In a 1999 interview with the BBC, David Bowie shared some of his views about the internet. Though still an emerging technology back then, it was already having a huge impact on the music industry.
“I don’t think we’ve even seen the tip of the iceberg. The potential of what the internet is going to do to society, both good and bad, is unimaginable,” the rock icon said rather prophetically. “The actual context and the state of content is going to be so different to anything we can really envisage at the moment, where the interplay between the user and the provider will be so in simpatico that it’s going to crush our ideas of what mediums are all about.”
Twenty years after that interview, Bowie’s predictions about how the internet could revolutionize content have proven remarkably prescient.
Lazada and Zalora alumnus Kenrick Drijkoningen sees the same thing happening today – but with blockchain technology standing in for the wider internet, and money taking the place of content.
The fund borrows its name from the Lunex Project, a 1950s plan by the US Air Force to put humans on the Moon that predated the Apollo 11 landing by over a decade. The US Air Force’s foresight is something that Drijkoningen and his team are drawing inspiration from as they seek out the big blockchain innovations of tomorrow.
“The reason that we spun out this dedicated fund for LuneX is that we think crypto [and] blockchain are the next iteration of the internet,” Drijkoningen tells Tech in Asia.
“The internet digitized content – so your newspaper, your music, your video, all went from analogue to digital. It’s pretty clear [now that] transition that happened, but it wasn’t that clear in the 1980s and 1990s.”
“Now we [are moving] from digitizing content to digitizing actual assets,” he says.
The early internet had “layer one” protocols such as TCP/IP, which essentially enabled the communication of data across the network. Web browsers such as Netscape Navigator and Microsoft’s Internet Explorer were built on top of this first layer, which were themselves followed by another layer comprising applications like Google search, Facebook’s social network, and Netflix’s video streaming.
Blockchain protocols like Bitcoin and Etheruem are today’s “layer one,” and now there’s demand to build infrastructure on top of these. “The services you need in a new system of money are some of the things that already exist in the old world – custodial services, KYC [know-your-customer], wallets, exchanges – all these service companies that enable that next layer, the application layer, where consumers start interacting with it and businesses start using it,” Drijkoningen explains.
As Drijkoningen sees it, the digitization of financial assets – whether money itself or things like real estate, company stocks, bonds, or alternatives like art – could prove even more revolutionary than what the internet has already done with content.
“Allowing for permissionless transfer of these things, and all the innovation that can happen around that – we’re in the early stages, but we think that could potentially be, in terms of value creation, even larger than the internet,” he says.
“That’s because assets obviously have a higher monetary value than purely digital content. We look at this industry like we need to be there. We need to be early and we need to understand it because [that] sets us up for the next 10 years.”
Venture capitalists are used to taking on high risk. They know that not every startup they back will give a positive return. But given the incipient nature of blockchain technology, Drijkoningen recognizes that LuneX is making a particularly big leap of faith.
“But that’s our role, to understand what the basic building blocks [are]. Then we really want the entrepreneurs to come in and build exciting companies,” he says. “At the start of the internet, you couldn’t have imagined Facebook, or Instagram, or Snapchat – all these things being built on top [of it] – but what you could recognize is the power of digitizing content, and all the possibilities that spin out of that. I think it’s a little bit similar here.”
Drijkoningen has other reasons to feel confident about the growth prospects for blockchain and cryptocurrencies.
“There’s a market cap for the US dollar, there’s a market cap for gold, and you can benchmark [those] versus the market cap that bitcoin currently has and you see that we’re really, really early in this ecosystem,” he suggests.
The estimated value of all the world’s gold is about US$7.58 trillion. All the bitcoins in circulation add up to around US$156 billion based on current pricing.
But if you compare the two assets side by side, you can make the argument that bitcoin itself is “a better money,” Drijkoningen claims.
The new gold
There’s a finite quantity of physical gold, so investors know that its supply can’t be inflated. It’s also a remarkably resilient material which doesn’t spoil or rot, making it a good store of value.
However, the precious metal is expensive to extract from the ground as well as to store and transport. It can be stolen fairly easily, depending on its owner’s security arrangements. In the past, even governments have seized gold from its owners on economic or political pretexts.
In those aspects, bitcoin is “certainly better than gold,” Drijkoningen argues. “It’s easier to store, it, easier to transfer – it cannot be taken away. What’s not so good about it is it’s more volatile and carries some technology risk. Not everybody understands it or [knows] there will not be some catastrophic bug that’ll bring it down,” he says.
What if you flip the equation on its head, and the actual money becomes the store of value? That’s what bitcoin proposes.
Many people around the world are beginning to consider bitcoin and other cryptocurrencies as the best store of value available to them. This is particularly the case in emerging markets or developed countries going through acute economic problems.
“Whether its Argentina or Venezuela, they know they cannot trust their local currency. So why would they hold the local currency?” Drijkoningen says. “People say bitcoin is volatile, but if you live in these places, people are like, ‘Whatever – at least I’ll have some value in a year’s time!’”
He continues: “If you don’t trust [your central bank’s] monetary policy or don’t trust they’ll do what’s in your long-term best interest, now there’s an opportunity to pick something else. I think it will keep governments more accountable and gives […] access to financial services to all these people that never had it. Nobody in Africa or South America is profitable for a bank, so they never get any services. Now they just need a US$50 Android phone with an app, and they can transact with whoever, whenever they want.”
Cryptocurrencies also have a role to play in relatively stable, developed economies, he adds, particularly in the current environment of extremely low interest rates and negative sovereign bond yields.
“It’s not normal. Your money just depreciates over time, all the time. This is why you get bubbles in the stock market and real estate and all these other assets – because nobody wants to hold the actual money!”
This situation forces savers and investors into buying assets that they often don’t understand. Cryptocurrency, of course, is yet another one of those mysterious assets. But Drijkoningen thinks its potential to be a secure store of value makes it different from more traditional investments.
“What if you flip the equation on its head, and the actual money becomes the store of value? That’s what bitcoin proposes,” he suggests. “I don’t need to make [so many] speculative investments in real estate or stocks or bonds, because [bitcoin] holds value better. Then you can make a more calculated decision [to] invest in more productive things, rather than just trying not to lose money.”
After the ICO hype
In spite of all the perceived advantages cited by Drijkoningen, the fact remains that widespread adoption of blockchain technology – and consumer and business trust in it – remains low.
The rise and fall of initial coin offerings – a fundraising event in which a blockchain-centric company sells its own cryptocurrency – haven’t helped.
From 2017 until early 2018, ICOs proliferated in number and size as startups began to take advantage of bitcoin prices – then at all-time highs – and the growing hype around the technology.
Amateur investors who knew next to nothing about blockchain piled in, putting their life savings into bitcoin and ether, and buying large sums of tokens issued by unregulated coin issuers.
Then, when crypto values began to tumble back to earth and regulators increased their scrutiny of ICOs, the same people lost huge amounts of money. Crypto’s reputation will take a long time to fix.
Being active in this space now when everybody has lost interest… That’s where your alpha comes from.
So why is now – in the aftermath of this chaos – the right time to set up a blockchain specialized VC fund?
“The reason we had this whole ICO boom and bust was we had this new tech that is poorly understood by lots of people, and easily accessible,” says Drijkoningen. “It’s perfect for scams. But again it’s not too different [from] the 2001 internet boom and bust, where people were just peddling companies to go to IPO that had no business model and no reason to exist.”
The dot-com bubble in the late ’90s also led to negative perceptions about the internet. “People said the same thing at the time: The whole stock market bubble burst; we go home. We don’t need the internet – it was just a fad,” he says, channeling those who had lost a fortune. But he sees the hype generated around the internet and its subsequent crash as a “hallmark” of any revolutionary, early-stage technology.
“The internet wasn’t ready back then, and blockchain and crypto are not ready right now. But being active in this space now when everybody has lost interest makes for the fact that you have a massive informational advantage versus the rest of the market,” he says.
“That’s where your alpha comes from – you have some info or see something that nobody else is looking at, and because of this, assets are mispriced. There are companies being formed now that not a lot of people are looking at, that are at excellent valuations.”
Nevertheless, at US$10 million, LuneX’s fund is hardly earth-shattering. Its relatively small size reflects that, at least in part, many investors are still exercising extreme caution when it comes to all things crypto.
Drijkoningen argues that the fund is of a “good size” given that the industry is still in its embryonic stage.
LuneX, he points out, is targeting only a handful of startups, particularly in Singapore, and they’re all early-stage companies on their seed or series A round. As such, “it doesn’t make sense to have a US$50 million fund, because you couldn’t deploy that here.”
He adds, “The other [reason] is on our LP, our investor side, a lot of people are wary of the industry or don’t understand it, want to learn about it, but aren’t ready to commit significant capital to invest in it. So it would also be a stretch to raise a much larger fund specifically for this industry at this point in time.”
Drijkoningen confirms that there is “some overlap” with Golden Gate Ventures in terms of LuneX’s backers, “but not that much.”
Most of the fund’s capital comes from high-net-worth individuals and family offices with some experience in the blockchain space. “Then we have some corporates who feel this could be relevant to this business and want to learn about it,” he says. “The large investors we see being much more careful […] it’s much harder to get them to come into this ecosystem because there’s a new asset class involved [and] there’s regulatory uncertainty.”
Still, Singapore is an advantageous place to be in this regard, as far as Drijkoningwen is concerned, since LuneX is conspicuous. He observes that while there are a number of larger blockchain-focused VC funds operating out of the US, Golden Gate Ventures appears to be the only traditional VC firm in Southeast Asia with a fund dedicated to the space.
While it has a global mandate, LuneX is concentrating on opportunities in Singapore and Southeast Asia.
“I prefer to do the deals in Singapore if we find good companies here,” he explains. “Because we’re based here, I can help the companies better, interact with the founders, meet them, have coffee with them, try to help them.”
Another boon to being in the Lion City is LuneX’s is it participation in the government’s Startup SG Equity scheme, under which it co-invests in startups alongside state-owned “deep tech” investor SGInnovate.
As for the fund’s returns, things “are looking pretty good so far,” he says. “A few startups are raising now so we’ll have a markup on the portfolio. And then [we’ll] focus next year on helping these companies grow, develop the portfolio, deploy the rest of the capital we have, and then maybe do a ‘Fund 2’ end of next year, or early year after.””