Ken Seiff: Staying Up When the Market Is Down

Ken Seiff is the Managing Partner at Blockchange, a venture capital firm investing exclusively in early stage block chain companies, protocols, and applications that are trying to make a dent in the universe. In this conversation, Ken Seiff and Anthony Pompliano discuss the anatomy of an early stage company, what investments Ken has made previously, and where he sees the biggest opportunities in the future.

• 0:02Speaker 00

  What's up everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off the Chain, simply the best podcast in crypto. Let's kick this thing off.

• 0:15Speaker 00

  Ken Seiff is the managing partner at BlockChange, a venture capital firm investing exclusively in early-stage blockchain companies, protocols, and applications that are trying to make a dent in the universe. In this conversation, we cover the anatomy of an early-stage company, what investments Ken has made previously, and where he sees the biggest opportunities in the future. This conversation was a lot of fun, so I hope you enjoy it as much as I did.

• 0:39Speaker 00

  This podcast is presented by Blockworks Group, the only blockchain event and media production company I trust. If you're an investor, lawyer, accountant, or entrepreneur, and want to attend exclusive events and dinners, visit them at blockworksgroup.io. I promise you won't be disappointed.

• 0:56Speaker 00

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 1:25Speaker 00

  Before we get started, I wanted to tell you about our sponsor, BlockEstate, a security token project in the $200 trillion industry of real estate. They've partnered with Polymath and Coinlist Comply API to create one of the first tokenized real estate funds, and they have a unique buyback and burn model. To learn more, visit blockestate.com.

• 1:44Speaker 00

  All right, guys, I've got Ken here. I'm super excited about this because you've got a bunch of secrets you're gonna spill while you're here. Thank you for coming.

• 1:52Speaker 01

  It's good to be here. Thanks for having me.

• 1:54Speaker 00

  Absolutely. All right. So I actually don't think that many people know your background or how you got into investing in crypto. So maybe let's start from the beginning.

• 2:05Speaker 01

  Sure.

• 2:06Speaker 00

  He's looking at me like I'm crazy for asking that question.

• 2:09Speaker 01

  Well, in 2011, my wife ran a small startup and had an employee who asked to be paid in Bitcoin. And I signed the checks for the company and so I called the accountants and said, "Let's pay in Bitcoin." And they said, "What's that?" And I said, "Oh, I figured you would know." And began the process of learning about Bitcoin, none of which came from the accountants or the payroll company, discovering only that it was impossible to pay an employee in Bitcoin at the time. And so I forgot about it. And in 2012, I had a woman who had worked for me, who ran social media for me, who started to talk about buying hamburgers in

• 2:53Speaker 01

  Bitcoin. And so now I was an expert because I had learned it was impossible to do payroll in Bitcoin. And so I was able to engage in conversation about buying hamburgers for Bitcoin and forgot about it again until 2013, when I was captivated by some of the stories in the press and had heard a few investors talking about it. And so just to learn, I bought some Bitcoin. And sometime thereafter, months thereafter, Bitcoin took off on a run and it became much more interesting and I began to dig in a little more and went

• 3:33Speaker 01

  down the rabbit hole as everyone does at some point. And where I really got captured by what was happening was in 2014, I went to, I was going to South by Southwest, which I had done every year, and discovered through a friend that there was the Texas Bitcoin Conference that started two days before South by Southwest. And so I went and my friend was very close to the Ethereum founders who were still working on their white paper. And Gav Wood and Vitalik Buterin showed up at this conference and I spent some time with both of them during that, during that conference. And I saw two things. I saw that

• 4:17Speaker 01

  they were the matinee idols of the conference, even though they hadn't finished working on a white paper. I learned what a white paper was and I heard the word blockchain for the first time. And I was really fortunate because Gav and I ended up in the car together a lot during that trip and ended up at dinner together and out for drinks afterwards. And he was forced to suffer my questions about what is the blockchain and how is Ethereum different from Bitcoin? And by the time that March conference was over, I had had a lesson from the master unwittingly, probably, and I think I annoyed him with my questions. But I walked

• 5:00Speaker 01

  away with really only one insight, which to this day still means something to me. And that was that when I looked at Bitcoin, it was like, it was like as if the early days of the Internet had, somebody had built email and had to build the Internet together with the email to make email work. So there was an application and an underlying protocol that were wired together. And that Ethereum was simply the underlying protocol for the blockchain. And that you would be able to build lots of applications on top of the blockchain. And on that basis alone, I decided to participate in the Ethereum pre-sale, figuring

• 5:42Speaker 01

  that if an application built on the blockchain could be big, then the blockchain separated from it could be even more valuable than the applications built on top of it. And so then I invested in Ethereum and began the process of learning more over the next few years and making a few other investments and waking up in 2016 and 2017 and seeing some real success with those investments.

• 6:11Speaker 00

  When you learn about the Ethereum investment opportunity, are they throwing around the words ICO? What does that mean to you? What was kind of the presentation, if you will, of that opportunity?

• 6:27Speaker 01

  Interesting question, because they did use the word ICO. And I kept saying IPO, because it felt very much like an IPO to me. And in fact, shortly after they took my Bitcoin, and it was a really Uncomfortable experience to send Bitcoin to buy Ethereum if you weren't very sophisticated, because you were just sending the Bitcoin into the ether to people who you didn't know, without real contracts. And every venture capitalist who I talked to about it at the time said, "That's crazy to do. It's completely overvalued."

• 7:11Speaker 01

  But shortly after that, I reached out to a banker who I knew, and I said, "Can you sit down with me and the team, because we want to talk about how to manage the process post-IPO?" And I literally used that phrase "post-IPO," because the same mechanics of an IPO come to bear in an ICO, except that the ICOs aren't doing it as well. And for example, in an IPO, the bank, the investment bank who's taking you public, or the banker who's taking you public, they'll sell much larger, much more of a book than they actually have the supply for. So there'll be pent-up demand. And then there'll be an investor relations firm that does a really good job communicating,

• 7:55Speaker 01

  not just with your existing investors, but with prospective investors. And they'll build a book of future business. And there's a lot of thought to how to manage PR on a strategic basis. And so what you have in an IPO is a thoughtful process post-IPO for supporting the economy of the share that's being issued. That clearly was something worth thinking about back then. Remarkably, to me, that hasn't evolved almost at all in today's world. And so we recommend for all of our portfolio companies to simply get great communications experts, think about not raising every last dollar, and focus on building a communication strategy, both to the

• 8:41Speaker 01

  To the prospective investors as well as their existing investors and to the press that matters. So if they're, if they need enterprise support, they should be in the trade publications from the enterprises that matter.

• 8:54Speaker 00

  Absolutely. And so when you invested in the ICO, which maybe you were calling IPO at the time, what was your expectation? Did you think that, you know, hey, this thing's going to go from, you know, basically nothing to $1,200, $1,400? Or did you think of it as I'm learning? Like, what was kind of the thought process there?

• 9:15Speaker 01

  Two things. One, I definitely saw that it could be massively disruptive. And somewhere along the line in March or April, I sent an email to Gav saying, if you guys build what you're, what you're thinking about doing and are successful with it, it could change the world. So I saw the possibility, but I also think the probability was next to nil. When I woke up one morning and discovered that, that Gav had, had, had or was leaving Ethereum, I just assumed my investment was worthless. And so I reached out to him, figuring

• 9:58Speaker 01

  I'd ask how it was going. And then I'd, he'd tell me, oh, it didn't work. I'm starting something else. And then I could write off my Ethereum investment on the tax, my tax return. And instead, his response was, things are great. And I wrote back and said, is there a market value to this? And he sent me a link. And I remember, I reached back out to him and said, has there been a reverse stock split? Because I'm still thinking stocks at the time. And he said, no, that's what each token is worth. And that's when

• 10:32Speaker 01

  I realized, and that was only, hard to say only, but that was only a 30x return at the time, give or take. And that felt monumental. And so

• 10:43Speaker 00

  I mean, that's a venture investor's dream, right?

• 10:46Speaker 01

  Yeah.

• 10:46Speaker 00

  30 plus X is amazing.

• 10:48Speaker 01

  I remember at one point early in my career, we had a very famous investor who was known for, who was known for investing in companies that 10x'd. And I remember him at one point telling me that he had invested in, I think he said, 30 10 baggers. And I thought to myself now in hindsight, that that wouldn't put you at the starting line today. That 30 10 baggers, 30 10 xers was great for public stocks, but in this space, you could do that pretty easily over the last, over the last three years.

• 11:27Speaker 00

  For sure. Absolutely. Okay. So the Ethereum investment obviously goes well between the time you invest and when you start to realize, hey, this is working, there's, you know, attractive returns. Are you looking at other projects? Are you, you know, kind of just doing other things and not really thinking about it? What's kind of your mindset at that time?

• 11:49Speaker 01

  I'm a retail technology, retail technology investor and was running a venture fund. And that was my sole focus. I was forced to look at another deal. I was forced to look at another deal because of the hard fork of Ethereum. So I had to learn about hard forks and make some decisions about Ethereum Classic. And, and so as I, as I went through that process, I learned more. I was forced to have more conversations.

• 12:21Speaker 01

  It wasn't until

• 12:24Speaker 01

  January 2017, when I had just finished my second retail technology venture fund. And I wanted to start thinking about how to build a much bigger fund because we had great performance in those first two funds, all unrealized at that point, but great performance. And at least three, four years into it, we were on a great, a really good trajectory. And as I was thinking about how to build that fund, all of the cryptocurrency investments had taken off. I had, I had the year before invested in Parity and was really pleased with what was going on there, begun to spend more time with that team over the prior year.

• 13:07Speaker 01

  And so I started to invest in other cryptocurrency projects and really blockchain technology projects. I don't invest in tokens and I don't think about trading charts very much. I think about it as a technology that could be disruptive. And that led to a process where, as I was making investments, a really smart investor who was in my earlier fund asked me, "How do you measure the market value of these things? And what do the profits look like? And if everything's open source, how is it defensible?" And I couldn't answer any of those three questions, and they seemed like really good

• 13:46Speaker 01

  questions. And so I stopped working on my next retail tech fund and decided that I would try to learn a little more so that I could answer those questions. And there weren't great answers, but there are answers. And it took about six months. And while I was doing that, I was reading everything I could. I was talking to every team. I was actually making a lot of investments. And along the way, I discovered that there was a fund opportunity here because people were interested in the space. Investors who I thought were really smart were offering to invest alongside of me. And I always hated raising capital. It's one of the things I just don't like doing. I like investing. I like talking to teams.

• 14:29Speaker 01

  I like helping create leverage for them. And it just seemed like very different than my first two funds because investors were saying, "We'll invest alongside of you." And so very quickly, I turned to the woman who I had hired to work with me on the next retail tech fund. Her name's Caroline Cassie. And I said, I think we should do blockchain fund. Would you like to be my partner in it? And she thought about it for a little longer than I did and said, yes. And then we went out to the Polkadot Retreat in Spain and spent more time with Gav, Gav Wood. And he said, he'd like to invest in it. And then I said to him, why don't you be a general partner in the fund with us? And he said,

• 15:13Speaker 01

  okay. And so by the end of that couple week period, we had gone from learning about the blockchain, making some investments and planning on doing a large retail tech fund, to having three partners committed to building something in the blockchain venture fund world. To be clear, Gav is full time at Parity and Web3 Foundation with Polkadot. And so our, our commitment from Gav is a much smaller time commitment. But it does help provide aerial cover on where the technology is going.

• 15:48Speaker 00

  Absolutely. And so you raised your first fund, right? And how big was that fund?

• 15:54Speaker 01

  The first fund was $35 million, including the GP's investment.

• 15:59Speaker 00

  Got it. So $35 million fund. And you started deploying that. And so one interesting thing that you've said is, you look at these as technology companies, right? Or technologies that could be disruptive. So how much of the fund's focus is on kind of the liquid markets versus you're investing before, you know, in the pre ICOs or kind of ICO type rounds? And then eventually they become liquid, right? Kind of a more condensed timeline, if you will, than kind of traditional investing?

• 16:25Speaker 01

  I think from day one, our thesis was to invest in the really big outcomes of the blockchain. It was our view that there would be many thousand X companies that would emerge over the coming decade or two. We wanted to be in as many of those as possible. And we felt that To improve those odds, we had to be in early. We had to be in the first or the second round to really have a portfolio of that. It also meant taking huge risk. It meant having a lot of investments that would likely fail over a 10-year period. So we had to give a lot of thought to what that kind of portfolio composition would look like because Airbnb was not an obvious investment back in the internet days and Uber

• 17:10Speaker 01

  was not an obvious investment in the first round. So we had to set up a series of limiting factors by which we could then say, okay, let's rule out a lot of stuff because we want to be in everything that could. We began to pull together this thesis, which we call investing for possibility instead of for probability.

• 17:34Speaker 00

  And so in that, because I've never heard that before, right? And I think it's a really powerful concise statement. What you're looking for is not something with high likelihood of being successful, but really just the fact that if this is successful, this will be incredibly valuable to the world and your investment, no matter how big or small it is, will become much, much more valuable than it is today.

• 17:59Speaker 01

  Yeah, I guess I didn't fully answer your last question. Almost everything we do is a SAFT agreement or equity, so we're not buying liquid tokens. One of the ways we frame things is just by trying to understand where history is going to repeat itself and where it's going to rhyme and where there are significant differences. And it certainly feels like the blockchain is rhyming with the internet. And if you look at what worked in the internet, number one, protocols didn't work, but that was because there was no economic incentive to build protocols and they will work here. And I think we're not the first to say that protocols will be immensely valuable. We believe that.

• 18:44Speaker 01

  And there's an economic incentive for protocols to develop. And whether you think there are 12 protocols for the internet or 30, one of the things we believe very much is that there will be many more protocols for the blockchain simply because the economic incentives are so powerful. The second thing is if you look at the waves of Development of companies on the Internet. Things went through essentially three separate waves. The first was just replication. It was, I've got a, I've got a magazine and people are talking about the Internet. I'm going to put my magazine on the Internet and you're gonna, you're gonna go to my magazine and you're gonna flip through pages and it's gonna take forever for those pages to load, but you're used to that format.

• 19:28Speaker 01

  Or I've got a catalog and I'm gonna put my catalog, I've already got the photographs, I've already got the product in the warehouse, I know how to ship and fulfill from a, from a warehouse standpoint, so I'll just take orders online. And, and, and companies literally, and they were innovators, but they literally replicated their business model. I don't think anyone made a lot of money doing that over the last twenty, investing in that over the last 20 years. But the second wave was they, they, they took advantage of the technology and at a minimum they, they enhanced the businesses that they moved online. And what I mean by that is, somebody in the magazine business said, hold on a second, we can add videos to this.

• 20:13Speaker 01

  We can scroll so you don't have to pageinate. We can allow you to search for an article so you can find something from our archives without having to go to a library or look through old issues. And somebody in the catalog business said, we can add alternate shots. We can show you this product from a side and from behind. We can show it to you in every single color, which we couldn't do in the catalog because we didn't have the real estate. We can, we can scroll, we can zoom, and we can, we can double expose items. And so that phase of enhancement actually brought out some really powerful properties of the Internet and allowed people to think about how that technology would build a better business.

• 20:55Speaker 01

  But the wave in which people made money was in the wave of innovation, when they built things that couldn't be built without the Internet. And, and the first company I think of to do this, and I suppose Netscape would be an argument for this, but the first company I really think about to do this is Google. And then we saw Facebook, we could certainly point to Lyft and Uber and Airbnb as examples of businesses that could not exist without the Internet.

• 21:22Speaker 01

  And the last point I'll make on this is they all required enabling technologies. And so it wasn't until you started to see the mixing of technologies together that we saw the true innovation of the internet. And so here, I think, we're going to go through similar waves. I think the first wave is we're just going to get the protocols built because without the protocols, there is no utility on the blockchain. And if you compare the utility on the blockchain today to the utility on the internet in even 1998 or 99, the internet had far, far more utility. But it was also worth $3 trillion against $300 billion today. The protocols were built.

• 22:03Speaker 01

  And so we're in an industry that is handicapped because the protocols aren't built. But it's going to grow faster. It's going to deploy faster. There are more enterprise companies sitting on the sidelines. There are, the protocols are getting built more broadly and more deeply than in the internet and more rapidly. And most importantly, in order for the internet to have utility, people had to have internet access. And so there wasn't internet access for everyone. You actually literally had to go have a landline brought into your home to get internet access. And that already has happened for the blockchain. There is, in order to use the blockchain, you have to have internet access. And everyone already has internet access.

• 22:47Speaker 00

  Basically blockchain gets to grow on all of the infrastructure, network effects, etc., that the internet laid for the last 20, 30 years.

• 22:54Speaker 01

  That's exactly right. And that'll speed its adoption.

• 22:56Speaker 00

  Absolutely. No, I completely agree with that. All right. So let's kind of get into like the anatomy of a deal, right? So where, from a sourcing perspective, do you guys normally find, you know, most of the deals you end up investing in? What types of sources are they coming from?

• 23:13Speaker 01

  I think it's useful to understand how we operate first. Okay. We apply a commercial filter to every deal we look at. We say, is the market size really large? Can this, can this technology or this business be built without a blockchain?

• 23:34Speaker 01

  If it gets built and if it requires the blockchain to be built and if it's a large market, we're interested, but we want to understand the, the commercial viability of that market. Over time and with a lot of usage, will that market, market evolve into an oligopoly or a monopoly? If not, and it's highly competitive, will there be a compression of margins? Are there some form of, is there some form of barrier to entry that will allow for expansion of margins? Some kind of barrier to entry, oligopoly or monopoly outcomes? And that could be in the form of network effects or technology or something else. If it meets all those criteria, we then ask, is this team capable? If they have a downhill slope, a tailwind and a lot of lock, are they capable of running

• 24:19Speaker 01

  a business that's worth a thousand times or 10,000 times as much? Can they get it there? If all of those things are true, and if there's a cryptocurrency, we'll then ask the question of, does this token enhance the business? Do they really need a token? Are they, is the token doing something like overcoming network effects of complementary industries that exist today? Is there some, some other benefit to the token? If we can get a collection of good answers to that, we're likely to invest. And that, that leads to the second part of what we do is, we like to think of ourselves as much more than a check. We like to think of ourselves as a lever.

• 24:59Speaker 01

  So when we do invest, we spend a lot of time with the teams post-investment, much more post than pre, which I think is unusual for a venture investor. And we work with them on their go-to-market strategies. We work with them on fleshing out their executive team, sometimes helping them add co-founders or key employees. We help them raise capital from investors who we think are value-added, that can supplement what they're doing as well. We work with them on the product side sometimes to, to protect against what could be an Achilles heel in the future, which is better UX from a competitor.

• 25:37Speaker 01

  And that has led, that combination has led to two things that have impacted our deal flow. First, our founders genuinely, I think, would, would as a group say, were more value added than most. And so we got, a lot of our deals come from the founders of our portfolio companies. That did not happen a year ago. That's happening at a much more meaningful rate today. The second thing that it's done is, a lot of venture investors don't invest with that exact same approach. And so we view our diligence as complementary to a lot of investors, whether they're the OGs of blockchain investing, or the traditional venture funds of Silicon Valley. Number one, we don't take the whole

• 26:20Speaker 01

  round. Number two, we make decisions really quickly. We share our thinking. And so we're not threatening to anyone, and we believe we're complementary, and we make decisions really quickly. So we, we do see a lot of deal flow from other funds. And then finally, I've been a founder for a really long time, and just have a fairly good set of incoming deals. And Gav sees a lot of deals as well, just simply because of where he sits in the blockchain ecosystem.

• 26:51Speaker 00

  Got it. And so, it's fascinating that, you know, in such a short period of time, you've been able to build a reputation and kind of show with action to your founders, hey, we actually can be helpful here. And my guess is that they're introducing you to new founders because they want their friends or people they know to benefit from the same stuff, right? And so it's kind of a self fulfilling prophecy, as you continue to deliver that. When you meet one of those teams, what is the vetting process like? Right? You talked about kind of your criteria, but how do you actually interact? Are you doing in-person meetings? Is this phone calls? Is this kind of, you know, some sort of back channeling on references? Like, what does that process look like?

• 27:34Speaker 01

  I say we're definitely learning a better process. We much prefer to meet a founder in person. I describe the process that we go through with founders as a bit like drilling for oil wells. There's not enough time in these deals to do seismic testing and bring in all kinds of equipment and do deep diligence, particularly on a project where you've got a white paper, sometimes no code, and one or two founders. And so the way we think about it is, and you can do this on the phone, I like to do it in person, I'm a little more old school like that. But we like to drill really deep in a couple of areas.

• 28:18Speaker 01

  And if somebody can truly outthink the questions as we drill deep, it gives you confidence that the team is thinking strategically. And what I mean by that is, we might pick six or eight different areas and ask questions. And it's okay for them to not know. It actually shows self-awareness to say, yeah, I haven't thought about go-to-market, or that's not my strength. I'd like to have somebody come into the, join the team as a co-founder or as head of go-to-market strategy. But if we, if we drill in and they profess to know about it, we expect them to know about it and have thoughts about it. And they don't have to agree with us, they just have to have a point of view.

• 29:00Speaker 01

  Secondly, we look for founders that run meritocracies and are collaborative, because you're inventing new space here and there's no way anyone can have an answer. And we look for signals of that. And then, I guess, the last thing that, that we do is, I think my partner Caroline is really good at reading people. And so we talk about what we learn, we talk about internally what we learn from founders before we invest. How they think, how they operate, how they communicate with us are all signals of how they'll communicate with investors and customers and their team.

• 29:40Speaker 00

  Absolutely. Let's, um, let's talk about a deal you did, right? Is there one that you've talked about publicly that, that we can kind of dig into? Not so much the people or the process of investing, but kind of post-investment, how you look at, you know, what that company could, could potentially end up being or the value they could create?

• 30:00Speaker 01

  Sure. We were an early investor in Hashgraph. Okay. And at the time, we invested in Hashgraph, and I think it's a somewhat controversial project. For sure. There's 39 governing nodes, there's a patent involved, there's a parent corporation and a decentralized network or a foundation. And so it's got a lot of the mechanics that traditional investors don't like. At the time, the technology didn't have a test net. We're not technologists internally, so we couldn't prove out whether it could work or not work.

• 30:44Speaker 01

  I heard it described by some people I introduced to it to be a science project. But we looked at it a very, I think we looked at it in a different way, in two ways. One, we weren't troubled at all by the 39 governing nodes. It meant that each node had 2.6% of the vote from day one, and we had some assurances that the governing body could expand the number of nodes over time. Number two, those 2.6% voters were very, very large companies with potentially 10 or more billion dollars in revenues, whose reputational risk was important to the, as important to them as making money. So they had a lot to lose by being malicious actors.

• 31:29Speaker 01

  And then finally, we simply liked the fact that the team was very focused on the technology in the early days, and they were super impressive when you talk to them about the technology. So for us, it was a bet on, could this team build something different? Could they build something better? It was about possibility, not probability. And we actually thought there was a Plan B for them. So if they don't win everything, and we don't get our 10,000x or whatever it is that a win of everything would be, there was a really solid Plan B there. One, they had super fast transaction speeds.

• 32:12Speaker 01

  So if the world coalesced around, hey, we need to have a fully decentralized, fully public, more traditional approach blockchain, and these guys didn't win.

• 32:27Speaker 01

  They still might win anything that required a slightly lower level of security and validation with high transaction speeds. And so, in our view, new businesses were going to be built, enabling new businesses to have 250,000 or 500,000 transactions per second could create entirely new businesses that couldn't sit on those more traditional blockchains. Yep. And we also, so from our standpoint, that was a really powerful driver of investing was, they didn't have to win everything to win a monopoly in a certain space.

• 33:05Speaker 00

  Before we move on, I wanted to tell you about our sponsor, BlockEstate, a new security token project in the $200 trillion real estate market. They've partnered with Polymath and Coinlist Comply API to create one of the world's first tokenized real estate funds. Tokenization is the process of creating a digital token that represents ownership in a real world asset. You've heard me say it before, but a clear use case for this is real estate. BlockEstate aims to bring increased liquidity to this massive market. We're really, really thankful to the BlockEstate team for their support, so we'd appreciate if you checked out their website at blockestate.com to learn more. If you're intrigued by what they're doing, feel free to reach out to them or give them a tweet on Twitter. Thanks so much. How do you think about team building, right?

• 33:48Speaker 00

  In that sense, so you invest early, right? There's some subset of a team there, you know, kind of the early formations of a team. That project in particular happens to have some people with some experience, right? So it's not kind of younger people who are working on it. How do you, is it like they are building a company, right? And they're building a team, just like you would kind of have the hierarchical structure? Or is it more of this kind of distributed decentralized type team building and governance that I think people more, you know, associate with some other blockchain projects?

• 34:23Speaker 01

  I think the traditional rules of teams will apply here with some minor differences.

• 34:30Speaker 00

  Across blockchain.

• 34:31Speaker 01

  Across all of blockchain.

• 34:32Speaker 00

  Yep.

• 34:34Speaker 01

  The great teams are mission driven, always have been, I think they always will be. The great teams share a value system across the executive team and across the employees. And they work really hard to drive decisions around the mission and to drive hiring and management decisions around the, a shared set of values. Not all teams start with a perfect execution on both fronts, but the great ones do start with a core or a kernel of that. This is a, this is a unique space in the sense that we're seeing a lot of deals outside of Silicon Valley. An increasing number coming from Silicon Valley, but a lot of deals are coming from outside of it.

• 35:19Speaker 01

  And a lot of those teams, and a lot, and a lot of teams in fact, including the Silicon Valley teams, are really much more decentralized than traditional businesses. That brings a whole nother level of communication skills that's required. It brings a talent pool into the mix that has been largely ignored. I think we're going to see more decentralized teams. I think we're going to see extraordinary amounts of talent come from places outside of New York and Singapore and Hong Kong and Shanghai and Beijing and, and they're going to come from places like Alabama and Romania.

• 35:59Speaker 00

  Absolutely. Yeah, you, you hit on an interesting thing here around governance, I think gets talked a lot about in blockchain, but communication, right? And so in any company, you need to be able to communicate, the sharing of information is really important and kind of allows you to move faster. In a startup, it's essential, right? When you've got a small group of people who, you know, there's not that much kind of infrastructure in place, not that much institutional knowledge that's in place, that, that ability to not only communicate, but communicate quickly and in a dynamic fashion is important. Well, what happens when you take all those people out of the same office, right? And you do, and you put them all over the world, communication actually becomes a little bit harder, right? And so the, the, to coordinate across time zones and, and skill sets and all this stuff is.

• 36:40Speaker 01

  And languages.

• 36:41Speaker 00

  And language, yeah. It's quite challenging and the best teams, to your point, that they're doing it, kind of making it look easy.

• 36:49Speaker 01

  One of the things that's changed since I did my first startup and my very first startup required a great deal of communications with China. And when we started, everything was done by phone. And that was really hard because the phone calls would happen at 10 or 11 o'clock at night on almost a daily basis. And then we had fax machines, which were kind of a real boon because they were the first form of asynchronous communication that you could use in near real time. But today, we have Slack and we have email and text messaging. And so I think the methods of communication help a lot. You can search

• 37:34Speaker 01

  for stuff. You can tag things. You can leave things as open items. And so the ability to follow up and stay on top of the details is so greatly enhanced that I think it makes up for the, at least it's somewhat, if not fully, makes up for the loss of face-to-face communications. But I also think that's a personal choice. And if you're not comfortable with operating that style, you're going to build your team in your office. And we will see a lot of that.

• 38:06Speaker 00

  Absolutely. No, it's super fascinating. Let's talk about themes, right? So what themes in the blockchain and crypto space are you excited about moving forward or you think are important?

• 38:14Speaker 01

  I think, generally speaking, we don't think that way.

• 38:22Speaker 00

  Okay, interesting.

• 38:23Speaker 01

  There are themes that we're super not interested in.

• 38:26Speaker 00

  Okay.

• 38:27Speaker 01

  So we'll rule out themes. And every time we rule out a theme, we end up making an investment in it. So we rule out like 98%. But it makes it easier, right? We've ruled out decentralized exchanges. We've ruled out custody.

• 38:39Speaker 00

  Why? Why those two?

• 38:42Speaker 01

  Custody is an easier example to explain. Today, if you're

• 38:50Speaker 01

  Looking at the business models that are being valued in custody and in and around that, they're charging 100 basis points, maybe 50 basis points for the custody. If you look at traditional custody solutions, you'll see two things about them. One, they're highly competitive, there's a lot of players, and they're getting 2 basis points for custody. So here's a case where we think the end market is going to be highly competitive and highly fragmented, and we think there'll be a compression of margins over time. In the short run, while they're overcharging, there are not a lot of clients for custody, and there are a lot of custody companies fighting for a limited number of clients and a lot of money going into them, which we think leads to very high customer acquisition costs.

• 39:34Speaker 01

  Does that mean nobody will be worth anything in custody? Absolutely not, that's not our point. Our point is that the ROI on a custody investment doesn't fit our thesis of achieving the kind of returns we want to achieve. And I think similar arguments could be made for decentralized exchanges. That said, I think our approach to thesis investing is that our thesis is, we want to be surprised. There is a lack of imagination that exists in thesis-driven investing, i.e. we build a thesis from what we know, and so there are hundreds of businesses and industries we know that are going to be disrupted.

• 40:17Speaker 01

  I want to be surprised by the million people who are out there saying, "I can take these two technologies, twist them together, invent something new." That wouldn't fit any thesis I had. And I want to be surprised by the 10 of them who come up with something extraordinary, right? Some of them are just going to be dumb ideas. But we've seen some really cool stuff, and it's the first time in my life I'm prepared to invest in a technology that is looking for a problem. Because there are a lot of people looking to take these technologies and come up with really creative applications for them.

• 40:53Speaker 00

  Yeah, it's super fascinating, this idea of you almost are trusting that the people you're investing in have that imagination, that skill set and experience with either problems or technologies that you don't. And so if they're able to build something or explain something to you that you already kind of can wrap your head around, it actually may be not big enough. Right? It's not that it can't be successful, it's just it can't be big enough.

• 41:19Speaker 01

  I want to be a catcher at the plate, getting a lot of pitches. And I want to find the pitch that just was so unexpected. And so I think about, there's a company called Nodle, which we like a lot. And it's a super cool idea. It's a mesh network of Bluetooth.

• 41:41Speaker 01

  I actually don't know what the first problem is that's going to take that, that protocol and get built on top of it. But I know that if 10 creative people dug in for a month, there'd be some really cool ideas that come out of it. And so I have a high level of confidence that there can be really cool things that will get built on that kind of protocol. Now, having said that, and saying we don't thesis invest, I'll tell you one thesis which we are thinking about these days. And when the pitch comes across the plate, we're, we're interested. Having grown up in B to C commerce in my life, and later B to B commerce, we

• 42:25Speaker 01

  think there's a new form of commerce. And my friend and partner Caroline invented the phrase D to D commerce. And we think there's going to be an era of device to device commerce that will grow up. I think you still, there may be lots of them, and some of them are going to be small businesses. But the idea that devices can talk to each other in a decentralized autonomous world, where nobody owns individually that device, could lead to lots of opportunities to make a lot of money if you are the one who sees that pitch and recognizes it as being something different.

• 43:02Speaker 00

  Yeah, it is something that we thought a lot about of as you tokenize or digitize assets, right? So we always talk about these stocks, bonds, currency, commodities are all going to get digitized. The short term value, I think, is what people talk about, oh, settlement times, liquidity, you know, global participation, all that stuff. That is true. That stuff can happen. But the real value is in automation. You're basically taking all of these assets and you're putting them into a format that now automation can do things that we definitely can't think about, right? So the way that I always use the example is, why do you own one asset, right? Let's say your house, you sell that asset into a commonly denominated

• 43:46Speaker 00

  currency like the US dollar to buy a second asset? That seems like the reason why you're doing that is because that's the best option today, right? Is you go into that common denominated currency because you and the person that you are transacting with both accept that? Well, if we ever get out of needing to make that extra transaction, you can just go from one asset to the other, there's a whole bunch of disruption that follows, right? And I don't even know what that looks like yet, but it feels like that's the type of stuff that gets really interesting and down in the weeds.

• 44:17Speaker 01

  Yeah, you can see things like separating the debt and the equity from a home, separating the mortgage payments into blocks. So if I want to buy money coming back to me at the time my kids start college, I can buy a bunch of mortgage coupons for a specific year or for a specific set of four years. There'll be a lot of invention around traditional assets. What I can tell you is we're not very excited by security tokens as a thesis. And a lot of people say, well, there's going to be a lot of value that's created by the liquidity,

• 44:57Speaker 01

  maybe. The aftermarket for these time sharing has proven to be actually not a really good investment. And so it only becomes liquid if you have a liquid aftermarket, and that's going to take some time to build. So simply securitizing an asset and tokenizing it may actually not do any good for the value. And it's likely to be one of those spaces where there's a lot of competition, not a lot of

• 45:31Speaker 01

  Not a lot of margins and a compression of margins over time, certainly not an oligopoly or a monopoly. That said, a marketplace of securitized assets might be super interesting because there are barriers to entry in that field. So we don't say no, we just need to understand which part of it it is.

• 45:50Speaker 00

  Well, and a lot of what you're talking about here is, to some degree, you're really hinting at a lot of infrastructure type investing, right? So the exchange of the tokenized securities, rather than say, hey, this one individual house is going to go up by, you know, 20, 30% in value, the marketplace might be a more interesting way to look at it. The protocols, for example, if a bunch of things get built on top of the protocol, there is value assigned to the protocol or the foundation, right? And so it's an interesting way to think about infrastructure investing, which I think a lot of people kind of deem as boring or, you know, the picks and shovels and all that stuff. But really, if you put a, you know, kind of a perspective of imagination into infrastructure,

• 46:35Speaker 00

  now you start talking about some really, you know, kind of powerful things that could get built if people are successful.

• 46:40Speaker 01

  I think a really good example of that in the early days of the internet that created a lot of value at the time was eBay. It took what were local marketplaces and turned it into a national marketplace and built a meaningful and massive barrier to entry, simply because the buyers wanted to be where the sellers were and the sellers wanted to be where the buyers are. And frankly, Craigslist is another example of a company that should have been disrupted many years ago, but created pretty overwhelming barriers to entry for decades, even though there were better products out there. We could see that happening here. We could see that happening with marketplaces of securitized assets.

• 47:19Speaker 00

  What do you think about crypto as money, right? So whether it's Bitcoin or something else, what's the thought process there in terms of, are you investing alongside that? Do you think that that is viable? Is it something where we just, it's a time thing and it's just going to take a lot of time for it to come to fruition?

• 47:37Speaker 01

  I think it's a really limiting definition of...

• 47:43Speaker 01

  What a token is and what the blockchain can do. If you think about what the internet was, any internet business that exists today could be described as the exchange of data between two entities. And we've learned a lot about what data is and how many forms of data there are, but data could be your GPS location, your credit card information, it could be a text, it could be a video, it could be an image, it could be a list of your friends. And as you look back on the development of the internet, there's, I don't, I haven't found a company that can't be described as one entity exchanging data with another entity.

• 48:24Speaker 01

  For example, a person sends their, their data of GPS location and credit card information to an entity who shares it with another entity slash person slash driver, and that driver goes to the GPS location. That's Uber. A person- And that wasn't possible before certain pieces of technology and hardware were created. And also not possible without the frictionless exchange of data. Yes. And if you look at the curve of, of the creation of data, it's a hockey stick up and to the right since the invention of the internet. The same is true, I could give you other examples if you want, but Facebook is, a

• 49:09Speaker 01

  person sends some texts, some videos, some images, and the data of who their friends are to entity Facebook, and entity Facebook sends it to the friends from that list of that data of friends. And, and you can see how every business can be described that way. So to just think about cryptocurrency as money, I think is limiting because the blockchain is what allows an entity to exchange value with another entity. And if you think about how we've defined broadly the number of types of use of data for the internet, we're in the early stages of defining what value is. But for example, value is the stuff we know. It's the store of value like gold. It's the, it's, it's, it's the-

• 49:56Speaker 01

  The currency like the US dollar or a stablecoin, its ownership like the title to your house or to your car. And I think we all get that. But it's also prospective value. It's the promise of something in the future like an insurance policy. I think where we start to drift off is right about there. And I think we're going to define value in a much bigger way. I think we'll start to look at things with more common sense and say, of course, the recipe for the secret formula for Coca-Cola is value. Of course, my private medical records are value.

• 50:37Speaker 01

  And so the definitions of value and how we exchange, the definitions of value are going to grow. And I believe in the future, every single blockchain company will be able to be described as, just like entity exchanging data with another entity describes the internet, I think, an entity exchanging value with another entity in a frictionless way in both cases is how we're going to look back in 20 years at what the blockchain is. And I also believe that the curve of creation of value is going to follow a hockey stick growth as we start to find new ways to exchange value and new forms of value.

• 51:16Speaker 00

  Absolutely. I buy that for sure. All right, let's do a rapid fire of questions here. First one is, what do you think is the most important company in crypto other than your own?

• 51:28Speaker 01

  I definitely wouldn't say it was our own.

• 51:31Speaker 00

  I got a couple of psychos who come on who want to say that, so.

• 51:35Speaker 01

  I think it has to be Bitcoin. I think Bitcoin at this point, I'm not a Bitcoin maximalist. I finally, it just finally occurred to me a few weeks ago that Bitcoin had won, that there are other companies that might get supplanted. If you look at the search engine wars of 1999, we're in that phase with blockchain protocols. So what might be a winning protocol today may get replaced by something else. And just to refresh everyone's memory, you had AOL, and then you went through a war phase where you had AOL, Lycos, Excite, Ask Chieves, Yahoo, and then Yahoo won temporarily until Google came around and then Google crushed everyone. I think we might see the same thing with protocols.

• 52:22Speaker 01

  But Bitcoin, for a bunch of reasons, is likely to win, simply because if you want to leave a second or third world country with your assets, there's no safer way to do it today. You can't take gold, you can't take currency, you can't take diamonds. And it occurred to me that at some point, we're going to have an economic crisis, and people will see that, not in our country, but in a second or third world nation, and that will be the proof that the blockchain works.

• 52:50Speaker 00

  It's so funny you say this. I saw on Twitter, literally today, there was a gentleman who tweeted and said that he had a friend from Venezuela who was leading the country, and he was at the airport, and it wasn't his family, but another family was there, and they were getting shaken down, and they had gold with them, and it was getting confiscated. And he was like, that's probably that entire family's wealth. And so I think that is the prime example of the difference between a physical asset versus these decentralized, distributed, digital asset.

• 53:22Speaker 01

  Yeah, if you've got $100 million, or $1 million, or $100,000, or $1,000, and it's your only asset, and you want to get it across the border, and your biggest risk is a volatility of 10 or 20%, that's a much better risk than losing 100% of it.

• 53:38Speaker 00

  Absolutely. I completely agree with that. All right. So what do you think is your most controversial thought? What do you believe that a high percentage of other people would disagree with?

• 53:50Speaker 01

  That technology is not the only defining barrier to entry in blockchain protocols. I think really good technology matters. I think great technology is investable and worth having. But I've seen many instances in my life of really good and second-best technology being married with best-of-class go-to-market strategies winning. So we're very cognizant of that. And I'd say the other thing is that we simply don't believe in investing in the categories that everyone else makes the category of the moment. I think those are really bad investment decisions.

• 54:37Speaker 00

  You see this all the time, right? A founder comes to you and says, hey, I'm raising a round, it's about to close, and X, Y, and Z funds are in, right? And we've tried to make a list of how many companies that have been overly successful were either, one, highly competitive, seed and Series A rounds, and/or, two, raised an enormous amount of money early on.

• 55:04Speaker 01

  The best investment I've ever made in my life is Ethereum, and I couldn't convince anyone else I knew to invest in it. And I think we have a thesis in our fund that if we disagree, we have to take it really seriously and we have to invest. And so, we each can make, every partner in the fund can make an investment decision on their own, because the most controversial are not the most obvious, by definition. And we don't, I mean, I can't imagine a group of three partners sitting around talking about Airbnb and everybody saying, oh, that's going to be a huge winner. People are dying to rent out their apartments to strangers, let people they don't know in when they're not there, right? So I think

• 55:48Speaker 01

  the likelihood that there is consensus on the big winners is probably very low.

• 55:53Speaker 00

  Yeah. I wish that we could find all the data. We probably can't find all the data, but it would be really interesting to see what the actual percentage is, right? Because it's got to be single digits, right? All right. You got a magic wand, you wave it, you can change any one regulation that exists today or improve one. What do you change?

• 56:11Speaker 01

  I think the regulatory climate is, the regulators are doing the right things generally right now. If I could do one thing and wave one magic wand, I'd get rid of New York's bit license, because it just causes a lot of aggravation generally and makes the US a less competitive place. I know the New York regulators are trying really hard, but when you look at a SAFT agreement and it says New York residents can't sign, or... You talk to companies and they simply don't want US investors. I think that's a bad thing for this country. I think we do a really good job as a nation at protecting our small investors. And I think that needs to go on.

• 56:56Speaker 01

  And I think the people who commit fraud and the egregious violators should have a two by four hit swung swung at their head. I just, I think there's, this is one place where it'd be nice to get rid of because I don't think it performs the function it was intended to perform.

• 57:12Speaker 00

  Absolutely. The protections are fine, right? It's just the way in which it's executed. That is fair. All right. So one question I ask everybody is, let's just admit that aliens exist and they're out there somewhere. Do aliens have pets?

• 57:29Speaker 01

  I actually think the aliens would look at the way we walk our dogs and think that the dogs were in charge.

• 57:34Speaker 00

  That might be the best answer we've ever gotten. That is perfect and probably not wrong. All right. So you can ask me one question before we go.

• 57:48Speaker 01

  I'm curious, as you've gotten into this space, I learned about you through my 19 year old son, who's a huge fan. Name's Reed, if you want to do a shout out.

• 58:00Speaker 00

  Shout out Reed.

• 58:03Speaker 01

  I'm curious, as you look at your audience, how you think it's going to evolve in the next five years? So who's, who's tuning in now and who is going to be tuning in to you in five years?

• 58:16Speaker 00

  Yeah, that's a super interesting question. So I've been surprised, right? I think that I'm still one getting comfortable with just a 19 year old that I don't know actually even knowing who I am, right? That's kind of weird and somewhat uncomfortable.

• 58:31Speaker 01

  For both of us.

• 58:32Speaker 00

  But at the same time, you know, I frankly thought that most of the people who are tuning in on Twitter and kind of engaging in all this stuff was, you know, who the institutional investors think it is, right? It's the it's the young kids that, you know, kind of don't have anything else to do. They're somewhat fringe, if you will, that they get lumped into the like, oh, that's the kid in their parents' basement type stuff, right? And so as, you know, I've kind of started to spend more time with these institutional investors, what I found is they're actually super interested in this stuff. And so we've been talking to some of these institutional investors, and they want they want to listen to a podcast. They want to, you know, who should I follow on Twitter and do this stuff? And the running joke that I have is a lot of what like the older CIOs always tell them, like, all right,

• 59:16Speaker 00

  so here's like the scary part, go on Twitter and follow like Whale Panda or something, right? And it's like, you know, there's not like a person, it's this, you know, almost like caricature to some degree. And and some CIOs are just like, you know, what are you talking about?

• 59:31Speaker 01

  We're big fans of seven.

• 59:32Speaker 00

  Yeah, yeah. And just like, well, it's just like, you know, like, look, what are you talking about? Right? It's kind of half the crowd. Then the other half the crowd is like, okay, no problem, right? If you say that's the, you know, person that's got information, like, I'm it. And so where they haven't quite broached yet is like the Telegram world, right? It's all the different groups and because you got to kind of know some people to kind of, you know, navigate your way into into the high quality groups, etc. But I've been surprised at how many of the people that are not participating, so not deploying capital, they're not actually in, but they're paying attention, right? And so if I if I

• 1:00:13Speaker 00

  looked at like a Twitter, it's still, you know, 90 plus percent, the kind of crypto anarchist, the kind of younger crowd, all that stuff. But I do see, you know, hints of this like more institutional, more mature kind of legacy world becoming interested. What I think will become interesting is if any of those people who are now coming in end up gaining large audiences, I think we're starting to see with lawyers, right? So the, these people who come from kind of a more legacy world who, you know, we had Jake Travinsky on, right? And he's been doing a great job, some news hits. Everybody on Twitter either, it's really good or it's really bad. No one really understands it, but just tweet a bunch and, and people will, you know, favorite it and retweet it,

• 1:00:57Speaker 00

  whatever. But he, but he explains it. He says, hey, this is what happened. This is the potential impact, right? Here's other things to look at, etc. And he's, and he's growing an audience very quickly because he's providing value. I don't know if like the bankers and those types of people are going to be able to do the same thing, because I think that the authenticity gets lost when they try to just become the crypto anarchist. People can, eh, you're not, that's not really you. So I do think that the lawyers are doing a good job right now saying, look, I'm not a crypto anarchist. I'm not into the crypto Twitter stuff. I'm a lawyer, but I understand law. And so if you people want to understand what's happening here, I can explain that. And I think that that's, you know, we'll see more and more of that over the next, you know, 12, 24 months.

• 1:01:38Speaker 01

  On your podcast, I mean, on your Twitter account, watching you.

• 1:01:41Speaker 00

  I, I think that more of those people for sure. And the other thing that, that people have figured out, which is super annoying, if they tag me in their tweets, I, I favorite every one of them, right? Because it's like a, look, so we took the time to tweet. And so when I favorite it, it's just like a, hey, I see this, you know, thing, you know, just you put some effort in, I put some effort in, you know, it's called a day. It gives them more engagement. And so now I have people, I, there's one guy who, if I could figure out who it is, just email me or something. He has a bot and he tweets at me every hour.

• 1:02:14Speaker 00

  And it's so annoying.

• 1:02:15Speaker 01

  You need a bot to, to, to favor the tweet?

• 1:02:19Speaker 00

  No, no, no, he, he, he, he's been doing it. So hopefully we keep the, the kind of automated type messages to be down. But, but I do think that it's really interesting kind of how the communication across the industry is, you know, this is the, you know, the most well documented revolution probably in history, right? You can literally see what everyone's thinking all the way back to, you know, 2009 about crypto and Bitcoin, etc. Whether it's on Telegram, you know, it's on Twitter, it's on Reddit, Bitcoin forums, you know, all this stuff. And it's pretty, you know, it's pretty interesting. That's a really good point. Yeah. All right. We'll end it there. You, you got me with the dog comment of the, of the aliens. All right, man. Thank you so much for coming. I'll do it again.

• 1:03:04Speaker 00

  Thanks very much for having me.

• 1:03:07Speaker 00

  Thanks again to our sponsor Block Estate. To check out their tokenized real estate fund, you can check out www.blocestate.com. Hey, everyone. Pop here. If you like this episode of Off the Chain and want to help us take crypto to the top of the apple, Spotify and other podcast charts, please do us a favor and rate, review and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off the Chain.