Bitcoin Will Change Capital Stacks
Link to the full Research in PDF
Fiat currencies have distorted incentives for both founders and venture investors alike. This report examines how Bitcoin offers a superior alternative to fiat currency for companies as working capital and a treasury asset, as well as how founders and venture capitalists can benefit from Bitcoin.
The Founder Challenge
In the typical venture capital model, the initial hurdle to running a successful business is raising capital. Venture funds typically derive 80% of returns from 20% of investments, while over two thirds of investments return no capital over the life of the fund.
This dynamic creates pressure for founders to pitch aggressive growth stories to attract capital allocators. If successful in fundraising, founders often face pressure from VCs to pursue vanity metrics including revenue growth, headcount expansion, and inefficient capital expenditures rather than optimizing for profitability, positive operating cash flows, and balance sheet strength. This misalignment in priorities stems from venture capital’s focus on achieving “unicorn” valuations or pursuing public offerings.
In favorable scenarios, this strategy typically necessitates multiple fundraising rounds to achieve a sustainable profitable business model, consequently diluting founder ownership and control. However, if the business’s growth metrics fail to meet investor expectations, funding typically ceases. Without positive cash flows and a strong balance sheet for support, the company faces bankruptcy.
We believe the anchoring to incorrect metrics is an implicit result of the artificially low cost of capital observed in recent decades. Many early-stage companies expend significant capital before prioritizing profitability, operating under the assumption that additional funding will always be available to create a competitive moat before reaching sustainability. This model can transform a promising business concept into a failure or lead to significant underperformance compared to Bitcoin.
The VC Challenge
Venture capitalists typically face pressure to raise substantial capital and then rapidly deploy it to prevent value erosion over time.
However, venture funds that are able to align the limited partners, general partners, and portfolio companies that Bitcoin is the hurdle rate are able to benefit immensely. By raising capital in Bitcoin and holding it as a core treasury asset, capital allocators are able to benefit from the increase in purchasing power over time. This allows for fewer tranches of capital raising, growing fund purchasing power, and a stronger allocation of capital and other resources.
Additionally, venture firms are incentivized to raise larger and larger rounds to drive management fees rather than focus on sourcing and executing on strong opportunities. This creates a surplus of capital needed to invest in a limited set of companies. By shifting to a Bitcoin treasury strategy, VCs can raise smaller funds, operate with leaner teams, and focus on manageable growth. Operating with smaller initial funds but managing a treasury with Bitcoin drives careful cost management and thoughtful diligence processes given the extremely high implicit opportunity cost.
How Bitcoin Improves Capital Stacks
The companies that collect revenue in Bitcoin benefit from its immediate settlement. This offers a significant upgrade relative to purchasing on credit, reducing working capital constraints and eliminating default risk. Bitcoin’s instant settlement is also valuable when companies consider expenses, offering instant payment for expenses in Bitcoin and quick fiat conversions in most developed markets.
Further, Bitcoin’s custody options reduce dependencies on the fragile legacy banking system. We believe that multi-institution custody will ultimately be the primary choice to reduce custodial risk of mismanaging private keys for businesses, especially those without Bitcoin security expertise. Thankfully Bitcoin allows any user to choose their custody model, and as more viable solutions arise, we believe business adoption of Bitcoin will increase.
While fiat currencies experience declining purchasing power, Bitcoin offers potential appreciation over time. This benefits pre-profitable companies by extending their operational runway until achieving profitability. This can result in fewer and smaller fundraising rounds, enabling founders to retain larger ownership stakes while improving venture investor returns through reduced dilution risk. If a company’s thesis proves invalid or execution falls short, the Bitcoin holdings provide value preservation, allowing owners to wind down operations while distributing Bitcoin and other assets to investors.
When Bitcoin becomes integral to capital structure, teams naturally evaluate venture returns against Bitcoin’s performance when forecasting business outcomes. Any product, service, or expense that has underperformed holding and acquiring more Bitcoin in the past faces higher scrutiny, and all future projects will be evaluated versus Bitcoin. The companies who do not follow this strategy will eventually contend with their competitors that have stronger purchasing power from the Bitcoin on their balance sheet that has grown over time.
Further, incorporating Bitcoin as a capital asset improves planning duration. Rather than chasing vanity metrics for short term goals like further capital raising, Bitcoin allows for improved capital duration planning. Given Bitcoin cannot be debased like other fiat currencies, it offers an improved ability to maintain and grow purchasing power over time, offering a superior alternative to a perpetually debased asset.
By changing the treasury asset of a company to Bitcoin, the company additionally will ensure that every future issuance of equity and debt will cause the company to be accretive to stakeholder value. This means that any adjustments to the capital structure of a business require that both the underlying operating company as well as the existing stakeholders must see accretive value to their existing shares and debt through careful balance sheet management.
WeWork & Bitcoin
WeWork is one of the most notorious poster children of “growth at all costs” venture capital. According to CapitalIQ, the company raised over $8.75 billion in equity investments, and reached a valuation of almost $44 billion despite never reaching positive EBITDA.
WeWork was the typical case of a business that did not have fundamentally strong gross profit or unit economics, but aimed to grow as fast as possible in the hopes of reaching a scale where the business would be profitable. This led to constant fundraising as WeWork burned through capital.
If WeWork had opted to allocate just 5% of each fundraise to Bitcoin, the company would have invested $188.3 million over a seven year time horizon starting in 2012, which would have been worth over $11.5B by the time WeWork declared bankruptcy on 9/30/2023. This could have been helpful to stave off WeWork’s $18.2B in total liabilities and could have extended the runway of the company.
While a relatively small Bitcoin allocation may not have been enough to shift WeWork into a success by itself, the immense treasury growth likely would have caused WeWork to more closely consider all of its opportunity cost versus acquiring Bitcoin, which would have caused the company to more seriously consider all expenses and growth plans. The impact of COVID on WeWork’s business and the larger commercial real estate market is undeniable, although not the first signs of stress impacting the business. Bitcoin is just one tool, and while it can be incredibly powerful if used correctly, other factors including the fundamental business model, market dynamics, and execution cannot be ignored.
Conclusion
Bitcoin represents a paradigm shift in how early-stage companies and venture investors approach capital allocation and treasury management. Its unique properties of instant settlement, custody flexibility, and purchasing power preservation create a more sustainable foundation for business growth. By establishing Bitcoin as the benchmark for investment returns, companies can make more rational decisions about resource allocation and avoid the pitfalls of chasing unsustainable growth metrics.
The adoption of Bitcoin as a treasury asset not only protects against fiat currency debasement but also enforces financial discipline throughout the organization. This transformation extends beyond simple asset allocation to fundamentally reshape how companies approach fundraising, spending, and long-term planning. As more businesses recognize these advantages, we expect to see a gradual shift away from traditional fiat-based treasury management toward Bitcoin-centric models that prioritize sustainable growth and value preservation.
The future of venture capital and early-stage company development may well be defined by this transition to Bitcoin-based capital structures, creating a more resilient and efficient ecosystem for innovation and value creation.
About Early Riders: Early Riders is a bitcoin-denominated venture firm committed to backing and building companies that recognize the strategic value of integrating bitcoin into their operations. Early Riders raises its fund in Bitcoin, holds its treasury in Bitcoin, and after exiting its investments, returns Bitcoin to investors.
Author: Early Riders