The Warburg Serres Investment Thesis, Part 1

Featuring Some Slight Digressions on Snowboarding

Writing about crypto is challenging.

The main reason is that it’s somewhat technical –– and different readers are simply at different stages of their “crypto journey.” Let’s use snowboarding as a metaphor. Some people are still on the bunny slope –– and that’s totally fine! I learned to snowboard on the bunny slope, and I loved hanging out on the bunny slope with my daughter back in the early days, teaching her the fundamentals of balance, alignment, technique, and so on. From there, it’s always exciting to begin to move on to green-circle slopes, then blue-square, then black-diamonds. The more knowledge and technique you have, the more of the mountain you can explore.

In prior posts, I’ve tried to keep it pretty green-circle. But in this post, I’m going to venture into blue-square territory. I deeply believe that people should only invest with me if they understand what they are investing in, or at least have an interest in exploring and learning alongside me. (Even I am still learning about crypto, and anyone who claims to know everything about a space that changes so rapidly is lying.) At the same time, there are space constraints in this newsletter, and so I won’t always have time to revisit some of the basic ideas in the crypto/blockchain space that I’ve covered in former posts. (I’ll try wherever possible to link back to relevant posts I’ve made previously.)

This post assumes that you’ve already internalized a few ideas, either from my former posts, or from elsewhere. A few of those key ideas include:

• Crypto is not synonymous with cryptocurrency! Currencies are a part of the crypto space, but if you’re thinking, “investing in crypto just means choosing the currency that’s going to surge,” then this post is not for you yet, and I suggest you read up on my own “crypto conversion” story (Part 1 and Part 2) to get up to speed. I’m never simply looking to sell someone on the next Dogecoin or whatever, because it seems cool/funny. I’m interested in investing with brilliant tech futurists who see, on a fundamental level, a better way of building technological systems.

• Rather relatedly: the FTX / Sam Bankman-Fried debacle was not actually about crypto, the dunks and hot takes from the peanut gallery notwithstanding. SBF’s seems to have been a classic bit of fraud that happened to involve cryptocurrencies, but again, we are not especially interested in cryptocurrencies. We are interested in the underlying blockchain technology that winds up giving us cryptocurrencies –– underlying technology that we believe can give us a better version of the internet, overall. That project –– building a better internet –– is and should be a decades-long project, and the SBF debacle will ultimately be seen as a grim little stumbling block on humanity’s quest to build this better internet.

• And still relatedly: Crypto (or blockchain tech, or Web3 tech, or whatever your preferred nomenclature) is fundamentally about big themes like new forms of governance (not so much of political bodies, but rather of firms/organizations), new forms of trust, new ways of storing value, and new forms of computing (among other things).

If you’re caught up on those green-circle-tier ideas –– or if you least don’t oppose them out of hand –– then let’s ski this trail! Read on.

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Speaking of skiing, when I talk about the Warburg Serres investment thesis, it helps to think of a mountain.

But now let’s abstract it. Like this:

A mountain is basically a triangle. And if we were to subdivide that mountain/triangle, we would observe that it has three main components: a foundation; a middle; and a peak. 

The peak is the most exciting part –– it has the best views. Most people who are serious about scaling a mountain have the ambition to reach the peak. But two important things are true of the peak: you can’t get to it without scaling the base, and the middle. (Helicopters don’t exist in my analogy, OK?) And also, the peak is actually the smallest part of the mountain, by volume. A whole lotta rock you don’t spend much time thinking about, while you are on the peak, is really important for you to be able to enjoy the peak at all.

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Warburg Serres’s investment thesis is basically predicated upon this: that the Web3 space will be something like that three-tiered triangle. In my next post, I’ll go into some detail about what exactly the three tiers mean in a crypto/Web3 context. But since all that will be a bit abstract (involving technologies that don’t exist yet), let me first illustrate the three-tiered triangle in reference to the web you do know.

Additionally, let’s focus our attention, for now, on one aspect of the internet you know: video.

And let’s also go back in time to the years before internet video was ubiquitous, the early aughts.

Let’s imagine you are an investment analyst today with a remit to focus on internet video, and that you also happen to have a time machine, and that this time machine delivers you back to the year 2003. You step out of your time machine and hear the strains of R. Kelly’s “Ignition” cranking on someone’s newfangled “iPod” device. But as dope as that jam is, you are a focused professional, with one goal: you want to maximize returns on a concept you know is going to be huge in less than a decade: internet video. 

So where do you invest your dollars?

“YouTube, of course,” you probably think, smugly.

But here’s the catch: YouTube doesn’t exist yet. And in fact, it can’t exist yet. The technology just isn’t there yet. The closest thing that you have are smatterings of flash animation here and there. (And we all know how awesome that was –– until it wasn’t!) Because for YouTube to exist, many other things first have to be true.

• High-speed internet access needs to be a thing 

• And it needs to be a widespread thing… not just in the mere millions of users, but really in the hundreds of millions or billions. (Today, we all basically breathe high-speed wifi.)

• And a norm of user-created video needs to be established; the very idea of a market for non-professionally generated video needs to be a thing. Behaviors don’t change overnight! Often a younger generation needs to start to come up behind the current one, to make new forms of content creation suddenly “normal.”

• Various technical components that eventually will become a part of YouTube –– various bits of code and infrastructure, some open-source, some privately developed and ultimately licensed by YouTube –– need to be invented.

Your quest to get rich in 2003 off of internet video just got more complicated than picking some obvious name-brand everyone will know a decade later. In order to even create that killer app, you have to invest in the fundamental technologies that will make that killer app possible.

Put another way, you can’t climb to the peak, if the foundation hasn’t been fully built yet.

So your winning “Internet video” portfolio in 2003 actually needs to consist of a dozen technical, infrastructural (maybe even boring-seeming technologies) that are essentially pre-conditioning the environment for apps like YouTube to even exist. You need to focus, in 2003, on the foundational.

To give just one example of a company you’ve probably never heard of, but that you really want to invest in in 2003: Akamai Technologies (AKAM). All that money you think you want to plow into “YouTube,” which is still a glimmer in someone’s eye, you really want to invest in AKAM, which in 2003 is trading around just a dollar a share on Nasdaq. Just a few years later, as YouTube is just finally becoming widely known, AKAM trading around $55. 

By playing it smart and betting on the right foundational provider implicated in internet video technology, you’d have a 5,500% return on your 2003 investment in AKAM.

By investing in these technologies, you are actually making good investments in and of themselves –– most of these companies see huge returns in the years following 1999 –– but you are also putting yourself in the best position to perhaps be an angel investor in YouTube itself, well before Google acquires it for 1.6 billion in 2006.

(By the way, in 2003, you should massively short R. Kelly, and hold that position for a long time. Kind of like a mullet in the 80’s.)

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So let’s park here and take away, for now, this general idea: that when making big bets on the technological future, you need to emphasize the “foundational” (infrastructural) investments over “peak” (apps) investments –– at least at the beginning. This is at the core of Warburg Serres’s Web3 investment strategy, fuller details and nuances of which I will explore in our next post.

See you next week, when I’ll talk about thinking beyond the foundational level of the mountain, and how the foundation relates to the middle and peak.