Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Ciaran O'Leary: BlueYard – The Disruption of Venture Capital

Episode Date: September 13, 2017

In the past year, the first killer application of blockchain technology has emerged: venture funding. As blockchain-facilitated crowdfunding is disrupting venture capital at blistering speed, we are joined by Ciaran O’Leary, Founder and General Partner at BlueYard. BlueYard stands at the intersection of this transition. Structured as a traditional VC fund, its thesis focuses fully on the decentralized economy and it invests in tokens too. Ciaran joined us to discusses what blockchain means for VCs and its implications for BlueYard. Topics covered in this episode: Ciaran’s journey as a VC How the VC industry has been changing Why he founded Blue Yard and its investment thesis Value creation in a blockchain economy Buying equity vs buying tokens Why tokens and ICOs are erroding the distinction between hedge funds and VC funds Best practices for running ICOs Episode links: BlueYard Capital BlueYard Investment Thesis Filecoin Investment Article Protocol Labs Investment Article Userfeeds & why the web needs a new information ranking system OB1 & OpenBazaar – BlueYard Capital – Medium This episode is hosted by Brian Fabian Crain and Meher Roy. Show notes and listening options: epicenter.tv/200

This is Epicenter, Episode 200 with guest Kiron O'Leary. This episode of Epicenter is brought you by Shapeshift.io, the easiest, fastest, and most secure way to swap your digital assets. Don't run a risk of leaving your funds on a centralized exchange. Visit Shapeshift.io to get started. Hello and welcome to Epicenter, the show which talks about the technologies, projects, and startups driving decentralization and a global blockchain revolution. My name is Brian Fabian Crane. And I'm Mihiro. Today we'll talk to Kiran or Leary, who is the general partner at Blue Yard Capital.

Blue Yard is one of the VC firms that's very active in the blockchain space, having invest in companies such as OB1, Filecoin, Protocol Labs and User Feeds. Our topic of discussion will be the role of venture capital in blockchain technology and the kind of unique challenges this role breaks. Kiran, welcome to the show. Thank you. I listened to it in late 2015 before investing in protocol labs. So this is a nice way to circle back. Yeah.

And I was that you guys also organized an event. I think just when Blue Yard started, decentralized and encrypted. I was looking up again. It was an excellent event. So thanks so much for having me there. Yeah, before was cool and things went crazy. Yeah, including you guys had Everett Snowden, who spoke, you know, with a live stream, which was pretty impressive that you guys managed to get that.

We did. We'll do it again sometime when things have cooled down. So can you share us a bit about your background? So before you started this VC fund, Blue Yard, you were also a VC at a different company. And like maybe how did you first get into the whole VC world? And what were your years at early birth that previous VC like? Yeah. So if you would have told me.

in my early 20s or late teens that I would be a founder of VC firm in my mid-30s, I would have considered that a considerable life failure. I had very different plans. I wanted to become an airline pilot, but then I guess I chickened out of the commitment of 40 years of flying for an airline. And then I studied business because I thought, look, you know, something handy to have in the back pocket and then stumbled into what I think is the worst background for VC, but a bunch of other VCs that are okay, have it also. So maybe I'll still make it. But I stumbled into investment banking at Lazzard, and then I worked for a large private equity firm called the Carlaw Group. But I left in my late 20s because I just realized it wasn't for me and I didn't want to spend a lifetime doing that

that thing. And I tried myself out as an entrepreneur, was working on a couple of projects. And in that time, I bumped into somebody who was working for early bird venture capital. And he said, well, look, if you're thinking about becoming an entrepreneur or trying yourself out, why do you come on board, get exposure, learn, build up a network, and then leave again. And I said, that's a terrible idea, because at that time, European VC had a, a pretty poor reputation and European entrepreneurship too. But as I signed up for it with the view of just staying for a short time, I realized something was changing.

Berlin was happening. London was happening. Stockholm was happening. Things were getting more ambitious, more fun. And I realized it was an opportunity to help change the ecosystem. And so I got stuck. And I opened up the early bird office in Berlin, invested in a bunch of companies like Wunderlist and Karto and was a little bit more opportunistic.

And in that time, though, I worked together with Jason Whitmire. And we had looked at our investments and had realized that a lot of them were around essentially liberating markets, breaking them up, empowering individuals versus organizations. And essentially this topic of democratization was floating around in our mind. And this was sort of 2013, 2014. And then in summer of 2015, we said, well, look, we're so passionate about what back then we called democratization and technologies empowering democratization that we said, the best way to do this is to start a new firm that would be thesis-driven and just do that and stand for that.

And then after a while, our thinking became a bit more sophisticated, and it ended up being that we care about the decentralization of markets, the empowerment of individuals, and the liberation of data. And I'm sure we'll be talking about what that means. But what I can tell you is that back then the blockchain was just a small part of our thinking. And then obviously it came into our lives in a very big way. Okay, that's very interesting. Now, when you're thinking about starting this VC fund, were there,

you know, did you feel like some big things were going to happen in the BC industry that it was going to change also as an industry? And how did that impact the way you went about starting Blue Yard? Yeah, for sure. We didn't know exactly what, but we felt in a sense that also starting a new, really small firm on a white piece of paper would allow us to question ourselves and our model more often and more aggressively. And venture capital has not. not been disrupted for decades. And I think everybody's now talking about ICOs and token sales and how disruptive that can be. And it is. But if you draw a dotted line to Kickstarter, to AngelList, to other kind of crowdfunding platforms and other kind of things, you'll realize

that it isn't just one thing, but it's a multitude of things that is, A, changing what kind of product entrepreneurs want to fund their company. And B, how capital can access early stage opportunities. And I think the best VC firms are right now deeply questioning themselves and what kind of value can they provide over the next five to 10 years that will allow them to survive

and what is essentially going to be a more decentralized model. Out of all of these tool sets, like you mentioned crowdfunding, ICOs, in your opinion, what are the forces that would produce the most change in the venture capital industry and why? So I think right now we're seeing in the token craze, and let's just call it that, somebody sent out a tweet, I forget who was, it was like, only in crypto can you

struggle to raise a 2 million seed round, but easily raise 80 million in token? Preston Byrne. Yeah, okay, that really was driving a lot of the things they, right now, simply the availability of capital without having to go through gatekeepers, which have fancy offices and long wooden tables, and you have to create a pitch deck and present them. So you take away that gatekeeper and you access the markets directly. Now, I think that that's important. What I think is long-term a much more disruptive, disruptive aspect is that if you're doing a token-based network and you involve your ecosystem

from the ground floor and you incentivize them with tokens, you're getting capital on board that essentially helps you to bootstrap your business and your ecosystem. And that's something that VCs cannot really provide. And so I think the VCs that are saying, oh, this is all going to end in tears and this is all terrible, they will have their moment, there will be a correction, but that shouldn't take away from the fact that the model itself is vastly superior. And so I think the reasonable assumption is, is the model will survive and how can we thrive and provide value in a model where just gatekeeping access to capital or access to early stage opportunities is not our core value proposition.

And I think there are multiple things. It's still, you still need to do due diligence. You still need to get to know people. It's still a people's business. Good entrepreneurs want to work with a close group of people to sort of spar with them. And so there are things we can talk about later where venture capital can survive, but it won't be gatekeeping. So your essential argument is that this ICO model, this token model, allows entrepreneurs to bootstrap a network along with getting financing.

So it's like it's serving. two functions at the same time. But if you look at the total space of all of the businesses, all of the technological areas, like you might think of machine learning, like VR, there are so many other areas. Aren't there many areas that do not need such a network at all? And do you think this token model can impact areas like that? For example, let's assume an area such as like electric cars. So VCs might expect to invest in things around electric cars or autonomous cars.

But that sort of area doesn't necessarily need a network of users to be bootstrapped. Do you think VCs in those areas will also be affected by this token model? Yeah. So I think it's fair to say that it won't have the same impact. impact on every level of business or vertical. But if you think about it in the history of financing, as soon as a new model is established, that works really, really well and is a good product for entrepreneurs and people investing, it tends to find its way into other areas.

And the way to think about it is you don't just necessarily have to have a token model with your users, you could also have a supply chain. You could with cars, distribute, you know, reward people with tokens for contributing to it. I think a lot of car manufacturers are going to view the future as having transportation networks versus necessary producing aluminum boxes, and that provides another level. And so I'm with you. I don't think everything will be tokenized immediately, but if the model survives, which I think it will, I'm sure we'll see parts of it creep into a whole bunch of other industries. I wanted to come back to your thesis, the Blue Yard thesis briefly, right?

So we have this decentralization of markets, empowerment of users, liberation of data. Of course, if you ask me, you know, are these good ideas? I would say like, yes, good ideas. But presumably you guys, you know, you aren't a charity, right? like you aren't a political committee. So what makes you think that these are good business principles or investment principles to build a fund on? Yeah, that's a very good question.

Of course, when we raised the fund was something weird to answer to the people giving us money. So at the core of it is the belief. that smaller distributed units that are self-assembling and networked will be superior to very large monolithic structures. And I think we're seeing this throughout, you know, everywhere. An area where we are now massively suffering from large monolithic structures is the Internet itself. And that's how we got into investing in protocol labs and user feeds and other companies we can talk about,

is the internet has, through its server client architecture in particular, unfortunately aggregated to three to five gatekeepers that essentially control the internet. And we can see today that it's strifling innovation. The internet is extremely vulnerable. You know, we're looking at essentially monopolies, controlling our data and running commerce. And human nature and societies and economies and economy,

have a way of reacting against that and creating new platforms because the business pain becomes so big. And when we started at Blue Yard, we saw that instead of this romantic notion, let's make a better internet, we were having the best Stanford grads, we're having the best MIT grads, the best engineers. Everybody's saying this cannot go on. We're going to rewire the internet from the bottom up. You're seeing individuals, people rethink data ownership. Who should I give my data to? Shouldn't I control it myself?

So you see force from the users. And you especially see enterprises saying, well, look, actually, I'm generating all this data, feeding it into silos. The silos are getting intelligent. I'm getting just addicted to them. So we need to rethink this. So Blue Yard is essentially focused on those market-driven demands that should help re-architect the technology of those markets. So we didn't just go into it thinking, hey, that would be a neat thing to achieve. but based on those sentiments.

Okay. No, I think that makes sense. I believe that thesis. One thing, of course, that's also changing with blockchain and tokenization. And there is a very well-known sort of article by Joel Monegro, this idea of fat protocols, so this idea that most of the value is going to get absorbed by the protocols, let's say in Bitcoin, actually most of the value is.

in Bitcoin, their currency, not in the companies. You know, probably if you aggregated all the value of Bitcoin companies, you get to, I don't know, three, four billion, maybe, like really Bitcoin-focused companies. And that's, you know, just a small fraction of the value of Bitcoin. So how do you think about those things? Like, first of all, you know, where the sort of value is going to get aggregated is that going to be in the applications and the protocol? will we still see some of these massive, you know, Google-sized companies being built? Or is that area over? Yeah.

So I hope that Bitcoin is a bad example. And the reason I say that is, so Joel's thesis, I think, was to say, look, protocols used to get zero. right so HTTP TCP IP or whatever zero and maybe that's not ideal for the maintenance and health and whatever of a protocol and also kind of unfair to the creators of a protocol so protocols should create a higher percentage or even a percentage of value they capture or be able to capture a certain percentage of the value they create Bitcoin if I think we're honest the way we're viewing it today is as a great storage of value and sort of a proxy for what could be the future of monetary systems and a hedge against some of the bad things happening in the world.

And so a lot of the value of Bitcoin and the Bitcoin blockchain is essentially on storing dollars. And that leads to an effect where Bitcoin is really valuable. But the Bitcoin blockchain isn't very well suited today to build. mass scalable applications. I think that's obvious. Now, as Bitcoin, the Bitcoin blockchain evolves, as Ethereum evolves, as Tesos comes along and others, I'm hoping we are going to see blockchains that the, you know, the majority of values captured by the developer and application ecosystem with a protocol capturing some value versus it being skewed like on Bitcoin. So I think that's a function of the immaturity of the application layer and the underlying blockchains.

Blue Yard is you guys from a structure, I think, or a structure like a regular VC fund and you have a VC background, both of you. And now you're coming into this world where obviously a lot of things happening very differently with all these ICOs and stuff. So how do you go about actually investing here? Do you just invest in this kind of really early seed stage projects, or would you also invest in in more later stage things? Yeah, that's a question we've been asking ourselves. So ideally what we like to do is to continue to apply what we think are the good parts of the venture model. So to go in really early, get to know teams, take a view on the personalities, most importantly, secondly, the technology and what they're trying to build,

and then take that risk when a whole lot of other people aren't willing to do it yet. And of course, with the availability of lots of pre-launch capital, that, of course, is becoming more difficult. I think we have to admit that. And that's why, honestly speaking, you know, recently we haven't been doing a lot because of those dynamics. But we do want to continue to apply that part of the venture model. I think there is something to be said that if, you know, we miss the boat, but we still have, you know, good access to the team, we see something others aren't seeing and we can get in a little bit later and buy some tokens that are meaningful and the economics work for us.

I don't think we should be so touchy-feely about the exact timing we come in. It's more about are we taking unique risks? Do we have a unique view? Or are we sort of just a piling on when everybody else has already piled on for a year? And by the way, our investors, the investors in Blue Yard could just, you know, I will have the same view because it's publicly known and can just buy the tokens on an exchange. So I think we have to be very honest with ourselves. where are we adding value through taking unique risks,

and where are we just doing something the market is doing in any case? So out here, like one of the questions I have is, so if with the limited partners of something like Blue Yard, is there expectation that the VC firm creates a unique thesis and takes unique risks, or is it just that it produces the best rates of return over the, next like five or 10 years, no matter what the internal strategy it uses. Yeah.

Look, at the end of the day, we have to produce returns in the story. It's just if you are an investor in venture funds or in many asset classes, you're thinking like we are, you're thinking in a portfolio, right? You're saying drive exposure to later stage Asian opportunities. Do I want to have South America and early stage opportunities? and do I want to. And so as a VC firm, you're most importantly a product for entrepreneurs, but you're also a product for your investors. And you have to answer, why do you need this product?

And so Blue Yard was a very specific product and we're very lucky that, you know, some investors said, oh, that's nice. I'm looking for that kind of product. But you do have to do that. I mean, there are very few funds in the world, but they do exist that have no thesis, no focus. and have just a track record of just producing so many good superior returns that it doesn't really matter. And that's also okay. But I would also say, frankly, that Jason and I, you know, it's just the way we are as characters.

And it's the most fun for us and we're passionate about these thesis. So we kind of had to do it that way. But we do need to answer to differentiation. So is it the case in the VC world that like when funds are young, they necessarily won't come with a track record of returns. In order to build a track record of returns, you need to operate as a fund for like five or ten years and to operate as a fund for that long, you're going to need limited partners. When the funds are young, they need to be much more differentiated in

order to attract people to like limited partners to invest their money and as maybe funds grow, grow older and they build a track record to purely the track record is just sufficient enough to gather funds and then the firms can afford to be less differentiated. Yeah, I think that there actually, that's true. You know, if you want to raise a meaningful first-time fund, I still think you need to show synthetic performance is how we call it. So looking at what you did before, angel investments or at the other VC firm and creating a synthetic portfolio and I think it'll have to show some solid performance. But I think you're right. People are willing to take a risk on something that is new, differentiated and fresh, and then maybe

give bonus points on an unclear track record versus obviously being something that's a bit old and established and has an unclear track record. But yeah, you know, it's it's, it's, you know, VC has every 10, 15 to 20 years gone through these refreshment cycles as new technology waves have come out. And I think we're seeing a similar thing now. There are 70 or more crypto funds in creation right now, I think in the U.S. alone. But the concern I have just overall for all of us, and it goes back to differentiation, is capital is becoming a commodity, right? The world is awash with capital. And so we're going to have to continuously think harder and harder about what the products around capital are that make it differentiated.

And so I think we're just seeing another wave of that. Recently there was this article on, I think, CNBC. And I was really astonished when I saw that because it said that the ICO, the amount of money rates, by ICO has now surpassed the amount of money raised in kind of seed an early stage venture capital funding. Now, I think it was maybe a bit of an apples to orange comparison since ICO type funding isn't necessarily seed to see stage, but still there seems to be, you know, there is clearly a massive boom going on. How do you think, what's your view on this boom and where do you think this will go. Are we going to go to, you know, hundreds of billions of dollars raised through

ICOs every year? What's the trajectory? Yeah, I wish I would, I could say, oh, there's a massive over-allocation right now, which I think there is. And that may not be a bad thing. We should talk about that because I think it will lead to a pool of talent and really important things being created. but there are so much capital lined up to go into this space for all kinds of reasons. And then there's, of course, the inside trade effect of people that have ether and Bitcoin and have made really good returns are looking to redeploy it essentially in the ecosystem. So we're seeing this flywheel, and I'm not brave enough to say, you know, it's going to stop sometime soon. Because the irony is that something terrible happens with the world, that makes crypto even more interesting than old assets, company shares, fiat.

And so it should fly even quicker. So I think it's going to be after some systemic thing internally. And, you know, there are some ideas how that could come about. So I think what it means is that when people said, oh, this could really disrupt venture capital. wrong. It already has, right? Not that, you know, it's now competitive to BCs funding AR or bioscience or whatever because it isn't, but if a market can attract more funding than the entire, you know, seed and whatever very early stage, we see funding across the world in such a short period of time. We just have to step back and acknowledge that as a disruptive force. As I said,

though, in terms of trajectory, I think it will increase, although if we're honest, we're now seeing a very serious decay in quality, very serious decay in quality, where, you know, the majority of ICOs are beginning to become extremely questionable. The conversation, the public conversation on Twitter and Reddit has been taken over by crypto day traders versus people. people who really care about technologies and markets and want to see it in the wild in the long term. And so I wonder if that will eventually lead to a situation where, you know, sophisticated investors and maybe entrepreneurs take a step back and rethink the model.

You know, one of the things that I think is still crazy is your pre-seed company, you're building your product, you raise double-digit million. and then you have it liquid and traded, and you have all these crypto day traders breathing down your neck, and you should be zigging, zagging, focusing on the technology, focusing on users. And that is a, pardon my friend, that is a shitty value proposition for entrepreneurs.

And so I, this is why I think sophisticated entrepreneurs will start with lockup periods, really being selective about who they have hold the token. And so hopefully we'll see some kind of natural selection. But I guess it was a long-winded way of saying, I just don't know. There's so much capital in the space, so much still coming in, that it's hard to see it stopping anytime soon. Yeah, I very much agree. I see the same thing.

And there's all these forces that are just structurally aligned to increase this and drive it forward. And one of the dangerous things that I've been thinking about is when you have all of these new. money coming in, like endowments and family offices and investment funds, etc. And they say, okay, we need to have, you know, we need to allocate a portion of our money to this crypto space. Like they don't, I don't, and they take this kind of index fund approach. And this happens at scale. I think this could really mean that they, and they may not look closely at the quality of the projects at all. They'll just buy some auger, buy some dash, buy. some Monero, right? Like just buy all of it. And I think that can just continue fueling really poor

projects for a long time. And I mean, personally, I, you know, look, I don't want to, I don't want to have anything to do with almost any of these projects at this point that are raising funds. And on the other hand, you know, it may not do these projects any service by being so in the limelight, you know, once you have a billion market cap and have raised so much or whatever, you know, the heat is on. And maybe you are a great project and some nice gulls and guys, but it's just hard to work under that kind of pressure. But, you know, that is lined up. Now, the counter to that would be, if you look at a lot of our storage of value, Fiat, gold, whatever, it's also essentially just the human mind making something up and agreeing that that is value, you know?

And you could say that humanity is deciding and markets are deciding that a basket of various crypto tokens, which could be a healthier approach than holding a narrow basket of crypto tokens, that this is a way for us to store value and to transact value. And that is better than owning sort of shares and gold companies or having physical gold or other ways or oil. But, you know, this is what we've decided. And if the world just allocates a tiny percentage to that, that ends up being a huge amount of capital. And I'm with you. That's something that could happen.

Now, the one thing that is really encouraging is at least in terms of Ethereum and Bitcoin. is resilience. And I think that should be the thing we all hold on to is how many times were they dead in the corner, supposedly? How many times was this over? How many times was this hard for going to go kill it? And we've created, at least with those two core networks and protocols, we've created extremely resilient networks and technologies.

They may not be perfect. They're still not very scalable. They're bit scrappy. They're too expensive. But directionally, you can see this incredible resilience. And I think that's also something people are buying into when you think of the storage of value argument. This episode is brought to you by ShapeShift. The world's leading trustless digital asset exchange quickly swap between dozens of leading cryptocurrency, including Bitcoin, Ether, Zcash, Gnosis,

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market or maybe even similar. And now we have people raising huge amounts of money at gigantic valuations. So what do you think this is going to mean for returns? Do you think people, the general returns of, you know, your average investor in this space will be, would be good, will it be terrible. It has obviously been amazing in the past, but looking forward, what do you think will happen? And how do you think about valuation as an investor yourself? Yeah.

So to your question on VC returns, you know, I think for at least the data we have from our investors, large U.S. university endowments, mainly in foundations, venture capital has been a really good and overperforming asset class for them, but because they're investors in a very small portion of the market that generates returns. And if you took the average of the venture market, you're absolutely right. It probably isn't that good, especially if you look at the cost base. And I'm assuming you're going to see something very similar in the crypto space that a majority of projects or the average may over long term not be so interesting, but you're going to have a few fundamental projects and building blocks that could be extremely valuable. So in terms of returns, you know, it's hard to see this being

sustainable. And I think that, you know, we don't know how long the bubble will last, how long it will ride out. But I think it's likely that if you're buying into, you know, every kind of project at publicly listed multi-billion market caps that, you know, historically has always gone south. Now, having said that the big question, is indeed, you know, are we thinking about this in old ways that don't apply anymore? And in terms of, you know, as a VC, you say I invests $2 million at the seed stage and I want 10 to 20% or all the kind of stuff. So the fundamental difference that we're trying to work through is if we hold equity in a company,

we're backing a team that sets up a legal entity that hires developers to, you know, that builds a product, ships a product, has to do sales and marketing, has to acquire customers, retain customers, generate revenue, generate a margin on that revenue, and we eventually get the discounted cash flow of that business. But if we're investing in tokens that essentially represent a market and are the underlying economic unit of the market, essentially we're going to, we're owning an atomic unit of a market itself versus a small piece in a company that has to extract economic rent from a market. And, you know, Jason and I are still trying to work through what that means mathematically. But what it does mean is that if these projects are more successful,

holding a token, if you have a reasonable percentage of the network, that's something we should talk about should be much, much, much more valuable than holding equity in a traditional company. And not even starting with benefits or, as I will say, negative effects around liquidity. But I think owning an atomic unit of the market itself is really important. I think that, you know, we're going to see similar risk profiles in the sense that there'll be lots of failures, although there is something to be said that if tokens can help you bootstrap an ecosystem and a network, maybe your chances of succeeding are higher. I'm not too sure I buy into the notion of raising lots of capital at the beginning will de-risk because capital

tends to corrupt and also lead to bad decisions. But I would say what we care about is essentially thinking about our ownership in the network and then thinking through if this works, is this fundamental pillar of a new internet and could be worth tens or more or billions of transaction volume and we own a part of those essentially transaction volumes or is this sort of a niche application and it's a little bit too early. But those are the things we're thinking about. So can we go through an example of this kind of thought process? So the tokens being representing the whole value of market activity and a fraction of the tokens being a fraction of that.

Can you take an example with a specific project? Yeah, I mean, an easy one for us to talk about because we're investors is Filecoin. So essentially, it's a token with a real utility value and an intelligence, right? So it's the logical routing layer of supply and demand and verifying storage and accessing storage. But it's also an economic unit to purchase storage and to earn value for storing. And so we're not offering a $9.99 a month, so and so many gigabytes, and we have to hire a product, whatever, but the market should hopefully, you know, self-assemble and we'll start transactioning in ways we can't possibly imagine. And by us owning file coins, we're essentially in for the ride of the market cap of the entire storage ecosystem versus, say, investing in a company. that was hoping to sell a SaaS product to users on the network.

But I think what's very fair to say is a lot of people, including us, you know, were experimenting. And I want to say in a couple of cases, borderline winging it. And it's uncomfortable. And we're trying our best and we're thinking about it and we're creating new models. But I think we're going to look back and shake our heads. at how immature and simplistic maybe some of the analyses and frameworks are or were. I think that we have to admit that.

So like with normal companies, there's this way, you can think of valuing a normal company as being like net present value of the future cash flows that startup is going to produce. And you can put STI. on those cash flows. But kind of my fear is with things like Filecoin and Bitcoin and Ethereum, there is just,

there is no intrinsic valuation model. And while we can, my impression is while we can say that, yes, they represent some kind of market, Ethereum represents the market of trustless computation, I feel it's just hard to assign a rational value to it. It is. but that irrationality also is something that exists in the equity markets.

So if you look at Tesla's market cap, I mean, clearly we're riding ahead of any reasonable discounted cash flow analysis there. I think even Elon Musk would admit it to that. I think that what's happening now is that this is all getting diluted by the storage of value aspect that's going on, you know, that is really, really hard to quantify and that's the, hey, we're just going to believe this is valuable. We can transact in it. But there is a way to say, well, look, what problem is this addressing?

How important is this problem? Is this a 50, 100, 200 billion problem or a 500 million problem? And then the difference is instead of, if you own tokens, instead of looking at the discounted cash flow, you're looking at the market transaction volume, you know? essentially. And then potentially the additional value that the token creates. And so I do think there's something to be said for at least trying an analytical approach. People are doing it.

You know, Chris Bernensky, I think, is ahead there and has done some really thoughtful things. But there is a way to approach it. And I think, you know, 96 to 99, you heard the same arguments. It was like, oh, it doesn't matter. It's just going to be huge. And a couple of years later, people were like, no, no, no, let's think this through. And it's going to happen here.

And I know that, at least among the investors, we invest with and talk to, there's a lot of, like, hey, you know, we need to do a better job in thinking this through and creating models and it's our responsibility. So how do you think with Blue Yard about buying equity in a company versus the token versus both? like when do you want to do which if like yeah how do you think of these two you seem to talk more about tokens so are you more interested in that aspect so for full disclosure we have tokens and equity and equity and tokens with the same teams and it's it's it's all of the above and the reason is is that um we think both have their merits and it really depends on the plan that the equity based company has with the protocol and the tokens. I think there's a strong argument to be made that if the company has one protocol with one token and it plans to release those tokens to the market and keep a certain part back on the balance sheet and then hope for appreciation and that's the way to fund the company,

it's really hard to see besides your look through ownership of those tokens. It's really hard to see why it would be interesting to hold equity versus the token. There is something to be said that because, especially with early stage technology, it's not clear. We're pretending as if, oh, these things will succeed and then you have all these tokens. Well, what if the network doesn't get delivered? What if the protocol fails? Or it's not what we thought it would be.

What if the company decides to, well, look, we went through some real. important learnings, now we're going to do our next thing, you know, and maybe another token model, maybe a slightly different model. And so we want to attach ourselves and work with great people and being in the company and owning a slice of equity gives us a relationship and a different risk profile. And so at least from the Blue Yard perspective, we're willing to do both. There are some of our companies that plan to potentially, that have multiple protocols, may have multiple tokens, may have multiple income streams, and there the equity side may be really attractive. I think we just need to have an honest conversation with the entrepreneurs, also

where they see the value. And typically, they're very honest and will sort of be pretty clear on where they would like to see the value accrue. But I think if it's a single protocol company with a token, and there's no sort of economic angle for, for the entity except just holding a bunch of tokens. I think it may be better for everybody just to hold the token. So what I should say is that we've also invested equity in companies that are planning to do a token down the road. And it may turn out that it may be more attractive to own the token versus the equity. But we want to work with the team now.

We want to establish that relationship. We want to help them get to that point. And then we can figure out what path to take the economics on. So we're, you know, we have to acknowledge that it isn't always clear. You talked before about owning a meaningful percentage of the net or a meaningful amount of tokens. Well, what's meaningful? And why does that matter? Let's go back to the equity world.

There are a few venture firms that have amazing logos on their portfolio, but still struggled to raise the next fund. because they had such tiny stakes or got in at such high prices that it didn't allow them to generate returns that, you know, LPs expect for a risky asset class. And so I think the answer we always have to roughly provide is if this is a blowout success, you know, it just, it works. What if this works? Where can this go? Can we with our, you know, the amount of tokens we hold, could we pay back at least half the fund or the fund or potentially multiple times the fund? And that's something we always try and extrapolate. And that's why I think we've concluded also because we obviously, with token sales and the way the market is, we typically have a very small percentage of the network. we need ideas and protocols that could be fundamental parts of a new internet.

So the sky isn't the limit, but like Alpha Centauri. And that's why you're seeing us invest in more fundamental pillars versus like, oh, we're using tokens for like, I don't know, car rental. You know, for us, that doesn't work as of today. So the interesting part is if you compare something like a traditional like hedge fund that is usually investing in liquid assets so if you look at the universe of like hedge funds that that by regulation and by design need to be always liquid these hedge funds can only invest in like liquid securities and be

ready to redeem the the investors value at any time now in the VC world traditionally like you're holding like illiquid things and necessarily the limited partners cannot liquidate their investments very quickly. So because of this fundamental illiquidity in the VC world, hedge funds had a, might have had a very hard time in the past actually backing, backing startup technologies and startup technology companies and which is why this market might have like clearly separated into these two things. Now, what do you think like if the future of startup financing and project financing is through tokens,

do you think these two worlds will merge? And this difference between like a VC and a hedge fund will it still exist? Yeah. So it is blending here and there and there are hybrid models and certainly we're co-investing with a bunch of hedge fund like models you all know. So they're having the time of their life right now. And the reason is because they can afford to be, and that's their strategy and they're paid to do it, they can think and act very short term. So they could say, hey, look, not too sure about this technology and team over five to ten years, but you know what?

I think I'm getting in a good terms and a pre-sale. I think it's going to pop 3X and I'm going to like, you know, walk out, you know, a couple of months down the road. And so they're having the time of their lives in terms of returns and capital gains and carried interest and everything. So hedge funds are great when the market works that way. But because of their model, they could be the entrepreneurs at the risk of this being self-serving worst enemy once the market flips, right? Because in theory, then, their job is to earn money on the way down.

And I'm just waiting for crypto short products. They probably already exist. And they can get pressure from the LPs, capital withdrawals. And so, again, if you are essentially what is a seed-like company and you want to do big maneuvers left and right and you need to pivot, you need to zig and zag, something we should also talk about is, you know, how clearly do you want to define the token delivery? You know, how does that tie you up way ahead of time? having a whole bunch of hedge funds and crypto day traders could really come to buy you. So I do think the disadvantage we have is that we have to commit long term and we want to commit long term. That means we can't be as opportunistic in a bubble.

But for entrepreneurs, it means they know they have a capital source, which is used to going through ups and downs and isn't expecting money over the next. next 12 months or 24 months, but is happy to see this out over five to 10 years. And so I think we're going to battle it out a little bit, but I do see both models staying in the space, both models being successful in their own way. And we are seeing hybrid hedge funds that sort of seem to have clarified with their LP base, that, for example, they also sign up lockup periods, you know, and those kind of things. It is a weird, weird little world that's emerging here. I mean, and it's also, I think, a bit, I don't know, I have some reservations, right?

Like, let's say if you, if the sort of strategy is we have access, so we get into these pre-sales, but then we trade me as well, right? So on the one hand, you sort of committing long term, but not really, and then trading it immediately. at the same time, it's obvious how you can create amazing returns like this, especially at this point. I think what you'll see is that what we saw with Falcoyn and, you know, in some other projects, and I think we'll be seeing more and more is, look, now everything's going up to the right to the corner. So nobody's being forced to think through how investors behave. but I think you're going to see more projects say, I do not want my token trading before I've delivered the network

that has utility value on. And the people that come in and get a good deal, pre-sale investors and early investors, whatever, I'm going to expect them to hold this for a long period of time. And then I'm not going to allow them to dump everything first, day of the network, but I'm going to have them sort of, you know, tie, you know, piecemeal it out over time. And I'm solving for the health of the network versus the ability for people to earn short-term gains. And I think that conversation is, is not being had enough. But I think

entrepreneurs are going to sort of come around and do more of that. Because they've the leverage to do it, right? I'm still curious, though. You know, if you, So let's say you have this VC strategy. You say we're going to go early, we're going to grow with these teams, really work with them for a long term. But then at the same time, the thing you're holding is a liquid asset, right? It's being traded up and down. There's lots of volatility. Don't you think that also adding a trading desk or like somebody who does somewhat see,

okay, there's maybe some announcement, but it's totally overblown and then liquidate some of the position or come back in. Don't you think that this almost necessarily will create better returns? Yeah, I think there's something to be said for, you know, what actually happens also in the equity world. So you have, you're an early stage investor, angel seed investor, and you've a company on your hands, which is doing amazing and skyrocketing and is, you know, has a pretty high valuation and a lot of capital that you take a little. piece off the table, right? So you're just sort of generating early returns, early liquidity, but you're keeping a big portion up for, you know, the upside. And I think a liquid token allows, you know, angel-like investors and VCs to do that in an easier way. But I do think that the product we're offering to entrepreneurs and to our investors is to take really long-term views and not to optimize,

for mid or short term market timings. And so I think at least what we've told our investors is, you know, this may be a wild ride up and down in terms of valuations and our fund reporting and how we value things. But we're not solving for that or optimizing for that. We're solving for ultimate, you know, proceeds over a five to seven-year horizon. And so I think it will be tempting. to do it and the best will resist. Now, having said that, if a network launches, it's successful,

it's working. It's really your call when you want to get out, you know. And so I think we're going to see people just doing trade-offs. I think there was an interesting analysis, though, also going back to the equity world, that a lot of superior gains were generated in the history of venture capital by VCs holding onto their shares after the IPO versus selling quickly in the IPO. I think Google is probably the most extreme case and probably Amazon. And so we're going to see some of that here too. It may be sort of a corollary of my question, now not about returns so much, but more about, you know, the ethics and in traditional equity markets, right, there's lots of rules around

insider trading, around reporting, etc., etc. We don't have any of this in this market. What do you think are some of the things that are happening today that you think are deeply problematic and that should change and how do you think we should go about this as an industry? Yeah. So I think the industry has to make a decision. So like any form of capitalism, it's.

terrible at self-regulating, just terrible. And that's just not the crypto-decentralized base, but that applies to nearly every piece of capitalism. And capitalism does, is the greatest system we know, but it does lead to certain market failures and potentially aspects that are troubling. And so I think this community needs to decide whether we wait to let the regulators come in more or less heavy-handed, and I think they're obviously thinking about it. The reason why they're not thinking about it too much yet is we can't forget is who's speculating

here. This isn't yet mom and pop risking their pension fund on it, but this is usually people that know what they're getting into. Well, yeah, question mark, but at least, you know, it isn't quite yet like it was in the late 90s. But I hope that there is radical competition in the decentralized space for transparency and good behavior and documenting it and then implementing it essentially what would be smart contracts. So it kind of like if we are this wave of decentralized, open, transparent networks and well investing it, we should eat our own dark food and think it through the whole

way. So there should be radical transparency, I think, in terms of, you know, we discussed this earlier, insider trading. You know, why not say of the pre-sale investors who, what wallets are selling, when and, you know, why maybe not, but the when is enough in terms of usage of proceeds, you know, I think that's something that there should be competition around in how that's documented to a avoid having a fleet of private jets. And then also, you know, thinking about new kinds of governance systems. You know, I don't think what you want to have is, say, a majority of crypto-day traders that hold a majority of the tokens to be able to influence governance control on projects.

But maybe there is a way to create governance that gives everybody a vote for certain decisions early on before the network has launched. maybe there's a way to have essentially like a board-like system that works with the entrepreneurs. And so I hope that we can solve it over competition. And then the market just decides to fund those projects over others. And so if you're not radically transparent, if you're not embracing good governance and transparency, it's just the likelihood that you can raise, it goes down. Am I optimistic that that is going to happen? And no, because we're human beings and we don't work that way.

But let's see. I know some people are. Yeah, no, it's interesting to hear that because I'm like, I really hope that this would happen, but I absolutely do not believe this is going to happen. I think the trend we have seen in this industry, if anything, is extremely strong evidence that this is not happening. And that, yeah, I think you've totally right. The quality of projects is decreasing the terms. It's just insane how much worse they've gotten.

You know, if you compare things like Ethereum to things that have raised more recently, there's no even comparison. They literally terms like 1,000 times worse and things like that or 100 times worse. And they, you know, extreme focus on marketing. And so. Yeah. Yeah. So the writing is on the wall.

Um, when you get, um, you know, uh, 20 targeted, promoted tweets for different token sales. And what did now somebody find a group on for tokens or you, I don't know, you buy the me a bundle? Um, now, having said that, um, bubbles are important to bring things to the mainstream. to have them become unavoidable in every conversation, be it at the dinner table or in the boardroom, and to attract lots of talent. And at the end of it,

typically, we're left with, you know, a short and midterm bloodbath in terms of capital, but with some really amazing new platforms that could be the next wave of innovation. And that's, I think, is the option. shut here is that the markets are deciding to fund decentralization and blockchains in an unforeseen volume and speed. And you know what? If 5%, 10% sticks, that could transform the internet the way we think of it today. And so I'm as bummed out as I am as an investor to sort of

have to now become slightly less active when it comes to, you know, 80 million one-pageer white paper or see deals. I still see opportunities that are high quality. I see more and more amazing teams gravitate to the space. So I'm suspecting we're going to be busy in this space and I'm suspecting at the end of it, we're going to be left with some new platforms that could be game-changing. Maybe one last question. So if you look forward and now with this long-term view and you know, clearly you're a very thoughtful analytical guy and thinking deeply about some of the trends where they're going, do you feel like you believe, you have a conviction about some of the changes, some major developments that we're going to see in this industry that, you know, people just

don't see, you know, most blockchain industry people, people don't have on their radar or would disagree with you on? I mean, if you go through Reddit and Twitter and elsewhere, the Slack channels of projects, it's more disagreements than anything else. I think the unpopular view is that we have the direction right, but the market timing terribly wrong. And I'm going to, where I usually, you know, I'm a little bit different is that I say we're willing to back, you know, big, big networks and protocols that are the architectural framework to a decentralized internet. And I am absolutely not willing to deploy a lot of capital on early application layer stuff.

And so the things we're doing add values to engineers, to developers, to people designing new systems, solving problems on the internet, how data is transported, stored, used, owned. But I think we're way ahead of our skis on a lot of the application layer stuff. But that's okay. So were we in the late 90s. and we still ended up with Google and Amazon and eBay and, you know, went on from there. But I think we're essentially in the day and age of, you know, the Cisco's of a new decentralized internet, except that it's not new hardware. It's new protocols. Yeah, I mean, that's a sentiment, I think, both of us, Brian and I can appreciate.

It's just quite hard to build applications that are cheap enough and scale well enough. So one of the last questions we had is like, so previously you said that this is a bubble, but the bubble can have really beneficial consequences because they lead to a lot of entrepreneurs coming into the space and etc. So right now as of today the market cap is around one billion dollars. Assuming this is a bubble, can you give us an estimate of the size you think it will grow to, a speculative estimate of how big this can get? So, you know, $150 billion, if you look at, you know, global equities, debt, you know, hard

acid wealth or whatever, you know, it's a negligible percentage. So, and there's so much capital lining up. I'm, I don't like giving estimates of things I've just no idea about. So I am just guessing, but I would not be surprised if we still saw from here out several orders of magnitude of capital coming in. And so, and I think we're going to see that appreciate in many different ways, but in a majority, long-term thinking to Ethereum and Bitcoin, and then more protocol-based tokens as they launch. And so I think we are still going to see this go to places where we think it's crazy now. we're going to certainly think it's really, really crazy. I still think we have a way to go.

But, you know, I may be wrong, and we may look back at this and say, ha, ha, ha. And what we should admit, this, like, you know, the thing we should not forget is this could go down by 98%. And then recover back again to where it is today. So, you know, volatility is also insane in the space, and that's okay. But, you know, let's not forget that, you know, the way down could also be pretty, pretty extreme. But we're bullish on the space directionally. We're bullish on its impact on society, markets, economies over the next 10 years. And that's what we're trying to solve for, not timing this bubble.

Well, Kieran, thanks so much for coming on. It was a real pleasure to talk with you and learn a bit more about what's driving you guys at Blue Yard. So thanks so much for joining us today. Thank you. It was an honor. And I'm already dreading listening to this in a few years' time and seeing how laughable it will be no matter what happens. But that's going to be fun. Yeah.

And I just realized this was our episode 200. it. So, uh, congratulations. Yeah. Uh, of course, we're going to link to, uh, some of the posts that Blue Yards written and, and the team is written there on on their thesis on some of the investments they've done and, and the website as well. So people want to look at that a bit more closely. Or maybe if you have an excellent idea, get in touch of them and see if they can support you. So you'll be able to find that in the show notes. And yeah, so thanks so thanks so for joining us also to our listener once again. So we're going to be back next week with another episode.

In the meantime, if you want to support show, you can do so by leaving an review. iTunes review, which helps us very much. And yeah, thanks so much. We look forward to being back next week.