Matthew Le Merle is co-founder and Managing Partner of Fifth Era and Keiretsu Capital – the most active early stage venture investors backing almost 200 companies a year. He is also Chairman of Securitize (Europe), Linqto, and CAH and an advisor at Warburg Pincus. He grew up in England before living most of his life in Silicon Valley where he raised his five children with his wife Alison Davis. Today he splits his time between the US and UK. By day he is an investor in technology companies and a bestselling author and speaker on innovation, investing and the future having worked at McKinsey, A.T. Kearney, Monitor, Booz and Gap. He has written several books including, most recently, his new book ‘Blockchain Competitive Advantage’ co-authored with his wife, Alison.
You have significant experience in investing in tech companies – what was it that first got you interested in cryptocurrencies and blockchain?
It was actually my wife, Alison Davis, who first introduced me to these concepts. After years of investing in electronic and digital content businesses and being active in Silicon Valley as well as a board director at Fiserv and RBS, she was keen to know more about bitcoin and got in touch with Brock Pierce, Bart and Brad Stephens. This led to her chairing the advisory board of their venture capital firm Blockchain Capital and becoming one of the early believers in blockchain. I dragged my feet a bit as I was still skeptical when people kept saying that blockchain would be bigger than the internet. Even now, I still see blockchain as a part of – and extension to – today’s internet, rather than as a replacement for it.
Your company is called Fifth Era – what do you mean when you talk about the fifth era, how will it be different to the way we live now?
When we look back in time, we can see all kinds of big changes that happened in the past but we forget these were not usually rapid changes; these changes were phases of time or eras that overlapped. Hunter-gatherers became settled, farmers and primary industry workers became traders, who then became industrialists but each of these shifts didn’t happen overnight. We are still in the industrial era and the World Economic Forum has even put forward the idea of the Fourth Industrial Revolution as an extension of this era. Alison and I feel that this is the wrong name for an era in which we move into a completely digitally connected age – indeed anyone who thinks this change will be incremental is at risk of missing the whole point. We refute the idea that this era, which encompasses blockchain and other frontier technologies, is simply an incremental continuation of the industrial age. We believe that this transition we are living through is so significantly different that it needed a new name and that is why Alison and I call it the Fifth Era.
You recently published a book ‘Blockchain Competitive Advantage’. What prompted you to write the book?
The new book is one of a family of books we set out to write. The first was aimed at individuals wanting to understand how you can participate in early stage technology as an entrepreneur, investor, or as an employee – and to demystify the subject in general. The second book was aimed at boards and senior corporate executives of large organisations responsible for driving corporate innovation, and focused on the new innovation approaches of companies we have worked with – and know well – like Amazon, Apple, Google, Microsoft and Facebook. This third book goes beyond blockchain, in a way, by asking how blockchain can move forward the digital world we have today. Our current internet is deeply troubled with issues like identity fraud, cyberhacks and data privacy breaches widespread. Even to hold onto the gains we have made by creating today’s digitally connected world is going to be a challenge. We need a more secure internet, with better identity solutions, which is more decentralised and where we can trade and exchange using cryptocurrencies and digital assets. The Bitcoin blockchain was created to try to make that a reality and it was a very important phenomenon but now things are changing again, and we are moving into a more competitive phase.
Each time a new technology innovation cycle evolves it does so in predictable phases – from laboratories and scientific experiments through to early entrepreneurs and investors who launch the first wave of projects and companies but often can’t create enough traction. The stage where I see blockchain being now is the early competitive phase where the more well-funded, well-established companies are focusing on real-world use cases. Big partnerships are forming with ambitious go-to-market strategies and large teams. Some of these will get traction but most will fall by the wayside. The point of writing a book about Blockchain and competitive advantage is that it is important to know where you are in the innovation cycle so you can change strategy and change the way you do things. In terms of blockchain, things are very different now from where we were in 2015-17 and companies as well as investors will need to raise the bar.
How far away do you think traditional investors are from waking up to the transformational nature of distributed and frontier technologies?
If you look at the wave of interest in Initial Coin Offerings (ICOs) – a form of crowdfunding using tokens to raise capital – you can see a glimmer of the latent demand to participate in ownership of digital assets or to have a stake in blockchain businesses. Some of the lagging by traditional investors is generational, some is simply inertia, but some of it is also based on lack of awareness. Large tech companies have risen to be the most valuable companies in the world and major investors who have not been exposed to tech stocks over the last decade now know they have underperformed the market. I believe the same will be true of blockchain and digital assets. Sophisticated investors are starting to get the message, yet the way people took a stake in some ICOs (in many cases more or less ‘sight unseen’ in a desire for high returns) was madness. We need these investments to take place within the rule of law and we need appropriate regulation to prevent bad actors and adverse selection. Yet, it is an indicator of how hungry investor audiences are to get access to these new innovations that millions of people signed up for cryptocurrency wallets and opened accounts on exchanges to be exposed to this new world and to these new investment opportunities.
A segment of business people are starting to understand enterprise applications of blockchain but there seems to be less understanding of tokenisation. How do you define tokens and what impact do you see security tokens in particular having on capital markets?
Innovation is always a choice. The question is when does it becomes mission critical for companies or for governments. Most individuals don’t need to become investors. For most SMEs, they are more interested in revenue generation than disruptive innovation. For most large corporates, they’re interested in competitiveness and value creation, and for most governments they are focused on jobs, the economy and wider geo-social issues. This new body of technologies we broadly call ‘blockchain’ is still discretionary – it is still a choice – so it is easy for people to postpone making a decision about it.
Large industries and companies like JPMorgan, Fidelity, Microsoft and Facebook, as examples, are now starting to see that this is mission critical for their businesses. In that context, we need to think about this set of technologies more as an enabler of the assets we already have – building intelligence into the way we digitise assets, for example, or as software representing an ownership stake which can be tracked on an immutable ledger. We should try to get away from thinking of this as something we only use for ‘new-to-the-world’ assets if we want more mainstream understanding and adoption of the technology. For Alison and I, we are really talking about the application of digitalization technologies to all asset classes, and the word ‘token’ is simply an easy way to describe the creation of software that holds the rights and terms of the digital asset that they represent. However, the asset itself does not need to be something new. Indeed, most tokens will be built around existing assets and asset classes.
Do you believe that we will see tokenized assets becoming widely adopted into investing in the near term?
Yes I do, and Alison and I are working hard with the teams at Securitize, Linqto, Bitwise and others, as well as with the many blockchain venture capital firms that we have invested in, to make this a reality. But it is hard work and it requires substantial investment and creativity since the new platforms that are being created have to both respect the way investing and financial markets have worked historically, as well as establishing faster, lower cost, more effective ways to conduct investing in the future. This is a hard balancing act, and very few have figured it out. I am proud to see the work of the teams at Securitize, Linqto and Bitwise as they ensure full compliance is embedded into their new offerings.
The first security token projects that we are seeing so far are trailblazing companies that are either looking ahead to what we all agree will be the future of private securities and funds, or they’re looking for an edge when raising capital in a competitive market. Private securities managed on blockchains have a level of compliance, transparency, and efficiency that far exceed what we see today in traditional private securities, and it’s only going to get better as we continue to improve.
This is only the beginning. It will be very interesting when (not if) a household name (like, for example, AirBnB, Monzo or Robinhood) decides to issue a digital security and bring their undisputed level of investment interest to the space.
Do you think some people’s concerns such as around the regulatory environment or lack of market infrastructure are justified?
People who have lived their lives working in the financial markets know that capital is a magnet for bad actors. You need to be constantly wary of scams and fraud. The layers and layers of regulation we already have were not created for the fun of it. On the other hand, innovators want to build things and break things. At times it can make sense to challenge the established ways of doing things. If we think back to the music industry, the business model and regulations didn’t take into account a digital world of instant downloading and file sharing. It needed to be disrupted, and the new world of digital content has been beneficial to everyone globally.
There is a tension here because regulation needs to be tweaked for a global digital world. The regulation surrounding public corporate equities can probably work for security tokens as they are really just digital versions of existing securities but for private equity, debt and real estate we may need some adjustment to regulations for the buying and selling of those assets in tokenized form. As Chairman of Securitize in Europe, we have put all our energy into compliance, efficiency and high quality but it’s hard work and it is also expensive and energy intensive. This, of course, also has the benefit of creating a barrier to entry.
In 2018, blockchain start-ups raised millions in Initial Coin Offerings (ICOs) but most provided a very poor return to investors. Is the ICO dead or do you see a revival coming?
Large bursts of activity such as we saw with ICOs last year do have a benefit in that they help push the world forward. However, when it happens in capital markets there can be significant collateral damage. Paradigm shifts only happen when established ways of doing things are disproven. The ICO wave which took place last year was a bit like a proof of concept with a high price tag attached which also lay the groundwork for a paradigm shift in global investing. The underlying insights of the ICO phenomenon are not dead but are morphing into a new direction with STOs. As these new investment approaches takeoff, we need to be sure that the teams launching investment tokens engineer them to be compliant with all the existing rules.
Where does the real competitive advantage lie right now in blockchain – is it still about the protocol layer with the winner being the first blockchain or distributed network to offer enterprise-grade speed and scalability?
The fundamental level is, of course, the protocols and we currently have more than we probably need. The current basis of protocol competition is speed, scalability, reliability and throughput. It is not yet clear if we will end up with one or a few generic blockchain protocols or whether the market will become highly segmented with certain blockchains being optimised for transactions, for example, and others for different purposes. It’s not yet clear what will happen, yet this uncertainty about the future is not uncommon as new innovations begin to roll out.
Back when I worked on Prodigy at Sears with McKinsey, no one knew what an Internet Service Provider was, systems worked very slowly, and images would ‘hang’ and take ages to download. Now we have a whole range of realtime streaming services like Skype and WeChat and others and you can see every hair on someone’s head. The current blockchain protocol wars can be compared to the operating system wars, or the search wars or the mobile phone wars. We will see large well-funded protocols trying to improve the fundamental characteristics of the innovation, as well as bolt additional functionality on to get ahead of the competitive curve. We can look at Microsoft’s recent announcement that it is launching a decentralised identity tool and globalID’s progress in precisely this light. We will get a big jump forward on the problems of today’s internet if we can crack the identity problems we face.
So, some protocols will buy in functionality, some will drop off the radar screen altogether, even some that are in the top echelons today. And we may even see some new blockchain protocol coming in late to the party that we haven’t heard of yet or which hasn’t been invented yet who leapfrogs all the rest, just as Apple’s smartphones did to Palm, Blackberry and Nokia, or Google did to Inktomi, AltaVista and Ask Jeeves.
You have also written a novel. How different was it writing fiction compared to writing a business book? Which was more fun?
In general, I believe in progress and innovation and see things getting better all the time, except in regard to the environment. In my novel I allowed myself to paint the negative scenario around how the Earth is being stretched on the rack and what would happen if we broke it.
When I was younger, I was inspired by the works of Tolkien and Asimov and always wanted to write a book but suddenly life got in the way with first university, then work, travel and family commitments and so on. My novel Second Chance is the realisation of that childhood dream and I wrote it with the next generation in mind so that they can be inspired to make a change before our environment is so damaged that we can’t reverse it.
I agree with Neil Gaiman that “We all – adults and children, writers and readers – have an obligation to daydream. We have an obligation to imagine. It is easy to pretend that nobody can change anything, that we are in a world in which society is huge and the individual is less than nothing: an atom in a wall, a grain of rice in a rice field. But the truth is, individuals change their world over and over, individuals make the future, and they do it by imagining that things can be different.”
I found writing Second Chance fun, but it was also troubling for me to imagine a world in which we have truly destroyed the Earth’s ability to carry us any longer. That is a nightmare scenario, if there ever was one.
You can find out more about Matthew on the Fifth Era website.
Blockchain Competitive Advantage is available on Amazon, along with Matthew’s other books.