The Exchanges

Q to reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. What are the, say, subsectors of the crypto world that you're trying to cover?

A I tend to kind of look at the market in four categories. There's DeFi, so like blockchain-based financial products. A good example of that is a decentralized money market like Compound, which probably, let's say, has a few billion dollars of Ethereum-based assets in it on a given day. There's NFTs in gaming, so that could include something like digital art being traded in a marketplace like OpenSea. That could include kind of a blockchain-based game like Axie Infinity. The third is like Web three more broadly and crypto has kind of become renamed as web three. So this is like maybe a bit confusing, but I think just historically decentralized software. So DAOs, these like internet native organizations and companies would fit into that token powered marketplaces. There's something like helium, which is kind of use token incentives to bootstrap this five G network. I would include in that. And then the fourth is just infrastructure that powers all of this. So that could be something like a company bringing real world identity on chain. It could be people making it easier to stake assets, things like that.

AI assessment note: “I tend to kind of look at the market in four categories. There's DeFi”

Q So you're at AngelList and they spin off this coin list. So why don't you go into what coin list was?

A So this is like summer, 2017. AngelList core business is around capital formation, right? They've kind of built this marketplace for capital going into early stage startups. They've Built some pretty cool network effects where there's a lot of LPs on the platform, there's a lot of founders, and then just a lot of things, whether it's, like, moving money around, signing documents, forming companies, cap tables, they've kind of productized a lot of this. Coinlist, the idea was really driven by Evol Ravikant, the founder of AngelList, who's been into crypto, I want to say, since 2012 or 2013, for a long time. And 2017, the market was starting to heat up. There were some of these, like, ICOs, this idea that you could bootstrap Capital for a new business through the sale of tokens was becoming a bigger and bigger thing. And I think there were actually pretty legitimate regulatory reasons as to why it did not make sense to do this in AngelList. The details are not very interesting, but essentially AngelList uses an exemption that a lot of venture capitalists do, which basically says your core Kind of had to be done. The crypto stuff had to be done through a different entity. There were also, like, pretty different business dynamics in primary offerings of tokens versus series seed, series A startups raising money, right? Generally, when I saw those financings done at Angelus, for exa…

AI assessment note: “Coinlist, the idea was really driven by Evol Ravikant... Filecoin, which was the biggest token sale”

Q Why don't you talk me through a little bit of the evolution of CoinList?

A Yeah. So when CoinList started, it really was kind of like AngelList for crypto. It was like, we're going to help you with your initial fundraising, and then that's kind of it. And so it looked very different from AngelList in that we did many fewer deals, but they tended to be much larger ones. Filecoin, for example, raised Let's say the average round on AngelList was like a, a 500,000 dollar seed round, but it really was a similar business. But since then CoinList has evolved a lot and the vision always was, if you start with like the primary offering, you're kind of like upstream from everyone else. So for example, once you do the token sale, where are those tokens going to go? You're actually ahead of any other wallet. It's much easier for people to just receive tokens within CoinList and then, well, what can you do with them? You can actually build a lot of financial services on top of that. You can provide native staking. You can allow people to lend their assets. From a trading perspective, before CoinList had their exchange, a common route would be you would invest, you would get your tokens in a third party wallet, and then you would like take them to another venue like Coinbase to trade. But today CoinList actually has a pretty large exchange and you can do all of these assets natively within it. So they've kind of built a, a pretty meaningful Business around just fin…

AI assessment note: “when CoinList started, it really was kind of like AngelList for crypto.”

Q What does the research process look like when you found something you think is interesting?

A I think it depends whether or not it's live or not. At the earliest stages, most of these things are not deployed on mainnet. There's not really any analytics. And so I think that really looks kind of like traditional venture. Let's look at this market, what's worked, what hasn't. Do we think these founders are exceptional? Let's back channel some of their early customers. Let's talk to like teams building this ecosystem who knows them. I think that really looks like traditional venture. On the other hand, if we're looking on something on the open market, then it's much more analytical and data-driven. Looking at what retention has been, where are earnings and like TVL going? What do comparable things trade out on the open market? What are those multiples? And so for the, call it, 10 to 20% of investments we make when we're buying liquid assets, that looks a lot more analytical and research-driven.

AI assessment note: “At the earliest stages... looks kind of like traditional venture... open market, then it's much more analytical”

Q said, like entry multiples are five, 10 X what they were. How do you think about calibrating your own expectations when you're making an investment? As on the one hand, maybe returns are just lower, And there was this incredible opportunity because people didn't appreciate the space. On the other hand, is it possible that it's just a frothy environment and people are going to lose a lot of money?

A There's like some famous saying about technology, like you probably overestimate what's going to happen in the next year, but probably underestimate what's going to happen in 10. I think that's kind of how I look at it. I think On one hand, there are like pre-launch games that traded eight billion dollar valuations. And so a lot of new games then kind of get comped to that. So you have a lot of two guys who worked at Blizzard and they have like a few slides and they want to launch a blockchain game and that's going out at a hundred. I don't think the liquid markets will support that. I think a lot of people will lose a lot of money in the short term. Fortunately for us, maybe most of our portfolio is not liquid, so we don't know how that's going to play out. But I think in general, our decision process is like one, we're very valuation sensitive. We don't have a big fund. We need to be very disciplined. And so I think we're a little bit protected, hopefully. And I think the second is we only underwrite things on like a multi-year timeline. If we buy something private at 20 X, it's at twenty million. It's not because we think we can sell it in six months at a hundred. It's just not our strategy. So I think for funds that take a long-term time horizon on a ten-year period, we're just in any one. What is the market size of the first globally accessible money market? Compound right…

AI assessment note: “our decision process is like one, we're very valuation sensitive”

Q And so what'd you do after the two years there?

A When I was there, we had to recruit a lot of workers to the platform, and I saw kind of a lot of the problems with that firsthand. We were using Craigslist, and this is kind of when all of these on-demand platforms had spun up and raised a lot of money. They were all kind of going after the same workers. I saw an opportunity to build a platform to sort of help those workers, like optimize their incomes, work across platforms, and really just try to make that experience better. And so I spent about six months trying to get this idea off the ground. Working with an engineer I'd known from Handy. And I think I talked to like, 90 venture capitalists. All of them said no. So towards the end of 15, this was going terribly. I had no money. I was pretty close to having to move back in with my parents. And then I needed a job. I think I used AngelList a bit to just like find investors and connect with them. And then I was looking for jobs on AngelList. And they were hiring for this kind of role to be like an analyst on the deal team. And I think the idea of having just been rejected by so many venture capitalists, like the idea of going to work somewhere and actually maybe understanding what that world looked like a little bit more was really appealing. So I fortunately got the job, packed up all of my stuff, which wasn't very much. And I moved out to San Francisco about two weeks later…

AI assessment note: “I spent about six months trying to get this idea off the ground.”

Q And what did you see coming through the pipe as this first gets going, 2017?

A Yeah, so I would say it was maybe out of every hundred teams, two were Pretty incredible. Filecoin, the Protocol Labs, which is like the parent company behind it, they already shifted IPFS, which was like this pretty impressive decentralized storage platform, really impressive team of technologists. And the vision for Filecoin was really quite meaningful. Then maybe there'd be another team like that. And then there would probably be another 98 teams that saw like the local Fox news story about the The kid they went to high school with who raised ten million dollars in an ICO for a hotel chain or some like crazy token rewards platform for dentists and kind of like everything in crypto. It's a little bit of the wild west. And so there were just a lot of people trying to make a quick buck. I was the first employee to jump over from AngelList to CoinList. And when I started, one of the first things they did was look through the sales funnel we had. We had this Pretty bad type form on the website. And it was just like, Hey, if you're interested in working with us on a token sale, give us some information. And I think when I started, like no one had literally no one had ever opened this. And when I opened it, there were about 2000 about needs and there were everything from like, we want to raise half a billion dollars to fund a hotel space to actually some kind of like web two compan…

AI assessment note: “out of every hundred teams, two were Pretty incredible.”

Q You mentioned before defining a moat. What does a moat or a defensible moat mean in this space?

A It's a good question. I think in general, it's really hard. You kind of think about What companies have relied on historically, and none of that really works in crypto, right? Imagine you're building a marketplace in web three, let's say like your compound. It is incredibly easy for anyone to pull money off of your platform. Actually, all they need to do is literally click a button in a wallet. And that money is very mercenary. So there's not really any user lock-in. Then you think about like a brand marketing perspective, talking to your users, holding loyalty. Well, actually you don't know who any of your users are. You just have a list of a 100,000 wallets that have interacted with your smart contracts and you have no way to contact those users. So every growth assumption that web two businesses have used to grow is breaks in web three. So then like, all right, where are the modes? I think one is community. What does community mean? These are kind of user owned networks, right? If you own one comp token, you are a small, but owner of comp, but you own a bit of the network. You can vote on governance decisions. And these things are run really openly. There's a compound discord. I bet you could like go in there and talk to the core team pretty quickly. So we tend to think of community is kind of giving leverage to the core team and everything they do. If you have a really enga…

AI assessment note: “So then like, all right, where are the modes? I think one is community.”

Q I want to circle back a little bit. And so in the startup that you tried to create, talking to What was it like for you, both as you reflect back on maybe why they all said no, and what you learned from that?

A It sucked, to be honest. Like, it was really, it was just hard, I think. I've only been on the other side of the table in a post-COVID world, so I don't know what it was like then. But, you know, it was, hey, yeah, why don't you come out to San Francisco and meet us, right? All right. I'm just gonna buy a plane ticket and crash on a friend's couch. And hopefully this like three minute coffee chat is worth me flying. 2500 miles. It was hard. I get why they said no, right? I was like a solo founder. I wasn't technical. I think the sentiment around this general market of on demand services was also kind of declining. I also made a lot of tactical mistakes now, for example, you know, that I know now, like a lot of Investors would say no. And then like, oh, well, like, but you should talk to this person. Right. And I think now I see it on the other side of the table. If someone passed on an investment and it sent it to me, I would say, why did you pass on this? And why are you sending it to me if you did? But if there is a book, I hadn't read it. And so I didn't know that at the time, but I do think it was a valuable experience. I mean, I think it gives me a lot of empathy now where I get to sit in an office all day and talk to people. And it's not my livelihood on the line of If I say no. And so I certainly, I think having a huge amount of respect for a founder's time and recognizi…

AI assessment note: “It sucked, to be honest. Like, it was really, it was just hard”

Q And what was the impetus for launching a fund?

A I left CoinList in basically the beginning of. I had been there for a long time. I'd learned a ton, but I think as CoinList business continued to scale, a lot of the problems we had, especially on the business side, were scaling problems rather than crypto native problems. So for example, you know, we're going from, let's say, 5000 people participating in any token offering to a 100,000. How do we like get our compliance process a lot more efficient to get them through that? And I really wanted to like go work on more crypto native problems. So I left, I wasn't sure what I was going to do. I started consulting with a few projects on kind of growth and go to market strategy. Some of that was kind of token launch, like similar to what I've been doing. Some of it was more just broader business strategy. But what I saw was a lot of the introductions I got to companies I was working with came from their investors. And so it became more and more clear to me that all of the growth problems of web three are More and more important as like a lot of these kind of hard technical scalability problems got solved and very few investors really seem to have this capacity to help teams with it. I think the second impetus was I'd seen a lot of colleagues from AngelList like leave to start venture funds based on their specific experience. So Ryan Hoover, for example, who is the founder of Product…

AI assessment note: “I think the second impetus was I'd seen a lot of colleagues from AngelList”

Q So when you looked at the landscape, you saw a lot of the activity and the tokens that were coming through. How did you decide what your philosophy would be?

A I think we look at things through a pretty classic venture lens, which is really that it's about people and tenacity more than anything else. That's not to say the token design, the market, what blockchain are building on, all of these things matter. But I think for us, a lot of the successes I had personally, like I mentioned, OpenSea and Dune Analytics, where, you know, on paper, these are really good investments. No one cared about those companies for a long time. OpenSea was like not a breakout hit for at least two years after they raised a seed round. And my perspective is crypto has been really hot since we started the fund. I don't think that's going to last forever. These markets have historically looked like bubbles, and I think they'll continue to be, although long term, I think the trajectory is going in the right direction. And so it's really founders who have the tenacity and To kind of build through multiple cycles. They're going to be the ones who build meaningful businesses. And so that's sort of been the driving criteria more than anything else.

AI assessment note: “we look at things through a pretty classic venture lens, which is really that it's about people”

Q And how do you measure the success of a project like Maple as it progresses to technology, to users, to hopefully eventually cashflow?

A Maple's an interesting case study in that most of what we do out of our fund is like private deals. We invest in companies before there's a token, we sign a contract with them. And at some point down the line, they launch a token and we get it, but it's not like anyone could just do this. Maple is different in that they'd already launched the token by the time we raised the fund. Maple was never a counterparty to our investment. We just looked at on-chain metrics using something like doing analytics and you could see AUM is slowly creeping up. You could see them kind of onboarding more of these pool managers. And so kind of the same way, like, you know, a stock analyst would just like quarterly reports on Ethereum. We could look at this in real time and just see that all of this was going up into the right. And so we started buying NPL on the open market and And we continued to do that until it was the largest position in our fund. But I think generally the core metrics that a lot of these DeFi protocols are judged on is people call it TVL total value locked in smart contracts, which is more or less analogous to like AUM for fintech and then launching cash flows. So for example, in April, a certain percent of every interest payment is more or less like directed back to the treasury, which token holders control. Again, one of the really cool things about DeFi and crypto in gener…

AI assessment note: “core metrics that a lot of these DeFi protocols are judged on is... TVL”

Q How do you think about your competitive advantage in the space? I mean, you've got a couple of funds that have raised just huge amounts of money and lots of others around your size.

A A lot of it, especially when we started was really just like driven by our backgrounds and what we had done in the space. A lot of people ask us like, all right, how some of our LPs, for example, want to do more direct investments. All right. Like, how can I do it? And the feedback we give them is like, there was so much money chasing deals right now. It is so competitive. Unless we can tell a team you should talk to X, Y, Z asset manager, because they can help you with A, B, and C, it's not going to happen. You really should just give us money and let us do it. So for us, it's like, Hey, we know this web three growth stuff really well. You want to launch a token, right? We've worked on 40 of these. We have more data points than most people. It's really leaning into the growth narrative. I think we have a deeper, but a narrower focus than most funds. So it's really, that's what we've leaned into. I think now, maybe it wasn't obvious when we raised the first fund, but structurally, every fund has kind of gotten really big and almost priced themselves out of the earliest stages of the market. You look at, most crypto funds call it like Like, 2018, 2019, I think Multicoin, one KX, you know, these guys had like 30 to fifty million dollars. The funds weren't massive. So I think for us, we've intentionally kept our funds small. We like working at the earliest stages, and so I think j…

AI assessment note: “we've intentionally kept our funds small. We like working at the earliest stages”