the former came into sharper focus. There was a substance to that fear which transcends performance anxiety, and there are other paths that don't have those risks. Ultimately, Volky was the one to have the best sense of neutrality and when asked “if right now we were to choose VC or no VC, what would you pick?” And he said no, so we wrote the email right then.

Some sanctimonious argument about how venture money is bad

No. Neither venture nor money is bad. It's just not right for us.

It constantly challenges our integrity

To raise venture money is to be constantly tempted into three kinds of lies:

1. lies about progress made

2. lies about clarity

3. lies about other investor interest

These lies vary in terms of their felt intensity. For the most skilled entrepreneurs perhaps they're not even a consideration, but as this was my first time in the hot seat I felt the constant pull to oversell the obviousness of the narrative and my confidence in our approach, to explain away or inflate our progress made, and to make it seem like we were already highly desirable to other funders, especially that last one. It’s such a beauty contest, you’re wanted only if you’re wanted.

Even as I write this I have to laugh because I imagine for most founders reading this it feels like that's the job. Like I described how what I don't like about being a fish monger was the fish and the mongering. If you want to sell the product you tout its benefits; no different for companies.

The issue is that this isn't just a pull you feel as a founder, it's fundamentally part of the game, and recognized as part of the game. A funder wants to know not just that you can build a company, but equally important is that you can play the fundraising game. They are looking not just at your company building skills, but whether you're capable of manufacturing a high purity FOMO concentrate, as that's what will dictate your success in the next round. In a quote I can no longer locate, Marc Andreessen says this explicitly, something like, "before I fund you I want to see that you can get funded."

It's this requirement to look good that gives us terms like "momentum management", the task of massaging the optics so that you can rep a good second derivative.

Of course, the cost of a lie isn't merely paid by your soul. Sinclair says, "It is difficult to get a man to understand something, when his salary depends on his not understanding it." and when you are fundraising your job is to fundamentally personify the impassive composure of a mountain in a windstorm, even your "yes that's a good concern" are as accidental as shaky cam.

And I would be resigned to it if I believed that this was the best we can do.

But I think we're building the alternative.

I'm here because I believe there's another game of capital allocation on offer, just as lucrative and more broadly applicable — one where experiments are maximally rewarded when they are informative and consequential (not necessarily successful), where assets are most lucrative when in the public domain, and where all of this means that curiosity, rather than conviction, reigns.

And if that's the case, then why the fuck waste your time with the old game?

The old game is sticky to the touch

One reason to waste your time with the old game would be if there's little consequence to playing it. Sure, it makes you want to lie, but maybe that can be managed and in exchange you get some dollar bills to pin to the mission board.

The issue is that once you touch the old game, it gets everywhere. It's like touching the hotel remote.

Here are five ways that venture transmutes us in ways we don't want:

1) It foreshortens our time in the idea maze

In order to generate sufficient growth for our current investors and next round of investors, we have to essentially be done with the idea maze and ready to execute. The thing is, we're definitely not done with the idea maze. Or, rather, we've just exited one labyrinth and entered another. Now we're jointly optimizing mechanism, business model, and product. Taking money will accelerate our ability to grow on certain dimensions (e.g. perhaps bizdev?) but the challenges we face right now are high context problems, which don't get easier to solve with larger headcount.

This gives us more time.

2) It preconceives us as a C-Corp, which has downstream effects

One of the things we believe about what we're building is that as we develop mechanisms for counterfactual reasoning it requires (and permits!) us to also contend with the problem of the value of information contribution to a network. The exciting thing that implies is that we may emerge on the other side of the mechanism design process with a novel credibly neutral mechanism for allocating ownership of a network based on contributions to it. This is not only an exciting development for us nerds, but it means that one could create an organization that fundamentally changes the way in which stock ownership and pay are awarded. In this new kind of organization, ownership is allocated as you take risks that pay off and contribute surprising information — taking the job of distributing raises into the hands of a neutral and transparent mechanism, and out of those of a capricious manager.

By establishing ourselves as a C-Corp now, and allocating tokens and equity, we foreclose the opportunity to live under this new mechanism from day one and we inherit all the legacy code (both good and not) from that org type.

3) It has us play a different game than our users

The promise that we're offering to our users is that there's a new game of capital allocation that's better than VC — we call it Epistemic Capital. It's a capital class that permits all the upside of speculative crypto assets, but then constrained so that the stable valuations tend to accumulate over epistemically sound and consequential ideas. And this is hopeful, because it means that we can now contribute to the creation of an idea and the idea itself acquires economic value as it proves durable and impactful, which allows us to experience a reward for creating it, all while benefitting most not when it's patented and metered, but when it's maximally made available and used.

If that's actually really real, then why wouldn't we behave as if we believe it's true? Why wouldn't we position ourselves to give ourselves away as much as we intend to ask our users to?

4) It establishes a CEO

We claiming that we're building a new kind of work.

But then, we put a CEO in place who communicates with a board of directors and who seeks out funding. If we go the venture route, that CEO must play the role of chief story teller and investor communicator, which means also taking ownership of finding what story resonates. This means that as the CEO I have the information asymmetry that allows me to nudge the vision in any direction.

But if we're actually claiming not only that it's possible but also better to live under decentralized collective sensemaking and decision making, why wouldn't we be doing that ourselves?

On a personal note: What's kind of funny is I've always wanted to be the CEO of a startup, especially a startup building exactly this. The only thing that really dissuaded me from being a startup CEO is the unappetizing process of fundraising — the rest of the task I have done and can handle. Two years ago I would have lost my head had you told me this would be an opportunity. Now here we are with that unsavory task at least done for a time, and yet, now I find my email address in the From field of an email that says, "Thanks, but no thanks."

I will admit; giving up control of the project was hard. With $1.2m in the bank account, I could have ensured that my vision at least got a shot. But it's not just my vision that we're hosting here. Volky has his own view, and our many collaborators have their own as well. The thing I'm both scared of, and excited to watch emerge is: what happens when I give up control? What's capable of flourishing when we share the controls? What do we choose when everyone gets to make a case for their view in the same way as anyone other? /personal note

5) It makes cooperation / field building difficult

The problem with building a company is that we have to optimize not for impact but for market share. Now, to be honest, I'm actually quite excited about the way in which optimizing for impact often coincides with eventual claim to market share, and how market share is a decent proxy for impact. But in the field that we're in right now, what matters much more is uptake and experimentation with mechanisms for sense-making and public goods funding, and much less (to me) which company does it. If supermodular wants to build an index wallets implementation, or protocol labs wants to build a custom L2 for it's specialized transaction type, or futarchy fi / metadao / buttery wants to implement epistemic leverage, I wish they would. What matters is that we reach the in-zone of sense-making and good governance in time. We're all about to be egregiously wealthy or dead anyway.

So that’s why we didn’t take VC.

If you want to join us, lfg https://t.me/+-dHotW78sT42YmFh