If there’s one thing that venture capitalists have taught me, it’s that aligned incentives can kick ass.
It’s a phrase you’ll hear often if you spend time with professional private market investors. But if I summon my collegiate years, the phrase is really just the economic principle that individuals respond to incentives, restated in a slightly more targeted fashion.
In the land of venture capital, the idea works out as follows: Individuals respond to incentives, so you want to ensure that everyone at a company, for example, has aligned incentives.
This is why startups often offer a dusting of equity to employees, giving them a tiny slice of ownership in the overall project. This aligns employee incentives toward aggregate corporate success, something that employers want because they are in the game of paying people as little as they can while still hitting human capital quality benchmarks and not having too much employee churn.
There are less crassly capitalistic reads of why venture capitalists allow startups to sell equity to employees at below-market rates through options. I don’t buy them. Investors like return, and they optimize for it, thanks to their own incentive structure.
VCs have a good gig. They take money from existing capital pools, invest it in work that others are doing, and then get a cut of deal profits while also ripping a few hundred bips per year of their total investing vehicle. Here again, we see aligned incentives, with venture capitalists profiting when their backers profit. Teamwork.
I drag you through all of that to explain that the concept of aligned incentives is marrow-deep in the startup and venture capital worlds, something that can, at times, blind folks to other ways of doing business.
Games, for example. Crypto games in particular.
You see, the crypto community and its myriad backers are pretty hot on crypto games. Here, it seems, is a place where incentives can be aligned in a new, exciting manner, translating gaming into related economic activity. All the fun of games, but with aligned economic incentives! What could go wrong?
Play to earn?
Through the lens of aligned incentives, the concept of play-to-earn games on a blockchain excites venture capitalists. Users will play the game, generating both fun and economic activity. The user gets some of the value, and the company the rest. Everyone is happy, and the game can go on making money forever, right?
Originally published at techcrunch.com