The Pomp Podcast - Ken Seiff: Staying Up When the Market Is Down

Episode Date: October 4, 2018

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

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Ken Seif is the managing partner at BlockChange, a venture capital firm investing exclusively in early-stage blockchain companies, protocols, and applications that are trying to make a dent in the universe. In this conversation, we cover the anatomy of an early-stage company, what investments Ken has made previously, and where he sees the biggest opportunities in the future. This conversation was a lot of fun, so I hope you enjoyed it as much as I did. This podcast is presented by BlockWorks Group, the only blockchain event and media production

company I trust. If you're an investor, lawyer, accountant, or entrepreneur and want to attend exclusive events and dinners, visit them at blockworksgroup.io. I promise you won't be disappointed. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. Before we get started, I wanted to tell you about our sponsor Block Estate, a security

token project in the $200 trillion industry of real estate. They've partnered with Polymath and Coinlist Comply API to create one of the first tokenized real estate funds, and they have a unique buyback and burn model. To learn more, visit blockestate.com. All right, guys, I've got Ken here. I'm super excited about this because you've got a bunch of secrets you're going to spill while you're here. Thank you for coming. It's good to be here. Thanks for having me. Absolutely. All right. So I actually don't think that many people know your background or how you got into investing in crypto. So maybe let's start from from the beginning.

Sure. He's looking at me like I'm crazy for asking that question. Well, in 2011, my wife ran a small startup and had an employee who asked to be paid in Bitcoin. and I signed the checks for the company and so I called the accountants and said let's pay in Bitcoin and they said what's that and I said oh I figured you would know and began the process of learning about Bitcoin none of which came from the accountants or the payroll company discovering only that it was impossible to pay an employee in Bitcoin at the time and so I forgot about it. And in 2012, I had a woman who had worked for me who ran social media for me who

started to talk about buying hamburgers in Bitcoin. And so now I was an expert because I had learned it was impossible to do payroll in Bitcoin. And so I was able to engage in conversation about buying hamburgers for Bitcoin and forgot about it again until 2013 when I was captivated by some of stories in the press and had heard a few investors talking about it. And so just to learn, I bought some Bitcoin. And sometime thereafter, months thereafter, Bitcoin took off on a run and it became much more interesting. And I began to dig in a little more and went down the rabbit hole as everyone does at some point. And where I really got captured by what was happening was in 2014, I went to, I was going to South by Southwest, which I had done every year

and discovered through a friend that there was the Texas Bitcoin conference that started two days before South by Southwest. And so I went and my friend was very close to the Ethereum founders who were still working on their white paper. And Gav Wood and Vitalik Buterin showed up at this conference. And I spent some time with both of them during that conference. And I saw two things. I saw that they were the matinee idols of the conference, even though they hadn't finished working on a white paper. I learned what a white paper was. And I heard the word blockchain for the first time. And I was really fortunate because Gav and I ended up in the car together a lot during that trip and ended up at dinner together and out for drinks afterwards.

And he was forced to suffer my questions about what is the blockchain and how is Ethereum different from Bitcoin. And by the time that March conference was over, I had had a lesson from the master, unwittingly probably. And I think I annoyed him with my questions. But I walked away with really only one insight, which to this day still means something to me. And that was that when I looked at Bitcoin, it was like as if the early days of the internet had somebody had built email and had to build the internet together with the email to make email work. So there was an application and an underlying protocol that were wired together. and that Ethereum was simply the underlying protocol for the blockchain and that you would be able to build lots of applications on top of the blockchain.

And on that basis alone, I decided to participate in the Ethereum pre-sale, figuring that if an application built on the blockchain could be big, then the blockchain separated from it could be even more valuable than the applications built on top of it. And so then I invested in Ethereum and began the process of learning more over the next few years and making a few other investments and waking up in 2016 and 2017 and seeing some real success with those investments. When you learn about the Ethereum investment opportunity, are they throwing around the words ICO? What does that mean to you? What was kind of the presentation, if you will, of that opportunity?

Interesting question because they did use the word ICO. And I kept saying IPO because it felt very much like an IPO to me. And in fact, shortly after they took my Bitcoin, and it was a really uncomfortable experience to send Bitcoin to buy Ethereum if you weren't very sophisticated, because you were just sending the Bitcoin into the ether to people who you didn't know without real contracts. and every venture capitalist who I talked to about at the time said, that's crazy to do. It's completely overvalued. But shortly after that, I reached out to a banker who I knew and I said, can you sit down with me and the team? Because we want to talk about how to manage the process post-IPO. And I literally use that phrase post-IPO because the same mechanics of an IPO come to bear in an ICO, except that the ICOs aren't doing it as well. And for example,

in an IPO, the bank, the investment bank who's taking you public or the banker who's taking you public, they'll sell much larger, much more of a book than they actually have the supply for. So there'll be pent up demand. And then there'll be an investor relations firm that does a really good job communicating not just with your existing investors, but with prospective investors. And they'll build a book of future business. And there's a lot of thought to how to manage PR on a strategic basis. And so what you have in an IPO is a thoughtful process post-IPO for supporting the economy of the share that's being issued. That clearly was something worth thinking about back then. Remarkably to me, that hasn't evolved almost at all in today's world. And so we recommend for all of our portfolio companies to simply get great communications experts, Think about not raising every last dollar and focus on building a communication strategy both to the prospective investors as well as their existing investors and to the press that matters.

So if they need enterprise support, they should be in the trade publications from the enterprises that matter. Absolutely. And so when you invested in the ICO, which maybe you were calling IPO at the time, what was your expectation? Did you think that, you know, hey, this thing's going to go from, you know, basically nothing to $1,200, $1,400? Or did you think of it as I'm learning? Like, what was kind of the thought process there? Two things. One, I definitely saw that it could be massively disruptive.

And somewhere along the line in March or April, I sent an email to Gav saying, if you guys build what you're thinking about doing and are successful with it, it could change the world. So I saw the possibility, but I also think the probability was next to nil. When I woke up one morning and discovered that Gav had or was leaving Ethereum, I just assumed my investment was worthless. And so I reached out to him figuring I'd ask how it was going and that he'd tell me, oh, it didn't work. I'm starting something else. And then I could write off my Ethereum investment on my tax return. and instead his response was things are great and i wrote back and said is there a market value to this and he sent me a link and i remember i reached back out to him and said has there been a reverse

stock split because i'm still thinking stocks at the time um and he said no that's what each token is worth and that's when i realized and that was only hard to say only but that was only a 30x return at the time give or take um and that felt monumental and so um i mean that that's a venture investor's dream right yeah 30 plus x is amazing i remember at one point early in my career we had a a very famous investor who was known for uh who was known for investing in companies that 10Xed. And I remember him at one point telling me that he had invested in, I think he said, 30 10 baggers. And I thought to myself now in hindsight, that that wouldn't put you at the starting line today. That 30 10 baggers, 30 10Xers was great for public stocks. But in this space,

you could do that pretty easily over the last three years. For sure. Absolutely. Okay. So the Ethereum investment obviously goes well. Between the time you invest and when you start to realize, hey, this is working, there's, you know, attractive returns. Are you looking at other projects? Are you, you know, kind of just doing other things and not really thinking about it? What's kind of your mindset at that time? um i'm a retail technology retail technology investor and uh was running a venture fund and that was my sole focus um i was forced to look at another deal i was forced to look at another deal because of the hard fork of ethereum so i had to learn about hard forks and make some decisions about Ethereum Classic. And so as I went through that process, I learned more. I was forced to have more conversations. It wasn't until January 2017 when I had just finished my second retail technology venture fund. And I wanted to start thinking about how to build a much bigger

fund because we had great performance in those first two funds. All unrealized at that point, but great performance. And at least three, four years into it, we were on a really good trajectory. And as I was thinking about how to build that fund, all of the cryptocurrency investments had taken off. I had the year before invested in Parity and was really pleased with what was going on there. Begun to spend more time with that team over the prior year. And so I started to invest in other cryptocurrency projects and really blockchain technology projects. I don't invest in tokens and I don't think about trading charts very much. I think about it as a technology that could be disruptive. And that led to a process where, as I was making investments,

A really smart investor who was in my earlier fund asked me, how do you measure the market value of these things, and what do the profits look like, and if everything's open source, how is it defensible? And I couldn't answer any of those three questions, and they seemed like really good questions. And so I stopped working on my next retail tech fund and decided that I would try to learn a little more so that I could answer those questions. And there weren't great answers, but there are answers. And it took about six months. And while I was doing that, I was reading everything I could. I was talking to every team. I was actually making a lot of investments.

and along the way I discovered that there was a fund opportunity here because people were interested in the space. Investors who I thought were really smart were offering to invest alongside of me and I always hated raising capital. It's one of the things I just don't like doing. I like investing. I like talking to teams. I like helping create leverage for them and it just seemed like very different than my first two funds because investors were saying we'll invest alongside of And so very quickly, I turned to the woman who I had hired to work with me on the next retail tech fund. Her name's Caroline Cassie. And I said, I think we should do a blockchain fund.

Would you like to be my partner in it? And she thought about it for a little longer than I did and said yes. And then we went out to the Polkadot retreat in Spain and spent more time with Gav Wood. And he said he'd like to invest in it. And then I said to him, why don't you be a general partner in the fund with us? And he said, OK. And so by the end of that couple week period, we had gone from learning about the blockchain, making some investments and planning on doing a large retail tech fund to having three partners

committed to building something in the blockchain venture fund world. To be clear, GAV is full-time at Parity and Web3 Foundation with Polkadot, and so our commitment from GAV is a much smaller time commitment, but it does help provide aerial cover on where the technology is going. Absolutely. And so you raised your first fund, right? And how big was that fund? The first fund was $35 million, including the GP's investment. Got it. So $35 million fund, and you started deploying that. And so one interesting thing that you've said is you look at these as technology companies or technologies that could be disruptive. So how much of the fund's focus is on the liquid markets versus you're investing in the pre-ICOs or ICO-type rounds, and then eventually they become liquid, a more condensed timeline, if you will, than traditional investing? I think from day one, our thesis was to invest in the really big outcomes of the blockchain. It was our view that there would be many thousand X companies that would emerge over the coming decade or two.

We wanted to be in as many of those as possible. And we felt that to improve those odds, we had to be in early. We had to be in the first or the second round to really have a portfolio of that. It also meant taking huge risk. It meant having a lot of investments that would likely fail over a 10-year period. So we had to give a lot of thought to what that kind of portfolio composition would look like because Airbnb was not an obvious investment back in the internet days and Uber was not an obvious investment in the first round.

So we had to set up a series of limiting factors by which we could then say, okay, let's rule out a lot of stuff because we want to be in everything that could. We began to pull together this thesis, which we call investing for possibility instead of for probability. And so in that, because I've never heard that before, right? And I think it's really powerful, concise statement. What you're looking for is not something with high likelihood of being successful, but really just the fact that if this is successful, this will be incredibly valuable to the world and your investment, no matter how big or small it is, will become much, much more valuable than it is today. Yeah. And I guess I didn't fully answer

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

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

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

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

without the internet and the first company i think of to do this and i suppose netscape would be an argument for this but the first company i really think about to do this is google and then we saw facebook we could certainly point to lyft and uber and airbnb as examples of businesses that could not exist without the internet and the last point i'll make on this is they all required enabling technologies and so it wasn't until you started to see the mixing of technologies together that we We saw the true innovation of the internet. Here I think we're going to go through similar waves. I think the first wave is we're just going to get the protocols built because without

the protocols, there's no utility on the blockchain. If you compare the utility on the blockchain today to the utility on the internet in even 1998 or 1999, the internet had far, far more utility. It was also worth $3 trillion against $300 billion today. The protocols were built, and so we're in an industry that is handicapped because the protocols aren't built, but it's going to grow faster. It's going to deploy faster. There are more enterprise companies sitting on the sidelines.

The protocols are getting built more broadly and more deeply than in the internet and more rapidly. Most importantly, in order for the internet to have utility, people have to have internet access. And so there wasn't internet access for everyone. And you actually literally had to go have a landline brought into your home to get internet access. And that already has happened for the blockchain. There is, in order to use the blockchain, you have to have internet access.

And everyone already has internet access. Basically, blockchain gets to grow on all of the infrastructure, network effects, et cetera, that the internet laid for the last 20, 30 years. That's exactly right. And that'll speed its adoption. Absolutely. No, I completely agree with that. All right, so let's kind of get into the anatomy of a deal, right? So where, from a sourcing perspective, do you guys normally find most of the deals you end up investing in?

What types of sources are they coming from? I think it's useful to understand how we operate first. We apply a commercial filter to every deal we look at. We say, is the market size really large? can this technology or this business be built without a blockchain? If it gets built and if it requires the blockchain to be built and if it's a large market, we're interested, but we want to understand the commercial viability of that market. Over time and with a lot of usage, will that market evolve into an oligopoly or a monopoly? If not,

and it's highly competitive, will there be a compression of margins? Is there some form of barrier to entry that will allow for expansion of margins, some kind of barrier to entry, oligopoly or monopoly outcomes? And that could be in the form of network effects or technology or something else. If it meets all those criteria, we then ask, is this team capable, if they have a downhill slope, a tailwind, and a lot of lock, are they capable of running a business that's worth a thousand times or 10,000 times as much? Can they get it there? If all of those things are true, and if there's a cryptocurrency, we'll then ask the question of, does this token enhance the business? Do they really need a token? Is the token doing something like overcoming network

effects of complementary industries that exist today? Is there some other benefit to the token? If we can get a collection of good answers to that, we're likely to invest. And that leads to the second part of what we do is we like to think of ourselves as much more than a check. We like to think of ourselves as a lever. So when we do invest, we spend a lot of time with the team's post-investment, much more post than pre, which I think is unusual for a venture investor. And we work with them on their go-to-market strategies. We work with them on fleshing out their executive team, sometimes helping them add co-founders or key employees. We help them raise capital from investors who we think are value-added that can supplement what they're doing as well.

We work with them on the product side sometimes to protect against what could be an Achilles heel in the future, which is better UX from a competitor. And that combination has led to two things that have impacted our deal flow. First, our founders genuinely, I think, would, as a group, say we're more value added than most. And so we get a lot of our deals come from the founders of our portfolio companies. That did not happen a year ago. That's happening at a much more meaningful rate today. The second thing that it's done is a lot of venture investors don't invest with that exact same approach. And so we view our diligence as complementary to a lot of investors, whether they're the OGs of blockchain investing or the traditional venture funds of Silicon Valley.

Number one, we don't take the whole round. Number two, we make decisions really quickly. We share our thinking. And so we're not threatening to anyone. And we believe we're complementary. And we make decisions really quickly. So we do see a lot of deal flow from other funds. And then finally, I've been a founder for a really long time and just have a fairly good set of incoming deals.

And Gav sees a lot of deals as well, just simply because of where he sits in the blockchain ecosystem. Got it. And so it's fascinating that, you know, in such a short period of time, you've been able to build a reputation and kind of show with action to your founders. Hey, we actually can be helpful here. And my guess is that they're introducing you to new founders. because they want their friends or people they know to benefit from the same stuff, right? And so that's kind of a self-fulfilling prophecy as you continue to deliver that. When you meet one of those teams, what is the vetting process like, right? You talked about kind of your criteria, but how do you actually interact? Are you doing in-person meetings?

Is this phone calls? Is this kind of, you know, some sort of back-channeling on references? Like, what does that process look like? um i say we're definitely learning a better process um we much prefer to meet a founder in person i describe the process that we go through with founders as a bit like drilling for oil wells um there's not enough time in these deals to do seismic testing and bring in all kinds of equipment and do deep diligence, particularly on a project where you've got a white paper, sometimes no code, and one or two founders. And so the way we think about it is, and you can do

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

to have a point of view. Secondly, we look for founders that run meritocracies and are collaborative because you're inventing new space here and there's no way anyone can have an answer. um and we look for signals of that and then i guess the last thing that that we do um is i think my partner caroline is really good at reading people and so we talk about what we learn we talk about internally what we learn from founders before we invest how they think how they operate how they communicate with us are all signals of how they'll communicate with investors and customers and their team. Absolutely. Let's, um, let's talk about a deal you did, right? Is there one that you've talked about publicly that, that, uh, we can kind of

dig into not so much the people or the process of investing, but kind of post investment, how you look at, um, you know, what that company could, could potentially end up being or the value they could create sure um we were an early investor in hashgraph okay um and at the time we invested in hashgraph and i think it's a it's a somewhat controversial project um there's 39 governing nodes uh there's a patent involved there's a parent corporation and a um and a a decentralized centralized network or foundation. And so it's got a lot of the mechanics that traditional investors don't like. At the time, the technology didn't have a test net. We're not technologists internally, so we couldn't prove out whether it could work or not work. I heard it described by

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

about the technology. So for us, it was a bet on, could this team build something different? Could they build something better? It was about possibility, not probability. And we actually thought there was a plan B for them. So if they don't win everything and we don't get our 10,000 X or whatever it is that a win of everything would be, there was a really solid plan B there. One, they had super fast transaction speeds. So if the world coalesced around, hey, we need to have a fully decentralized, fully public, more traditional approach blockchain, and these guys didn't win, they still might win anything that required a slightly lower level of security and validation with high transaction speeds. And so, in our view, new businesses were going to be built, enabling new businesses to have 250,000 or 500,000 transactions per second, could create entirely new businesses that couldn't sit on those more traditional blockchains.

Yep. And we also, so from our standpoint, that was a really powerful driver of investing was they didn't have to win everything to win a monopoly in a certain space. Before we move on, I want to tell you about our sponsor, Block Estate, a new security token project in the $200 trillion real estate market. They've partnered with Polymath and Coinlist Comply API to create one of the world's first tokenized real estate funds. Tokenization is the process of creating a digital token that represents ownership in a real world asset. You've heard me say it before, but a clear use case for this is real estate. Block Estate aims to bring increased liquidity to this massive market. We're really, really thankful to the Block Estate team for their support.

So we'd appreciate if you checked out their website at blockestate.com to learn more. If you're intrigued by what they're doing, feel free to reach out to them or give them a tweet on Twitter. Thanks so much. How do you think about team building, right, in that sense? So you invest early, right, that there's some subset of a team there or, you know, kind of the early formations of a team. That project in particular happens to have some people with some experience, right? So it's not kind of younger people who are working on it. How do you, is it like they are building a company, right?

And they're building a team just like you would kind of have the hierarchical structure? Or is it more of this kind of distributed, decentralized type team building and governance that I think people more associate with some other blockchain projects? i i think the traditional rules of teams will apply here with some minor differences across blockchain across all of blockchain yep um the great teams are mission driven always have been i think they always will be the great teams share a value system across the executive team and across the employees and they work really hard to drive decisions around the mission and to drive hiring and management decisions around a shared set of values. Not all teams start with a perfect execution on both fronts, but the great ones do start with a core or a kernel of

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

Romania. Absolutely. Yeah. You hit on an interesting thing here around governance. I think it's talked a lot about in blockchain, but communication. Right. And so in any company, you need to be able to communicate the sharing of information is really important and kind of allows you to move faster in a startup it's essential right when you've got a small group of people who you know there's not that much kind of infrastructure in place not that much institutional knowledge that's in place that that ability to not only communicate but communicate quickly and in a dynamic fashion is important well what happens when you take all those people out of the same office right and you and you put them all over the world communication actually

becomes a little bit harder right and so the the to coordinate across time zones and skill sets and all this stuff is and languages and language yeah it's quite challenging um and the best teams to your point that they're doing it um kind of making it look easy um one of the things that's changed since i did my first startup and my very first startup required a great deal of communications with china um and when we started everything was done by phone um and that was really hard because the phone calls would happen at 10 or 11 o'clock at night on almost a daily basis. And then we had fax machines, which were kind of a real boon because they were the first form of asynchronous communication that you could use in near real time. But today we have Slack and

we have email and text messaging. And so I think the methods of communication help a lot. You can search for stuff. You can tag things. You can leave things as open items. And so the ability to follow up and stay on top of the details is so greatly enhanced that I think it makes up for the, at least it somewhat, if not fully, makes up for the loss of face-to-face communications. But I also think that's a personal choice. And if you're not comfortable with operating that style, you're going to build your team in your office. And we will see a lot of that. Absolutely. No, it's super fascinating. Let's talk about themes, right? So what themes in the blockchain and crypto space are you excited about moving forward or you think are important?

I think generally speaking, we don't think that way. Okay. Interesting. There are themes that we're super not interested in. So we'll rule out themes. And every time we rule out a theme, we end up making an investment in it. So we rule out like 98%, but it makes it easier, right? We've ruled out decentralized exchanges. We've ruled out custody. Why? Why those two? Custody is an easier example to explain. Today, if you're looking at the business models that are being valued in custody and in and around that, they're charging 100 basis points, maybe 50 basis points for the custody if you look at traditional custody solutions

you'll see two things about them one they're highly competitive there's a lot of players and they're getting two basis points for custody so here's a case where we think the end market is going to be highly competitive and highly fragmented and we think there'll be a compression of margins over time in the short run while they're overcharging there are not a lot of clients for custody and there are a lot of custody companies fighting for a limited number of clients and a lot of money going into them, which we think leads to very high customer acquisition costs. Does that mean nobody will be worth anything in custody? Absolutely not. That's not our point. Our point is that the ROI on a custody investment doesn't fit our thesis of achieving the

kind of returns we want to achieve. And I think similar arguments could be made for decentralized exchanges. That said, I think our approach to thesis investing is that our thesis is we want to be surprised. There is a lack of imagination that exists in thesis-driven investing, i.e., we build a thesis from what we know. And so there are hundreds of businesses and industries we know that are going to be disrupted. I want to be surprised by the million people who are out there saying, I can take these two technologies, twist them together, invent something new. That wouldn't fit any thesis I had. And I want to be surprised by the 10 of them who come up with something extraordinary. Some of them are just going to be dumb ideas. But we've seen some

really cool stuff. And it's the first time in my life I'm prepared to invest in a technology that is looking for a problem because there are a lot of people looking to take these technologies and come up with really creative applications for them. Yeah, it's super fascinating, this idea of you almost are trusting that the people you're investing in have that imagination, that skill set and experience with either problems or technologies that you don't. And so if they're able to build something or explain something to you that you already kind of can wrap your head around it actually may be not big enough right so it's not that

it can't be successful it can't be big enough i want to be a catcher at the plate getting a lot of pitches and i want to find the pitch that just was so unexpected um and and so i i think about um there's a company called noddle which we like a lot um and it's a super cool idea it's a mesh network of bluetooth i actually don't know what the first problem is that's going to take that that protocol and get built on top of it um but i know that if 10 creative people dug in for a month there'd be some really cool ideas that come out of it and so i have a high level of confidence that there can be really cool things that will get built on that kind of protocol. Now, having said that and saying we don't thesis invest, I'll tell you one thesis

which we are thinking about these days and when the pitch comes across the plate, we're interested. Having grown up in B2C commerce in my life and later B2B commerce, we think there's a new form of commerce. And my friend and partner, Caroline, invented the phrase D2D commerce. And we think there's going to be an era of device-to-device commerce that will grow up. I think you still, there may be lots of them and some of them are going to be small businesses, but the idea that devices can talk to each other in a decentralized autonomous world where nobody owns individually, that device could lead to lots of opportunities to make a lot of money. If you are the one who sees that pitch and recognizes it as being something different.

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

So the way that I always use the example is why do you own one asset, right? Let's say your house, you sell that asset into a commonly denominated currency like the U.S. dollar to buy a second asset. That seems like the reason why you're doing that is because that's the best option today, right? is you go into that common denominated currency because you and the person that you are transacting with both accept that. Well, if we ever get out of needing to make that extra transaction,

you can just go from one asset to the other, there's a whole bunch of disruption that follows, right? And I don't even know what that looks like yet, but it feels like that's the type of stuff that gets really interesting and down in the weeds. Yeah, you can see things like separating the debt and the equity from a home, separating the mortgage payments into blocks. So if I want to buy money coming back to me

at the time my kids start college, I can buy a bunch of mortgage coupons for a specific year or for a specific set of four years. There'll be a lot of invention around traditional assets. What I can tell you is we're not very excited by security tokens as a thesis. and a lot of people say, well, there's going to be a lot of value that's created by the liquidity. Maybe the aftermarket for these time sharing has proven to be actually not a really good investment. And so it only becomes liquid if you have a liquid aftermarket and that's going to take some time to build. So simply securitizing an asset and tokenizing it may actually not do any good for the value. And it's likely to be one of those

spaces where there's a lot of competition, not a lot of margins, and a compression of margins over time. Certainly not an oligopoly or a monopoly. That said, a marketplace of securitized assets might be super interesting because there are barriers to entry in that field. So we don't say know. We just need to understand which part of it it is. Well, and a lot of what you're talking about here is, to some degree, you're really hinting at a lot of infrastructure type investing, right? So the exchange of the tokenized securities, rather than say, hey, this one individual house is going to go up by, you know, 20, 30% in value, the marketplace might be a more interesting way to look at it. The protocols, for example, if a bunch of things get built on top of the protocol,

there is value assigned to the protocol or the foundation, right? And so it's an interesting way to think about infrastructure investing, which I think a lot of people kind of deem as boring or, you know, the picks and shovels and all that stuff. But really, if you put a, you know, kind of a perspective of imagination into infrastructure, now you start talking about some really, you know, kind of powerful things that could get built if people are successful. I think a really good example of that in the early days of the internet that created a lot of value at the time was eBay. It took what were local marketplaces and turned it into a national marketplace and built a meaningful and massive barrier to entry simply because the buyers wanted

to be where the sellers were and the sellers wanted to be where the buyers are. And frankly, Craigslist is another example of a company that should have been disrupted many years ago, but created pretty overwhelming barriers to entry for decades, even though there were better products out there. We could see that happening here. We could see that happening with marketplaces of securitized assets. What do you think about crypto as money, right? So whether it's Bitcoin or something else, what's the thought process there in terms of, are you investing alongside that? Do you think that that is viable? Is it something where we just, it's a time thing and it's just going to take a lot of time for it to come to fruition? I think it's a really limiting

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

it with another entity slash person slash driver, and that driver goes to the GPS location. That's Uber. A person- And that wasn't possible before certain pieces of technology and hardware were created. And also not possible without the frictionless exchange of data. Yes. And if you look at the curve of the creation of data, it's a hockey stick up and to the right since the invention of the internet. The same is true, I could give you other examples if you want, but Facebook is a person sends some texts and videos, some images, and the data of who their friends are to entity Facebook and entity Facebook sends it to the friends from that list of that data of friends. And you can see how every business can be described that way. So to just think about

cryptocurrency as money, I think is limiting because the blockchain is what allows an entity to exchange value with another entity. And if you think about how we've defined broadly the number of types of use of data for the internet, we're in the early stages of defining what value is. But for example, value is the stuff we know. It's the store of value like gold. It's the currency like the US dollar or a stable coin. It's ownership like the title to your house or to your car. And I think we all get that. But it's also perspective value. It's the promise of something in the future, like an insurance policy. I think where we start to drift off is right about there. And I think we're going to define value in a much bigger way. I think

we'll start to look at things with more common sense and say, of course, the recipe for the secret formula for coca-cola is value of course my private medical records are value and so the definitions of value and how we exchange the definitions of value are going to grow and i believe in the future every single blockchain company will be able to be described as just like entity exchanging data with another entity describes the internet i think an entity exchanging value with another entity in a frictionless way in both cases is how we're going to look back in 20 years at what the blockchain is. And I also believe that the curve of creation of value is going to follow a hockey stick growth as we start to find new ways to

exchange value and new forms of value. Absolutely. I buy that for sure. All right, let's do a rapid fire of questions here. First one is, what do you think is the most important company in crypto other than your own i definitely wouldn't say it was our own um you i got a couple of psychos who come on who want to say that so i i think it has to be bitcoin i think bitcoin at this point i'm not a bitcoin maximalist i i finally it just finally occurred to me a few weeks ago that bitcoin had won um that there are other companies that might get supplanted uh if you look at the search engine wars of 1999. We're in that phase with blockchain protocols. So what might be a winning protocol today may get replaced by something else. And just to refresh everyone's

memory, you had AOL, and then you went through a war phase where you had AOL, Lycos, Excite, Ask Chiefs, Yahoo. And then Yahoo won temporarily until Google came around and then Google crushed everyone. I think we might see the same thing with protocols. But Bitcoin, for a bunch of reasons, is likely to win simply because if you want to leave a second or third world country with your assets, there's no safer way to do it today. You can't take gold. You can't take currency. You can't take diamonds. And it occurred to me that at some point, we're going to have an economic crisis and people will see that not in our country but in a second or third world nation and that will be the proof that the blockchain works i i um it's so funny says uh i saw on

twitter uh literally today there was a a gentleman who tweeted and said that he had a friend from venezuela who was leaving the country and he was at the airport and it wasn't his family but another family was there uh and they were getting shaken down and they had gold gold with them and it was getting confiscated. And he was like, that's probably that entire family's wealth. And so I think that is the, you know, the prime example of the difference between a physical asset versus these, you know, decentralized distributed digital asset. Yeah. If you've got a hundred million dollars or a million dollars or a hundred thousand dollars or a thousand dollars, and it's your only asset and you want to get it across the border and your biggest risk is a volatility of 10 or 20%,

that's a much better risk than losing 100% of it. Absolutely. I completely agree with that. All right. So what do you think is your most controversial thought? What do you believe that a high percentage of other people would disagree with? That technology is not the only defining barrier to entry in blockchain protocols. I think really good technology matters. matters. I think great technology is investable and worth having. But I've seen many instances in my life of really good and second best technology being married with best of class

go to market strategies winning. So we're very cognizant of that. And I'd say the other thing is that we simply don't believe that in investing in the categories that everyone else makes the category of the moment. I think those are really bad investment decisions. It's so like you see this all the time, right? A founder comes to you and says, Hey, uh, I'm raising a round. It's about a close and X, Y, and Z funds are in. Right. And we've tried to make a list of how many companies that have been overly successful were either one, highly competitive seed and series A rounds and or two, raised an enormous amount of money early on?

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

right so i think the the likelihood that there is consensus on the big winners is probably very low yeah i i um i wish that we could find all the data we probably can't find all the data but but it would be really interesting to see what the actual percentage is right because it's got to be single digits right um all right uh you got a magic wand you wave it you can change any one regulation that exists today or improve one what do you change i think the regulatory climate is the regulators are doing the right things generally right now if i could do one thing and wave one magic wand i'd get rid of new york's bit license because it just causes a lot of aggravation generally and makes the u.s a less competitive place

i know the new york regulators are trying really hard but when you look at a saft agreement and it says New York residents can't sign, or you talk to companies and they simply don't want U.S. investors. I think that's a bad thing for this country. I think we do a really good job as a nation at protecting our small investors. And I think that needs to go on. And I think the people who commit fraud and the egregious violators should have a two by four hit swung swung at their head um i just i think there's this is one place where it'd be nice to get rid of because i don't think it performs the function it was intended to perform absolutely the protections are fine right it's just the way in which it's executed i mean i think it's fair

um all right so uh one question i ask everybody is uh let's uh just admit that aliens exist and they're out there somewhere do aliens have pets i actually think the aliens would look at the way we walk our dogs and think that the dogs were in charge. That might be the best answer we've ever gotten. That is perfect. And probably not wrong. All right. So you can ask me one question before we go. I'm curious, as you've gotten into this space, I learned about you through my 19-year-old son, who's a huge fan. Name's Reed, if you want to do a shout out. Shout out, Reed.

I'm curious, as you look at your audience, how you think it's going to evolve in the next five years. So who's, who's tuning in now? And who is going to be tuning in to you in five years? Yeah, that's a super interesting question. So I've been surprised, right? I think that I'm still one getting comfortable with just a 19 year old that I don't know, actually even knowing who i am right that that's kind of weird and and somewhat uncomfortable for both of us right yeah right uh but but at the same time um you know i i frankly thought that most of the people who are tuning in on on twitter and kind of engaging in all this stuff was you know who the institutional investors think it is right it's the it's the young kids that you know kind of don't have

anything else to do they're somewhat fringe if you will uh that they get lumped into the like Oh, that's the kid in their parents' basement type stuff, right? And so as I've kind of started to spend more time with these institutional investors, what I found is they're actually super interested in this stuff. And so we've been talking to some of these institutional investors, and they want to listen to a podcast. They want to, you know, who should I follow on Twitter and do this stuff? And the running joke that I have is a lot of what like the older CIOs, I'll always tell them like, all right, so here's like the scary part. Go on Twitter and follow like Whale Panda or something, right? And it's like, you know, there's not like a person.

It's almost like character to some degree. And some CIOs are just like, you know, what are you talking about? We're big fans of 7. Yeah, yeah. Well, it's just like, you know, like, look, what are you talking about? Right? It's kind of half the crowd. Then the other half of the crowd is like, okay, no problem.

Right? If you say that's the person that's got information, like, I'm in. And so where they haven't quite broached yet is like the Telegram world. right so all the different groups and because you got to kind of know some people to kind of you know uh navigate your way into into the high quality groups etc um but i've been surprised at how many of the people that are not participating so they're not deploying capital they're not actually in but they're paying attention right and so if i if i looked at like a twitter it's still you know 90 plus percent the kind of crypto anarchist the the kind of

younger crowd all that stuff but i do see uh you know hints of this like more institutional more mature kind of legacy world uh becoming interested what i think will become interesting is if any of those people who are now coming in end up gaining large audiences i think we're starting to see with lawyers right so the these people who come from kind of a more legacy world who uh you know we had uh jake uh travinsky on right and he's been doing a great job some news hits everybody on twitter either it's really good or it's really bad no one really understands it but just tweet a bunch and and people will you know favorite it and retweet it whatever uh but he explains it he says hey this is what happened this is the potential impact right here's other things to

look at etc and he's growing a audience very quickly because he's providing value i don't know if like the bankers and those types of people are going to be able to do the same thing because i think that the authenticity gets lost when they try to just become the crypto anarchist people can add you're not that's not really you so i do think that the lawyers are doing a good job right now saying look i'm not a crypto anarchist i'm not into the crypto twitter stuff i'm a lawyer but i understand law and so if you people want to understand what's happening here i can explain that and i think that that's you know we'll see more and more of that over the next you know 12 24 months on your podcast i mean on your twitter account watching you i think that

more of those people for sure um and the other thing that uh that people have figured out uh which is super annoying uh if they tag me in their tweets i i favorite every one of them right because it's like a look so we took the time to tweet and so when i favored it it's just like a hey i see this you know thing you know just you put some effort and i put some effort in you know let's call it a day it gives them more engagement and so now i have people there's one guy who if i could figure out who it is just email me or something he has a bot and he tweets at me every hour and it's so annoying you need a bot to to to uh favor the tweet no no no he uh he he's been doing it so uh hopefully we keep the uh the kind of automated type messages to me down but uh but

But I do think that it's really interesting kind of how the communication across the industry is, you know, this is the, you know, the most well-documented revolution probably in history, right? You can literally see what everyone's thinking all the way back to, you know, 2009 about crypto and Bitcoin, et cetera, whether it's on Telegram, you know, it's on Twitter, it's on Reddit, Bitcoin forums, you know, all this stuff. And it's pretty, you know, it's pretty interesting. That's a really good point. Yeah. all right we'll end it there you uh you got me with the dog comment of the of the aliens uh all right man thank you so much for coming let's do it again thanks very much for having me thanks again to our sponsor block estate to check out their tokenized real estate fund you can check

out www.blockestate.com hey everyone pop here if you like this episode of off the chain and want to help us take crypto to the top of the apple spotify and other podcast charts please do us a favor and rate, review, and subscribe. To review, simply go to the Off The Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off The Chain.