If there’s one thing I’ve learned from venture investors, it’s that matched incentives can be quite effective.
If you spend any time with expert private market investors, you’ll hear this statement repeated often. However, if I recall my university years, the expression is actually simply a restatement of the economic theory that humans react to incentives, although in a somewhat more focused manner.
In the world of venture capital, the following is how the concept works: Motives have an effect on people, therefore you want to make sure that everyone inside a firm or organization has incentives that are aligned with one another.
This is why startups often provide their staff with a sprinkling of stock, allowing them to feel a little sense of ownership in the whole endeavor. Employee incentives are aligned toward overall corporate success, which is something that employers desire because they are in the business of paying people as little as possible while still meeting human capital quality benchmarks and avoiding excessive employee churn, both of which are undesirable.
Why venture investors enable firms to offer equity to workers at below-market pricing via stock options may be interpreted in a less blatantly capitalist manner. They are not anything I would purchase. Return is important to investors, and they strive to maximize it as a result of their own incentive structure.
VCs are in an excellent position. Essentially, they take money from existing capital pools, invest it in work that others are already performing, and then take a portion of the transaction profits while also draining a few hundred basis points per year from their overall investment vehicle. Once again, we have matched incentives at work, with venture capitalists benefiting when their investors do well financially. Teamwork.
I put you through all of that to demonstrate that the notion of aligned incentives is deeply ingrained in the startup and venture capital communities, and that it may, at times, blind people to other methods of doing business in the marketplace.
Take, for example, video games. Crypto games, in particular, are becoming more popular.
As you can see, the crypto community, as well as its many supporters, is quite enthusiastic about crypto games. A location where incentives may be aligned in a novel and interesting way, converting gaming into associated economic activity seems to be here, according to the evidence. With all of the excitement of gaming, but with aligned financial incentives! What could possibly go wrong?
Do you want to make money while you play?
The notion of play-to-earn games on a blockchain is appealing to venture investors because of the aligned incentives that it offers players. Users will engage in the game, resulting in both entertainment and economic activity. The user receives a portion of the value, with the remainder going to the corporation. Everyone is pleased, and the game can continue to generate revenue indefinitely, right?