On The Brink with Castle Island - Brooke Pollack (Hutt Capital) on the Blockchain Fund of Funds Landscape (EP.342)

Episode Date: August 22, 2022

Brooke Pollack, the founder of Hutt Capital joins the show. In this episode we discuss:  Brooke's career journey and path to founding Hutt Capital The events that led him to seeing that crypto/blockchain was going to be an industry with dedicated venture managers The institutional limited partner landscape The narratives that have captured the most institutional mindshare Views on the optimal fund structure for crypto/blockchain managers The DeFi landscape Views on NFTs as a foundational building block for future businesses.    To learn more about Hutt Capital visit www.huttcapital.com and follow Brooke on Twitter 

Today in the podcast, I sat down with Brooke Pollack, the founder of Hutt Capital, a leading blockchain fund-to-funds and asset management platform. Brooke was an early mover in the fund-to-fund space, and he's thoroughly traveled not only the blockchain idea maze, but the idea maze around fund structuring within this blockchain and crypto ecosystem. This conversation was a lot of fun. So without further ado, here's my conversation with Brooke Pollock from Hutt Capital. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions. not reflect the opinions of Castle Island Ventures. You should not treat any opinion expressed by anyone on this podcast

as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion.

This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac. the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Brooke, well, thanks so much for joining the podcast.

I can't believe we haven't had you on. Excited to have you on the podcast. Yeah, thanks so much, Matt. It's great to be here. It feels long overdue. So excited for the conversation. Well, there's definitely a lot going on in the space. maybe before we dive into all of it, could you just tee up your background and what was your

path to becoming a fund entrepreneur with HUD? Yeah, of course. So before doing this, I spent a decade working for global investment firms in the traditional private markets world. So I actually started my professional career three weeks before Lehman crashed in 2008. And that may or may not have made me a bit jaded on our financial system. But either way, it was great timing because our firm put a hiring freeze on three weeks later. And I was working for a family office consultant basically helping, you know, ultra high-high-knit-worth families to invest their portfolios with a specific focus in my case in the private market. So all sorts of different types of, you know, closed-end funds, which included venture, but also

buyout and energy and growth equity and credit and real estate, a bunch of things. You know, after that, spent some time in the secondary world with a firm called Hamilton Lane, which has a large advisor and asset management business, mostly working more with endowments and pensions and sovereign funds and spent my time on the secondary side. So we were kind of trafficking in the training of private fund interests, you know, doing GP restructuring, basically buying portfolios of private assets managed by third parties at the end of the day. And I did that for a couple of years and had the good fortune of getting into venture full time in 2014 with a firm called Green Spring Associates, which I guess as a year ago is now now part of Stepstone group, but was

independent while I was there. And, you know, spent my time there. And, you know, spent my time there. investing in venture funds. So they're a large kind of traditional venture fund of funds platform. And investing in funds, a lot of the brand name funds folks to be familiar with. It's been a lot of time on the emerging manager side, which is a little more intellectually stimulating, helped to build out their secondary business. You know, learned the direct side of the business while I was there as well. They had a large kind of direct kind of growth equity business.

And, yeah, spent a little four years there working across the platform. And in the meantime, they got really interested. in the blockchain crypto space. I guess the quick backstory there is, I went to school with a couple guys who, I mean, post-graduation later on, became,

I know, early folks in the Bitcoin world, you know, started early companies in the space. And yeah, really just from a personal perspective. At some point, I was like,

okay, well, what are these guys up to? Kind of caught my attention. And, you know, caught up with one of them in late 1714, walking me through just why Bitcoin is fundamentally

interesting, like how to use a crypto wallet, like pretty basic stuff. But it was the first time that it, I really clicked. And, you know, there wasn't much for me to do with it from a day job perspective at the time. But that really changed in 2017.

You know, for the first time we started seeing a lot of these blockchain venture funds emerge. And, you know, there were a couple out there that were in existence before that. But, you know, kind of the quality and quantity really started to increase at that point. So I basically just decided, hey, I'm going to go out there, get some of all these funds. It really built out my network and relationship in the space. And, you know, spearhead of Green Springs efforts. in the space last year, I was there and basically just became convinced that this space was the future. I just found it far more, you know, both intellectually and financially interesting versus

everything else going on in this space. And, you know, I'd always wanted to do something more entrepreneurial. I had some other ideas in the past, which frankly were pretty awful, which luckily I didn't pursue. And, you know, finally found both the overlap of passion and what I felt like would be a great idea and ended up leaving Green Spring to start HUD Capital, which we obviously can get it more into, but started a had Capital in 2018. It's a great journey. It reminds me a lot of my journey being at Fidelity. And I went through this process of just sort of unlocking insights, I guess I would say, around how big this industry could be. So sort of started with Bitcoin. And then after Ethereum launch, started to get a lot more excited about some of the things that

being built on that network. And over time started to see that the addressable market. for this stuff was going to be, you know, a lot larger than I thought a year or two before. What was your process like in terms of just realizing the market potential for blockchains and why that might be something you want to build a franchise around? Yeah. I mean, for me, what really got me interest in the space originally was, you know, the idea of monetary experiments being possible through, you know, open source money in a way that was never possible before.

So, yeah, obviously, anyone can kind of go out and forth the Bitcoin. code and most of those efforts were not super exciting, but, you know, in theory, anyone can go out and kind of create these monetary experience. I just found that very kind of exciting from personal perspective. And, you know, the idea of, you know, applying these open networks, permissionless systems to other categories I found extremely fascinating, obviously the idea of being able to, you know, build those on new smart contract platforms and, you know, not solely being, you know, kind of a singular kind of Bitcoin-centric industry. We declare we're very bullish on Bitcoin and it's very fundamentally, extremely interesting. But, you know, kind of seeing that there was a

much bigger industry to be had here, you know, kind of really got me excited. And I mean, part of it, in terms of starting a new firm, I'm sure there was some naivety in terms of doing that in the middle of 2018. Yeah, that was a very interesting experience from that perspective. but from like a business standpoint, you know, I was looking out there, okay, there's like 50 early stage venture firms, like, okay, we're not going to be the best early stage venture firm if I was to go out and start, you know, an early state venture fund back in 1718. But, you know, looking at my background, relationships that we had, you know, I felt very strongly. We could be the best blockchain venture fund of funds platform. And that got me really excited too, just the idea of actually, you know, going out and building something that was unique. where we could be the very best at doing it, you know, really kind of got me over the hump as well

in terms of, you know, leaving to start new business. And certainly you had some great experience before that you articulated around working at other asset management firms that had done fund investing and direct investing. So how does that inform what you want hut capital to look like in terms of your investment strategy? Yeah. So I guess for us, it's kind of, you know, an overlap between both being institutional. I spent 10 years basically working for institutional product markets firms and LPs and fund of funds

and kind of taking that institutional background and applying it to a new space. And having been in this space, you know, full time or spending way too much time since I guess 2017, you know, kind of combining that institutional background with a more crypto-native approach that's, you know, necessary in a space like this. So that frames a lot of what we do. you know, likewise, you know, have seen in the venture world, I think the idea that venture returns fundamentally are not scalable. And, you know, that factors into a lot of what we do as well. So, you know, as a fund of funds, folks can kind of see on our website a lot of the firms that we work

with. But, you know, we've purposely shied away from some of the very large funds. You know, it's not a judgment on quality. It's purely a judgment on how we believe you generate outside returns in the venture capital world. So we do have a focus on, let's say, more modestly sized funds as a result of that. Yeah, I think another thing, well, I see maybe a couple of things that I've been, yeah, really learned from that experience. You know, one, in terms of building a fund of funds, you know, you really just can't be a fund of funds anymore. You know, we've seen that play out in the traditional world where, you know, over time, it ends up just being kind of a race to bottom on fees. You really need to build a diversified platform where, you know, you use the

fund-to-funds to also generate, you know, deal flow on a secondary basis and direct basis, and kind of build this broader platform, you know, kind of anchored by the fund-to-funds. So, you know, for example, we are also a secondary investor. We also make direct investments and companies and protocols. And, you know, that's kind of a very fundamentally important part of our platform to build something that's long-term and sustainable. And, you know, probably one of the key item is just, like, the idea of differentiating yourself as an LP, I've worked at places that were both very good at that and very poor at that.

I guess very poor at it, just more passive, I guess you could say. And seeing some of the groups that are more innovative and kind of pushing boundaries on that has really led me to believe that that's very important. And yes, we've, you know, aside from things like, you know, maybe passing along deal flow or helping with some operational things, we've also kind of tried to be much more proactive in terms of building out partnerships with, you know, folks that train developers and trying to help them get placed with our portfolio companies than those of our managers, you know, building a partnership around like providing liquidity to early stage protocols and, you know, likewise helping the investments of some of our managers in that perspective. And, you know, kind of continue to think through how do we

really differentiate our capital and kind of push boundaries forward from that perspective? And, you know, ideally in a more crypto-native way, again, given what our focus. is. Yeah, that's great. And certainly that's a, that's a huge value add. So we were raising our fund at the same time that you were raising your first one in 2018. And the landscape was a lot different in terms of what types of questions LPs asked, how sophisticated LPs were generally. And I'd say back then it was much more of a family office, high net worth individual type of LP roster that was comprising a lot of the crypto funds. But there was an education journey. So I guess generally speaking, what's your assessment of quote unquote institutional LPs right now?

now in this landscape in terms of how sophisticated they are around crypto, and then how far along there are on their deployment schedule or cycle towards crypto-focused funds? Yeah, I feel like if you look back, you know, in the past four or five years, I feel like it's been a slow, continued journey amongst the institutions to, you know, get up to speed, go through the education process, and then start deploying in this space. So, you know, you continue to see more institutions deploying into this category, you know, largely either, you know, one, just owning Bitcoin directly, potentially Ethereum, you know, potentially one or two other assets, but primarily Bitcoin and Ethereum, and then, you know, also primarily through venture strategies.

You know, at first, there were, you know, a couple well-known funds in the industry that were commanding almost all the institutional capital that came into venture funds in this space. and alongside institutions being more active, we've also seen more willingness to go out and invest in funds that are not, you know, kind of like the well-known, very large brand name funds and be a little more creative

and really dig into the industry and try to figure out, okay, well, you know, what do we believe is the right strategy? How do we think you best approach the space? What does that lead to in terms of, you know, what fund or funds that we should be working with? So, you know, the, I guess the institutional capital is much more spread out than it used to be as well. You know, a big difference between what we see today and back in like 18 and 19, as you and I were talking about earlier, is that, you know, in 18 to 19, it really felt like the institutional capital with, you know, a few exceptions, became significantly less interest in this space.

I think there was general consensus that, okay, you know, crypto's dead and, you know, there just wasn't a whole lot of interest to deploy. And things really slowed down. And you haven't seen that happen right now. And, you know, in kind of this current bear market, you continue to see institutions deploying. You continue to see institutions really interested to get up the learning curve and get educated and, you know, understand the landscape of funds out there and, you know, kind of gets to know those managers. So, you know, the general feeling and talking to groups like that is very, very different than it was the last bear market. You feel like there's a realization that, hey, this industry is here to say,

stay. It's not going away. You know, you can debate what it looks like in the future and what form that takes, et cetera, but this is going to be a real thing that we need to seriously consider for our portfolio. So that's been, you know, really good to see. And, you know, things are maybe a little slower right now. Obviously, it's always tougher for an institution to maybe get something through their committee in a bear market than it is a bull market. But, you know, very much a temporary, you know, matter from that perspective in our view. I totally agree. I'm kind of chuckling because I remember back in, I guess it was the end of 2018, maybe early 2019, the price of Bitcoin had fallen to something like $3,500.

And I had an LP say, just kind of matter of fact, they're like, oh, it's too bad. Like, too bad none of this stuff worked out. Like, it's all kind of over. I was like, no, like, don't worry. We're just in a bear market. These things happen. But this time around, it is quite different. I mean, we have LPs that are calling and saying, you know, what is the best asset in

a certain category? What's the best company in a certain category? Are there any secondary opportunities? And so it just feels like a much different bare market experience this time around. Yeah, yeah, very much. It does feel like a lot of, you know, investors we talk to on the kind of institutional peace side, you know, realize, all right, well, if you are of the mind that this industry is here to stay, this is actually a great time to be deploying.

And, you know, valuations are down significantly from six months ago, et cetera. And yeah, likewise, that's not really something that we heard back as much in 2019. team. So it is nice to see. We spend a lot less time on education these days than we used to, which is nice. One of the fascinating things just from being a GP perspective has been to see the proliferation of new types of blockchain strategies. So you have funds now that only do blockchain gaming. You have funds that are focused on buying NFTs. And so there's a, there's a real concentration here that's happening. And very rarely, I think, do you see funds that say they do everything. I mean, that doesn't really exist anymore. So how does that inform how you think, think about portfolio construction across HUD? Yeah, so, I mean, the short answer is significantly. And yet, to your point, so five years ago, you go out, you pick a BlockchamBC fund.

And they're probably going to cover the entire universe because there, frankly, like, wasn't that much to cover at the end of the day. You know, the application layer was just getting going and, you know, there's a much smaller world than it is today. And, yeah, to your point, as the industry grows, you know, we start to see a lot more specialization, you just can't cover everything well like you used to be able to do. So we see NFT funds, gaming funds, you know, DFI funds, Dow-focused funds, and, you know, etc. And, you know, for us, like, we're very holistically focused across the ecosystem. You know, our general goal is to

provide diversified exposure to the top startups, you know, across sectors, across geographies, across structures. And, yeah, I mean, you really just can't get that through a single fund anymore. So our goal is to find, okay, who are the best players in all these different categories? You know, who's best in the gaming space? Who's best in the DFI space? Who's best in the NFT space? You know, who's best on, let's say, NFT infrastructure? There are funds out there also just, you know, buying NFTs directly.

And is that something that we want exposure to? And, you know, who's the best outside the U.S.? And all these different categories and, you know, kind of put together this, you know, like all-star roster of funds that we believe are best in three in their different categories. and, you know, there's still funds that are not as specialized that, you know, we work with and are extremely excited about that, you know, tend to be writing first checks into companies or protocols, but with a more, you know, diversified focus across different sectors. But, yeah, so, yeah, that's kind of a little about how we think about it.

But again, you know, a second we have the luxury of doing it as a fund of funds, like, you know, if you're trying to pick a single fund, you know, you're kind of. of forced to decide what part of ecosystem you want exposure to just by nature of how that's evolved. So, you know, we have the luxury of kind of going out and picking out, you know, the top funds that we see in these different categories. It's definitely a huge benefit of a fund to fund structure. And I mean, the other benefit that I think is less obvious, but is definitely a factor in this market and would love to get your thoughts is just the state of a lot of these funds being like very oversubscribed,

which was definitely not the case in 2018. You know, many of these funds that I'm sure you're seeing are generally capacity constrained. You know, they're doing early stage investing. You can't run some of these strategies with a billion dollar fund. It just wouldn't make sense and wouldn't move the needle. So talk a little bit about what you're seeing there. And obviously, you're getting great access. So talk about what that process looks like in terms of getting that access.

Yeah, of course. And, yeah, to your point, that is a big fundamental change from, you know, two or three years ago where, yeah, back in 1019, anyone could basically get access to any fund because there just wasn't the, you know, demand of capital to be investing in funds in a way to really drive, you know, the type of overscribed funds and, you know, very difficult access like you see in traditional venture world. And, yeah, that's changed really in the past 18 months, kind of starting, I'd say, early in 2021, where we started really seeing a pickup in institutional, in particular, demand to invest in funds. the space. So, you know, what that led to is basically all of the good funds became very oversubscribed, you know, turning way LPs, you know, many of them could have raised, you know, multiples of what they did. And, you know, for us, to your point, you know, being able to offer access to those funds, a very kind of, you know, fundamental value proposition out of fund of funds offers. And, you know,

we're very fortunate that we have, you know, very good access across ecosystem. But how does that work as a fund of funds? Like, how do you try to get access to these funds? You know, part of, I mean, part of it just goes back to kind of relationships and reputation of the space. And we've been doing this since 2018. So a lot of these folks are just people that we've gotten to know over a long periods of time, who want us involved, enjoy working with us, you know, kind of being, you know, long-term patient capital that, you know, people know, isn't going to get cold feet because, oh, we're in a bare market, so we don't believe in this space anymore or something like that. And, you know, as a young firm, you know, that can get

you a long ways. But fundamentally, like, as I was describing earlier, too, you know, we really do a lot of work and effort to differentiate our capital as a fund of funds to, and, you know, why are we doing that, you know, one, to get better access than two, to get more allocation to these very oversubscribed funds. So, you know, a couple of like the things I mentioned earlier in terms of, you know, providing deal flow, helping like operationally and various things of that nature, you know, helping with developer talent and providing liquidity and things of that nature. And, you know, really kind of continue to look for different ways that we can help from that perspective to ensure that we continue to get the access and allocation that we want in the future.

But, yeah, I mean, we talk to LPs all the time who are, you know, trying to get into funds that we've worked with for a while and are subscribed and they can't access. and I think it's only going to get, I guess, get worse, you know, worse in terms of trying to be a new LP getting into these funds. Yeah, a lot of these funds are still relatively lesser known, you know, in terms of like the broader institutional LP world, like within crypto, their brand names, but within the broader institutional LP world, they're still relatively lesser known.

So, yeah, as more folks kind of come into this space, you know, get to know those funds, they're only going to become more difficult to access. We kind of see this as a one-way street from that perspective. I think it's definitely a one-way street, and you can almost do it from the bottoms up where it just doesn't make sense to be investing in a $1 million pre-seed round if you're running a $2 billion fund. I mean, it just doesn't move the needle. And so I think these capacity constraints, this oversubscription dynamic is definitely

pervasive. And certainly from where we sit, you know, having partners that are long-term aligned and aren't going to get spooked in bare markets goes a long way. Yeah, and another piece that we've, I guess the dynamic, which that has led to is two, three years ago, I mean, you couldn't really have a mega fund, generally speaking. There just wasn't enough demand out there to drive that. And, yeah, at this point, you know, the best funds can raise a lot of money. So, you know, you have a situation where kind of the folks that want to have these very large funds, you know, kind of build out these large platforms can now actually do it. And, yeah, there's a lot of, There's a lot of temptation for managers to go out and raise more money. So, you know, you learn quickly kind of, you know, who is going to be more disciplined on fund size, who does want to build a large platform. And kind of that dynamic as well has changed a lot of in the past three years.

One of the things that you've probably seen a lot of is just different choices around how to design a fund. A lot of these funds in the early days were actually hedge funds that were doing illiquid deals out of a hedge fund structure. And some of those didn't work out well. just generally speaking, what's your view on open-ended versus closed-ended versus hybrid funds in the crypto space? Yeah, so our firm invests, so historically you've invested solely in closed-end funds. And, you know, for us to invest in an open-ended or hybrid fund, it would have to be a pretty significant exception for us. So, you know, I guess that tells you, you know, where I'm headed with this answer. But, you know, we believe very strongly in the closed-end venture

model in the space. And, you know, probably one way to answer that would be to kind of describe some of the concerns that we have with open-ended and hybrid funds. You know, I guess on the open-ended fund sides, you know, having talked to a lot of funds that have gone through this, like there's just a lot of structural complexity trying to do a lot of illiquid deals through an open-end fund and having all these different side pockets and, you know, which LPs have exposure and just, you know, operationally is a bit complex. So, you know, there's a lot of, you know, some benefits to not having to worry through that. More fundamentally, this is a highly volatile category.

I mean, we can see what's happened in the past two years in terms of prices. Things go up a lot. They go down a lot. And that's kind of part of the cycles of crypto. And that leads to certain issues for open-ended funds in terms of retention and alignment from our perspective. In the retention side, let's say you're a crypto open-ended fund of some sort, you know, Liquid VC fund, hybrid fund, you know, whatever it is specifically, you

have annual high water marks, you know, typically anyways. And if you're up a lot in the year and then down a lot the next year, so let's say last year and this year, for example, so far for a lot of open-in funds in this space, you know, how do you continue to retain talent when your high water marks are so much higher? What we've seen historically is that that's very difficult. And, And your management fees can fluctuate pretty significantly during the course of a year or over the course of a couple years based on what the markets are doing and your NAB kind of going up and down as a result. So that's been a big issue historically. You saw a lot of that back in 18192 where a lot of hedge funds just they lost pretty much their whole talent bases because of that. From alignment perspective, last year and this year is a great example as well on that piece where so a closed end fund.

the carried interest is taken basically at exit. So what's standard is that a fund has to return, you know, all of the called capital. And only after that do they start generating carry on a realized basis. You basically split proceeds with LPs moving forwards, you know, whatever the carry split is. And that, you know, that's going to take a few years typically, you know, give or take.

Or an open-ended fund, they take, you know, annual carry based on their NAV. So what that means is like a year like last year, you know, open-ended funds, were pocketing, realized carry, a lot in pretty significant amounts, which is fine. But what you've seen now is that a lot of those funds are now down significantly this year. And so their LPs are down, but the GPs in the meantime realized a bunch of carry. And there's just a lot of lack of long-term alignment concerns that we have, especially in such a volatile space. You know, we've seen funds, for example, who, you know, did really well with Luna last year. Obviously, that imploded this year.

So a lot of those positions, if not realized, went to basically zero. But a lot of open-ended fund GPs still realize carry on those investments. You know, I'd say what they should be doing is returning that carry because, you know, that would create clearly much better alignment and is the right thing to do with LPs. But with a closed-end fund, let's say that exact same scenario happens. Sorry to labor the point here, but just I think it's helpful to go through. You know, the same thing happens. So let's say close-end venture funds, invested in Luna, you know, was up a lot last year, went to zero this year.

They realized no carry because, you know, unless they maybe realized profits on that and we're above their, you know, their one-x DPI already, you know, you're much more aligned with how you generate carry and how your LPs make money long term. You know, that's another concern for us. I guess the last one just fundamentally is that if things go well, an open-ended pool of capital gets large quite quickly. So let's say you've got raised $100 million and you know, U3 exit, you three exit again, you're at, let's $900 million. So investing a $100 million fund and $900 million fund are very different. And, you know, one of the benefits you have as a close-end fund is you can reset every fund. So you can say, hey, we're raising $100 million funds. Okay, well, now we'll raise another $100 million fund or, you know, often funds will get bigger.

But, you know, you have control over that. You know, if you're open-ended funds, things go as well. you get large quite quick, and the ability to repeat historic returns becomes more and more difficult as they grow. So, you know, that's another concern for us. And I think if you're in on one of those funds day one, like, okay, well, you know, become a victim of your success. There's worse things that can happen. But if you're looking at those funds, you know, they open themselves up or they're kind of consistently open. You know, what you end up buying into is, you know, largely a liquid crypto portfolio of kind of more mature liquid assets that they've done very well with so far.

And you're not really buying into like fundamentally an early stage portfolio where your capital is going towards, you know, funding early stage, you know, new companies and protocols that they're excited about. So, you know, likewise, you know, that's something that is less compelling for us. And if we were going to do something like that, it would have to be backing a fund on day one. I guess alternatively you could say, you know, a bear market. there could be a situation where you can try to take advantage of that as well. But obviously, we have some kind of broader fundamental concerns as we've outlined. So, yeah, that's a bit of how we think about it.

And I think the last thing to mention is like on the closed-end venture side, you really have a lot of flexibility in terms of what you can invest in. You're assuming your structure and such that you're not capped at 20% of your assets going into, you know, token structures, you can basically invest in whatever you want. You can invest in equity. You can invest in, you know, illiquid tokens. you can invest in liquid tokens, and you kind of have the flexibility to go across these different structures as you see fit, which I think is, again, best done through a closing structure.

Yeah, it's a really good answer and certainly agree with the, you know, the size dictates the strategy. So if you're a $100 million fund versus a billion dollar fund, it's just fundamentally your investment strategy has to be a lot different. Do you see any opportunities out there for just liquid token funds and more venture-oriented liquid token funds? And I guess the reason for the question is there is this dynamic where a lot of the venture funds who are investing pre-launch, so to speak, they're not going to be holding these tokens necessarily for 10 years. There will be at some point where there will be pressure to sell, return capital to LPs. And there is sort of a gap in the market there around tokens that already exist and may still have a venture return in front of them. But if the investors are already up 50x from the pre-launch or the convertible note round, maybe they won't be hanging on for that extra.

a leg. So curious what you think about that pocket of the market just around funds that only buy liquid tokens. Yeah, man, I do think there is a place for that. Like, whether it's a fit for our mandate or not is a separate question. But I do feel like there's a gap in the market, you know, for groups who can do really deep fundamental analysis for, you know, let's say tokens outside the top 50 and the kind of like, you know, longer tail assets that, you know, there's a lot of like really high quality projects out there that are not very well known, you know, have relatively low market caps. And, you know, if you can kind of do that like deep fundamental analysis, you know, kind of, let's call it a stock picking portfolio for lack of a better word, you know, I do think

that's a pretty interesting strategy. And I don't see a lot of funds pursuing that. Yeah, we've seen a small number, but I do think for funds who have that capability, you know, it's a pretty compelling model to chase and, you know, I think it'd be a bit differentiated market. I also think in general to your point, like, you know, there's not really like the same structural capital to continue supporting liquid assets, you know, outside of like these kind of like top 10, top 50 index indices. So, you know, it'd be great to see more of that as well. I don't think there's necessarily a near-term fix for that. But I think the fact that there isn't a near-term fix probably means there's more opportunity for those types of managers

that we just described as well to to find significant. access if they're good at what they do. Yeah, I think there's a lot of those pockets. I was talking to someone the other day, just even around private equity. So you haven't even seen private equity really meaningfully enter the crypto space. And at some point, they probably will be. So I guess it's the nature of the opportunity from an asset management perspective that a lot of the categories, whether that be secondaries or fund of funds or private equity even, they'll start to exist in the crypto space at some point. Yeah, you're definitely seeing the big private equity firms start to dip their toes in. I think there's going to be a lot more of that.

over the next couple of years. But yeah, to your point, what activity has been, you know, tangible there has been pretty limited. So, I mean, yeah, like just from a long-term perspective, it's just still so early from like a capital formation, you know, kind of capital market funding perspective in terms of the types of capitals that are coming into the space. One of the things that you must get asked a lot of questions about is just regulation. And I guess this was a lot less clear back in 2018, but there are still parts of this market that are pretty unclear, frankly, from a regulatory perspective. And so how do you think about that in terms of underwriting risk, just general regulation? Yeah, I mean, in a way, we try not to overthink it.

You know, given we are a diversified fund of funds, we make direct investments as well, but kind of focusing more on the fund to fund side of things, like our job is to go out and find best managers who have access to the best startups. And, you know, our, Our job really remains that regardless of changes in the regulatory environments. Likewise, because we're pretty diversified across the ecosystem, we have exposure instead of like a single fund, okay, we're going to go invest in 25 or 30 startups, whatever the number might be for a specific fund. You know, we're going to have exposure to hundreds of startups.

So, you know, any single company or protocol, you know, that runs into regulatory issues is kind of inherently less impactful. obviously if there are big major regulatory changes that impact everything, that impacts us, of course. But I think a lot of that, like, regulation's always been a risk in this space. It's going to continue to be a risk for a long time. You know, it's difficult to mitigate that unless you want to say, hey, I'm worried about defy risk, you know, in terms of like, hey, what happens if, you know, the government starts, you know, regulating like non-QIC, like dexes and wallets and stuff like that.

But at the same time, like, we're just very fundamentally bullish on defy, and, you know, we're not going to not invest in that category because there is a potential for regulatory concern. We think the benefits of that outweigh the risks, I guess, given the model we have. So, you know, it doesn't have a huge impact on how we deploy. Like, we track it very closely. Like, it's obviously important to understand what are those risks, kind of where are the key categories, those risks exist. you know, what's more sector-specific, kind of like what's bigger, like, in an industry, fundamentally changing type of stuff. But, yeah, at the end of the day, it doesn't, frankly, impact our strategy a lot. That could change in the future. Obviously, there are things that can happen

that would change it, but at least historically, that hasn't been the case. I guess on one angle, one of the key regulatory risks, if you even want to call it a risk at this point, is just some of these tokens being securities. And I guess the good news is that if they are securities, then at least you have clarity on how they ought to be traded. And perhaps that market size is a lot larger, which I suspect it is, in terms of broker dealers that could now trade these things. And so it's really just the clarity, I think, on who controls and regulates the spot market. Is it the CFTC? Is it the SEC? And can we get a little clarity here on whether or not some of these things are securities or commodities?

And then at that point, I think you just have a lot more capital that is freely flowing into these systems. Yeah, we agree. I mean, we talk to people all the time who are, you know, it's called institutions. or institutional investors who, you know, they would like a lot more clarity on this stuff before they're going to get more involved or, you know, place a larger amount of capital, potentially in a space like this. So I do think there are a lot of folks who would really enjoy that clarity and, you know, it would lead to more capital formation and more capital coming into this space as well. I mean, yeah, we hear that pretty regularly. So generally

have the same assumption. Well, you can always wait for the clarity, but it would be like waiting for like 2005 in terms of internet investing. You can wait until you have the full clarity or you can start to dip your toes, which we're all doing, obviously. I'm curious just what the big narratives you see driving sort of the next few years of growth in this industry. It's obviously a hard question because things come out of nowhere. Defi popped out of absolutely nowhere when it first started, really. But where are you seeing the most, you know, time and attention and just entrepreneurial passion and what are you looking towards in terms of just the future growth of the industry? Yeah, I think, you know, we've kind of reached the point as an industry where, I mean,

there's going to be continued growth in infrastructure and people are going to continue to come out with new layer on blockchains and, you know, kind of some of the more infrastructure and building block types of things. But I think we've reached the point where, you know, Like to really continue to get people excited, you know, we need to continue to show them, okay, well, blockchains exist really just infrastructure to build on top of. So what are you building on top of them? And, you know, kind of this application layer, which, you know, historically has largely been, you know, defi and NFTs.

And, yeah, I think you need to continue to show or, you know, build things that people want to use on blockchains. And that could be, you know, some of those same categories, whether it's, you know, buyer and FTEs or gaming and those are all categories that are really excited about. But things that, you know, consumers want to use because they're fun and interesting or have some sort of fundamental value proposition without caring quite as much kind of what's going on behind the scenes. Like I'd love to say that I think fundamental privacy is going to drive a ton of usage. But like historically I haven't really seen that be the case. Even if it's

something that we think is incredibly important, you know, usually it's driven by kind of really interesting consumer use cases. So, you know, we see people building out social networks on blockchains and other kind of decentralized applications, like, you know, some things around, like, more like physical and wireless infrastructure and things of that nature. And I think to really get a growing pie of people excited and, you know, kind of wanting to come into the space, you know, need to find or, you know, show that we can have growth in use of blockchains to do real things. Where do I think that growth will come from?

It's hard to say, like, to your point, yeah, a lot of things happen to pop up. Like, it could be things that don't even exist right now or no one's really thought of or no one cares about. Yeah, I think a lot of that will come from some of the existing places. Like, I think one of the beautiful things about the NFT space, you know, well, you know, it's an interesting category. Like, it creates something fun and interesting that consumers can do

without really caring about what's happening behind the scenes. So looking at things like that, things like your NFTs, areas like gaming, areas like, you know, social, for example, you know, I think those are categories that could bring a lot of users into the space and really help to drive kind of those future narratives around this category. You know, we're super bullish on DFI, but it's a bit more like complex and confusing to your average consumer. So, you know, I think that would be more of like a back end used by, yeah, at least in the near term. you know, kind of companies that are gaining a lot of consumer adoption and kind of have that broader traction. See, and that's, yeah, that's some stuff that we believe would need to happen. Like, you know, like personally, kind of putting on like my investor nerd hat on, like, I'm pretty interested in like the idea of new forms of capital formation and that could be like, you know,

venture dows or guilds or just new models that are coming out there to basically fund start. are really, early stages. I think that stuff is pretty interesting and have been kind of diving into that world a bit. But I'm not sure that's necessarily going to be, you know, driving tons of users into the space relative to other categories. It's interesting because it could if it's fused with NFTs, I think, because, you know, NFTs really is just the addressable market there is gargantuan. When you think about, you're just talking about provably scarce file types. And that can represent a ticket, that could represent a receipt that could represent an ownership stake. So one of the things I've been thinking a lot about

lately is our NFTs and just NFT financial market infrastructure, will they be the backbone of all of these private blockchain attempts from years ago that never worked? It's just now they all work on NFT infrastructure because it's open, it's interoperable. And you could imagine a lot of capital being formed either in a regulated context or through even like anonymous DAOs using NFTs as a primitive for pseudo equity ownership in things. So I would agree with you on your bullish sentiment on NFTs. I think we're probably just scratching the surface in terms of what this is going to be used for.

Yeah, I strongly agree. You're just starting to see kind of more creative use cases of NFTs outside of art in terms of what you can do with them. And, yeah, like from a like funding perspective, you know, we've seen startups using NFTs as a funding mechanism, which, you know, introduces other questions as well in terms of like, if we're trying to get access to the best startups, like, what does that structure look like? Like, what type of instruments do you need to be investing into, you know,

to gain that access as things get, you know, more creative from that perspective. But yeah, that's been quite exciting to see. Well, this has been great, Brooke. I feel like we could riff for hours. But where can we send people to learn more about HUD Capital and follow what you're doing? Yeah, so our website's HUDCapital.com. You can find us on Twitter. We're not super active, but at Hutt Cap. And you can find through the website. We also have a medium page, which is medium.com slash at Hutt Capital, I believe. And yeah, you know, feel for you. I guess my email that might be on our website, but those are the best ways. Awesome. Well, thanks so much for joining us today.

We'll have to have you back on soon. Appreciate it the time. Yeah, this is fun. Thanks much, Matt. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.V.C. To listen to all of our podcast episodes, please go to On the Brink-Podcast.com or just click on the tab in our website. Thanks for listening.