“Raising money is not a human right. Capitalism is evolutionary. Businesses are supposed to fail!” I shout at my cohosts, Eric Kress and Mishka Katkoff. They summoned me to TWiG 193 to share my thoughts on crypto winter and we got into it!
Though things got heated, rest assured we are all friends and this is all in the spirit of healthy debate. Still, I can’t help but get flustered with certain attitudes around partaking in the risky venture that is early stage company investing and building.
Whether you are a venture or private investor, a crypto true believer hungry to build or an entrepreneur trying to make your dream game by any means necessary, I believe that you need to deeply understand the nature of high risk endeavors and the possibility of getting wiped out. The reality is that statistically, most startups fail and most early stage investments go to zero.
This is how the system works. It is evolutionary. And I believe that only by truly understanding the system, by acknowledging its brutal reality, can you as an entrepreneur make the best choices to give your company the highest probability of success.
Below is an excerpt from our debate from TWiG 193, edited for clarity. This was one of the most fun conversations I’ve had since joining the TWiG crew.
Kress: We are, we are not going to cover this at all well, but give us your take on Crypto Winter. We’ve been calling you out for weeks on this stuff.
Ethan: Yeah. You’ve been summoning me. I’ll try and give the shortest possible version of what happened and I’m leaving out tons of detail. But pretty simply the US Federal Reserve lowered interest rates and that had the effect of killing the frothiness in the crypto market. Prices are down across the industry for token assets…
Kress: I gotta stop you there. You cannot blame the Fed increasing interest rates on crypto. It’s supposed to be devoid or separate from…
Ethan: No, no, I’m… Well, (1) anybody who thought that the price of crypto assets was not correlated anybody who bought that story was a moron and deserved to get wiped out…
Kress: That was the story though! The whole point was alternative…
Ethan: That wasn’t my story. I think that probably all this weird alternative finance stuff is gonna be, you know, regulated or sued out of existence or a lot of…
Kress: It’s gonna be regulated into oblivion!
Ethan: So, I’m not blaming the Fed rate on crypto. It’s the other way around. A higher price of borrowing money has had the effect of creating crypto winter, right? Because a lot of people wanted to cash out. The easy money wasn’t there. Prices are down for tokens and NFTs across the industry. Many companies have fallen and many more will fall. And so far we haven’t seen any contagion into the real economy.
So I would say we were in a super frenzy mode where it seemed like easy money. You could fundraise easily. You could just put Web3 in your deck without any thought of what your business model is and have people tripping over themselves to give you money. And that seems to be over.
But there are still many projects that have seen massive success. Just see the interview we published a couple weeks ago with Illuvium after their 72 million land sale. There is still demand for crypto games and crypto assets out there. But in general, the market is lower overall.
So as I said, I recently started a crypto games company. That’s how much I believe in this. So I don’t really care that much that we’re in a crypto winter. I mean, it’s probably going to affect me when it comes time to do the next piece of fundraising. But I’m here because of the tech, I believe in the tech. And I believe that properly executed, a free-to-play game where players own their assets is better for players than a free-to-play game where they don’t.
And that’s why crypto games are going to win. So this moment we’re in right now, to me, it feels like when Facebook turned off the social posts that you could post to the wall and everybody who was on easy street on Facebook Canvas with really bad, free-to-play games found that they, they no longer had free, cheap, easy users. And they didn’t have the underlying retention or business model to succeed. And companies went out that doesn’t mean that it stopped the ascendance of free-to-play in the west. It’s a new business model…
Kress: Oh, that’s a terrible analogy.
Ethan: I think that’s exactly where we are. This is a period similar to turning off the feed, right? Like companies that didn’t have the fundamentals are going under. Products that don’t have the fundamentals are failing, but people…
Kress: Dude, they’re criminals! They’re fucking criminals. They just stole money from, from tons of people. It’s a completely different situation!
Ethan: Who are the criminals? Who stole the money?
Kress: They created assets that had no value sold it to whoever would buy it. And now the people that bought it are left holding the bag. That is not what that is not what Facebook did. Facebook basically pulled the rug from under the publishers, but the consumer wasn’t really impacted.
Ethan: No, I’m saying in the life of the business model his is an equivalent moment where things…
Kress: It’s a false equivalency in the sense that people were not being taken for all the money that they had because of Facebook’s policies. You know, the only people that were affected were the actual publishers.
Ethan: Well, wouldn’t you say that the investors who invested in those companies and those companies were then wiped out because of Facebook’s platform change were taken?
Kress: All right, that is a good point. But that is a very small percentage of people that were willing to risk that money on those investments. Anyway, moving on this affected a far more broad spectrum of people that are losing their ass.
Ethan: I’ll just say that if you’re in crypto or were in crypto solely for the hype, if you’re like, “I have this game that I wanna get funded and I can’t get it funded through traditional means. So I’ll just put Web3 in it” and where doing it disingenuously, you should stay away from the tech and the business model. If you’re like me, if you believe that it’ll change the nature of free-to-play games over time by making things more fair and better for players, by giving them ownership of their assets, then now’s the time to build.
Mishka: What if you were forced to Web3? Because here’s the, the reality…
Ethan: Who was forced to Web3?
Mishka: Let me tell you…
Ethan: People who make choices are not forced!
Mishka: Reality, reality…
Ethan: People who make choices are not forced! What world are you guys fucking living in? Nobody is enslaving you and forcing you to work at a Web3 company. That is a choice.
Mishka: You run your company for a while and you tell me what’s forced or not. Anyways. So money forces you to do different things. Let’s say in Q3 last year, everything was about Web3. Everything! Like you couldn’t raise your money unless you had amazing metrics on your game. So at that point you had to put in Web3, that is called forcing. You either put Web3 or you go bankrupt. So, there were a lot of companies…
Ethan: Raising money is not a human right. Capitalism is evolutionary. Businesses are supposed to fail! If you’re not a good enough underlying business that somebody wants to invest money in you, then you go out of business. That’s Capitalism!
Mishka: Let’s relax. So, no survival is not… So you’re a company. And then say you can put in Web3 and then you can raise a lot of money that allows you to build upon a game. But now you have to add a little bit of an L1, a little Solana, a little Dapper Lab to your life, a little discord and all of that jazz. There are a lot of companies that did that. There are a lot of companies that pivoted to Web3 because they had to, they were not forced. I’m sorry for using that word. They were, not groomed for it either…
Ethan: They pivoted.
Mishka: Yeah, to survive. Exactly that.
Kress: Okay. I don’t know what Mishka’s talking about, but at the end of the day, this kind of correction basically separates the wheat from the chaff to some degree, right? Or in crypto’s case the major criminals from the minor criminals, right?
So it’s like the major criminal absolutely annihilated, right? So maybe people that are a little bit above board or more above board are going to survive. But I guess that there are so many things I want to understand about this from your perspective. And maybe you’re not covering it as closely as I thought, Ethan, but like a lot of these companies were funded based upon the sales of the crypto assets behind them, right? So now, if these things are completely…
Ethan: Are you saying they were funded by selling cryptographic assets to investors?
Kress: Right. Or coins or whatever. And so if those coins are now worthless, how are they gonna go and get additional funding?
Ethan: Again, if they have a sound business that an investor believes in, they’ll be able to sell stock. And if they’re not able to sell stock and they’re not able to raise revenue from players, then they’ll go out of business. This is capitalism. Raising money is not a right. And everybody who invested in cryptographic assets at that level that you’re talking about should have been an accredited investor. It was their responsibility to understand the risks of the market they were investing into.
High risk, highly volatile markets can create high rewards, but they can also wipe you out. So if there’s a fund that was raised by a venture capital fund that only bought tokens and all their tokens are worthless, that it was their responsibility to know that that could happen. Right? That is investing. Investing is not a right. Profits are not a right. Company survival is not a right.
Mishka: Oh my God. Ethan went all South Carolina on us. He’s like pull yourself by your bootstraps…
Ethan: This is capitalism! If a business is not generating revenue from its customers, and it does not have metrics that convince an investor to buy its stock, then it goes out of business.
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