The Breakdown - How Excess Capital and Low Interest Rates Reshaped Silicon Valley, Feat. Chris McCann

Episode Date: August 19, 2020

Today on the Brief: Everyone turns bullish as S&P 500 nears all-time highs Emerging market currencies are floundering  Bitcoin holding sentiment highest in two years Our main conversation features Race Capital’s Chris McCann. Chris was previously the founder of Startup Digest, building it to 1 million subscriptions long before email newsletters were a thing. He spent four years building the community program at Greylock before launching his own venture firm.  In this conversation, Chris and NLW discuss: The relationship between monetary policy and startup finance What changes in startup financing have followed COVID-19 What the emerging fintech stack looks like, outside of crypto Find our guest online: Website: Race Capital  Twitter: @mccannatron

sort of the interest gap, if you will, show up across all financial assets. You saw that very dramatically in the public markets post-COVID and post a lot of the government action. You're seeing it now in Bitcoin. You see it show up in residential real estate side, which really should have a lot of negative downward pressure, but you're seeing actually like a rise in a lot of key markets. Like, of course this is going to show up in the early stage private market side. I think it just, it's a little messier. It lags a little bit more. It takes a little bit more time. And at the end of the day, for many of these companies, you know, if they do take 10-year horizons, the time cycle will take a lot longer to play out.

But yeah, of course, it's going to show up on the early stage private market side. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Crypto.com, BitStamp, and Nexo.io. and produced and distributed by CoinDes. What's going on, guys? It is Tuesday, August 18th, and today my guest is Chris McCann, an investor with race capital, a guy who has been in alternative media and startups for a long, long time.

And we're talking about how public markets and private startups interact with one another. So it's a really interesting conversation about an important and frankly increasingly important part of the market. But first, let's do the brief. First up on the brief today, the unignorable stock market rally. So what happened? The S&P is pushing towards new all-time highs. In fact, it has, over the last few days, a few times briefly exceeded its February closing record. This will be when all is said and done, the fastest bear market ever, followed by the quickest rebound ever. The thing that's notable is what the sentiment shift is like. This morning, there was a Bloomberg piece called Stock Market

at record forcing everyone to become believer. A Bank of America study that came out today also showed similar increases in bullish sentiment. From a Bloomberg piece about that study, among investors surveyed by Bank of America Corporation in the week through August 13th, 46 described equities as being in a bull market up from 40% in July. The share of skeptics who say it's a bare market rally has dropped to 35% from 47% a month earlier. there are more signs of optimism. 79% of investors expect a stronger economy, the most upbeat result since December 2009,

while 57% are betting on higher profits. This is all interesting because certain numbers are psychological barriers, and getting back to the February highs after the incredible shock of the coronavirus is one of those psychological barriers. At the same time, this also seems rather risky. In that Bloomberg piece about the stock market forcing everyone to become a believer, they make reference to the career risk of missing a $12 trillion rally. In other words, there are a lot of folks who are not looking very good right now because they've been saying that this isn't real.

But meanwhile, people who have been acting as though it's real, at least in the short term, have just been raking it in. City Group has a private measure of what they call euphoria that just hit its highest level since the dot-com boom. Of course, not everyone agrees. Peter Chaccini of Alpha Omega advisors said, The equity markets are now like an old elevator way over capacity. It's just a matter of time before the cable snaps and its passengers end up in the basement. That's where the Fed will be waiting. One of the fascinating realities or dualities that people are living with right now is the idea that they can, on the one hand, believe that there is something fundamentally wrong

that makes this rally strange or suspect while at the same thing. same time having to divorce themselves from that and actually go make money, especially if they're investing other people's money. For more on that particular conversation, I'd encourage you to go check out my interview with Tony Greer from a couple weeks ago. Next up on the brief today is the dollar telling a different story. The 40-day correlation between the Global FX Volatility Index from J.P. Morgan and the VIX of U.S. stocks fell below zero to the lowest correlation since 2009. currency traders, unlike it seems, equities traders, are anxious about unknowns and their potential impact on the dollar. So, for example, the U.S. presidential election, a potential corona

comeback during the colder winter months. And many emerging markets have had it even worse. The Brazilian Real, the South African RAND, and the Turkish lira have all lost around 20% of their value against the dollar this year, while the Russian rubble and Mexican peso have dropped 15%. This is despite the fact that the dollar has been sliding against other major currencies to its weakest level in two years. Part of the reason that these particular emerging market currencies are struggling is that they're in places where there is still a high incidence of coronavirus. The key thing here and why I wanted to bring this up is that there are multiple narratives even coming from the data that we need to be aware of. Right now is an extraordinarily messy time in terms of what different markets are telling the story of and what different significant. they're giving. Last up on the brief today, Bitcoin holding sentiment is the strongest it's been

in almost two years. The number of Bitcoins held in exchange addresses fell by 0.83% to the lowest since November 24th, 2018. What that means is that more people have moved their Bitcoin off exchanges, of course exchanges being where they would sell. When there's less Bitcoin held on exchanges, it means that more of that is in cold storage or just offline in wallets and doesn't mean it's likely to move as quickly. As a counter example, in the days leading up to Black Thursday, exchange balances went up 2% as more people were getting ready to sell or were at least wanting to be able to sell quickly depending on what shook out in the markets. Overall, balances of Bitcoin held on exchanges are down 1.4% over the last week and 3% in the last

month and in total are down more than 11% from the March 13th high. In short, people are really feeling confident about the Bitcoin position. They're not trying to be able to sell quickly, which is an extremely bullish sign from a fundamental perspective. With that, however, let's get into our main conversation. Chris McCann is a co-founder and partner at Race Capital, an early stage venture investing firm. Before that, he was the founder of startup. Digest, which was one of the absolute original alternative media publications in the startup space. I mean, we're talking way, way before Substack, way before the newsletter phenomenon. He built this thing to have depots in 500 plus cities and a million subscribers before

eventually selling it to TechStars in 2012. He was an early advisor and mentor to the Thiel Fellowship. He ran community and designed the community program at Greylock for a number of years. In our conversation today, we discuss a ton of topics, but two big ones that stand out are one, how fintech is changing both separately and related to crypto, and two, how public markets interact with and interplay with startups. In other words, what things like low interest rates and excess capital have to do with startup valuations? This is a really fun conversation, so I hope you enjoy it. All right, we are back with Chris McCann. Chris, Thanks for joining the show.

Yeah, thanks, Nathan. I'm happy to be here. So, Chris, you and I have known each other for a really long time because we were in San Francisco coming up, I feel like at the same time when Web 2.0 was just burgeoning. So I'm really excited to have this conversation and dig back into your perspective on how things have changed in the context of venture capital and how crypto and blockchain come into that,

but also just some of the larger trends that you're seeing. Yeah, no, same here. It's been a pleasure knowing you over all these years. And it's really cool to see a lot of the people back in the Web 2.0 era, now diving into Web 3.0 and our financial infrastructure. And, yeah, I mean, I've been having a lot of fun in the space. Awesome. Well, so I want to dig in, and I feel like this will be a good way to introduce yourself as well.

I want to talk about how you've seen venture capital change. So your bridge into venture capital, if I'm not mistaken, was in the context of Greylock. So, I mean, maybe one, you can just talk about kind of how you got into venture. And then two, I'd love, I want to dig in maybe how you've seen venture change more specifically in the context of COVID. But maybe let's start with some broad changes that you've seen over the last, you know, five, ten years in the industry even. Yeah. Maybe actually, let me zoom out even a little bit more than that. Before Greylock, I started to run one of the early media companies called Startup Digest.

It was a technology-focused newsletter, which now is kind of all the hot rage and out there and everybody's doing a newsletter. But back when we were doing it, there was very few people sort of covering the space at all. So Startup Digest, we ended up growing the subscriber base to about a million subscribers across 550 cities. It ended up being acquired by tech stars. But I bring it back towards then. So we started Startup Digest in 2009. And back then, startup business.

were a thing, but they weren't necessarily like this popular thing that everybody did. It was more the geeky people, the nerds, the programmers, the developers, you know, some stuff in enterprise. It was a much quieter, simpler space. And it was always more on the, the fringes, if you will. I actually, I don't know if you can like categorically prove this or anything. I actually think one of the first things that really popularized startups was actually the Facebook movie. Because I remember pre-Facebook movie, it was still like this weird thing. And post-Facebook movie, you had a lot of the sort of Ivy League schools, consultant people, investment makers all wanting to jump into the startup space. And that was, you know, I think the 2010-11

timeframe. And after that, we've just seen a huge continuation of that. And how that affects like the venture capital side is, again, the venture capital space used to be a smaller, like a smaller subsector of the finance space, you know, very much a kind of minority within the general private equity landscape. And now it is turned into, you know, startups themselves have turned into this small fringe thing to this large mainstream thing. You know, in fact, when you look at some of the largest companies in the world, many of them have shifted from oil and natural resource companies to now technology and data companies. And that is all shifted downstream. So startups are getting now raising more money than ever, higher valuations than ever,

more VC funds than ever, all across the stages. And probably the biggest notable difference is, you know, back then, you didn't really have a lot of these late stage players into the space. So the other investment banks, private equity funds, sort of KKRs, Black Rocks of the world, these guys never dip their toes into any technology-related stuff. And now it's almost the norm. So it's super interesting. So let's take this detour actually for a little while. Because I think, you know, so one, it sounds so normal now, right?

We started this newsletter and it grew. I mean, a million subscribers at any time for newsletter, right? Like, the big ones, morning brew and hustle. Those are, you know, on that order of magnitude of numbers, you know, and reputable for, right? These are huge numbers. But still, like, I think it's hard for people to remember or, I mean, they weren't even around then. But, like, it was, I mean, TechCrunch was barely kind of getting up and running at that time, right?

It was just sort of asserting itself as the first paper of record for startups at that time. So to have something that was this really kind of independent, non-traditional media company was really, really different. And I think it coincides with what you were saying, which is that the idea of startups as a thing, right? I mean, just by way of example, people didn't even know, like, did they spell it like start dash ups or was it like two different words, right? And, you know, we were still, the folks who were coming out to San Francisco in that time period, you know, 2007, 2008, 2009. were, you know, I mean, it was the very earliest embers of, you know, M&A returning, right? I still remember at that point, like, it wasn't like a startup was getting acquired every day or every week even. It was like, you know, they were really notable for these 20, 25,

$30 million acquisitions. That was kind of the juice that started to get the engine revved up. And I think that you're right that that sort of social inflection moment was, or the social network moment was an inflection point. And it felt like, you know, every couple years there was another inflection point. But I mean, the entire time that I lived in San Francisco from 2009 to 2017, it was the group that had come a year before said it was too late and like they were all over it because a new group had flooded in, right? And I think that, you know, part of the interesting thing that you're bringing up is that there was almost a two-sided shift. On the one hand, you had the increased supply of startups thanks to more people wanting to get into the space,

right? More cachet. I think probably the accelerators had part to do with that, right? So you have more startups just coming up, doing more interesting things. It's also technology builds on itself, right? So infrastructure gets built and then people can kind of create downstream types of startups on top of other startups. But then you also have, to your point, with the KKRs, et cetera, a new demand for startups as companies get kind of moved further out on the risk spectrum in terms of where they're deploying capital. And that's the part of the story that I didn't really get while I was there while I was in the startup industry.

All I saw was kind of the growth in sort of the ecosystem of companies itself. What I didn't see or I didn't really recognize as such was the role of the increase of capital and types of capital in driving the actual fundamentals of, the industry itself. Yeah. Yeah, just to touch upon that, like, yeah, it's a very good frame of reference. Both you had an increase in supply after you see, after some of these large social networks got to sort of real legitimate scale. You had an exponentially decreasing cost of starting due to the fact of AWS and a lot of these infrastructure companies playing on. And then you had an increase in the market size. So as more and more people, you know, moved businesses and spent more time and money

online, you had an increase in just the total available market of all this, which fueled a lot of the increase in funding. So just the pure early stage funding in this industry. And then the thing that's drastically new now is, I don't know if there's like a term for this, but you almost see like the financialization of these smaller technology companies. Like historically, you really never had these large growth BCD, D, E, F, mezzanine rounds. You know, you did rarely, but not at the scale that we're seeing now. And, you know, especially when you talk to a lot of people on the, a lot of institutions on the LP side now, they're treating early stage technology as an asset class, like as a thing that you deploy money,

into. And again, that's a very different historical norm than we had in the previous decade. Yeah, that's just kind of some of the big trends, like at least I've noticed since I've been here in Silicon Valley. How does that impact the way that you think about structuring your fund, where it fits in, your expectations for exit, right? Because obviously the longer companies stay private, the more that it changes your expected return. profile for these companies, right? Or does that not really factor in? That's a great question. So generally, venture capital funds are structured as, as 10-year entities. So, you know, most by nature take this much longer-term view, just

because, you know, if you're investing in a seed or Series A type company, it typically is going to take five to six years to get to real full customer and product maturation. And then it's going to take about 10 years to get to the full. full financial maturation. And that's just looking at generally the, I guess, typical life cycle of a company. Now you could, since you could raise so much capital in the private markets, there's a broader question of whether that will be extended even further. I remember back at Greylock, we did some of this analysis. And yeah, you were seeing companies stay private even much longer than that 10-year time horizon window.

And now with the availability of capital on the late stage side, that could be pushed out even more. So I guess that affects, so with race capital, where, you know, venture capital fund focused on the earliest stages. So pre-seed, seed, anything kind of pre-market fit. So I guess the two biggest changes for our side is one, the markets are larger. So the available things that you can invest in has widened. Secondly, the time to return to capital will be longer.

Hopefully that those will be larger outcomes, but you know, you have to plan and prepare for that. And then probably the biggest thing is what this affects is the valuations on the early stage side. So pre-COVID, we were regularly seeing things literally super, super, super, early getting anywhere between 10, 12, $13 million post money valuations. These were typically a really solid person with an idea, no product, no customers, no revenue, no anything. That was sort of the norm in Silicon Valley. I think post-COVID, that has adjusted downwards a little bit to more healthier levels. So typically, so we've seen 150 companies in the past four months, average seed stage valuation we're seeing now is a little under 10 million.

But probably more importantly is the companies that are raising at that level, they typically have much more traction than pre-COVID. So typically they have a working product. They usually have a few customers. They're not at revenue scale, but they usually have a few sort of paying trackable, either monthly recurring revenue or customers with paid POCs. they've typically made more progress before they go out and raise,

which I think that is a really, really healthy thing. I think pre-COVID there was a lot of unhealthy signals, but a lot of that stuff have self-corrected. Super interesting. So in that kind of pre-COVID era was how much were the ability for founders to command that sort of valuation driven by previous success, versus just some like kind of new hype cycle or was that kind of tied together? It's a little tied together. I think that was just what the kind of average company was going for.

And so, and obviously there are exceptions on both sides. You know, there's ones that are much higher than that, ones that are much lower than that. But that was kind of the norm. So, you know, if I was a founder and started a new thing and I talked to, you know, my friends who are also in a similar position, I'm going to triangulate to about that same size valuation and that same size amount of fundraise. So typically anywhere from one up to $2 million was sort of typical for. And again, this is primarily for Silicon Valley, early stage VC stuff. When you go outside of Silicon Valley, totally different numbers and dynamics and ranges for all of that.

I think post-COVID is the markets have thrown a wrench into all of this. where a lot of people are adjusting to it. Some market sectors are actually doing much better than before. Some are doing much worse. You have a lot of incomplete data across the list and people are sort of figuring it out real time. But I think it's hard to escape the law of large numbers, if you will. Like wherever you see the market shift towards,

the early stage private side typically will follow just usually has a little bit of a lag towards it. It's interesting. So this is a thing that I've been thinking about a lot because I never thought about it in this context, but going back to things in San Francisco that people love to complain about, this early stage valuation was one of them, right? You know, literally every year that I was there, it was like that and rent is what people would complain about growing too much. And I wondered looking back, I was like, is this actually one of these hidden examples of where inflation shows up, right? Not in the consumer price index, but in the valuation.

of early stage startup. So what do you think? Yeah, I'm not a macro investor or macro trader. Again, we're primarily on the early stage venture side. But you've seen the sort of the interest gap, if you will, show up across all financial assets. You saw that very dramatically in the public markets post-COVID and post a lot of the government action. You're seeing it now in Bitcoin. You see it show up on and residential real estate side, which really should have a lot of negative downward pressure, but you're seeing actually like a rise in a lot of key markets. Like, of course, this is going to show up in the early stage private market side. I think it just, it's a little messier.

It lags a little bit more. It takes a little bit more time. And at the end of the day, for many of these companies, you know, if they do take 10-year horizons, you know, the time. time cycle will take a lot longer to play out. But yeah, of course it's going to show up on the early stage private market side. Super interesting. Okay, let's go back historical a little bit. So you were at Greylock after Startup Digest. What were you doing at Greylock? And what were the big things that you learned that made you want to kind of move into running your own fund? Yeah. So, yeah,

I kind of had a non-traditional path into venture that might have looked a little bit more traditional on the outside. Started a company and sold it moved to venture. That seems kind of very, very normal, if you will. But my path was a little bit different than that. When I was first brought into Greylock, the thing I ran and started the whole four and a half years I was there, I actually started this community, basically network-based program within Greylock. And what that means is initially it was targeted mostly towards the operational areas that the firm was looking at. So we created a whole bunch of communities and groups around growth, design, product, infrastructure engineering, security, customer success, basically a lot of these key functional

areas that go into creating a business. We did it in part with our portfolio companies and also mostly outside of it as well because really talent and great people are across all companies, not just our own internal portfolio companies. And since these were very like-minded, very sort of particular groups, like you could actually get much more into the weeds, share much more personal stories, you know, talk about some real operational stuff that mattered across a lot of these companies. And then what that ended up morphing into is we basically just applied the exact same model to operations. We did the same thing across all the emerging market sectors as well. So VR, AR, ESports, Autonomous Vehicles, Robotics, Crypto, sort of all of these new areas.

We grouped together not just the early stage founders in many of these places, but also the ecosystem kind of around that core area. So, for example, in the VR space, like we got a lot of the headset makers, the peripheral makers, the founders building content, the infrastructure players, some of like the really, really deep engineers in the space. And also, same thing, got together, shared a lot of really specific things that are part of those specific industries. And people were much, much, much more willing and open to talk about the stuff because A, it was very like-minded, heavily curated group. And then B, since these were all fundamentally new spaces,

everybody was trying to figure it all out all at the same time. So my last few years, I largely spent most of the, across all these emerging market spaces, primarily with early stage founders. That was, you know, in part how I kind of initially sort of got into the crypto space. You know, Greylock did a few investments in there, but the community stuff was the primary area that I fell into. And then before I left, like what all this ended up becoming is we really used it as a strategic arm for both deal flow and talent flow. So there was a lot of companies that were hired through

all these community activities that we did. And then also many early stage startups that we both invested in. And then I was also happy, like just both started because a lot of this work that we did. And then talk, let's talk about how you got from there to race. When did race start? What is your, how kind of industry or sector focused are you? What's your approach? Yeah, so I'll give you the longer short version of that. So after I left Greylock, one of the areas I was always fascinated about because Greylock was primarily Silicon Valley focused venture firms, so everything here. And even before that, Startup Digest, we had a lot of publications all over the place.

But I was always primarily based up here. So one of the places I was super curious about afterwards was China. And so after Greylock, me and the family, the kids, we, We actually moved to Beijing for three months. And then that's when I spent a lot of time with my now partner, Edith Young. So Edith used to be a GP at 500 startups. She used to do a lot of the Asia and China-based investing there. And since she was there and we spent a whole bunch of time together,

we came up with this concept of now what ended up becoming race capital. We brought on two other partners. So Phil Chen, so Phil used to be a GP. at Horizon Ventures, so Lika Shying out in Hong Kong. He also created the HCC Vibe. And then now our newest partner, Alfred Chong, so Alfred, he was the former founder and CEO of a company called BEA Systems. In BEA, they were previously, they were a $50 billion public company doing $2 billion in revenue. During the last 2008-2008 million crisis, they were bought by Oracle for $8.6 billion in cash. And he was a hugely prolific investor since then. And the main thing that pulled us all

together in addition to being friends and co-investing together and the shared interest of Asia, is we really wanted to focus on the infrastructure stack of the ecosystem. So not so much all the applications, whether it be on the fintech or crypto or emerging market, but really on a lot of this core infrastructure stack. So this is primarily what we focus on. We're early stage venture fund, pre-seed seed, anything pre-market fit, anything across any of these core infrastructure areas, whether that be fintech and financial infrastructure, collaboration infrastructure, privacy and security, anything with embedded systems,

APIs, transaction-based systems. This is the type of stuff that we tend to get gravitate towards. Just because you're seeing such a sea change in the application side, like you said, the infrastructure implies all the applications being built on top. And I think we'll see sort of the reverse trend in the next few years. here as well. Let's dig into that a little bit. I would love for, you know, a lot of the folks who are listening to the show, their familiarity with, call it, FinTech has to do with crypto. But what's your sense of what this complete FinTech infrastructure stack looks like? And where does crypto fit into that for you? Yeah. The crypto side is a little messier, but way easier,

just because there's, there's no existing stuff. And so everything. is net new and everything is messy and everybody's trying to win and it's crazy. So the crypto stuff is really, really fun. But that one is a little bit easier to imagine this is infrastructure because it hasn't been won yet. In the traditional banking or fintech side, it's a little bit more complicated because here in the U.S. at least, you have this pre-existing install base of many, many banks and large financial institutions. And they're the ones that mediate all of the transactions and payment side and account opening and all that. So when you actually look at many of the fintech applications,

so the Robin Hoods, the SoFi, the Coinbase, the squares, the chimes of the world, what many people don't realize is many of them are using these underlying partner banks to actually store the deposits, hold the funds, do segregated accounts, and all of the stuff. In many of these partner banks, most people haven't heard of them directly. So these are companies like Evolve Bacon Trust, the Bank Corp, CBW Bank, Lincoln Savings Trust, East West Bank. These are not your Goldman Sachs, Chase, Wells Fargo of the world. These are these underlying banks that have been comfortable partnering with these fintech companies. And these are the ones that are actually powering a lot of the, as I mentioned,

like when you actually open an account and deposit money, these are the underlying banks of records. And even if you peel away, you know, even a little bit below that, most of these banks are actually run through core banking infrastructure. So whether that's FIS or Jack Henry, these are actually where the underlying ledger sits. So if you're sort of contrasting that to the crypto world where, you know, you are the one that owns the keys, if you will, and you could see the ledger, the actual ledger in the traditional banking world sits within these core banking infrastructure companies. And then probably the most interesting new category in all of this is sort of similar in the crypto space, but applied to the traditional fintech space, is many of these developers,

particularly within these fintech companies, they actually want to be able to initiate transactions, do account openings, and do all of this, facilitating. through developer-focused APIs. And so you're seeing this whole new type of company, what many call like Banking as a Service APIs. There's a few other names. And these are companies like Synaps and SILA and Rails Bank, and there's kind of a handful of others.

This space is super new, has not been one yet, but this is basically allowing developers to be able to instrument these things within your own application and be able to take deposits, handle payments, and do all that facilitated purely through 100% developer-focused experiences. Again, they're still being mediated through banks.

It's not like a third system, but it's basically just allowing developers to be able to do this directly within their applications. So this is kind of like what it looks like in the traditional financial world versus the crypto world. In some sense, it's almost two different tracks, and there really hasn't been a lot. of crossover between the two. But I do think that a lot of the underlying fundamentals are still the same, where people want more access to this, more transparency. They want these things to be developer-focused. They have to be able to serve international customers since day one.

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How far do you think the companies that are playing, in that banking as an API type space can push these traditional financial institutions? The honest reality is probably not very far because at the end of the day, even all these platforms themselves, they still need to confine themselves towards whatever that banking institutions compliance stack is.

So they still need to do full KYC, KYB, you need to meet all that. and then they themselves have deep partnerships with these underlying banks and still need to connect to these core banking infrastructure systems as well. There is a question of whether there can be like a newer developer-focused core banking system and whether the bank of record necessarily needs to coincide in the specific geographic location that the user sets. So there's a little bit of push, pull, wiggle that you can. But by and large, when you're partnering with the traditional bank,

you are going to need to 100% follow and comply and be in full sort of transparency across this. Versus in the crypto world, it's very different. There is none of the stuff from the beginning in the ledger is publicly open. Individuals can initiate their own transactions and hold this. It's a very different, it's just a different, different conception, if you will. Yeah, no, it's interesting. So it reminds me a little bit. It's very different context, but not totally dissimilar from the, my brief stint in venture

capital was focused on ed tech. And there was really a big difference between ed tech as systems that better work within the confines of something like K-12, right? Where there's rules about what gets taught and there's sort of, I mean, the same sort of compliance regime, although very different, obviously, than for the financial sector, versus things that were fundamentally offering an alternative imagination of what that sector and what education would look like. And realistically, VCs weren't, you know, when they said they were ed tech, they might have meant more of one or the other.

Yeah, that's actually a really great analogy. It's, yeah, on one side, it's, yeah, working with the traditional existing education in school system. On the other side, it's individuals like streaming their own classes. Right, exactly, exactly. They can be a varying quality. They can be amazing or they could be total scams. Like, you get all of the world on that side. How much has the success of Plaid and companies like it brought more attention to this sort of sector?

Yeah, the Plaid put a big price tag on this space. So Plaid being bought for, I believe, 5.8. billion dollars, just I guess very directionally showed that the space is massive. And in fact, like right at the same time Plaid was being bought, I think this is right at the same time when Credit Karma was announced. And then PayPal made a major acquisition, which I'm forgetting the name of, all happened within like a week of each other. And so there was a lot of movement in the space. And when you think about it, like, you know, not to knock what Plaid does, but

Platt is servicing like a very, very, very, very particular function of this, being able to connect your existing accounts into an application, primarily on the login, authentication side. And if that alone is worth $5.8 billion, how big is all of finance? I mean, that's one of the more exciting things from an investor like a venture perspective, Because when you look at the financial services industry, you're talking about hundreds of trillions of dollars of market value, whether that be in assets or payments or custody. I mean, these are huge, huge, huge markets. So there will be many, many, many, many winners and many, many, many subcategories. And unfortunately, for the crypto people, there will probably be many, many middlemen across all this stuff, just because it's such a massive.

the market. So you're finally seeing technology and SaaS companies and maybe crazier stuff actually dripping into the financial industry, which that itself is actually like a very new thing too. I want to actually take this in a slightly different direction too and ask you about China because obviously, you know, all of you guys at this fund have not just China, but kind of Asia investing experience as well. And I wonder how much the kind of growing trade war specifically or just in general, the context of U.S. and China's relationship impacts you as you think about investing. Yeah.

So I can speak generally about that. For race capital specifically, we're all based and located here. All of our investments are here. you know, we're not afraid of teams that are based outside of here. We're not afraid of teams that are targeting, you know, users and distribution bases outside of here. But again, all of our primarily investments are here. So it affects us directly from a fun level a little bit less. For more of a macro level, it's a little bit, I guess, different and more interesting.

Maybe I'll just take the financial one specifically. So I talked a little bit about the crypto space. I talked a little bit about the traditional banking side. Asia totally different, 100%. Asia is much, much, much more comfortable with digital wallets, digital balances, paying via QR codes. In fact, we invested in a company at Race Capital called Sitcon, which they're based here,

but they basically allow QR code-based payment wallets to connect to POS systems here. They were initially targeting basically Chinese travelers to the U.S. So if you have your balance in a WeChat wallet, you'd be able to pay a U.S.-based merchant. So, you know, a Fendi or they partnered with all of the casinos and cruise lines and luxury brands and all that stuff. They have 500,000 merchant or 50,000 merchants across 500,000 locations. And their payment volume is huge. I can't say specific numbers, but like it grew extremely fast.

And now that they did this, basically all of the U.S.-based payment wallets are also waking up to this fact. They're like, hey, if you could store a balance in your wallet, why not just pay directly via this? And so in Asia, the infrastructure system there is totally different. You don't really have this large incumbent financial institutions. you have a very different makeup of how their payment infrastructure works. In China, it's primarily led by WeChat and AliPay. In many other countries, they have their own local variation of it, whether that's a grab or a whole host of other ones.

And so I think a lot of this stuff, it's well worth the time for investors to really understand the different dynamics in different places and how the ecosystem develops, what the products look like, like what the entrepreneurs are because, you know, Asia in some respects is far ahead of us, particularly when you look at financial infrastructure and payment technology. I'd argue it's far further from the U.S. I mean, sorry, more advanced than the U.S. Sometimes I almost feel coming back like things here tend to work a little bit slower versus there you actually see much more innovation.

Yeah, no, I think it's a lot of people recognize that. And part of what makes crypto so interesting is that in some ways it's the first technology industry, at least that I've seen, that really has grown up in different parts of the world, around the world at the same time, rather than being built in one place and then kind of exported out, which has given it a distinct set of kind of differences in flavors and tension sometimes. But it's definitely different than a lot of different industries. Yeah. Yeah. One of the things that attracted me still is attracts me to me to, the crypto space specifically is just how international it is from day one. It's the same thing across the place.

There definitely is with some of the local exchanges and regulations. There are a little bit of guardrails in some of this stuff, but it's a very internet native, which again, in the financial space is totally different and weird and new. But yeah, it's its own kind of unique thing. So earlier in our conversation, you were talking about, some of the things that have shifted post-COVID for early-stage investing, particularly around startup valuations as well as how far along, right? So maybe investors are looking to de-risk just a little bit. I'm interested in your take, you know, on kind of some of the shifting

narratives that you're seeing in Silicon Valley, by which I mean sort of the metaphor of investors rather than the specific geographic place. But what are some of the consensus views or shifted consensus views that you agree with? And what are some that you think maybe people aren't quite seeing yet? That's a great question. Maybe a few contextual points to add to that. So, yeah, post-COVID Silicon Valley, I think there's a lot of things at play and a lot of things shifting.

Maybe one of them, just to talk about the valuation side. a little bit more is a lot of, there is a strain of thought, which I don't necessarily agree in Silicon Valley that basically valuations don't matter at all. 1000 X revenue multiple, 10,000 X revenue multiple literally doesn't matter. Like the companies that win, you just need to be in there at no cost, the revenue model doesn't matter, the monetization model doesn't matter. You just basically need to shove small checks into as many companies as humanly possible and hope for these very large outcome winners. A lot of people follow this

thesis, invest in this thesis. I fundamentally disagree with this. You know, when you look at from a more of a founder and company building perspective, like customers, revenue, profitability, who you're going after, who the buyer is, who's the decision maker, is all this stuff really really matter how you run this, how you operationalize this. Customer revenue is customer happiness. A lot of companies in Silicon Valley tend to forget this sometimes. But how you charge for, pay for things, package things, pricing things, this matters a lot. This is one of the things I didn't like as much about the crypto space, the more time I spend into it. I remember post-Grayloff, but pre-Rase capital, I made a whole host of angel investments in the in the crypto space. Some of them have done

really well. So I was one of the very first, you know, investors in finance before they launched. And on the fun side, we invested in FTX before they launched and sort of a whole host of other ones. But one of the things I didn't like as much is I remember we would kind of come in or I would talk to early stage founders and I would ask, okay, like, who's your, who's your customer? How do you think about distribution, how do you think about adoption, you know, do you have any POCs, kind of a lot of the normal stuff. And a lot of people in the space are like, yeah, none of this stuff really matters. We just have this big vision, and this big dream. We're going to go after it and we want to raise it a $100 million valuation. And why that sounds sexy and cool and all that,

it really misses out on the fundamentals of why you're building this company in the first place. I dangerously see some of that same mentality seep in to Silicon Valley a little bit. Maybe just because of the extreme valuations we're seeing in the public market side, some of that perception is coming down. I see that to persist. I think we'll see a lot more sort of crazy stories come out of this. But I also think just being an entrepreneur and a founder, you've got to be really, really careful. And you've got to pick long-term partners. you really want to build the company around.

Because at the end of the day, it's the company that matters, not the dream or the valuation. It's what you build and what people use. That's like the thing that matters at the end of the day. Yeah, and I completely agree. I mean, I guess I think it's interesting to hear you kind of draw the connection between some of the irrational exuberance, let's call it, on Wall Street to crypto, or sorry, to just Silicon Valley startups in general.

I think that this connection point between public markets and private stage companies is really underdeveloped in a weird way as like a muscle or just a perspective, I guess. I've even been thinking about it. I don't know if you've been having any conversations about SPACs and this sort of, you know, huge trend right now. But, you know, you're finally starting to see this really clear. Basically for years, Silicon Valley has just kind of looked at public markets as this sort of frustrating, annoying thing that they have to get. to at some point, whereas it seems like there's more of a, well, I mean, SPACs, I guess you could kind of read as an attempt for Silicon Valley to impose its will on the IPO process rather than abide by it. But I don't know, I guess it's an interesting point that you're making,

just kind of seeing the connection between the two, I think. Yeah, it's, it's funny. We just did a, we did a Zoom cast, like a live Zoom event the other day with one of our limited partners. His name's Bill Janeway. He was the, he's a legendary VC. He was the former vice chairman of Warbrook Pinkus. He was the one that actually led the investment in VA systems. The company my founder or my partner started, they did a, their $50 million investment turned into $8 billion, returned back to the LPs.

It was one of the biggest disbursements of capital ever in the history of all of venture capital. And the thing he said about SPACs like sticks out to me. is he said, Spax is not a new concept. All of the stuff happened before, and it happened during all of the peak of the 1999 bubble. And so when you hear all the stuff being talked about, you should be scared and run. It's just, it's a, it's one systematic outpouring of all of this excess capital and demand we're seeing. Not to knock any of the SPACs and not to say like some of these will be sort of interesting financial model. But again, you know, it's just, it's another example of this super

low interest rate environment, this huge capital excess trying to find technology as this huge financial asset class, which is there's certain aspects of that, which are very, very unhealthy. Yeah, totally. I mean, I think you also have the classic phenomenon of, I mean, part of what people are citing as what's different this time, famous last words, but part of what they're saying is they're pointing to folks like Chamath, right, as the promoters, which are very different than the last set, particularly the 2007 ilk, right, who were, you know, 2006, 2007, who were in the real estate space. But the problem is that once you have a vehicle that started to do well, then you have everyone spin up their own version of it. And just by nature, it creates dilution.

It also has this fascinating impact. I think spec's really interesting, but it has this fascinating the impact of creating more competition that bid up prices because there's this interesting incentive to get the deal done in the window that you have to get the deal done, even if you have to pay a little bit more for it. So it's a really fascinating force that I think there's a lot of people who are both, I don't think it's impossible to be very interested in how it plays out while also kind of skeptical or cautious at the same time. Yeah, same. Again, like, you know, for race capitol, we tend to deal with really early stage stuff. And, you know, our number of one advice to a lot of these early entrepreneurs is sometimes you just got to ignore Silicon Valley

Twitter or crypto Twitter and you got to be heads down and you got to focus on customers and some of the stuff that matters and picking long-term partners. There's a lot of this crazy stuff and, you know, some of it is a little bit of a virtuous cycle and some of it will come back. But at the end of the day, like the companies that are building enduring things that matter, we always forget that we always kind of got to go back to it. But yeah, it's it's fun to talk about these things. I just, I wonder what the like long-term impact of them will be. Totally. Well, let's wrap with a couple predictions where I'll put you on the spot, which is for fun. Yeah, I mean, your business is ultimately to see the future, right? So, you know, you spend a lot of time with frontier industries,

as it's called them, in the Greylock days. Obviously, you're still, you know, thinking about a lot of things that are still developing. Of these kind of frontier industries, maybe that people are familiar with, what do you think is something where it still has a lot of time to develop versus its time is getting a lot closer? I'll pick the maybe two, maybe I'll do three. The one obvious one is crypto's super interesting.

I think it has a long time to develop. I think at some point it's going to have to build. some scaffolding and railing and all that stuff into traditional systems, or it will have a really hard time surviving as an independent system. That's a little bit easier one, just because so much of our interest areas gather into both of those. Maybe I'll take two with a little bit of a historical observation. So one, at Greylock, I spent a bunch of time in the VR space. And I remember at the time, everybody was plotting out these huge uptick. and adoption cycles for headsets.

And I remember for us, we're like, okay, like, you know, a lot of these entrepreneurs are very optimistic. Why don't we take, why don't we haircut that by 90% and just take that as the baseline adoption cycle? And how history has played out, even that was far too aggressive. It more looked like a 99.9%.

Like the projections for what we thought it might hit at the, I think when we looked into it, it was like 2014. So I think it was the 2014 or 15 holiday cycle were really a fraction of like what it was projected out to be. So a few lessons from that. One, fundamental consumer behavior change is really tough. Anything in the consumer markets is very hard. New behaviors, new adoptions, new devices, new devices, new stuff. When it happened, some of these things that have abnormally large outcomes, trying to predict or push that in a certain direction,

super, super, super hard. And then for most companies, like, you really need to limit the scope to what you're trying to solve to decrease as many variables as possible. If you have technical risk and adoption risk and consumer risk, and will this even ship risk? And can you even build this? Like if you layer on too much of these things,

a lot of it, the entrepreneurs themselves cannot control all of them. And that's like a really scary proposition to be in. So VR, well, I still think it's a super, super interesting technology and there's a whole bunch of VR experiences that I found utterly mind-blowing. I think it will take a, it's already taken much longer than most people anticipated. and I think it'll take even longer from that.

And maybe just the more general one is these things tend to take longer than what most people optimistically assume. And a lot of these hype cycles from VR to AR to autonomous vehicles to even AI, like they will all affect us eventually. It's always just a matter of timing. And most people in Silicon Valley tend to be way optimistic on when this will happen. Not saying it's effective will be important, but the timing matters a lot. I think this is one of the great lessons for anyone who's in investing or building on the startup side is so much of this comes down to when was the right time.

And were we the right company for the right time, not just where we're the right company. Yeah. And again, for entrepreneurs, a lot of the times what you really have to do is, and this is why this is important too, is you just got to be heads down, focus on customers, focus on the thing that matters. because you can get so caught up in these new cycles, these hype cycles. But a lot of the overnight successes that we see, in reality, most of the entrepreneurs have been working on the problem for years, if not decades, like for many, many, many long time periods before the thing they did came to fruition. So, yeah, these things take a long time.

Awesome, Chris. Well, for people who want to get more. of your thoughts or learn more about race capital. Where can they find you? The race capital website, just race dot capital. I'm on Twitter, LinkedIn. It's super easy to find me, just Chris McCann. I also, similar to Startup Digest back in the day, I started more regularly publishing my own personal newsletter again. I both do it on substack. And LinkedIn actually just asked me to publish a newsletter on LinkedIn using their new LinkedIn. I got to push for it, actually. They're clearly promoting it.

That's awesome. So you can find that just on my profile, I think. And if anybody listening, like, if anybody's building an early stage company around any of these infrastructure areas, I'm always happy to give feedback. It's just Chris at racecaprile.com. Feel free to reach out to me. Always happy to talk. Awesome, Chris. Well, thanks so much for hanging out today.

And we'll see you online. Yeah. Thanks so much, man. It was fun. I think the big takeaway for me is something that I mentioned in the actual conversation itself, which is how little I really thought about the relationship between macro factors and sort of the micro world of startups that I was experiencing when I lived in San Francisco, when I was on the entrepreneur side or when I was in the venture capital side. But the reality is that the things

that happen in the macro environment, particularly as it relates to the cost of money and who's being pushed further and further out on the risk curve, had a material impact on what was going on with technology startups, in particular what type of capital they could access and at what price. These trends are continuing to shape how technology startups are built now in ways that include both valuations at the early stage, as well as how long companies can stay private for because of the availability of really, really late stage capital. Ultimately, even this powerhouse of technology startups aren't totally separate from larger market forces. Their context is still set by larger market forces. And in that way, I think it's really important to be able to tie what's

happening on those furthest bleeding edges of the economy in technology startups with what's going on more broadly. Hopefully, that is an interesting point of view for you guys to take. I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.