The Pomp Podcast - Nikhil Kalghatgi, Founding Partner at CoVenture Crypto: Why Aligning Incentives in Crypto is Challenging

Episode Date: February 1, 2019

Nikhil Kalghatgi is a founding Partner at CoVenture Crypto. In this conversation, Nikhil and Anthony Pompliano discuss Nikhil's work at SoftBank, how to apply Moonshot Investing to digital assets, and what CoVenture is currently excited about as the crypto industry continues to mature. ----- Join the Off the Chain newsletter. Pomp's daily email analyzes the crypto market for institutional investors. Simply, it’s the best crypto newsletter delivered to your inbox every morning. No frills. No bullsh*t. Just everything you need to know in a 3-minute read. https://offthechain.substack.com/ ----- BlockFi BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

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. Nikhil Kolhadi is a founding partner at CoVenture Crypto. In this conversation, we discuss his work at SoftBank, how to apply moonshot investing to digital assets, and what CoVenture is currently excited about as the crypto industry continues to mature. This conversation was a ton of fun, and I hope you enjoy it nearly as much as I did. Before we get started, I want to talk about one of our sponsors, BlockFi. These guys are doing really interesting work in crypto lending. What they allow you to do is keep your crypto, put it up as collateral, and receive a US dollar loan

funded directly to your bank account. They do loans ranging from $2,000 to $10 million, and they're perfect for helping you reach your financial goals of all sizes. You should visit blockfi.com slash pomp. Again, that's blockfi.com slash pomp. Again, And one more time, type it in, BlockFi.com slash Pomp, if you'd like to learn more about putting your crypto to work without having to sell it. Definitely do it. 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. All right, guys, super excited. I've got Nikhil here. We've got a ton to cover, so I'm not going to blab too much. Just welcome. Let's get this thing started.

Let's do it. All right. Background. What the hell did you do before you got into crypto? I did. Was there life before crypto? Basically, I was an engineer and then I was in military intelligence. It was pretty weird, crazy experience. Worked on some projects that were actually unbelievable precursors to a lot of blockchain projects that are being developed today. Although I had never uttered or understood the word crypto or blockchain in the early 2000s.

Uh, so I, I started a small investment group while I was doing that, did a master's degree in engineering management. And very quickly, uh, I got myself into the startup world. So I was first employee at what is now a decent sized tech company. And then about a year into that, I was feeling the investment bug and we were fortunate. We were in this tech stars program, the first one outside of Boulder in Boston in 2000 and he was eight. And Brad Feld came and Jason Mendelsohn. These are, you know, extraordinary guys at Foundry Group and got to meet them. And about, you know, six to maybe less than a year

into it, I told Brad, I said, hey, I love investing. I want to be an investor. I might go to business school. He's like, business school will be the biggest mistake of your life. I tend to agree with that. It's, it's, I now having gone through it, you know, it was an amazing, amazing experience, build incredible connections um and uh you know harvard opens up a ton of doors for sure which frankly i didn't have uh prior to so um got into that and six months in i applied my first venture gig and it was softbank uh got it and never looked back so i've been a venture investor for almost a decade um with softbank and it was a smaller fund and started co-venture uh crypto

uh joined the co-venture team with ali you know really really well um so neat uh a t who's also here and uh uh it's been an amazing amazing run so that's sort of the general curriculum so it's like it's like crypto came late but the origin story of how did we get into crypto is sort of you know a question everybody wants to ask i think everybody has two origin stories all right there's the i got lucky and got rich answer and then there's the i'm ideologically aligned with crypto and i'm passionate about it and whether that makes you a bitcoin maximalist or whether that makes you um you know a decentralization maximalist uh you know you're ideologically aligned i'm going to cut it two other ways uh the first time you heard about crypto and the

first time you did something about it those are usually not the same no date one one came a lot later than the other you can guess which uh so check this there was a a uh a uh entrepreneur at SoftBank. He just left a company called Prosper, I think it was. And a fellow outside of SoftBank had knew him very well. And we'd become close friends. He'd become a business partner of mine later in life. And he said, Nikhil, you've got to meet this founder. He's actually a SoftBank guy that you never interacted with. He's moving on. He's starting a new company now. So, I went out and flew to meet him. And he's in Silicon Valley. I sat down. He says, Nikhil, here's a crazy idea. It's called a distributed ledger. This is 2011.

11. And I said, a distributed what? I was like, first, what's a ledger? And so an hour and a half into it, I still didn't understand what the hell he's talking about. But I knew that there was something really special here. So that was Chris Larson, who ended up starting Ripple. And it was an amazing entrance point to learn about cryptocurrency. And subsequent to that, years later uh not too many uh i had less soft bank and started exploring uh cryptocurrency and we'd made some investments in the next firm that i joined and uh and then fast forward from there and it's all in on crypto with a lot of investments so now we've got you know angel investments from my partners um uh and myself ranging from you know there's coinbase and ripple and stellar and

Blockstack and Digital Currency Group and a whole bunch of other ones that have been fortunate to allow us to be around the V1 of crypto. And now V2 is completely different and we have a completely different approach to attacking it as an organization, not as a bunch of individuals. For sure. So before we get into what you guys are doing and how you're approaching it from an investment side, I want to do some role playing. So we've never done this before. Sounds romantic. but uh i want to throw out the name uh or type of organization of other people in the crypto ecosystem that might may be under attack or uh be in a reactive position to some of this stuff

and you just talk through if you were in their seat so if i was pomp under attack by by twitter what would i do oh the twitter trolls are easy i just say have a great day and give them a smiley face and a fire emoji fire fire fire and that's it um all right so government if you're a government or some sort of monetary organization in the fiat world how do you think about crypto what would you do as either a reaction or maybe something to be proactive and responding to it what's your thoughts there ignore or shut it down is pretty much the the gut response that people will have um i think ignore it is the smart move considering it's so small that it's kind of irrelevant from a economic perspective on virtually any government um around at this point in time

and then uh ban it has been the other response and we've seen that in a couple of ways there's the outright ban with which only like three countries in the world have basically said we don't care about this we're just going to say no and not deal with it because they've got bigger humanitarian issues and they have bigger challenges going on in those countries i think bangladesh is one country that has a complete and outright ban on it but i don't think it even ranks i don't think it's spoken about in the bangladeshi government um is my guess it's just added to the list of things they don't have to worry about at least and then uh and there's others that kind of take the middle ground and say we like this we don't like that right um china's a good example

the u.s government's a really good example where i would call it semi-regulated and you know there's clear definitions of of way things are taxed and there's clear definitions of way certain pieces are regulated and there's just so many gray areas that they realize you know what this is really too hard for us to deal with right now let's figure out the biggest risk areas let's make an example of people so i love what you know the sec has done so far um at least in 2018 in response to icos um you know they don't have thousands of people on staff in order to address all the holes of innovation that are being created we're talking right now and the government shut that i don't even know if they have anybody i know no registrations are going through no it's wild

uh but up until the shutdown i i'd say they were actually quite um you know they actually had a very very clear response what do you think they should do so i agree with you that that's what the different ones are doing if you're let innovation let innovation go wild up until it very clearly breaks rules i think that's the right approach why they don't have the resources in order to do much more than that first of all their other option realistically is do nothing And I think that sends an equally bad message as an overcorrection. So the U.S. government in particular has the most to lose by overcorrecting, by sending investors abroad as a result of them not being able to do what they want to do here is really, really bad for the U.S. government, especially right now. What if you're an incumbent financial services company?

So like big, big, bulk bracket banks, things like that. Payment services or banks. Look, every bank is just like every other major company that you can think of. They want to make a ton of profits. They're willing to go to extraordinarily great lengths in order to do so. The one thing is that they're not going to throw away the baby with the bathwater when it comes to regulation. So they're going to say, we don't believe in this. We think this is BS.

We are not supporting this type of activity until they can very extremely clearly look their chief risk officer and head of compliance in the eyes and get the blessing to go full throttle. Meanwhile, in the background, they are spending a ton of resources internally on making sure they've got all the right patents in place to make sure that their traders are being sophisticated, to make sure that they've actually moved their smartest people into this burgeoning growth area off of whatever area is dying. And the same thing happened in mortgage-backed securities, and the same thing happened in gold, and the same thing happened. And every single time there was a massive trend at some of these big banks, they moved some of their greatest talent over right before it was the time to take advantage of it. So don't get me wrong. It's going to be no, no, no, and then it's going to be a quote-unquote overnight success that took two, three years in the making. And do you think that a lot of these banks feel like they're under pressure or their core business could be eroded away? Or do you think that they look at this as an additive business where it's just our core business isn't going anywhere? This stuff actually isn't going to attack that. We just have now a new potential revenue source when this has regulatory clarity. So I spent a lot of 2017, 2018 going around to big banks, teaching them about cryptocurrency, teaching them about blockchain.

We hosted classes at our office and at big financial institutions' offices about why they should care about blockchain, why they should care about crypto, and why it makes them more money, not so much less. And I'll tell you, there's a couple of varieties of responses. Invariably, particularly in 2017 and the first half of 2018. there was the classic, isn't this a drug dealers? What is a blockchain kind of conversation? Fine. That's okay. Education is the first step in this whole process. So once we get past that, there was invariably some folks in the room that said, um, Hey, just so everyone knows, I've been mining personally. Like, I think this is a great idea, but they were always the minority in the audience. I won't name which banks, but let's call them, you know, the top five banks

in America, you know, by AUM perspective. And now they kind of recognize that this is the reinvention of a lot of their assets, ironically, to a state where it's kind of like how the world was before banks. So people talk a lot about a barter system, which never really existed in humanity, right? There was effectively a sense of credits and debts that happened well before we even had physical printed money. And in essence, what I'm saying is that there was virtual money before we had physical money. And now we're kind of going back to this post-bank world of virtual money again. And it's a really, really efficient process. It's a lot more complex, obviously now than it was you know uh six thousand years ago but i actually think that most of the

processes now will become much more efficient as they become blockchainified or as they because they eliminate a lot of middleman resources i think most of the most of the uh big banks recognize this um they probably recognize it first in uh patent defense bank of america i think has the largest number of patents among companies in the u.s um by the way globally the number one patent holder in the world of blockchain do you know china correct which company i don't know alibaba ah and they had 10 of all patents in 20 2017 i think it's the latest numbers i have wow pretty wild um the the point is is that most of those are not due to their e-commerce and they're due to the financial services group that they have in financial so okay so that brings me

to uh if you're a traditional investor or like an incumbent financier there's been this rise of everything from icos right so kind of the ability to sell tokens for non-diluted funding to tokenize securities tokenized debt all the stuff that's kind of coming down the pipe as ways for entrepreneurs or asset owners to gain access to capital markets if you're sitting and you're running a traditional venture fund, a traditional private equity fund, um, you know, even a bank as a lender type situation, how do you think about, um, this space as it's growing and what would you do if you're sitting in those shoes? So the, the first check box that needs to be hit is legal. I don't mean regulatory, I mean legal, right? Um, you need to make sure that how

are these things actually enforced? Can I get my money out in the event that, you know, there's a fall or in the event that something triggers into another type of asset. And that's probably the hardest challenge that we have right now i think the regulatory framework follows the legal framework and the regulatory framework depends on what structure uh there is and the enforceability around it so that's uh that's the first big challenge when i think of tokens as they're structured right now security tokens in particular it's mostly pdfs on a blockchain i'm seeing a number of efforts being that out there i mean you've seen spice trade and you've seen um a spice wc uh specifically saying and then um that's sort of version 0.1 i would say that's basically

just funds that are theoretically tradable although it's going to be hyper limited in terms of the liquidity okay let's be one what i think happens over the next two years is you're going to have this incremental growth that is going to be short-lived this is not massive step function evolution of the security tokens. This is going to be bit by bit crawling forward, inching forward. And we'll look back and say, wow, that was so embarrassing how little distance we moved. But they're really important steps. So if we want to get to this goal line, and the goal line is all the stuff you've probably heard and talked about a million times, every single asset tokenized, all the things that's on the balance sheet of the banks are tokenized, fragmented liquidity,

new liquidity, new pathways of capital flowing. You know, you've got debt that upon these triggers turns into X, Y, and Z because it's all in a smart contract globally. That'd be great. Right. But in order to get there, we're going to need just to do the simple stuff. Like what if we just increased accessibility to existing products that already are around today? I'm not saying you open a door that's never been opened. I'm saying the door's already open. People can go and buy this product, but we're going to open the door an inch more through tokenization. A good example is you can go ahead. I ask everyone this, like, do you own any of the FANG stocks?

And you say yes. And then I say, wow, well, it's obvious why you'd own the FANG stocks, right? The highest growth sector for the last five years in the U.S. And, you know, they're super popular. You're probably a user of those stuff. You're very familiar with the companies. And, you know, they're traded with an extreme amount of liquidity, blah, blah, blah. But do you own any of the FANG of China?

China's been growing extraordinarily over the last five years. Let's not count the last three months of emerging markets crash, but the last five years generally. Do you even know what the fang of China is? Chances are in one of the highest growth countries of the world, in the highest growth sectors in the world, in one of the most popular products in the world, that's going to be a decent bet over that period of time. But people don't. And they don't really know that you can actually go online and buy these really, really easily. Do you have a Fidelity account? You could probably figure out a way to do it.

But my mom has a Fidelity account. She has no idea what A shares are. She has no idea how to put a wrapper around a Chinese listed stock. And I can tell you if someone went to her and said, hey, give me your cash. I'll turn it into whatever the Chinese listed stock is. That'll be great. The trick is, the product that this person's offering my mom is, I'll take your money, I'll turn it into some Bitcoin, I'll buy it for the swap exposure to a publicly listed product, and bam, there you go. You've got a new product that basically did not do anything innovative in the world other than gave someone exposure to a completely liquid asset that's already available. Now, it's neat, right? It's a party trick. But I think these are the incremental benefits that we have to start in order to get people to trust the technology itself and start trusting that there's financial assets that can be backed in cryptocurrencies and blockchain products. And I think we start moving forward from there. But it has to begin with trust and accessibility before we can create entirely new products.

Yeah. And it's also many times people ask me, what's the one thing that has to happen for the world that we all envision to become reality? I say time, right? It's just, and it's time is a proxy for let entrepreneurs build companies, let investors find those entrepreneurs, give them capital, right? Let regulators educate themselves and begin to create rules that are kind of pro-innovation, but still keep the scammers out. Let users kind of demystify this for themselves, right? Of like, Bitcoin's pretty scary for a lot of people, right? They've heard that, you know, it can be stolen. They hear that criminals use it, all this stuff. When they start to understand, okay, you know, I get what it is.

I understand how it works. I have an easy way to access it. You're just demystifying or reducing those barriers. So time brings a lot of that stuff. It has to be time, but it also has to be within the time frame that people actually remember, right? The first time people heard about crypto. So I disagree with that. I disagree with that.

Here's why. Most of the products that are popular today, when they first were brought out into the world, no one used them. And not even in the first day. Like email is a perfect example. I think email was created like early 80s, if I remember correctly. Sure. how many people were using email in 1993 not that many right so you could argue that well email had a 20-year window right now was still within the time that they remembered

i think this stuff just takes much much longer and so you know this idea of go back to um you know every asset being took every stock bond currency commodity being tokenized like if that takes 15 years will we have all forgotten about it probably not will we have all of the hype and hoopla that maybe 17 you know 2017 brought probably not and so it's somewhere in between of like completely forgotten and like this is going to change the world tomorrow i think there's merit there i would say anybody that came into the stock market crash the tech crash in 99 it took them a little bit of time in order to feel comfortable about investing in tech again. And the time when they felt comfortable was probably when the amount of capital that they're

investing now is more than the amount of capital they lost in 1999. So the only way to get that back is unfortunately a price point that is somewhere reminiscent of whatever the price point was with our last entry and sadly if a lot of people entered in on twenty thousand dollars it's going to be a little bit of time probably until they feel like okay it's been five years goldman sachs is offering this it's at twenty five thousand you know now i'll go in now it's legitimized yep i think that's fair um while we're on the topic of uh kind of the intersection between traditional markets and traditional finance etc and crypto uh what advice would you have for people that uh are in the traditional finance world um they've already mentally switched

over and said, hey, this crypto blockchain thing is really interesting to me. I'd like to work on this for some part of the future of my career. How do I get started? I love this. I love this. So our firm is based upon this kind of talent, folks moving in from traditional finance, hedge funds, big banks, traders, all that have bought into the Kool-Aid. In fact, many of us were the same thing um there's a mindset in traditional finance of hierarchy a focus on what you're doing do it really well and you'll be rewarded go up these rungs these step ladder function and you can get ahead and if you don't you got to move off to somewhere else it's a little bit easier okay that's fine but that's not the world of crypto right we have hired folks that

are fresh out of school that have spent two years in institutional finance and now they run parts of the business, right? Um, it's much more horizontal than the, the, um, the application of that horizontalness within the entire industry is that everyone's kind of accessible. You're pretty accessible. I'm pretty accessible. Um, you know, and we run decently sized businesses. So how do you, you know, how does someone stand out in now that we know that there's a thousand doors open? How do you know which one to go through, who to reach out to? I mean, it's pretty darn easy, right? If you're writing, if you're communicating, if you have your own independent conviction, share that with the world and you can get, you know, it's pretty easy to get promoted

on any of these blogs or any of the websites. Many of our team actually now have started publishing their own thoughts. Ali publishes, Winford, Honor. These are all folks on our team that are independently blogging both for ourselves as well as for themselves. And if you want to get super smart the same thing you do in traditional finance have a point of view believe in one aspect of the business and go super super deep on it right everyone thinks that they're an inch deep in crypto because it's so hard to be smart in crypto so hard if you can be smart in any one topic own it and people will listen to you so if you are a trader you know there's a lot of people out there doing uh technical analysis of bitcoin great have your perspective on it own it it's

still your point of view i assure you that the number of people from traditional finance that are getting into crypto is still smaller than the number of people that are in crypto from every other asset class so you've actually got a huge edge i think the reality is everyone there's a startup community in crypto that has never worked in traditional finance has no idea how it operates so if you are sub five years experience and you've worked in traditional finance you have i think your pick of the litter in terms of joining um venture-backed high quality startups right now and if you ever and you can reach out to me i'm at nikhil cal n-i-k-h-i-l-k-a-l on twitter and i can give you a long list of uh folks to um that are looking for amazing jobs

and that are hiring that's good advice uh what themes are you excited about in crypto oh so my best themes we keep in our back pocket and wouldn't share obviously uh but some other themes that i'm happy to share i'm just going to start go i'm going to go to the store and buy some beer give it to you and then we'll get them out of here as if the beer is not on the table right now uh no it's uh traditional financial products with a um slightly nuanced crypto spin on them is i think the best way to make a lot of money in a short amount of time in crypto and really what you're talking about is if you think of like a venn diagram you've got hardcore decentralized the world crypto type investment opportunities and on the other side

you've got traditional financial products everyone understands when you bring those two together that overlap is really where you guys think is interesting i'll add another yes and i'll add another dimension to that chart um think of it as like a two by two matrix and you've got uh on one access you've got um new firm versus old firm like like you know blackstone versus company startup x and then you've got new idea versus old idea on the other axis. And so you've got four boxes and the ideal places to be are a new firm with an old idea or an old respected firm with a new idea. The other two boxes are really, really hard. Old firm, old idea, tired, new firm, new idea, too scary and risky for a lot of investors.

A pill battle. Yeah. We talk all the time that whenever there's a new piece of technology that's created, you can do one or two things. You can build things with it that the world's never seen, where you can use it to improve the old world. And most of what I would call hardcore Silicon Valley is go build new things. The bigger, from an addressable market and market cap standpoint, the bigger opportunity is actually to take that new technology and improve the old world. Exactly. And that's what we're seeing right now. So for example, I've got a thesis that horizontal plays within financial services are going to be the first applications of blockchain tech that we see at scale. Okay. Explain that. Um, so the, the reality is that all the big

financial institutions have done, um, you know, some proof of concepts, uh, that have go back to 2014, 2013, even, and that's great. They've got some 10 to 50 people inside the business that are familiar with the tech or heard of it or responsible for managing people are funding it. Great. So there's some education that's already happened institutionally and that takes years. And those years have already transpired. That has happened across, I don't know, how many financial institutions have done anything in crypto internally? Probably all of them have looked at it. Right, right.

That's extraordinary. So let's say there's 6,000 or 8,000 of these legitimate firms around the world. And they've all, you know, 5,500 of them have done something, I would say. And that's great. So now they're smart on it being something that they are allowed to look at and allowed to explore. um they recognize that a completely verticalized application is not going to be ripped out and replaced just try taking any single application within an old world regulated firm erp tech or you know uh financial modeling or even your quickbooks you know really basic things that are

applicable across any company and it's very very hard to rip those out so my suggestion is if you can create a product that's applicable across the entire industry then you've got six to eight thousand customers out there already ready to buy it all right you're not going to be replacing you know an entire vertical group so the examples of these are you know that everyone throws around would be kyc aml they're applicable to everyone you're not saying they're doing a whole new kyc aml process no everyone's going to have their jobs this is going to be a slight improvement it's going to cost a lot more uh but it does everything that's already happened and then some that's like the first layer where i think it starts to fail and the vision that's you know

contemplated everywhere else is non-financial services entirely vertical plays so everyone wants to point to supply chain i think that's going to be the hardest application for cryptocurrency and blockchain tech why it's global by nature you're dealing with multiple governments inherently it's step function harder than dealing with one government doing one government alone it was really really really hard two it is uh it is mission critical kind of tech for the companies you're servicing that's in one essence good because people have incentive to do it but you don't replace tech that's mission critical ever right you just legally can't get around it it's means too much there's a lot of protection um you really don't screw around with the cash cow

if it ain't broke don't fix it kind of mentality so uh kyc and aml you know while it's in the critical path of doing business it's not generally revenue generating for financial services it's something that people always want to lower their costs on um and it's just a completely different sales process uh if you explain to me how much more money blockchain can make for some of these companies sure um but right now it's i think largely seen as a cost savings mechanism which is a harder sell but i think it's the only sell uh in the near term for financial services firms for these massive industries that are trying to replace entire vertical stacks that's super super hard uh the friction in the sales process the friction of proving it out uh is a too high

hurdle i think right now and more importantly um usually these entire vertical stacks uh get swapped out when there's a hammer that forces you to do it right the chinese government says you must do this or walmart says supply you know my entire supply chain you must have rfid tags in every single shipment or something like that that is how you completely change a vertical stack that's really really hard across you know a grouping of people that are collectively trying to you know do this together um as opposed to someone saying you must do this all right before we continue with this conversation i want to mention our sponsor again blockfi remember they do crypto lending so you posted your crypto as collateral they give you a u.s dollar loan and

you can use the u.s dollars to do whatever you want you should visit blockfi.com slash pop and then tweet at me that you went if you tweet at me after you went to blockfi.com slash pop maybe i'll throw you a like a smiley face or the fire emoji the fire emoji is the best remember go to blockfi.com slash pop and i'll see you on twitter what's your take on other things that are interesting so what you described with like the KYC AML that's essentially building technology as a service right it is a service today that yeah there's some technology solutions there's some that's done manually but if you can come in you can build technology that automates or makes more efficient that process there'd be incredibly valuable what's one or two others that are

similar to that that you think would be either one interesting for entrepreneurs to look at or two would be valuable for potential customers to be pitched settlement is probably the biggest opportunity today it takes you know a day to five days to settle most transactions and i'm not even talking about you know inter-country transactions you know um everybody likes to throw out the idea of real estate i think there's probably much faster simpler uh products out there so just look at one company so if you're inside if you're inside a big bank right now um ask yourself uh what are the slowest intra bank settlement times right um you know you've got instant i'm sure you know checking account checking account intro of a traditional commercial bank you know is pretty

fast but i assure you as soon as you get away from this hyper liquid stuff um it gets much much much harder so those i think are going to be the first ones because now you're dealing with a regulatory environment and a decision making process that's so much much so much faster You know, things are on the opposite end of the spectrum. The worst idea is remittance. I think it's wildly difficult for crypto today. And yeah, there's some great stories with Ripple. There's some great stories with a handful of other companies that have done nine figure remittances that I've seen at least.

But again, two governments is three times harder than one government. Mm hmm. What if you're a retail investor, right? You don't have, let's say, all of the opportunities today just given the regulations to invest in anything. Right. So there's some private offerings that are only available to accredited investors. I think most people in the space would wish that they were open to everyone. They're not because regulations. Hopefully that changes in the future. But if you're a retail investor today, how would you think about crypto as an investment opportunity? So not necessarily like, hey, what would you go invest in? But much more around, is buying equity interesting? Is investing in some of the liquid tokens interesting? Are there specific themes that you would look at? Just how would you maybe explain to people, if you're a retail investor, this is the way to look at it? So every retail investor thinks on, I think on a two, most retail investors think on too short a timeline, right? The compounding effects of money take time. And so if you're looking for a get rich quick sort of thing, I don't think you should think of cryptocurrency as that angle anymore. Hopefully it's a real asset class and real asset classes have much higher level of trust, a little bit lower level of volatility. than what we saw in 2016, 2017, and even 2018 for that matter.

So if I was a retail investor out there, I would think of, you know, what's in my price range? You know, what's in my investment horizon? And how does this diversify from what I have already? If you are mostly illiquid and you've got a very tiny amount of liquid investable assets to your name, um, you know, let's call it, you know, 50% of your net worth, right. Is liquid and it's, um, you know, money that could otherwise go to your savings and, you know, your rainy day or six months of, of buffer, right. That's not investable assets, right. That's money that you should be careful with and treat it as like your, your, your core, uh, you know, money in case anything

goes wrong. Now, if you do have a bunch of money left over, right. The way I think about investing is what do i absolutely what can absolutely go to zero and doesn't matter right and that's the stuff that i would put towards um you know the most risky assets and that includes startups that's angel investing that includes things where i'm learning uh and a lot of folks unfortunately put some cash into crypto that should have been into that at that bucket and i've heard a number of of really challenging horror stories the biggest horror stories i've seen are around tax um unawareness and people not realizing that they made a bunch of money and they reinvested it from 2017 into 2018 into tokens and then uh they owed money on 2017 but

then they lost all of it in the reinvestment in 2018 and they owe and guess what taxes you know if you call bk um you know you uh you still got to pay those off no matter what okay so what should people do this is where the question started uh if i was investing in um in the equity of crypto companies i would want to be in the traditional piece of the cap stack today because i've seen most of the token economics and governance be very punitive to investors so reading the terms on those documents is super super super important now as so what i look at is um and what i look for are entrepreneurs that are fully aware of the alignment of their investors with uh with common shareholders and uh it's actually really hard because it's constantly changing and most

entrepreneurs don't really care about being smart on this they care about building their business and money is a means to an end for them to get to their vision so why are they going to spend time being super smart on this if they're not super smart and can't spend to the investors and yet investors are really really screwed so when i was at um when i was at softbank uh we were tasked with an interesting uh challenge it was coming up with the top 100 companies and we said back to to masa and co uh masa the founder and ceo of of softbank um what do you mean top 100 and he's like top 100 uh and and so we kind of had to read between the line this is top 100 companies to invest in to buy to do partnerships with i mean in the world right

It's pretty wild. It's an amazing thought exercise if you haven't done it already. If you had a magic wand and you could have equity in any companies in the world that you wanted, which ones would they be? And that's not even getting to what if it wasn't equity. That's a lot harder. But the interesting thing is you start with that question and then you realize, okay, if I know these are the best companies, can I structure a deal that makes it the most valuable asset for me? So I went to, so that was a really, really interesting exercise for me. And it got me to think on another plan or level in terms of what are the most valuable assets in the world?

Because assets are really, as an investor, they're not just the underlying value creation that's happening in the company. It's also the structure around it. So this is why, this is how I got here from your question of how does the structure, you know, influence, you know, how you're buying equity. And for me, that's just an example, a permutation of how does structure affect being an investor of any kind? So really, the way SoftBank, you know, operated when I was there, we were trying to do these extraordinary deals was really simple. It's like, look, I love you. You might like me. Here's an offer that I think will make us both a lot of money.

And oh, by the way, if you don't take it, I might give it to someone else. and it's an honest very transparent hard uh negotiating strategy that that tended to work out for the better um and i've seen it done a few times that's the best thing i ever learned from soft bank was the art of negotiation um and and it served me served me well since then what's the number one thing you learned about negotiating from soft bank always be willing to walk away from the deal any examples you want to give no definitely not i thought i set him up for that um yeah that is uh yeah emotion plays no role in this sort of thing um excitement plays no role in this sort of thing in fact i remember i recall

there was a deal that, um, a T and I were trying to do, um, last year. And, um, we had a, uh, a very, very big, um, meeting, uh, to iron out terms on an extremely strategic deal for us. And, you know, he calls me up right afterwards or message me, I forget what it was. And he's like, he's like, how did you, how do you feel right afterwards? And, uh, I said, no feelings. And that's how I knew we were on the right path. We made the step in the right direction. There can't be any emotion on these kinds of things. For sure.

And you've previously talked about moonshot investing, which is this idea of going after things that are pretty binary in outcome. But if they are successful, they are beyond our wildest dreams of what a company could accomplish and what the returns could be, etc. How do you apply that to crypto? How do you think about that? Oh, I think about this every day. This was one of my favorite things. Luke, can I take you back to a story before I answer? Of course.

So basically after- This is, by the way, podcasts are basically just story time for adults. Story time? Okay, good. So here's a fun thought exercise and everyone at home should think about doing this too. I have a group of friends, we all became best friends. They're extraordinary entrepreneurs in the world. You've probably heard of them.

Not Elon Musk, but a couple of them are at that level and we all catch up pretty regularly. and we went on this trip one time and and we all were deciding we want to do with our next chapter with our lives we'd been fortunate we've had a bunch of success and or we've had a bunch of failures too that's for sure and and we we happen to be at this point in our lives at the same time we had a little bit more time to think about what it is we want to do next and and the question came up was well let's say all the world's resources are ours because we really feel like we've unlimited resources um within arm's reach what is the most undervalued asset in the world is it a person is it a group of people is it a piece of real estate is it a technology

i don't know and so we time time um and then can we acquire the asset and let's go acquire it And, uh, and, and so we, we did, we, we spent like 18 months of time focused on this sort of thing and, uh, you know, went around and tried to find it. It ended up being a amazing thought exercise. Um, the actual economics behind it, um, were wildly, were nearly wildly lucrative. It ended up becoming a failed project in the end, but I can tell you through that exercise, we brought in some of the world's most powerful investors together. We built this, you know, plans to build a $10 billion, you know, clean energy redevelopment project in America. And it was an amazing, amazing experience. now uh some of those folks are involved in the in the crypto world most of them are in energy and in tech and in the application of that thinking was really simple what is something that's actually unobtainable today and then let's flip it on its head let's just say we could get it right what are the characteristics of things that are unattainable how do we create a framework around that and to identify the top 10 things in the world that are unattainable that we think

could be worth something if we were to make it accessible and and that's kind of how i think about crypto today like what would make what is completely impossible today that through the use of this technology that i believe in that you believe in could be worth you know tens or hundreds of billions of dollars or maybe even more and so that's that's one of the frameworks that we think about and yeah it's a lot of pie in the sky but we very quickly turn it down into actionable investment theses that we then so let's talk about uh co-venture crypto right so if this is kind of your background your perspective and the thoughts that you spend on a daily basis what exactly is co-venture crypto and what the heck are you guys doing every day so very simply

co-venture crypto intends to provide institutional grade access to cryptocurrency products Um, we are a part of CoVenture, um, which has multiple sleeves, venture, credit, and crypto. And, you know, we've got, um, some extraordinary backers ranging from, um, high net worth individuals to, uh, SBI Holdings, fully known as SoftBank Investments, which is a, um, large publicly traded financial institution that, uh, that seeded our business. So we think of the world as institutional investors will come in. It's going to take time. Let's build products right now that we can monetize, whether that's strategies around asset management, as well as products that can be distributed through retail and approved by governments, whether that's the SEC or the FSA or other jurisdictions of the world.

So our strategy is diversified. you know i think i like to think of ourselves as a data company um we try to source data from all these different brains these brains being people as well as companies as well as infrastructure as well as partnerships and we've built you know um many of these already we're collecting this data and then we try to turn that into proprietary data infrastructure and proprietary data itself that we can then monetize most of that today is monetized through trading but we've also expanded into uh venture and now we're expanding into other categories as well very cool where do you see uh institutional investors today but what's kind of been your um touch points with them and what

they're thinking about right now in january of 2018 february 2018 institutional investors today I guess it was 2019. Yeah, 19. I'm a year behind. That's okay. Institutional investors are currently concerned over, is this asset class going to be around forever? I put this at the lowest point of institutional conviction that I've seen.

It's really, really scary. That being said, this is the most optimal time to make investments into the sector. So equity valuations have gone down the most. The number of applications have dramatically increased. Every day you're hearing about tier one caliber institutions getting in. And once that credibility comes in, I think it will alleviate a lot of the concerns that are in there. I'm tired of hearing about how X company is coming in and is going to launch something in Q1 of this year or next year or is going to launch this thing. And it's going to be big. It's going to be huge. That's I think everyone's tired of that. The person who's most tired of hearing that is the institutions themselves.

It's great. Fidelity, March, please come in. We can't wait. I'd much rather hear about them having launched than that they're going to be launched. and that's actually a huge difference between the venture community and the institutional investor community the institutional investor community loves to talk about things they've already done you know as opposed and the tech and venture community loves to announce things six months before they're before they're actually starting work on it for sure let's go through more

of the deals you guys did or you guys publicly announced that you um invested in nomix yep right and maybe just talk about what that is what got you guys excited kind of how you think about that business moving forward yeah sure so so our dna is um tech trading um and uh data uh all of us have a background in engineering and traditional finance and we've been able to parlay that into investments in those kind of subsectors nomics basically takes a very different approach to the same sector where they are an API company that is educating a lot of the exchanges and frankly is becoming the back end for a lot of the exchanges and the trading venues out there. That's exactly what we've been doing in the background as well. We have spent months and months with several

exchanges telling them, well, this is how institutional investors think. This is how a sophisticated trading team would want to engage with your exchange. These are all the hurdles you need to take from regulatory perspective. We're not getting paid consulting fees for these types of things. We're getting paid in opportunities to invest before anyone else. Nomics is a really great example of a company I believed in. I mean, the investment thesis is made public. We've already blogged about it. Clay Collins is an extraordinary entrepreneur, great successes. We believe in Clay and I think he'll have an even bigger success here. There's another company that we haven't announced an investment in where we've been partnering with them for six months.

we've been working with them and we were able to get them to, um, open up around, uh, of investment, uh, just for us originally. And, uh, you know, that's, that's an example of, you know, being hunters, not being responsive. And I think the best venture folks are all hunters. If you look at girly, you know, um, Greylock benchmark, you know, Sequoia, the big, the big funds out there, their best investors are all hunters. They're not just reacting to the deal that comes in their way and our best way to hunt is to use our sharpest arrows and knives and those are around trading and data so anything that's an exchange or a trading venue or derivatives or offering an institutional kind of trading product whether that's prime brokers and this quote-unquote

institutional um structure infrastructure for trading that everyone this mythical infrastructure that everybody keeps talking about needs to be built that's the uh that's stuff that we're looking at mostly because that's the background we came from and that's what we we know best so we're anything that we don't see um out there we we may even try to build ourselves very cool um before i wrap up i usually do a rapid fire questions lately people have been uh making it not rapid fire so we're going to try to make it rapid fire um what do you think is the most important company in crypto china why that's not a company for the record but go ahead it was fast though uh now you slowed it down you know that making that's another question why why china uh

they single-handedly have focused the energies of i would say the most the second most important global mind of engineering uh talent around blockchain tech as opposed to crypto trading um and the second that they reverse that opinion i think that uh trading venues around the world will have their hand forced are they ahead or behind the united states technology ahead all right what's the most controversial thought you have in crypto when people hear this most people are going to disagree with you on oh um the winners of most of the subsectors in crypto will be determined by who's got the most runway really i'm going to completely disagree with that i love this wait explain why you're in crypto winter right now the number of companies number

of distressed companies out there that are great is wildly high i'd put it at you know 2000 you know the year 2000 kind of levels if you've got a lot of money out there you can sit and wait this one out if you don't it doesn't matter how the grade of your talent uh you know you are are in a tough position there's there's that old there's old adage right it's about you know you're a uh a great employee of a company or you're at a great company or you're in a great industry, right? Which one of those three leads to the most success? Do you have an answer? Uh, the one that leads to the most success, I'm going to sidestep the exact question, but I'm going to say the people who are most successful are the people who are surrounded by

the rest of the most successful people. Surrounded by what do you mean by that? Meaning there they work with them work with them for them if you're if you're on a rocket ship it doesn't matter if you're a c player or a d player right you are going to benefit massively yeah if you're around much winners then you win yeah exactly uh so here's why i disagree the companies that i think are currently executing the best are likely to be the companies that have raised uh smaller amounts of money right the companies who raise tons of money are actually not performing i tweeted about the other day i said uh if you're a company that raised in 2017 and we're in 2019 you still haven't released your product yet the odds that you're going to be sustainable or valuable are incredibly

low yep uh and the other data point would be that even though we're in a bear market the best companies will still get funded so let's say that in 17 during all the hype you know 100 of companies get funded i'm making this up if in a bear market only 10 of companies get funded that would have gotten funded in 2017 investors hopefully have good enough filter that those are the 10 best percent companies and therefore if you're good you don't care if it's a bull or bear market you're still able to get the funding you need totally fair for companies being invested in now companies that already exist that have a two or three year head start um that are going to be around in two years maybe they've already got two years of product out there have you got a two-year head

start on launching a product in the subsector that's pretty extraordinary if they never launched product absolutely if you haven't launched a product and you raised you got 500 million bucks in your balance sheet you're gonna fail i'm gonna say this right now and somebody somewhere will pull this up when i'm wrong less than three companies that raised money in 2017 and now in 2019 have not released a product yet less than three of them will be around in 10 years okay because my guess is that let's say that there's i don't know probably 100 200 companies that raised money in 17 still have not released their product in 2019 less than three of those companies will be around we'll see yeah so trust me somebody's gonna save this on the internet

come back to me archives what uh if you could wave a magic wand and change or improve one regulation what would it be oh i would uh let's see i would love love love love to have extreme clarity on KYC AML requirements for companies that hold crypto. It's fair. It's one of the biggest blockers, I think, for financial institutions coming in. And that might be solved through custody solutions. It might be solved through a tech solution. It might be solved by just declaring, hey, you must have a letter from lawyers from each

person you take money from, whatever it is. But just something. that would solve it would, I think, um, would be phenomenal. Okay. Most important book you've ever read? Uh, most important Ender's Game had a huge influence on me. Um, you know, I read it when I was really young. Ender's Game is a sci-fi kind of book. There's a movie on it. Um, I think it was not that great. And, uh, I, I, I massively, I learned a lot about resilience, about, um, fighting for what you believe in, even when it's hard. I think it was what, like 17 when I read it

something like that i would say as an adult my absolute favorite book that had wide-ranging impacts on me which is a much harder thing to get is uh uh a um is the the book that we actually named our one of our funds off of um oh my god you can edit this part right uh thank you um the book that had the greatest influence on me as an adult is called uh three body problem and three body problem is by i'm gonna butcher the name but uh and a chinese guy named seichen blue um and it is a mind expanding story it was very popular last year actually um i think obama mentioned it a couple times or whatever it is but three body problem all right So sticking on that, um, I only asked one non-crypto question.

Uh, are there non-crypto questions? Yeah, of course. Well, uh, there's alien questions, which this is, um, do you think that there are pets or alien animals? We always think of aliens as like the equivalent of humans, right? Kind of single species. Um, when they get off the spaceship, are they bring in, uh, animals or pets with them? Uh, no.

i mean if you're landing on a foreign planet like you're you're there for business all right you think you think they're there for vacation so you don't think that they would bring their animals or pets with them but what about uh at their in their home i guess we'll call it uh do i think aliens have pets yeah sure why companionship i don't think is a human trait i think it's probably a you know like animals in america in on an earth like do animals have pets i think animals have other relationships that wouldn't be defined as pets but as a collaborative i don't see a donkey running around with like a turtle on a leash right you've got you've got you've got uh animals that depend on other animals in their micro system that's fair you know whether that's for companionship

or for sustenance it's probably a combination of both that's fair all right uh dolphins play right yeah dolphins play we some of our pets like why not pets i guess animals are farmed for specifically eating but yeah that's fine um i follow up or i end each podcast with uh letting you ask me one question what one question do you have for me um let's see this is like this is the fun time where i just get to make fun of you right yeah it's like the whole that's the whole thing welcome to the club yeah um who who is the greatest influence on your personal life not in your professional life doesn't count your significant other doesn't count my parents easily

but what have they done for you lately just kidding probably too much um the way choose one i can't they do everything together uh it's like if you ask them you have to answer the question right now yeah i wouldn't uh no i mean look it is it depends on how you'd ask it right who had the most impact on me uh in terms of probably my ethics and morals and like everything around like how i think as a human probably my mother just because she spent the most time with us as kids right and then if you said to me how i interact with the world right and how i think from a framework standpoint etc probably my father because that's how we spent the most time together um and then i grew up in

a household with four brothers so you can imagine uh there was like that's why twitter doesn't really bother me that much like every person in my life who ever talked shit to me actually loved me were you the little one and i'm the oldest so it's even better you act you act like a little one yeah yeah it's fine because uh when whether you act like the old one or the little one when you've got four younger brothers you just beat them all up yeah no but is that what you see twitter like just being no but everyone who uh you know how many times as a kid i came home and one of my brothers was like you're an idiot and i was like oh you must have had a bad day like yeah you want to go play video games yeah yeah sure right like twitter's kind of same thing

There's some, there's people who literally, uh, I don't even block them anymore. Like there's people who just responded like, you're dumb. Okay. Thanks. Have a great day. Sure. Move on. Um, so yeah, that's not an answer.

I was, I was the youngest. Uh, so. So you got beat up. Oh yeah. No, I had one older sister. Um. So you definitely got beat up. Big time.

Big time. Oh yeah. Yeah. She's, she's five years older. But my family was very, uh, you know, we had the typical immigrant story, right? It was, you know, it was a rough, rough going the first bit and then it got a lot easier as, you know, um, parents are able to, you know, move on in the world and do something themselves. But, uh, um, you know, Twitter's a different animal. I've got a, uh, I've got a whole theory that, uh, people on Twitter are, uh, what's the saying?

Um, money doesn't make you, it just reveals who you already were. Twitter's the same way. Like sitting behind a keyboard just reveals who you actually are. you say all the things that you wish that you could say to the guy on the subway who cut you off or you know to the nice person who you see at the bar that you wish you could say a compliment to you don't be creepy right like if you're a nice person you're nice on twitter if you're an asshole you're an asshole on twitter and that's fine um all right man i appreciate it it's fun thanks it's a lot of fun we will have to do it again thank you so much for coming and uh and

best of luck appreciate it take care all right you reached the end of the podcast congratulations I appreciate you listening all the way to the end. You deserve a trophy. But before I hand out the virtual trophies, remember to go visit BlockFi.com slash Pomp. They're the crypto lending leader in the U.S. They do it in 45 states, interest rates as low as 8%, and you can use the U.S. dollars funded directly to your bank account to do whatever you want. You should definitely go visit BlockFi.com slash Pomp.

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