Spring 2009
I'd heard Mark Twain said, “The coldest winter I ever spent was a summer in San Francisco," and as a result I resisted the idea of moving there. Gavin and Viktor were convinced we needed to be in the heart of the tech industry, so I relented. The weather turned out to be quite pleasant, but more importantly the city had inventive restaurants and lively bars to keep me occupied. Gavin, being familiar with the area, chose an apartment on Russian Hill, just off Polk, as our new headquarters. The location fell between the Marina, Pacific Heights and North Beach, giving us easy access to some of the best nightlife the city had to offer. Now I’ll be the first to admit that this was probably not the smartest idea for three guys trying to bootstrap a startup, but youth is grandest in its folly. I think it was a college professor that told me that.
We rented a nice three-bedroom flat with a large living room which we converted into our company office. It was here that many discussions took place around the practical applications of bitcoin, eventually leading to Cryptonomy. The idea behind it was simple: we wanted to create a web store that allowed users to interact and exchange goods and services using bitcoin, but without having to have any advanced knowledge of VPNs, the Tor anonymity network, block chains or private keys. The software client would handle all the security and anonymization on the backend, allowing users to transact easily and freely. Evading regulation, taxation and oversight was easy, if done carefully among trusted parties on the deep web. We brought the lawlessness of the all-cash black market to the masses by creating a private black market that didn’t require any technical expertise to access. A thorough vetting, rating and reviewing system prevented scams and fraud. Gavin had the idea to require vendor candidates to first achieve a certain trust level on various partner forums and an annual membership fee helped cover our infrastructure costs and allowed us to keep the cost of transactions extremely low.
Our goal was never to gain a ton of users, or eyeballs or clicks. We never even intended to raise money, though the central banks’ free money sweepstakes provided a phenomenal opportunity. Quite atypically, we preferred to generate earnings the old fashioned way, an idea that many of our fellow entrepreneurs found rather quaint. A typical conversation went:
“So what’s your strategy to scale?”
“Well, we have the architecture in place for the steady growth we’re achieving at present.”
“But what about when it goes exponential?”
“Well, we don’t foresee that ever happening, to be honest.”
“Then how will you raise a fat Series A?”
“We don’t plan to do that either.”
“But… then how will you make money?”
“We’re stacking paper hand over fist as it is.”
Queue dumbfounded look. Granted, it wasn’t completely out of left field. The problem was, we just didn’t see a need to show “hockey stick” growth in users to raise a few rounds, dilute our capital and control over our baby, just so we could finally IPO and get rich. We felt this practice usually led to companies growing faster than they could scale R&D and infrastructure, which in turn lead to major operational growing pains down the road. Nor could we comprehend how eyeballs and clicks could be turned into cold hard cash without reliance on consumer advertising, which was anathema to us. Global digital marketing spend was nowhere near the size it would need to be, to support the valuations of all these new free apps and services. For the advertising market to grow substantially we’d have to see dramatic growth in new products, but all the economic evidence was pointing to the contrary. To a tired consumer, deleveraging and reigning in their spending on useless trinkets. No, we were just fine running our lean business without any outside funding, outside input, and outside scrutiny. To us, this was the true entrepreneurial spirit, not spending investor cash on window dressing and kegerators until getting bailed out at IPO by retail (read: even more foolish) investors.
I wasn’t much help to Gavin and Viktor in the early going. The most I could claim credit for was the name Cryptonomy. It was an amalgamation of cryptography, autonomy, and economy that came to me after a few bong rips one afternoon. Viktor and Gavin worked on the soft client, contracting out much of the front-end work and focusing on the database security and network programming, while I provided some high level strategic input. It was disregarded more often than not and I didn’t wholly mind, it gave me plenty of free time to explore the city and continue my research in economics and finance. Jason lived nearby so we often met up to play squash in the evenings. As the Cryptonomy project began to take shape, Jason's interest in it grew.
We were in the sauna after an intense game one evening when he asked me, “So, where do these bitcoin things come from?”
“Well, really, as far as I understand it, they’re just listed transactions, there isn’t like a digital coin or anything. An accounting entry is made awarding you newly created bitcoin if you complete a transaction with someone or when you successfully solve a problem to verify and record transactions on the block chain, which is basically the ledger of all the transactions that have taken place.”
Now keep in mind, it was 2009, so even a financially savvy guy like Jason should be excused for asking, so we’ll humor him and go on with the conversation.
“And who keeps the ledger?”
“Nobody man, that’s the best part, it’s distributed across the network of machines that have the software. It’s peer-to-peer like KaZaa or wherever you download your music from.”
Jason considered the concept, “So people just set up computers that run the software to get new bitcoins?”
His mind was racing ahead to the money making opportunities this presented.
“Yeah, pretty much, people just run these racks where all the computing power just goes to mining these things.”
“So they just have these machines running, crunching numbers and getting bitcoin? That’s fucking genius.”
Laughing, I replied, “Yeah, it’s great if your utilities are included in the rent.”
“Ok, so there’s the electricity and cooling cost, but if you can mine them efficiently or the equipment you use was bought at a discount, you’d be in business right?”
“Yeah, I guess, but Viktor and Gavin already did all the calculations and said mining isn’t all that profitable in dollar terms. They both think we’re better off just focusing our attention on Cryptonomy.”
Jason was undeterred, “So basically you process some equations to add blocks on the ledger, notating a transaction, and as a result you’re awarded a small amount, which is notated the same way, so and and so forth.”
I nodded, “Basically, until it reaches the max cap that was assigned, 21 million I think. As the chain gets longer, and it gets closer and closer to the max it’ll be less and less cost effective to mine them.”
“Fair enough, it’ll depend on how fast people join the network, but the faster people join the faster the value will appreciate in dollar terms… Viktor and Gavin’s calculations had fixed costs for hardware right?
What if I use my employee discount to build the racks we run the mining software on? We sell these crazy fast GPUs and I get a 50% discount. Maybe that’ll make it cost effective?”
We left the spa in excitement to research the matter. As it turned out, graphics processing units were able to mine bitcoin even faster than traditional CPUs, and were just starting to be utilized in this application. We had all the technical expertise between Viktor and Gavin to get the operation set up, so with Jason’s steep discounts on the hardware, our mining operation was up and running.
Within a few months, I had accrued enough bitcoin that I felt I should diversify out some of my holdings, especially considering the wild volatility in the nascent market. By happenstance, it was around this very time Jason and I met a couple younger guys from the Bay Area that had their own entrepreneurial ideas.
We happened to face off against them over a game of Beer Pong at Bar None in the Marina. They were an Indian and Asian pair, like ourselves, so we naturally hit it off. I remarked to Jason how much they reminded us of a younger version of ourselves. The Asian kid worked in finance, while the Indian one was at some tech startup, but they were both intent on launching their baby, BoozPops. It was a simple idea, freeze pops made with vodka, but what interested us was that they were the first smart Silicon Valley boys to pitch us an idea that didn’t sound like: “we’re going to disrupt this or that mission critical vertical by leveraging paradigm shifting technology through innovative platform development… in the cloud.” In fact, when Jason asked them about what sort of business books they were reading, they had a simple answer that has stayed with me to this day. I think it was the Indian kid that said, “Why bother?
Business is just the execution of common sense.” I’m not sure if it’s all that simple, but the mentality seemed to work for them. And the genius of their idea did lie in its simplicity; they just wanted to hit frats and sororities with a fun, nostalgic, boozy product. Now that was something Jason and I could get behind. We agreed to stay in touch and when they ran into some issues with their manufacturer a couple months later, Jason and I helped out with a small investment. BoozPops would go on to become a bit of a sensation around college campuses and the stream of income from our revenue share agreement helped fund the lifestyle I’d lead for the next few years.