The “Bit” and the “Coin”: The two huge opportunities hidden inside bitcoin

(originally published on PandoDaily)
Most people think of bitcoin as a mere replacement for fiat money, or what we think of as “cash.” While currency is the best-known application of the bitcoin protocol, there are even more compelling disruption opportunities outside the finance world that we’ve barely even begun to tap into. So, when people ask me about bitcoin, I like to explain that there are two things going on here: the bitcoin protocol (the Bit) and a bitcoin currency (the Coin).

The “Bit” Side of Bitcoin 

Bitcoin’s biggest disruption is the distributed system in which every transaction is shared and available on a public database, known as the blockchain. It sounds complex, but it is not. In essence, the bitcoin protocol simply enables a decentralized database to track ownership of assets. The beauty in this over-simplification is that assets can be anything from physical to virtual.
It’s the simplicity of the concept that creates the most fascinating applications. The bitcoin protocol has both the potential and the promise to disrupt major industries as we now know them. Every industry where a third party exists to track ownership of assets could potentially be disrupted by an application built on the blockchain. Companies such as Ticketmaster (ticketing), Old Republic National Title Insurance Co. (property titles), and even the venerable New York Stock Exchange (stock exchanges), could be entirely disrupted by next-generation counterparties leveraging the blockchain.
How and why would this happen? The bitcoin protocol can allow buyers and sellers to securely buy, sell, and track assets such as tickets, titles, and shares of stock by leveraging the blockchain’s distributed “consensus protocol” that can keep track of ownership. We are starting to see interesting start-ups such as BitHalo and Namecoin that are building applications that will enable asset owners to directly access the blockchain, further eliminating the need for expensive middlemen. Perhaps one of the most exciting developments is IBM’s proposal that it may use the blockchain to build out a distribution platform for the Internet of Things.

The “Coin” Side of Bitcoin 

Today, the most widely used application of the bitcoin protocol is the currency. This makes sense given that money is a pretty logical asset for which people would want to track ownership. If you hear on the news about bitcoin, it almost always has to do with money that is being stored on the blockchain.
Most of the early bitcoin companies are focused on the currency in three categories: (1) building the basic infrastructure that allows people to buy and sell bitcoins on exchanges such as Bitstamp andBitfinex, (2) securely store bitcoins in wallets such as Coinbase and Xapo (Emergence Capital is an investor in Xapo), and (3) transact through merchant services such as Bitpay and Gocoin. It is interesting to see how some of these early category leaders are evolving and adding more services, making the lines between these core categories less clear. Additionally, while bitcoin is the most popular form of virtual currency, there are other alternative currencies (or “alt-coins”) such as Litecoin, Ripple, Dogecoin and others.

Bitcoin’s Untapped Potential

Where are we going from here? As a technology entrepreneur and an investor at Emergence Capital, it’s been fascinating to see the rapid evolution of the ecosystem in just the past few months. And even though bitcoin (the protocol and currency) can be confusing, the ecosystem is starting to mature. Here are some signs that we’re headed in the right direction:
  • More experienced teams of founders: We’re starting to see extremely talented, high-profile teams focused on bitcoin startups. Wences Casares and his team at Xapo, Jeremy Allaire at Circle, and Ben Davenport over at BitGo are some examples of experienced founding teams making big bets on this nascent ecosystem.
  • Second-derivative startups: While the first wave was focused on building basic platform services such as exchanges, wallets, and merchant services, we’re now seeing far more diversity in the ecosystem as startups begin to address the challenges arising from increasing bitcoin adoption. Namely, these are in the areas of security, identify, financial tracking, analytics, and so on.
  • Bitcoin protocol startups: Of these trends, the third and most fascinating one, in my opinion, and the one still in the earliest stage, is the growing number of startups working on problems not even related to bitcoin the currency. Instead, they’re leveraging the value of the protocol itself. Companies that are currently rethinking DNS, ownership of physical assets, ticketing, file storage and, even email systems, are blowing my mind as I think more about a world in which bitcoin the protocol disrupts entire technology ecosystems as we now know them.
Bitcoin is still in its infancy and it’s exciting both to think how far the ecosystem has come and how much opportunity remains ahead. Banking and financial services are ripe for disruption and bitcoin has introduced a number of principals that have the potential to do just that. But, counter to popular perception, many of those who create the most value using bitcoin technology may have nothing to do with financial services. We’re only scratching the surface of what “bit” entrepreneurs will soon create.

Another Transaction for the Blockchain

Today, Emergence Capital is thrilled to announce an investment in Xapo, an early leader in the emerging bitcoin ecosystem.  CEO Wences Casares has decades of experience in building successful global finance companies. My partners and I have known him for over fifteen years, and we can’t think of a better leader to navigate this exciting new platform.

On a personal level, I have been tracking bitcoin startups for nearly two years.  When I first canvased the ecosystem, I came across less than 100 startups, mostly focused on wallets, exchanges and merchant services.  I’m now working on an updated version of this landscape with nearly 1,000 companies, which I plan to publish in the next few weeks.

The more time I spend with bitcoin entrepreneurs, the more obsessed I become. It’s so much more than a financial instrument – it’s a protocol that allows efficient and secure fixing, storing and transfer of value. That value can be much more than a currency, we are thinking about use cases in real estate, tickets, email addresses and more. While we have started to see early companies focused on the consumer elements of bitcoin, at Emergence, we are particularly excited about the emerging B2B opportunities around security, identity, financial tracking, merchant services, analytics and others.

Just over 10 years ago we invested in which became the defining company in the SaaS world. Today, we are announcing our first investment in a bitcoin company, and we are excited to partner with Wences and the company that’s going to help define one of the most exciting developments for the next decade.   

SaaS Entrepreneurs: Show Me the Money

When Presenting Financials, Don’t Forget the Basics

Much has been written about the key metrics that cloud companies should track, and most SaaS entrepreneurs are well-schooled in calculating CAC (customer acquisition costs), MRR (monthly recurring revenue), and CLV (customer lifetime value).  It is surprising, however, how few SaaS companies now present a traditional P&L (profit & loss statement) with basic financial data.  At Emergence Capital, we have noted this trend, and we thought it might be helpful to point out a few of the key financial metrics that can help investors really understand the cash inflows and outflows.

For most young SaaS companies, bookings are the most important financial metric to track.  Bookings represent the dollar value of the contracts signed within a time period.  We look at the absolute numbers as well as the growth rates to determine the health and prospects for a company.   We have found, however, that there are a few critical nuances to consider when tracking bookings, and it is important to understand the following distinctions:
  • ACV Bookings vs TCV Bookings: ACV (Annual Contract Value) counts the expected revenue within the first year, even though some contracts may be multi-year. In order to account for those multi-year contracts we have the TCV (Total Contract Value) metric. We look at both, but care primarily about ACV Bookings.
  • Recurring Bookings vs Non-Recurring Bookings: Not all bookings are equal. In SaaS businesses, recurring revenue is the gold-standard. However, many companies charge small (and sometimes not that small) implementation, training and other professional services fees. SaaS-savvy investors typically focus on the recurring bookings, and they may discount the non-recurring component of bookings. 
  • New Bookings vs Renewal Bookings: When companies are just starting to sign contracts, this distinction is useless, but it is great to have the framework to account for both new and renewal bookings as renewals start to kick in. Given that churn for SaaS businesses is critical, understanding the renewal layer as a separate bucket is extremely helpful to assess the value customers are getting from your solution.
  • Upsells: We like to see negative dollar churn in every cohort. What does that mean? Of course you might lose some customers along the way, but the best SaaS businesses deliver so much value to those customers that stick, that the ACVs increase over time and these upsells more than compensate for those customers that churn out. We are ok with companies that have some customer churn, but we are more excited with those that have negative dollar churn (see charts below). For example, we can tell something happened with Cohort A, as the company lost a bunch of those users the month after they signed up (wrong targeting?). We can also tell that cohort B was not a good one, as MRR declined over time, however, cohort C was a great one as upsells were off the charts. Spending time trying to understand the underlying drivers for these behaviors is critical.

Gross Margins
Most people think gross margins are pretty straight forward.  Start with revenues, then deduct the costs of goods sold (COGS), and you get the gross margin.  Sounds simple, right?  You would be surprised to see how companies take radically different approaches to calculating what should be included in COGS. For example, in a freemium business, we believe the costs of supporting free users should be included in COGS, thus lowering gross margins. We like to see fully loaded COGS to reveal the real Gross Margins of a company.

Operating Expenses & Operating Income
The easiest way for us to rapidly calculate ratios and compare those ratios with our own indexes (ratios for companies that are doing great and ratios for those that are not doing great) is to bucket operating expense (OPEX) in 3 categories:

  • Sales and Marketing 
  • Research and Development  
  • General and Administrative

After deducting these expenses from the gross margin, you will arrive at an Operating Income (Loss). This number will help investors figure out how much money you are projecting the company will need over the next year or so.

This is a sample financial summary that we would love to see in every pitch deck:

Putting together something like this is not only necessary for raising money, but it is also extremely helpful to track the key drivers and ratios as you grow your business. For example, in the table I shared, you can tell the company was efficient early on (spent $5.5M in S&M to get $6.4M in new ACV recurring bookings ⇒ $0.86 for every dollar of new ACV recurring bookings), then became a little bit less efficient as it scaled (spent $12.7M in S&M to get $11.5 in new ACV recurring bookings ⇒ $1.10 for every dollar of new ACV recurring bookings), and ultimately controlled the S&M efficiency (spent $16.6M in S&M to get $20.7M in new ACV recurring bookings ⇒ $0.80 for every dollar of new ACV recurring bookings). As you can see, with this data you can not only benchmark your business against other companies, but you can also track performance improvements over time.

While tracking these metrics is just one piece of the puzzle, we hope this analysis and template can help shortcut the process and save you some iterations at the time of raising capital.

Content Marketing: Five Ways To Keep Feeding The Beast

The article was originally published on Content Marketing Insider (10/04/13)

In the last decade, marketers have experimented with new technologies, building the pipes to connect with their online audiences. Modern CMOs cultivate a blend of digital media, including emails, blogs, tweets, posts, and other forms of social media. While using these tools has elevated marketers to an even more central role in many organizations, it has also challenged them to keep engaging with an increasingly demanding audience. Marketers have created a beast, hungry to devour new content at a blistering pace.

Feeding the beast is where content marketing comes in. Consumers are looking for high-quality content, but it typically has a very short lifespan. (Think of a beast with a fast metabolism!) Fortunately, we are starting to see some new tools that can help marketers generate measurable ROI from their content strategies.

We have identified five key elements of an effective content marketing strategy, along with a list of applications to help marketers execute on each element:
  • Curation: There’s no shame in repurposing existing third-party content on relevant topics.  By doing so, you become the trusted channel where audiences go to find high-quality and relevant content, without all the noise. Companies such as Percolate and Trapit can help marketers identify relevant content and repurpose it for their own audiences.
  • Creation:  It’s hard to have a content marketing strategy without some original content, and marketers have become increasingly comfortable relying on a blend of internal and external writers. Original content can be long-form (multiple paragraphs or pages) or short-form (140-character tweets). New companies such as Contently and Scripted allow marketers to find great writers about topics ranging from cell phones to trampolines.
  • Workflow management: Editorial calendars are critical, particularly when multiple writers and divisions are collaborating around content. Marketers also need to manage revisions and approvals. This is where workflow management platforms such as Kapost and Zerys can help.
  • Distribution:  After the content is created, it needs to be published through multiple outlets: blogs, contributed articles, LinkedIn, Facebook, and Twitter. This distribution is not trivial, given the multiple formatting restrictions and the varying preferences for each audience. Companies such as Tapinfluence and Papershare come in here.
  • Analytics: This entire process will be repeated multiple times, so measuring effectiveness is critical. You can’t improve what you can’t measure, so having an analytics solution is the only way to close the loop and generate a self-reinforcing cycle. Companies like Simplereach and help marketers track ROI.
Content marketing is a relatively new industry, and currently we see multiple companies focusing on different pieces of the value chain. Within several years, I predict that there will be consolidation, as marketers simply can’t deal with five different vendors to manage their content marketing strategies. There will be category winners that expand into other parts of the content marketing cycle, but it’s still too early to tell which companies will emerge on top.

Bitcoin Landscape: The Who's Who in the Bitcoin Ecosystem

I’ve been spending a lot of time talking to Bitcoin companies, and I was impressed by the variety of business models people are working on. I started categorizing companies to make it easier for me to identify key trends, so I want to share my thoughts and research to get more inputs. I believe we are in the early days of a big financial disruption!

The main categories I identified are Exchanges, Wallets and Merchant Services. Exchanges are needed to get into and out of Bitcoin, they are also the gateway for Bitcoin to act like other assets, for both store of value and investment purposes. Wallets are needed to securely store your Bitcoins, and make them accessible whenever you need them for specific transactions. Finally, we have the merchant services companies, enabling merchants to easily accept Bitcoin as a form of payment.

These 3 categories are almost the pre-requisites to reach critical mass. Given the marketplace nature of Bitcoin, we need to reach that critical mass before successful applications can emerge. However, other categories are also important for the ecosystem to develop. 

Even though identity seems to be counter-intuitive for the Bitcoin protocol, it will be required to get to mass adoption. The use cases that are going to be allowed with regulation are those use cases in which identity will matter. We’ve seen it before, security always lags quite some time, however, in this ecosystem, I anticipate it will emerge much earlier given the nature of the disruption.

Other interesting use cases where I anticipate big disrupting companies will emerge are remittances and gaming. For remittances, the ease of cross-border transactions, coupled with the peer-to-peer nature of the protocol and the wide adoption of mobile phones in emerging economies, will create the petri-dish to disrupt incumbents such as Western Union. In the case of gaming, the divisibility of Bitcoin as well as lower transaction costs, will expand the opportunity by making micro-transactions a non-issue.

I haven’t seen companies in the lending or insurance spaces, but I anticipate people are already thinking about these opportunities and I look forward to hearing about them!

We are in the very early days of Bitcoin, so I’m convinced the landscape will continue to evolve. I’ve already seen companies completely change their business models, and that will continue to happen as we explore the frontiers of this disruptive opportunity. I also realize that I have likely missed some great companies, so please let me know if I missed you, or if you are thinking about other ways to categorize the companies (to add new companies click on this link: It would be great to hear your thoughts!