Do More With Less

Link to the full Research in PDF

This report examines how our historical efficiency gains through collective knowledge and technology pairs with the highest leverage deflationary tools today, namely software, Bitcoin and AI, as well as how those who embrace the tools will experience the greatest returns on productivity and capital.

Introduction: Do More With Less

Human beings are inherently deflationary, and with the acceleration of technological progress, those who combine the highest leverage deflationary tools – software, Bitcoin, and AI – will experience the greatest returns on productivity and capital.

Humans, teams, and our companies have become drastically more efficient over time as we have leveraged the collective knowledge of humankind to accurately identify challenges, create and refine powerful tools to solve problems, and share education about the most effective ways to collectively utilize those tools. We anticipate that efficiency will continue to accelerate, as we can use our improving tools to create even more sophisticated and useful technologies.

Over the past 25 years, the pace of technological improvement and its applications for enhancing workplace productivity has been remarkable. This includes the widespread adoption of the internet, machine learning, artificial intelligence, and other automation tools that have dramatically improved efficiency across every industry. We have benefited from significant improvements in operations, processes, and output measurements, enabling near-instantaneous feedback that drives better future planning and resource allocation. Advanced data analytic tools allow for more informed, resource-efficient decisions. Enhanced analytics can drive significantly more accurate predictive forecasting and strategic planning. However, the inherent bureaucratic nature of most organizations means that the proper implementation of these tools is often slow and restricted, preventing full realization of potential productivity gains.

Barclays measured total output per hour across both the UK and the USA from 1760 onward, using an index where that year is considered to be 100. Productivity in 2018 is around 3,000 on this index as a direct result of technology improvements.

Bitcoin Is The Best Fintech

We believe that one of the most useful tools ever created is Bitcoin. Bitcoin’s open, interoperable, and permissionless protocol is an incredible step function in technology. The growing trend of increasingly useful interoperable protocols with free and open source technologies should create exponential improvements in productivity.

Money is 50% of every non-barter transaction, and using the best money ever created can substantially improve trade for all parties involved given its liquid and saleable qualities. Using Bitcoin as an alternative or supplement to fiat offers several benefits including the ability to store value in a vehicle that cannot be debased and has shown strong growth in purchasing power over time. This allows for companies to raise less capital given the appreciation of their Bitcoin, while also implicitly driving the need for careful capital expenditure and cost management given the potential opportunity cost and price appreciation of holding onto the Bitcoin.

The Competitive Advantages of Bitcoin

For mature companies with established market dynamics, operating with a Bitcoin treasury benefits the corporate holder with purchasing power appreciation over time, and better long-term strategic planning. This offers unique optionality with respect to hiring, capital expenditures, and other strategic initiatives that competitors without a Bitcoin treasury cannot access.

For early-stage companies, operating with a Bitcoin treasury can extend the operating runway for pre-profitable ventures. Operating with a Bitcoin treasury and running lean operations allows for fewer and smaller funding rounds, limiting founder dilution, and improving investment returns. This also allows founders to be focused on building the business instead of perpetually fundraising while allowing the founders to maintain control of the company. Deeper cap tables can lead to prioritization overload and distract the business from focusing on more relevant priorities. Additionally, early-stage companies managing their treasury in Bitcoin benefit from its increasing purchasing power, offering substantial growth potential and attractive equity options that can help attract top talent.

The companies that opt to use Bitcoin as a treasury asset can benefit from many superior qualities to alternatives, including a forward monetary inflation rate of 0.84% over the next year, which continues to diminish in the future at a programmably verifiable rate, allowing companies to better maintain their purchasing power. This is a significant upgrade to companies operating with the US dollar as your treasury asset, which has inflated at a CAGR of 6.85% over the past 65 years, and has unknown future inflation rate. Most other fiat alternatives are worse.

Despite the natural improvements humans gain through individual and collective knowledge, paired with improving tools, inflating fiat currency has prevented the full benefits from being realized. The constant repricing of goods and services in an inflating unit of account has been a massive distraction, rewarding financial engineers over almost every other professional field. A critical component of embracing a “do more with less” mentality is denominating operations in a definitively finite unit that can allow the effective repricing of productivity gains. Those who identify Bitcoin as their hurdle rate will be forced to come up with more creative and efficient ways to maintain their productivity that is priced in a deflating asset, which causes further efficiency growth.

The Shifting Venture Landscape

As understanding grows that Bitcoin is the hurdle rate for capital allocators, startups will need to adjust their fundraising strategies and business models to meet the shifting interests of venture capital. We anticipate the traditional model of “swinging for the fences” by funding ventures requiring significant capital investment and expenses prior to profitability will become less attractive due to shifting funding priorities.

Some venture capital firms will continue to fund companies with plans for massive spending to acquire customers and scale despite weak gross margins. While this strategy has produced a few impressive successes over the past 30 years, many ventures have also failed in the process. Remarkably few have outperformed Bitcoin. We anticipate that the most successful strategy moving forward will involve investing in ventures with strong gross margins, low overhead costs, and management teams that deeply understand Bitcoin’s unique value proposition.

Meanwhile, successful venture firms will increasingly seek companies and management teams operating across industries with healthy gross margins, limited working capital requirements, and low overhead costs. By utilizing part-time labor, sharing cost centers across portfolios, and leveraging economies of scale, firms can optimize their investment strategies. Companies must manage overhead costs meticulously, recognizing the opportunity cost is selling or not acquiring more Bitcoin.

Many early stage companies that have realized some success aim to implement institutional processes that have been successful with larger businesses with established market dynamics, including hiring large teams, and spending capital on expensive CRMs that may not offer justifiable returns. However, the large scaling plans may stifle innovation through bureaucracy while simultaneously dragging down productivity and profitability. Investment in people, processes, and product is necessary, but founders and venture capitalists should be extremely focused on the marginal utility of each expense.

While some may view this approach as novel, we believe all individuals and organizations will eventually recognize Bitcoin’s transformative potential. The opportunity cost of holding Bitcoin will naturally constrain organizations’ ability to raise multiple large funding rounds while remaining unprofitable. Bitcoin encourages a return to businesses with strong foundational models, manageable growth, lean teams, and thoughtful expense management.

By focusing on companies with extremely high contribution margins, investors can avoid the high-risk industries with significant barriers to entry. We avoid industries with poor unit economics where significant scale is needed to reach positive cash flows and profitability as the time and capital needed to reach the adequate scale likely can be put to more productive use given Bitcoin’s likely rapid appreciation. Instead, we believe superior returns come from offering valuable services with reputable brand recognition and potential first-mover advantages. Companies with high contribution margins and low overhead can strategically hold Bitcoin-denominated revenue or convert excess fiat currency into Bitcoin.

Outperforming Bitcoin is difficult, and any company aspiring to do so must continually evaluate its technological productivity and be willing to reengineer existing processes. Society is benefiting from exponential efficiency improvements, and productive businesses must thoughtfully incorporate these advancements to remain competitive.

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