The Exchanges

Q So I'd love to turn to crypto and blockchain in particular, and maybe start with this notion of when you go through the example of an iPhone, you have Apple. Who had created this initially closed ecosystem and blockchain to some extent is the complete opposite of that. Why don't you start talking about what happens with centralized and decentralized systems?

A Yeah. And so one thing I'd say is we live in a recent period where a lot of the most successful computing was centralized, but the history of computing is there's a mixture. So the web as an example was a decentralized technology and a lot of the internet, but the web is a specific kind of network on top of the internet and email is another good example where Which is a protocol called SMTP, which is decentralized. And so I would argue the nineties was an era where the decentralized computing won out. And then the next decade or two, we've had a much more centralized era, as you point out, like with the mobile phone. 95% of the software in the world, if not more, is open source software. Your Android phone runs Linux. Your iPhone has a huge proportion of the software is open source. Almost every server is running, you know, AWS, et cetera, is running Linux on the other side. That's open source software. That's made by a ragtag group of People that get together on GitHub and design that software. That's a crazy idea, by the way, that I don't think has fully permeated the broader consciousness that the vast majority of software we use today is made by a ad hoc group of people on the internet and not inside of a company. A lot of the thesis we have with crypto blockchain is that a similar thing will happen with internet services in the same way that almost all software today is ma…

AI assessment note: “A lot of the thesis we have with crypto blockchain is that a similar thing will happen”

Q What have been your biggest lessons or takeaways broadly about investing from going through four such severe cycles?

A I started my career in the internet downturn, and then I was active during the financial crisis. So if you're an internet person, 2003 and 2008 were, at least so far, two of the worst times. I think probably people from that era maybe have a different view of the world because of that. One of the lessons you took was that you need to manage through those cycles. So the typical advice to venture back company is to have an 18 to 24 month runway. So meaning enough cash to survive that. I've always run everything at a four year runway. The way I see it is Mr. Market may go away for three to four years, so you better have cash in the bank, but I don't really listen to the public market otherwise. It's just this thing that goes away every once in a while, and you can't raise money, but it doesn't really matter or have any real signal for fundamental innovation. It's just too far removed. Coinbase did this well early on. They always ran things at a four-year runway, and if you look at it, that was very, very smart. And they saw downturns as an opportunity to take market share. And a lot of their competitors went out of business or got desperate or something. I think any area where you're kind of an emerging technology area, you need to run things at that kind of four-year horizon, ideally, pretty minimum, because you're just dependent on the moods and sentiment of the broader world an…

AI assessment note: “One of the lessons you took was that you need to manage through those cycles.”

Q Do you think that it requires at some point in time a killer app to draw the attention to hit that inflection point?

A I think that often happens. With mobile phones, you could argue it was the BlackBerry killer app. The BlackBerry story is very interesting. There's a good book called Losing the Signal. It's the history of Grimm, the company behind BlackBerry. Their hypothesis, so mobile phones, people had tried mobile phones for years and then failed. And they came along in the early 2000 and said, you know, our theory as to why they failed is no one has identified the killer app to your point. And we believe the killer app will be essentially with messaging, what we call today WhatsApp. And they realized the only way to do this is to build everything ourselves. So they built the full stack, as we say, like they built the device, they built the operating system, they built the network, they went and got the minutes, you know, the cell minutes, they built the backend encryption, they built the whole thing. And they did it because they had to, to make what they imagined, which is let's call it the WhatsApp experience or something. Right. And they did that and it was wildly successful. And then they of course did not adapt. I mean, actually they're still around in Reasonable evaluation. I don't know what they are, but they certainly aren't as culturally relevant as they were. But then what happened is Apple came along and said, you know what, the world has changed, and now we can build a general …

AI assessment note: “I think that often happens. With mobile phones, you could argue”

Q You can imagine the corporate incumbents, the web two winners, would have a natural resistance to anything that could be disruptive to them. How do you think about the strength of those businesses as they impact the future of the development of the blockchain?

A So if you go back to Clay Christensen, there's sustaining and disruptive innovations. I think of the really exciting innovations, one in which the economic model is misaligned with the incumbent economic model. AI is an amazing technology. The challenge as an entrepreneur or an investor in startups and AI is the incumbents get it, and they have very smart people, and it's aligned with their business model. If you're Google Cloud, this is another service you can sell. It's not some crazy new thing. Disruptive technology re-ranked the incumbents, and it did that because it was an economic issue. I believe Sears owned, I think it was Prodigy or CompuServe. They literally owned one of the top three internet service in the 19 eighties. My point is they were ahead of the curve. Barnes and Noble saw the internet coming. They all did. The challenge was it was completely new business model that was not aligned with their existing business model. They would have had to shut down their stores and convert them to robotic factories. I think there's always this retroactive thing where you're like, wow, those people were dumb. They weren't dumb. They were smart. But it was just a really, really tough lift to go and literally redo your entire business. That's why the internet was so disruptive. I think a lot of these other technologies are really important and cool. I think AI, for example, is…

AI assessment note: “I think blockchains are disruptive. Blockchains are very, very hard to respond to.”

Q At the programming level, the concept of being able to take whatever virtual goods you have and move them from one game to the other isn't actually that hard to understand. How difficult and how far away is that from being able to be programmed so that, as you said, someone who doesn't understand what the technology is can just seamlessly play these games and move around the virtual goods?

A I think it's less of a programming. I think the programming is there today. NFTs are pretty simple programming standard that's relatively easy to bring from one game to another. I think a lot of it is more questions that need to be worked out on the design side and the standard side. So if I have an elven magical sword in one game, what does it mean to take it to another game? How does it behave? Are the attributes the same? Are the visuals the same? What are the incentives for the user to do that? What are the incentives for the games to interoperate like that? Those are the more interesting questions. And I think there's two ways to look at that. One is, wow, this is hard and we haven't figured it out. The other is opportunity Shows up wearing overalls. It's a really exciting thing to figure out. That's where the most creative games people are self filtering into this. And they're saying, wow, this is fun. I don't want to create another cut the rope, the 18,000th puzzle game on the iPhone. I want to invent new design patterns. It's the frontier.

AI assessment note: “I think the programming is there today. NFTs are pretty simple programming standard”

Q All right. Last one. And we'll turn to a couple extra for the premium members. What life lesson have you learned that you wish you knew a lot earlier in life?

A I do wish I had moved to Silicon Valley earlier. I spent most of my career on the East coast and I love the East coast. It's wonderful. But if you're going to do tech, like there's a lot of debate now with the pandemic, maybe that will change and things will spread out. But in retrospect, it was all fine. You know, it worked out, but like, I do think just if you're going to do something going to that place, just that I think a lot of people spend way too much time prepping for things. You go to school, you do this, you do that. If you want to be a tech entrepreneur, go to Silicon Valley and become an entrepreneur. Like, if you want to do X, go do X. I wrote a blog post, uh, it was popular a long time ago called Climbing the Wrong Hill, and it was about this idea that in people's careers, I think you get caught on kind of a local optimum. Imagine the career landscape is a hilly landscape, and there's the highest hills where you kind of want to get to. It's very easy to sort of be walking up a hill and feel like you're succeeding. This is like you're at a job, you're at McKinsey, and you feel like you're doing well, and you're getting a promotion next year, and you're doing this, but my long-term goal is to go be an entrepreneur, right? But then what happens is you get caught on that hill because at each moment it's like, you're getting up higher in the hill and you're getting pr…

AI assessment note: “I do wish I had moved to Silicon Valley earlier.”

Q And so you then started a couple of businesses. How did you get interested in the business side of what you were doing in technology?

A I just started reading magazine articles and met a few people who were entrepreneurs. And for me, it was sort of epiphany. I didn't understand how the business world worked. I never had any experience with it. And the idea that you could have a job where you did things that were technical and kind of on the cutting edge and work with a bunch of people that you enjoy working with and take risks that appealed to me, like the idea that you would go and make a big bet and high variance outcome like that felt exciting. So to me, that was an epiphany when I kind of realized that that world even existed. I think it's more, I mean, that was early 2000. I think today it's people have seen movies like the social network, and there's a much broader understanding that this world exists, at least for me, maybe it was just, I was sheltered or something, but for me, it was like a breakthrough. Wow. You can do that. Frankly, before that, I decided to be an academic. I thought that was the only place you could do some things that were kind of intellectual. And so the idea that you could do things, which I think what we do now is very intellectual and yet Also take risks and work with people and be more extroverted and ideally have a significant impact on the world. That was appealing. So all that kind of came together. I started a, it was a 2004. I started a computer security company. I'd menti…

AI assessment note: “I just started reading magazine articles and met a few people who were entrepreneurs.”

Q How do follow-on funding rounds work in these? Is it somewhat similar?

A Yeah, so it's a great question. It's complicated, but I think essentially you should think of it as the early stages some of these companies start off More like traditional venture investments where there's equity, and then there's also what we call token rights. This is sort of pre-launch, and then once they've launched, there are tokens out there, and they're issued by a blockchain, and the company no longer controls things. So there's really these two phases, pre and post-launch. So pre-launch, it looks more like a traditional venture-backed company. Post-launch, it's not, and the way they do follow-on funding is, it's literally controlled by the code. I mean, so at this point, like, If you go look at these, there are very large treasuries, but the treasury is literally, I mean, I know it sounds crazy, but it's controlled by the code. And the only way that humans have oversight of the code is by voting on these governance votes. And so the community can go and decide to allocate some of those tokens to different things, or even to sell some of those tokens to build up the treasury. But it's truly owned by this crowd, if you will, right? So yeah, so once they're launched, and generally they don't need fund, they don't need fiat funding anymore because it's just code. They don't have Fiat expenses. The people working on Bitcoin today are open source contributors who probably o…

AI assessment note: “the way they do follow-on funding is, it's literally controlled by the code.”

Q Is there anything in this particular downturn that concerns you differently than downturns of the past?

A The main thing I think about there is regulation. In the past, the space was too small. I think regulation is coming, and I think we want to help have a discussion about it at least. What I would like to see is an outcome that regulates away the bad behavior while allowing the good behavior, the innovation I'm discussing on this podcast to continue, as opposed to the two other states, which is under-regulated now, which I don't think is good either. Or over-regulated to the point where a lot of this innovation moves offshore. We believe very strongly that this innovation should be in the United States. Most of our companies are domiciled in the United States. We always recommend that. We want them to pay taxes. I mentioned Uniswap. I'm in New York right now. They're down the street in Soho. They have an office here and they pay taxes. And we had these debates in the nineties over encryption and all these other kinds of internet policies. I think they landed in a pretty good place. Fast forward to today. I think that was a very wise decision because This has been a huge economic engine for the United States. We basically have two exports in the U S right now. We have tech and media. Just look at the numbers. Those are the two killer products that we have. It's important that we continue that. This is the future. Web three is the future of this. And it's very important that we fi…

AI assessment note: “The main thing I think about there is regulation. In the past, the space was too small.”

Q So over the last two years, when you had time to put this book together, a lot quieted down in the space you've been investing in. And the beginning of that period of time, you had just raised a large pool to invest. And I'm curious, what happens when the prices of the types of things you would invest in collapse, and then you go out to deploy capital?

A I started my first company in 2004 and I was a consumer internet company. It was a very hard time to raise consumer internet. The world was very negative on that. I mean, the internet was growing. It was post.com crash. The general sentiment was the internet's cool, but it hasn't worked as a business and it was way overhyped. Google's IPO changed that. And then of course the next five years with Facebook and everything else changed that, but at the time it wasn't. And so I started off my career in kind of a contrarian mode. I also did a lot in 2008 or co-founded a seed fund with friends called founder collective, where we did a lot of early mobile investing, 2008 through 10. I've been at Andrewson Horowitz for almost 11 years now. I've been through many, many cycles. My mental model is there's prices and then there's innovation. They're really two different charts that are somewhat unrelated. And the innovation chart in my mind is mainly driven by platform shifts and major new technologies. And so in retrospect, 2008 was a very good time to invest because you had the combination of the platform shift to mobile and you had a big pullback with the financial crisis that had all sorts of effects throughout the venture ecosystem. Sometimes the Mr. Market is up and technology is up. Sometimes Mr. Market is down and technology is down. But I think the best opportunities in my mind are…

AI assessment note: “the best opportunities in my mind are when Mr. Market is down and innovation is up.”

Q I'd love to go through a couple of those app layer categories and just see what's exciting you. What else in DeFi is getting you excited?

A DeFi is really interesting. We've been involved for a while. We invested four or five years ago in MakerDAO, which I consider one of the original DeFi protocols. And then Compound, as I mentioned, Uniswap, which is what's called a decentralized exchange, just passed a trillion dollars in trading volume, quite popular. A lot of those came out two or three years ago, and there's been some interesting stuff since, but I think somewhat of a lull in DeFi. A lot of these things run on what's called layer one Ethereum, where you have high transaction costs. One of the interesting things happening now in blockchains is that we're seeing production ready scaled other networks, including what are called layer two networks on top of Ethereum that are really ready for prime time. And that dramatically lowers the transaction costs and therefore opens up a lot of new design possibilities. When you have high transaction costs, as you did previously in Ethereum layer one, you had applications like lending where you maybe borrow a million dollars. You don't mind paying a hundred dollars plus for the transaction by lowering the transaction costs. I think you're going to see a lot more new design. So it's an area we spend time on and we're actively looking at, we made a few investments, seed investments in smart teams recently expect to make more, but I do think it goes in waves and right now wai…

AI assessment note: “layer two networks on top of Ethereum that are really ready for prime time”

Q How do you think about where we are today in the evolution of the programming of these applications compared to a couple of years ago?

A I think with respect to crypto blockchains, we are pre iPhone moment. Like we haven't had the breakthrough platform yet. I think we're somewhere, if you map it to mobile phones, let's say, I think we're probably 2004, 2005. I hope at least that we're like a year or two away from kind of the iPhone moment. And we've invested in a bunch of things, which we think could be the iPhone. Thinking about an investment entrepreneurial point of view, you can make money and really contribute to the world at any phase along this development cycle, including now. It's not, we're not quite there yet. We haven't built applications that reach hundreds of millions of people yet, but there's still lots of interesting work to create. And then once we kind of get into that Exponential period. The nature of the work will change because you'll be doing probably less infrastructure work and more application level work, more things that are directly user experience. Just like today, like with the mobile phone, most of what people do is things that directly interact with end users. Whereas early on, you tend to do more infrastructure.

AI assessment note: “I think with respect to crypto blockchains, we are pre iPhone moment.”

Q As a venture capitalist in the space, web three, where you're broadly sharing the economics with the creators or with the people that are using developing protocols, depending on the space, how do you think about your return profile as an investor, knowing that you're not trying to extract all the economics the way that the web two companies have?

A The dream was always in web two. It didn't happen is that you'd have these capital asset light businesses. Think of Craigslist or something. I don't know how many employees they have, but it's not many. And they have massive profit margins. As far as I know, Craigslist only monetizes a few categories. So they effectively have a very low take rate. They could run it very differently. If they were run by a traditional Silicon Valley management team, they'd be taking money in every category. They'd be growing the team. They'd have machine learning teams. They'd have all these other kinds of things. They don't do it that way. And it's quite good. It's a super high margin business. It's a different model. Like if you just go look at S ones of these tech companies, the vast majority, whether they're consumer enterprise, probably spending more on sales and marketing than their total revenue. In blockchain web three, there's been very, very few cases of people spending significant money on customer acquisition. One of the exciting things of web three is that the users, because they have tokens, because they have ownership, they become evangelists for these systems. Generally, tech markets can be very big and probably will continue to get bigger. Just going back to the 2000, if you told even the most bullish people that Facebook would be as big as it is today, I think they would think y…

AI assessment note: “A much lighter OPEX model with much lower sales and marketing costs”

Q What's happened with the engagement of some of those networks around something like Abort Apes or CryptoPunks the last couple of years?

A There was definitely a downturn in prices and a series of scandals that just created a lot of negative sentiment around the technology, and that just scared a lot of people away. But I think these are still, from a venture capital scale point of view, quite interesting. When you buy an NFT, it varies depending on which project, what you're buying. So you're certainly buying a digital object. In many cases, you're buying the IP rights to the artwork and the creative aspects, which is the case with Bored Apes and CryptoPunks. And then there are organizations, like there's the company Yugo, which we're investors in, which does not own the NFTs, but it creates applications and other things around the ecosystem. The interesting thing with these Bored Apes and things is building a network around them, building a community. In an ideal world, you'd have these core assets, and then you'd have a series of applications built around them. There would be games and social experiences. Let's take Top Shot, which is another project we're involved with, which is an NBA collectible cards. So they started off with the cards and you collect the cards and that's just sort of its own experience. But that's since over time, they and other people have released a series of games and other kinds of experiences around it. In the same way that when I was a kid, we'd have baseball cards and we make up dif…

AI assessment note: “There was definitely a downturn in prices... But I think these are still... quite interesting.”

Q What are some of the other themes you're excited about on the investing side?

A I would say first and foremost, one thing I've learned in venture capital for better or worse is it's fundamentally a talent business. Like we invest in people. And so someone will come in and have some new idea we've never thought of in a category we never thought of, and we'll invest if they're great. I'll talk about themes, but I just want to mention that the first thing we'd like to do is throw out our themes and invest in great people. In our practice, we break it into multiple categories. We have a very active infrastructure practice. The way I look at the history of computing, you have two layers of activity. You have the infrastructure layer and the application layer. Just to give you an example, let's take smartphones. I was sick for a week and I was watching old movies. Lethal Weapon, Mel Gibson, it was great. It was funny because they had these giant cell phones with these huge boxes they were carrying around. In the nineties, there were companies like General Magic. There's a documentary. It's really interesting about it. It's a company and I think it was early nineties. They tried to create an iPhone, but they were too early. I had a lot of these devices. There was the Sidekick, the Trio, the Palm, Windows Phone, the whole thing. And then finally, boom, in 2007, the iPhone came along, Android, and that really accelerated the modern smartphone adoption. But you had …

AI assessment note: “We have a very active infrastructure practice. The way I look at the history”

Q If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. So you go back a couple of years ago, say, 2017, and Bitcoin price is going through the roof, and people are paying attention to it, and all this money got raised in ICOs. We're now three years later. What's happened with the underlying technology and use cases?

A So if I could, maybe I'll give a quick summary of the history and of blockchains and what they are. So blockchains were invented by Bitcoin. It was a paper came out in late 2000, pseudonym in his paper, Satoshi Nakamoto. This idea of Bitcoin and, and the idea was to create a decentralized money system. There's a big debate as to whether it's meant to be focused on payments or store value. It's since become very much about store value, kind of digital gold. A very, very important thing happened in 2000 fifteen-ish, which was the invention of Ethereum. So what Ethereum was, was it said, okay, let's take this core architecture, the Bitcoin design, and let's generalize it. So Bitcoin is a computer. I think, well, the way I think of Bitcoin, it's a computer in a sense of that, by the way, what is a computer? A computer is a thing that can store things and run code that operates on those things, right? And so by that definition, Bitcoin, Ethereum very much are computers. Bitcoin is a computer that runs a specific application. That application is this store value digital gold application, right? Ethereum said, let's take that architecture and let's generalize it and let's add a programming language that looks a lot like a common programming language like JavaScript. And you can do anything you can think of. You can program and you can Run it on the Ethereum computer. Ethereum is a ver…

AI assessment note: “maybe I'll give a quick summary of the history and of blockchains”

Q Which two people have had the biggest impact on your professional life?

A Maybe I'll be nostalgic for a second. I grew up in a small town in Ohio, and I got interested in computers. Dayton has an Air Force base. It turns out that's a Air Force intelligence base where they do a lot of computing stuff. And I didn't realize it's the time, but I was very lucky because there were these groups of people. This is in the eighties. My parents would drive me over to these school gyms every two weeks. And there were all these guys who were probably in like their forties or fifties or whatever. And they had beards and mysterious jobs. And we would just sit around and talk about programming. We'd bring our computers, we'd show off our code. This is pretty real internet. And that was really formative for me. I don't remember the specific people, but I'm sort of lumping them together. What was so great about that too was it was a real community. PCs in the eighties were pretty niche before you really had the breakout of desktop publishing. And it was a real sense of camaraderie. Like you're in this too, everyone programmed. Basically what you did back then is you programmed or you played games. I was incredibly lucky to have that because that really got me interested in computers and gave me the sense of community. And by the way, it's one reason I love crypto today. I feel like it's a community too. You meet people that are into it, and you really feel like it's a…

AI assessment note: “I don't remember the specific people, but I'm sort of lumping them together.”

Q As we're going through this tumultuous time in the whole ecosystem, how do you think about, in the area of DeFi, the embedded leverage in the system?

A So we should distinguish DeFi from quasi crypto DeFi. I mean, there's these companies now in the news that are not DeFi. They're not on chain that are involved in lending and things, which according to news reports have been in trouble. Everything on chain, all the DeFi stuff that we're investors in, it's all open source, open data. You can go analyze it. It's all just there. So we can see it all. All of those things are fine. We'll see things could change, but by all metrics and reports, these other companies are very opaque. I don't think we have really any insight to them. I don't know where that will go, and maybe it will get worse before it gets better. You have some hedge funds now that maybe you're in trouble and maybe have leverage. Maybe we can just allude to regulation. Contrary to some reports, we have been advocating for regulation in this space. Specifically, I'll just take stablecoins as an example. That's been in the news. Some of these non-collateralized stablecoins blew up. It's a very important distinction between collateralized and uncollateralized stablecoins. For example, USDC is a stablecoin that's co-sponsored by Coinbase and Circle. That is fully collateralized. So if you have a dollar of USDC, there's literally a dollar sitting in a bank. It's audited. It's regulated. Maybe the regulations can be improved. And then you have uncollateralized. Terra Luna …

AI assessment note: “Maybe we can just allude to regulation. Specifically, I'll just take stablecoins as an example.”