# The Rise of Schelling Point Companies: The Future of High-Stakes Investment

A new era of Schelling Point companies, which are capable of creating entire new industries, is emerging. Investing in these companies can yield significant profits, but the risks are equally high if the ventures fail. A meticulous investment strategy is essential for distinguishing winners from losers.

According to Michael Dempsey, a crypto expert at Compound VC, understanding technological innovation and market structure changes necessitates examining the concept of Schelling Point companies. These companies don’t just sell products or services; they form markets around a central ideology and vision. Rather than following predefined categories in existing industries, they create new industries and secure dominant positions within those realms.

Schelling Point companies often do not start with a clear-cut product strategy. Instead, they prioritize capturing the narrative, which helps them rapidly amass capital, talent, and brand value. This approach is particularly effective in nascent markets where first movers set the rules, compelling latecomers to struggle to surpass them.

Notable examples include Palantir in the government tech sector, Anduril in defense tech, OpenAI in artificial intelligence (AI), Ginkgo Bioworks in synthetic biology (Synbio), Recursion in computational biology, and Bitcoin in cryptocurrencies.

Schelling Point companies aim to transform entire market paradigms rather than merely peddle technology or products. They secure a market lead centered around a specific technology or concept, thus demanding competitors to surpass their narrative to gain an edge.

While this method is advantageous for building strong brand power and trust, it comes with significant risks. If a narrative becomes too powerful, it can lead to overestimated expectations that outpace actual performance. When investor enthusiasm overtakes the pace of product development, maintaining market trust becomes challenging. Moreover, the failure of a Schelling Point company can impact the entire industry. For instance, the failures of Ginkgo Bioworks and Zymergen led to diminished investor sentiment in the synthetic biology market as a whole.

# Narrative Economics and Perception-to-Reality Ratio (P/R Ratio)

One of the critical factors determining a company’s success is Narrative Leverage—the ability to balance market expectations with actual performance. This concept, popularized by Steve Jobs’ ‘Reality Distortion Field,’ has recently been expressed through the Perception-to-Reality (P/R) ratio, rather than the P/E (price-to-earnings) ratio.

A high P/R ratio allows companies to secure more capital, fostering a virtuous cycle that accelerates growth. Tesla serves as a prime example. By emphasizing Tesla’s future value, Elon Musk persuaded investors of a long-term vision, facilitating continuous funding.

This concept is equally vital in the venture capital (VC) investment market. As research-focused companies shift to venture investments, the narrative strategy employed by Schelling Point companies is expected to be more frequently utilized. When research-centered organizations need to secure capital without a clear revenue model, positioning themselves around a particular technological inflection point becomes crucial.

# AI, Cryptocurrencies, and Investment Trend Changes

In recent years, the market has seen new investment opportunities arising from the combination of AI and blockchain technology. As AI technology advances rapidly, there is a burgeoning interest in companies and assets related to AI. However, many projects at the intersection of AI and blockchain are narrative-driven rather than being based on solid technological foundations, which presents risks.

One prominent example is Bittensor ($TAO). This project, promoting ‘decentralized AI,’ saw its token price surge from $50 to $710 within six months, reaching a market cap of $15 billion at its peak. However, as the narrative’s foundation weakened over time, over $4 billion in value evaporated.

This trend is common in the AI and cryptocurrency markets. Once a company captures the narrative, competitors often respond by presenting even more exaggerated narratives, driving market dynamics. Investors may seek opportunities in colossal technology trends like AI but may fall prey to speculative investments driven primarily by narratives.

# Repeated Bubbles and Investment Strategies

Historically, speculative market bubbles have recurred. Just as assets like Bitcoin have experienced multiple bubbles and busts, emerging technologies such as AI, blockchain, and quantum computing are likely to exhibit similar patterns.

The key lies not in predicting bubbles but in understanding the conditions under which they form and developing appropriate investment strategies. Investors need to discern whether Schelling Point companies achieve genuine technological innovation or merely ride speculative waves. Analyzing the gap between market expectations and reality, and focusing on long-term value over short-term narratives, is essential. During the early stages when narratives form strongly, investment opportunities abound, but distinguishing between short-term speculative forces and long-term value creators is vital.

# Future Outlook: Beyond Narratives to Real Value Creation

The emergence of Schelling Point companies is not a mere fad but a phenomenon that inevitably arises as technological innovation and investment strategies evolve. Companies that effectively leverage narratives can quickly attract capital and talent, securing a monopolistic position in early markets.

However, the ultimate determinant is the ability to translate these narratives into reality. Just as Tesla has transcended being a mere electric car company to achieve substantial value through innovations in battery technology, AI-based autonomous driving, and robotics, Schelling Point companies must progress beyond storytelling to deliver tangible results.

As technologies like AI, blockchain, and quantum computing continue to evolve, narrative-driven markets will keep emerging. Investors should carefully observe these trends while honing the skill to select companies that convert their narratives into genuine technological breakthroughs. Ultimately, the most powerful Schelling Point companies will be those that dominate narratives and materialize them into reality.