Byrne's Blog

Moving the Valuable Bits

Two startup founders, Bill and Henry, notice that they’re each in a pretty similar line of business, and that they get along too well to remain competitors. They’re in a new and cutting-edge field—why compete with each other when they can build something together? So they merge, and raise some funding while they’re at it.

A year or two later, Bill and Henry decide they should expand into an adjacent market. Their backers point out that a massive competitor already has a head start. So, while continuing to work on their their main job, Bill and Henry run a separate side project that pushes into the new market. Both the main company and the side project are quite successful, and the fearsome competitor turns out to kind of flail around for a while before exiting the business entirely.

They had the usual startup ups-and-downs, culminating in something all-too-familiar: they were earning lots of revenue from a single major platform owned by a third party. And one day the third party changed its platform policies and gave Bill and Henry the boot.

Both the company and the side project successfully pivoted, and neither Bill Fargo nor Henry Wells would recognize their main gig, American Express, or their side project, Wells Fargo, today. But they definitely demonstrate that a founding team is more important than theoretical competitors. And that if you build your business on someone else’s platform (in this case, package delivery over rail), you face intractable uncertainty (express rail nationalization in 1918). And, most interestingly, that once you have the infrastructure necessary to move bits, the most lucrative bits to move are the ones that tell you who is creditworthy and who is not.

When Wells, Fargo, and company were plying their trade, the most efficient communications network was the stagecoach. Wells Fargo and American Express delivered goods, but the most valuable were hard currency—gold bars—and letters of credit. By the time their express business was nationalized in 1918, Wells Fargo and American Express were both more in the credit business than the package business. By weight, the most valuable thing you can deliver on a regular basis is a piece of paper entitling the recipient to spend money.

These days, our bit-moving infrastructure is a bit improved from stagecoaches, and more resilient to platform risk than railroads. But we’re still in the early days of shifting our wealth-moving and wealth-measuring infrastructure onto the Internet. We’ve been grafting older payment rails onto the Internet since the first e-commerce transaction, but we didn’t have a working, Internet-native payment mechanism until early 2009. And now, the most interesting problem in my two favorite fields (finance and the Internet) is the same problem: how do we turn Bitcoin from a clever proof of concept into the currency of the future?

The answer is unclear, but it’s a pretty cool problem to solve, so I’m moving to San Francisco and joining 21.