STARTUPS

Andreessen Horowitz’s New Startup Accelerator: START

Introducing A16Z START:

• Fully remote accelerator, funding founders at the idea stage
• $1M in investment from a $400M seed fund
• 6 categories including American Dynamism, consumer, enterprise, Fintech, games or other

Why it Matters

Venture is a brand business. Today there are more VCs than ever, all trying to cash in on the big tech companies. VCs face competition from above (PE firms like Tiger) and below (solo GPs like Elad Gil or Packy McCormick). Valuations have hockey sticked, funds have stockpiled record amounts of capital, and the pendulum has swung firmly into “founder friendly” territory.

With all those funds competing to deploy capital, what’s the biggest differentiator for a VC? Brand.

A16Z is on the short list for strongest brand in venture and they’re using that strength to expand. Fast. They’re hiring so many people it’s become a meme:

Last year they launched Future, a new media property, and are publishing essays from some of the best founders in tech. They raised a crypto fund back in 2018 before the hype. They even gave up their legal VC status to go late stage and invest in public markets.

START is one more way to scale. Earlier than early stage, it brings the A16Z brand, connections, and capital to back future founders with only an idea.

If you have billions in capital, a dominant brand, and you’re funding Y Combinator companies anyway, why not compete?

The Big Question

If A16Z is determined to become the full stack player in venture, what will they do next?

When I worked at Silicon Valley Bank some of the execs whispered about A16Z raising a venture debt fund. Why partner with Silicon Valley Bank or Hercules for debt capital when you could raise a debt fund tomorrow?

What would you do?

P.S. Does anyone know of a good map of A16Z divisions, funds, and services? If there isn’t one already out there I’ll diagram it out in a future newsletter send.

DEFI

Beanstalk Investors Get Robbed

• Exploiters stole $182 million from Beanstalk investors—every cent in the project
• Incredibly, Beanstalk’s own voting and governance system was weaponized
• Armed with $1B in Flash Loans the thieves mounted a hostile takeover, buying 67% of the protocol
• After repaying the $1B loan and dumping the tokens the exploiters came out with $80M profit
• It all happened in 13 seconds

First off, this is sad. This isn’t a company’s money, this is investors’ money. People lost millions.

The story of how it happened, however, is both instructive and incredible.

What was Beanstalk?

Beanstalk was a stable coin, where each bean was pegged to $1 USD. Investors could earn a yield by lending capital to the central funding pool and then the user funds were used to maintain the stable coin. It was intended to be a stable coin built and owned by users, and it was working.

Flash Loans

To pull this off an exploiter anonymously and instantaneously took out a $1 billion loan. How?

Flash loans are a new technology built for DeFi. A crypto loan that requires no underlying collateral but has to be paid back in seconds or minutes.

The idea behind flash loans is to allow borrowers access to huge sums of capital, for all sorts of complicated transactions, with the sole requirement that the borrower repay the loan by the end of the transaction.

So, the borrower has to lay out the whole transaction beforehand and the protocol has to see that the funds will be returned, before the loan can be approved and the transaction goes through. Theoretically, it’s impossible for someone to default on a flash loan.

And once it’s approved you can play with huge amounts of capital at near zero risk to either party. It’s kind of genius.

But — with that kind of capital you can do some serious damage.

How the Beanstalk Exploit Happened:

• First, exploiters introduced 2 governance proposals to the Beanstalk system last Saturday, ostensibly to make donations to Ukraine.
• The 2 proposals had malicious riders hidden in the fine print. If passed, they’d allow bad actors to drain the protocol’s reserve fund.
• Then the exploiters took out $1 billion in flash loans and bought 67% of the Beanstalk project.
• With their new supermajority, they executed both proposals — which brought their code live on the blockchain — and drained all $182M from the project.
• Then they repaid the flash loan and sent their ~$80M in profit to Tornado cash to be washed.

All in 13 seconds.

Side note: Tornado cash is a way to wash crypto on the blockchain. The stated goal is to introduce privacy but the obvious use case is money laundering. Every time I hear about Tornado Cash I am amazed it exists.

And since this is crypto and every transaction on the blockchain is public, you can see it all right here in black and white.

What Comes Next?

Sadly, since there is no venture backing and prices have collapsed to a few cents per token, the money is gone. Beanstalk offered the exploiters 10% of the stolen funds as a ‘finders fee’ if they agreed to return the rest but no one is holding their breath.

What I can’t get over though, is that it’s not even clear this is illegal. This wasn’t done by a hacker, it was done by an exploiter. Who followed the rules and design of Beanstalk.

By design, if you have a super majority, because you own 67% of the entire protocol, you can pass whatever proposal you like. Including proposals to withdraw funds.

Since this was obviously intended to defraud others it might be illegal but it’s not cut and dry. That’s incredible.

The charts could give any investor nightmares.

Takeaway

DeFi is new. Regulation is virtually nonexistent. Protocols are not insured by the US government. There are fortunes to be made. There are also risks.

I’m fascinated by crypto markets and I firmly believe the believe the best way to understand these technologies is to play with them, but you invest at your own risk.

ELON

Twitter’s Poison Pill

• Twitter’s board announced a “poison pill” strategy to fight off Elon’s takeover bid on Friday
• The plan would allow shareholders to purchase discounted stock if Elon acquires a 15% stake in the company, effectively diluting the stock
• At $54.20 a share Elon’s offer values the company at $43B
• Twitter did $5B in revenue in 2021, up 37% YoY

I’d love to see Elon take over Twitter. There’s been virtually zero product innovation since Twitter launched 15 years ago, ad sales are still 85% brand advertising instead of direct, targeted ads — like TV commercials or billboards instead of targeted Instagram ads that only show you things you actually want to buy (and are massively more valuable) — and the stock is still about where it was when they went public in 2013.

The only question for the board is whether they can drive Twitter’s stock price above $54.20 in the next 6 to 18 months. If they turn Elon down and the stock plummets they’re going to get sued by shareholders.

The stock’s performance over the last decade speaks for itself:

FROM THE PODCAST

Every week I interview up and coming founders to break down their business, how it fits into the market, and get a glimpse of what’s coming next in tech. Here’s a quick take from the Just Raised pod this week: 

Faraway Games

A deep dive into crypto economy gaming with Alex Paley and Dennis Zdonov the founders of Faraway.

• Product: Mini Royale, a Fortnite-esque online game with NFT gear and land ownership
• Traction: 2M players + 92 thousand games a day on avg
• Raised: $21M Series A from a who’s who list of VCs including: Lightspeed, A16Z, Sequioa, Solana, Sam Bankman Fried at FTX, and Night Media

Today, games are social networks. Alex, Dennis, and I dive into what the future of gaming might look like when digital items become NFTs and developers become responsible for managing an economy of in-game currency traded against the US dollar.

“That’s what makes games sticky. It’s the social-political-community angle, not killing wolves or getting headshots. It’s the social systems that form around the core.”

– Alex Paley, CEO and Cofounder of Faraway

Tune in Here →

RECENT FUNDING

Up and Coming: New Rounds This Week

VCs bet on new solutions to combat the labor crunch

SESO Labor

• Raise: $25M Series A from Index
• Including: Participation from NFX, Founder’s Fund, Shrug Cap, and the Chainsmokers
• One Liner: Streamlines the hiring of seasonal immigrant farmworkers

Agriculture is going through a massive labor shortage. $3.1 billion worth of crops each year rot in the field because there aren’t enough workers to complete the harvest, and building software to streamline or eliminate government bureaucracy can be a great business. Just look at Mainstreet.

Streamlining the H2-A visa process — the special visa required to hire immigrant seasonal workers — also unlocks a marketplace business. Long term, SESO aims to create a marketplace of thousands of qualified H-2A workers to help farms hire more easily, and they want to advocate for workers on the platform to ensure they receive fair treatment within the US.

So, SESO is solving a massive problem in a critical industry, has SaaS pricing and margins, and built an initial product that solves the “cold start” problem for a much bigger marketplace business down the line.

That explains the list of stellar investors. This is one to watch.

Clipboard Health

• Raise: $50 million Series B in 2021 and a $30 million Series C announced this week
• VCs: Sequioa led the $30M C and Initialized, Caffeinated Capital, and Y Combinator participated in the A and B
• One Liner: Marketplace for nurses to pick up hospital shifts

Like the farming labor market’s SESO targets, and the US labor market in general, healthcare is facing a critical labor shortage. A labor marketplace app like Clipboard creates liquidity in the system so that healthcare workers can work freelance wherever they want, whenever they want, and hospitals and nursing homes can pull from a deeper talent pool. In a pinch, healthcare facilities can offer higher wages to attract nurses.

There are big hurdles to launching gig-work marketplaces for complex jobs like nursing. But when the market is this tight, businesses that once fell in the “too hard” category now look like obvious opportunities.

Plus, Clipboard’s gross revenue increased by roughly 25x in the last 18 months, according to TechCrunch.

Pipedream Labs

• Raised: $1.6M pre-seed from Balaji, Starship, and angels
• One Liner: Delivery robots that travel through 12-inch pipes to deliver products in cities

It’s a moonshot, extremely early, and the barriers to building new infrastructure in cities are obviously massive—but I couldn’t resist. These are the kinds of creative, radical products we need more of if we’re going to revitalize American infrastructure. Check out the thread. 

ONE FUN THING

Game developer Panic just started shipping the Playdate, the world’s smallest game console. Retro games are played on a black-and-white screen the size of a credit card, with a little crank handle to scroll. Kinda awesome.