Tomasz Tunguz has a Theory

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Today on Runtime: Tomasz Tunguz on the next ten years of enterprise investing, Australia backs away from a seven-year blockchain project, and the quote of the week.

Game theory

Over 14 years at Redpoint Ventures, Tomasz Tunguz developed a formidable reputation as an enterprise tech startup whisperer, helping companies like Looker, Stackrox, and Kustomer to successful exits. Last month he launched his own venture capital firm, Theory Ventures, with a plan to invest in companies that are working on core technology breakthroughs and making it easy for their customers to get up and running.

In a recent interview, Tunguz explained the theory behind Theory, the rapid shift in the investing climate over the last year, and why blockchain databases could solve the data residency puzzle. What follows are a few excerpts from our conversation; we'll publish the full interview Tuesday on Runtime.

On market fundamentals:

So, since 2010, let's call it, we've had the longest bull market in US history, and the cost of capital has gone way down. And so the venture capital ecosystem in the US has grown from about $8 (billion) to about $320 billion, and then we'll fall to about $180 to $200 (billion) this year.

When you have a bull market like that, people will stop paying attention to fundamentals. And that was true, as much with startups as it is with venture firms, because venture firms also have business models.

On Theory:

The reason the firm is called Theory is because we do a lot of work, we do a lot of research in building our thesis. Our goal is not to be in every great company but to make sure all the companies we invest in are great. By remaining small, having a really small portfolio and focusing on a set number of spaces, we don't have to cover everything.

So if we can go deep within a space, identify all the key companies and figure out what the buyers want — it's all B2B — understand what are the main specifications or criteria that buyers are using to evaluate, and then find the best company and then be able to support them through multiple stages.

On three key areas of investment:

One is just companies in and around data. Data volumes are growing 45% a year, and so people are spending more and more time, effort and dollars in order to understand and get value from it. We've got a theme called the decade of data, and that's not changing.

Machine learning is another one. The generative stuff is exciting; Goldman put out a report saying that that technology alone could increase US GDP between 1.5% to 2.9%, which would double US GDP growth, which is a really big deal.

And then the last category — and this is a category where two years ago it was the hottest thing — web3 technologies. The way I look at them is there were three big innovations that came out of web3; one are stablecoins, being able to move digital dollars around. And the other one is decentralized finance or defi, which is a new securities market. I'm not paying attention to either one of those — they're too highly regulated — but the last one is blockchains as databases.

On concerns about slow and expense blockchain databases:

On the performance side, you have new blockchains, new databases that are optimized for speed. You can look at Aptos, or Mysten, and there are others. And so what you have now (in the current world) is you've got Glacier for really slow storage and then you have Redis for like super-optimal super-fast caching, and you've got a whole bunch of stuff in between. That's starting to happen in the blockchain space where there are enough databases now for different kinds of applications.

I can't stand here and tell you, for every web2 database, there is a web3 equivalent. But we're getting there.

Read the rest of the full interview Tuesday on Runtime.

No blockchain for Oz

While Theory looks for a blockchain database star, Australia's biggest stock exchange has apparently seen enough of the technology. Reuters reported Friday that the Australian Stock Exchange no longer plans to use a distributed ledger as part of its clearing house, seven years after it first proposed the idea in 2016.

The report cited "significant challenges with the solution designs" as the main reason to pull the plug. Enterprise blockchain projects have been explored for a very long time now but there has been little actual progress, and after last year's crypto crash it seems patience is wearing thin.

It's yet another reminder that change comes slowly to the enterprise unless there's an easily understood reason to adopt a new technology. Right now it's hard to see any value in the enterprise blockchain, but now that the hucksters have moved on to pitching dubious AI schemes, perhaps a real breakthrough will have time to emerge.

Quote of the week

"I refer to WebAssembly often as a bunch of numbers in a trench coat." Bailey Hayes, Cosmonic, on how a lot of work needs to be done to make one of the most promising new cloud computing technologies in a while enterprise-ready.

The Runtime roundup

Apple is setting limits on how employees can use generative AI tools like ChatGPT, part of a growing number of companies concerned about security and data leaks in the rush to embrace our AI-powered future.

Microsoft wants to hire chip engineers as part of a push to develop its own AI silicon, which would allow it to join AWS and Google in that club.

Here's a weekend laugh: Lemon.io CEO Aleksandr Volodarsky shared some of the most hilarious designs that were created on a subreddit to build intentionally bad user interfaces. We're in talks to license #4.

Thanks for reading — see you Tuesday!