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Panel 3 VCs and Hedge Funds Trends, Due diligence, Advice to teams.

Panel 3 VCs and Hedge Funds Trends, Due diligence, Advice to teams.

Panel 3: VCs and Hedge Funds: Trends, Due diligence, Advice to teams. ambient music So the next panel, Im gonna moderate. My name is Ronan Kirsh, again. Its a VC and hedge fund panel and Ill let each individual to introduce himself. Hey everyone.

Im Spencer Bogart, with Blockchain Capital. Were one of the oldest venture firms dedicated to investing exclusively in the blockchain and crypto ecosystem. Our firms been around for about six years now. Hi, my names Jonathon Ellen. I was an explosives disposal technician, disarmed bombs for five years, then pivoted into blockchain.

Really kind of made sense, good transition. Helped cofound Blockchain at Berkeley and now Im mainly focused on decrypt capital. Also to crypt kind of token services and building that kind of ecosystem to advance the blockchain space. Hi, my names Joey Kroog. Im cochief investment officer at Pantera Capital.

We have a suite of funds that are invested in the blockchain space. Hello, everyone, so Im Dovey Wan from DHVC, like Danhua Capital and so we are running a half a billion fund here investing in like anything blockchain, crypto, and so whats very interesting about us is we have investor, like half of our capital coming from Alibaba, Tencent, Lenovo and a lot of major Chinese internet firm and we have and the other LPR, Renaissance and First Manhattan, so theyre like Wall Street people so its a pretty good combination so both from US and like China. Thank you.

So I think the first panel and the second panel pretty much cover all the topics that we wanna talk about. But, I mean, lets maybe kind of address a few of those topics so theres a lot of ethics arguments that brought up, what is right, what is wrong from a VC presale, et cetera. Its very obvious that VCs are getting some type of discounts, whether theyre dumping the market or not, this is really something that its not publicly.

Maybe you guys can address that? I believe our audience want to get your opinion on it, what do you think about it, et cetera. Yeah, I mean, I think everybody kind of realizes that this is a problem. It is kind of the nature of the beast when something is kind of the wild west and its kind of maturing.

I do think that, you know, some of the things mentioned like SAFT or these lockups are something thats gonna be kind of changing. If you have these VCs or kind of investing in these things, early stage, before the utility is already built or it is just a white paper, it would make sense for them to kind of get this like small discount, you know, because they are taking that risk. But you really have to kind of pair that with a lockup. You know, Ive seen a lot of these ICOs that are kind of having some equity portion, or some token sale or you know, these like year to two year lockups and then that really kind of brings back this alignment of, kind of, incentives.

Where if youre actually advising these things in investing, you should be doing it for the long term because you believe in this company, not because youre looking to kind of flip those token sales and thats really what we see going on. I think its really healthy and Im hoping that continues. Yeah, Id also like to just correct a few things that I heard earlier. The first is that the VCs just make free money out there and its just were sitting around and collecting cash from the sky. Blockchain Capitals been around for about six years and its hasnt been profitable until probably 12 or 18 months ago and we continued to evangelize and taking a lot of risk on this industry when nobody cared and honestly when we were laughed off the stage and when we were laughed out of Wall Street, and really its great to finally see things working out in the industry.

The second thing is that venture firms make returns off of discounts. First of all, were not even interested in things like, well, I heard things about like 1000 and 10000 percent discounts. Im not getting those deals so if you are, please let me know.

But usually what we see is things like 30 percent discounts and to be honest if youre a venture firm, you dont get economics that way. Youre not there as a venture firm to make 30 percent returns. Thats something that might be attractive to a hedge fund but your LPs are not gonna be happy if you return 30 percent of your capital after you lock them up for eight years. I had another point, but Ill pass it along. Yeah, I would say, another thing is like, the discounts.

Theres two kind of reasons, why they existed. One reason is a bad reason, and they shouldnt exist for this reason, and the other reasons a good one. So the good one is, they originally designed as an incentive for entities to fund these projects early on, help them, seriously help them, build out their project until theyre ready to actually do a regular sale. The other reason is, they do a discount and they raise a bunch of money three weeks before the public crowd sale.

The second one of those is just like, pretty much useless in, not like, an actual useful thing for anyone in the market. Another reason its not useful is if you look at the market, those sales that have done that, basically, if everyone gets a discount, you know, before the sale, then the discount is meaningless and so I think if, as the market will cool off of it, I think it will switch back to the way things were before which is, youd get a reasonable discount for helping one of these projects along, you know, working with them, you know, dozens and dozens of hours, as you helped them kind of design their protocol and helped them with any sort of technical or business issues they face. So one thing I wanna add here is we have seen a lot of founders. So they just applied a discount for the sake of like valuation, because one relevant question here is like, how do you value the token? Its like the token valuation is probably market cap about like probably ten, twelve million.

And so they might give like a discount, say, oh so I give you 50 percent discount and so for like a total market cap of like 20 million and so essentially youre actually getting the same thing but its like inflated discount and like a pseudo discount, I would say, as an investor, I would watch out for that and like the other thing is as an entrepreneur like you have to really watch out for any potential, like, concentration offer so like investment concentration if like one potential investor, so theyre like getting 50 percent discount and then taking like 20 percent off your like total token and then so that can be a big problem. And so you would also have to watch out for like any of the flipper and like, just like, tumble it around. If I can just add one more thing on there, its just, I mean, overall again, if you go back to the venture model, again, these 30 percent discounts and things they dont make your money and theyre bad for, overall, the company so when we look at a project and were saying, Okay, youre gonna sell to a bunch of people at a 30 percent discount, and then try to sell to everyone else at a 30 percent higher price, that doesnt feel like a way to build a good community, and so its not something we really like to see. Instead, wed much prefer to see a valuation cap, the same way when you invest in a seed or Series A round, you typically cap the valuation of the company at something thats very reasonable thats commensurate with the risk involved with the project. When youre just a team with a white paper and youre hoping to build a project there is an incredible amount of risk involved and so we typically expect to see valuation ranges, a typical seeder, seed stage valuation might be anywhere from two million, up to an extreme high end of just a phenomenal team, all star, tackling the biggest problem in the world, maybe a 20 million, if they have part of their product already built and thats really the way thay you ultimately make venture returns long term and then also, the last thing is just, I mean, from our perspective, tokens arent even that attractive.

Wed much rather own equity in a company, for the simple fact that equity tracks founders a lot better. So, I mean, how many tech companies out there are successful today? But only because theyre on their third or fourth pivot, right, and if you make a token bet on the very first product iteration you might have the right team, and the right idea, tackling the right problem but they might not be right in the first iteration. If you own equity in the company and they do a second token launch later or they change the product or they pivot to a different model, you make sure that you have exposure to that either way, and so its about downside protection and when theres a lot of risk involved. Yeah, and maybe to continue on what you just said, the strategy of your investment, how do you hold teams accountable with those ICOs, for example?

Yeah, so, I think like the way we really look at things is we look for places where we can really be of value at, places where we really kind of believe in the team, and we wanna be kind of deeply integrated with this. I think its kind of interesting you have like the venture capital, or you have a hedge fund but really in this space, there is this kind of this blend, theres this overlap. Its not really clear where that delineation is, because a lot of these teams, you know, theres so much money flooding into this space, arent really looking for that dumb money. Theyre looking for someone whos value add, who can kind of guide them through this process.

Theres so many different facets of the ICO process in kind of building out a blockchain project, that they really need help in kind of like diverse things. So thats really then our focus, you know, is building this kind of ecosystem where we can kind of plug and play all the different things that these companies need and we can really hold them accountable because we are offering those services and we are, you know, actively involved in the team. Were not really investing for these 40 percent discounts and quickly flipping it. Were looking for this medium to long term play where we can really be involved in the team and keeping kind of checks on that. So from our perspective, thats why, when we look at the founders, we really like a founder that has been in this space like for long enough and, like if you havent been through any cycle, like so if you havent been through like the up and down of the token price, and because its a very distracted life for any preproduct and pretraction company founder like to look at a token price just going up and down, so like, thats why all the public market, so just like, in the public sector, and then all the public companies, so they have a dedicated team, for market cap management and then for like, so for IR as well.

So I think its a very important as a founder you have to be psychologically prepared for that and so its very hard like just like to enforce anything to hold a founder accountable so like, so the founder has to be really perseverate and has to just like be, persistent. I think theres two sides of this too, its, you know, first of all from an investor side of, how do we make sure that the team is accountable which I think is much more difficult to do in a token model than it is in an equity model. As an equity owner you have actual rights, you have basically no rights as an investor in a token sale and thats very difficult for us to deal with as far as managing downside risk. The other side is, you know, from the perspective of the token project itself, or your company, token project, whatever you wanna call it, which is making sure that your investors are aligned with you long term and again I think that one of the smart things that was presented earlier on stage today was just the idea of lockups investing for your investors. That helps weed out the people that are just there to collect some discount or some favorable valuation and then flip up out of it.

I mean, ultimately, you know, a good investment partner is somebody thats there for you in the long term to help you build a company, a protocol, an application, whatever it is that youre dong, and not people that are gonna abandon you in six months. Joey, do you wanna say anything? Yeah, I would say, you know, Im a bit more comfortable investing in tokens than I think Spencer is. I think part of the reason is I think there are still a lot of those sorts. You know, a lot of the protections you associate with a company are much more, kind of like, sort of fiduciary duty sorts of things or you know, very rarely, as a venture fund, do you actually like, get down to like the letter of an agreement and sue a company you invested in because they screwed you over.

Its usually much more soft kind of reputational things and so I think if you look at token sales, there are a lot of people in this space who say, Well, you know, they can just spend the money on whatever they want. I dont think thats actually true. I think this will be challenged at some point, probably in court. So say youre a token project and you create a nonprofit in Switzerland, and then say you launch a you know, VC fund in a hedge fund with the money you raised from people who are trying to pay you to build this protocol, in that scenario, I dont think youre fulfilling the fiduciary duty to your nonprofit that you kind of created.

You werent supposed to create a venture fund and a hedge fund, you were supposed to build this protocol. That was the kind of mission of it. And so I think, a lot of these sorts of things, will be challenged as well. I think, you know, maybe now its kind of wild wild west, but I think, as time goes on you know, whilst token holders dont have like rights like a shareholder does, they do still have like the company building this, or the nonprofit building this, still does have like the obligation to actually do their best efforts to actually build it and not just run away with your money. I think that would still be illegal in failing to fulfill their responsibilities as a director.

If they just took the money and, you know, bought a, say, Lamborghini, just like it would if they did the same thing for a company funded with your VC money. Thank you. Yeah, I wanna touch on what Dovey said earlier. Theres a lot of entrepreneurs here, developers who are interested to see more, how do you guys pick your projects, so what does your deal flow look like, what attracts you more and how do you even value those projects or those tokens if you invest in them?

I would say, one very interesting finding is so actually a lot of the blockchain founders and theyre not decentralization believer so this is very interesting that you might be thinking, Oh, so if you are like, building a blockchain product, so you must be very decentralized person, but like actually a lot of founders are still very, like centralized mindset and I think the biggest philosophical division that, for the founder that I would invest in and for a founder that I would not invest and secondly, I would say, like the founder has involved in this space for long enough and they have been through cycles and so they have a good community connection because I, for any decentralization project, its always about building the ecosystem and so you have to think about whether this project is like a blockchain must project, and whether it has to be decentralized because like if the experience is actually 10x better as like a centralized experience so theres no need for decentralization. The other thing I would say is, being in a team, what makes a really good crypto project like, there are three elements, the first one is, there must be like a crypto expert, and also, like a distributing system like expert, and then, so like, the last one is, you need to have a really good game theory designer, and so the three domains actually like previously, so they not usually collide and then, right now we have seen, because of the ICO hype and then so the big coin price insanity, we have seen a lot more qualified founders and like really good talents like you should be from Academia, say for instance. Like early this year, like a group of like Scott Shenker students, so who used to work on like networking protocol and right now, theyre actually devoting themself in that blockchain, like which is a very like good opportunity and then, so, like, thats why, when it comes to deal flow and so we work with Pantera a lot, and like Blockchain Capital, Polychain, and so other than that, so one of our unique deal flow is say for instance, we invested in like Brent Cohens net share network and so that is an actual referral from Dan Boneh from Stanford, and so, we invested in like DAKLAB, and like QED, so Qudit, and then so thats actually a referral from Losango Chiasa, from Berkeleys CS department so I think why you need deal flow we have, is that we have this very good access from the Academia and so they can help us to have like some advantage when it comes to deal sourcing.

Yeah, Id say on the deal flow side, most of it is either inbound or introduced to us at some point. A lot of the times, theyre either looking for typical advice on say, building on Ethereum or some sort of game theory problem theyre trying to solve or they just wanna talk to us because were wellconnected in the space. On the sorts of projects that we like to invest in I think, the kind of most interesting stuff is the way I start, is I start with the tech, because with the space is so kind of popular and exuberant right now that you see lots of people who are have really good, you know, backgrounds and the team looks great, but their tech is just completely nonsensical and its because theyre just jumping into the space and dont really know what theyre doing. So I start with the techs, its fastest for me to just go through the tech and see what there makes sense.

Basically, its just looking for things that you know, make sense. A lot of projects are doing things in this space where, if you were to solve the problem, youd, you know, win multiple trading awards in computer science, and then last year, you know, one of the Academia people that shes talking about its probably not gonna happen. Then after that, a lot of its, you know, whether the token model makes sense at all.

The sort of stuff that is exciting to me is where, currently today, you have a central intermediary who sitting in the middle, extracting a lot of rent, charging a lot of fees, without adding value proportional to the fees that they charge and if you can cut them out, by replacing them with kind of a more peer to peer cooperative model, those are the sorts of things that we like to participate in. Those typically, kind of, tend to need a token for kind of obscure technical reasons. If you look at like, Omisego, or Ethereum, they need the token for pretty kind of, obscure technical reasons, whereas stuff where you can kind of tell that theyve just slapped a token on top of it because they wanted to do an ICO, I think those wont be around five years from now and so thats kind of how were thinking about it at a high level. Yeah, so I think what we really pay attention to is like, kind of three things, like team, tech and community. Like, team was already mentioned before.

A lot of these things can pivot. A lot of these things can kind of change, but you really need a strong team who has kind of a record of executing. Thatll be kind of usually indicative of if they can execute in the future. You really dont have to be as actively involved in keeping them on track. Obviously, having a really solid team that has a basis in the space, or like kind of an expertise in the vertical theyre developing on is really great.

The tech, like here mentioned before, is like extremely important. If you look at Github, its just not very great, that they dont have any blockchain expertise on the team. That can be really problematic and also one of the biggest drivers is community. A lot of these teams get a lot of money but they really cant get that kind of community buyin. They cant get developers, they cant get people to use the platform.

So really being able to kind of organically source that community is really important. As far as deal flow, we have really close ties with Berkeley. Theres a really huge community basis here. Theres a lot of developers.

Like I mentioned before, that community factor, having people who kind of contribute to these platforms and are able to actively develop on it and build it out, is really valuable. So thats where a lot of the deal flow comes is because we offer a lot of utility from these teams. We also have a real expertise in the privacy sector. One of the individuals from our team, Howard Woo, is one of the few people who kind of understands you know, theres a zero knowledge proof kind of zkSNARK space, and you know, actively helping to research and develop it out so a lot of these privacycentric things will kind of come to us for our ties with Academia as well as the expertise in that field.

Yeah, I agree with most everything thats been said here. I mean, listen, this is not completely changed in the way that you deploy capital to early stage projects. I mean, overall, the features are very much the same.

I mean, its team, tech, problem and the market that youre looking at. With probably the biggest shift just being that tech is probably much more important than it has been in other areas. Yeah, maybe you can say only, one thing that you would never invest in today? Like the project that like, doesnt make sense at all without naming it. I mean, I know I talked to Joey before and he said, like if youre like rentseeking for example, youre trying to stay away.

Tokenized sand, I think we saw a project for tokenized sand, right? I was gonna say, like, I see a lot of projects that are just kind of mimicking Ethereum. They make something that kind of is replicating something thats already existing, especially Ethereum, so thats one of the biggest things I look for, you know, is it trying to just do something, in not a better way than something that already exists? Ill go with the rentseeking one.

Basically, the idea is if you have someone whos, so the whole idea of this space is to disintermediate middleman and make things have lower cost because youre making things more efficient. And so a lot of tokens that come to us, Id say like 99 percent of them, actually insert themselves in the middle, decide theyre gonna charge a bunch of fees, and theres no barrier, theres no mote. Theres no reason someone wont just remove the fees, and make a free version. And so like, in a nutshell, when you have a token the sort of thing that you want people to be, well, people are willing to pay for security of the network, so theyre willing to pay for the security that the network is secure, like in say, Bitcoin, or your Ethereum, theyre not willing to pay, you know, the founder five percent every transaction or something like that, which is a lot of what we see. Yeah, and I remember so Ive seen one project which is its a friend of mine and so he was working on a pizza delivery company and one day, he basically just pinged me saying, so Im thinking about tokenize my business, and I was like, how you can tokenize a pizza delivery company and I think like one thing I freak out is because we have seen all these services and products like both online and offline, like if your primary business is like mostly offline, so its actually very hard to tokenize because you first you need this like digital representation of your business and your current workflow, like online first, and then you can tokenize it so I think for like the Uber, like the AirBNB, and like all this, probably we can, for now stay away from it, and like, before like the infrastructure is really ready for it.

Yeah, I think that leads me also to the next question, more about how the industry and the trends, you guys see the industry from a helicopter view. 2017 was very, obviously, the ICO rush, of very interesting projects, a lot of money involved, but what do you think are the 2018 trends, and where this industry is going this year? I think launching an ICO is gonna be a lot harder, I think the people are thinking, and becoming a lot more critical.

I mean, weve seen, you know, either from the helicopter view or from the first row seat, the market cool off a lot and I think thats probably healthy. I mean, as with anything, I think we saw kind of a natural Gartner hype cycle here. So, you know, the market got way ahead of itself, you know, is there something at the core thats really, really interesting here and its gonna be part of a long term mega trend? Yeah, I think so, absolutely, and we plan to continue investing in it.

But definitely in the short term, things got ahead of itself, and a lot of projects dont make sense so I think people are getting smarter about how to think about projects that need a token and ones that dont and what makes sense as far as a sale and valuation. Yeah, Im definitely gonna piggyback on that. I think were gonna see these kind of like timelines be elongated. I think a lot of people are rushing a lot of these things to kind of get on this hype, to kind of cash out on it. So I think were gonna see, you know, weve already seen in a lot of our deal flow these, like, equity stakes or these longer lockins or these different kind of structures where it really makes sense for individuals to kind of get involved early where they can actually be a value add.

Its not, you know, youre getting into a presale and youre immediately flipping your tokens or have that liquidity in a month. So I think were gonna see, kind of like, more rational like presales and also like equity stakes. I also think its really interesting, you know, being at DevCon and a few other places, privacy, I think, is really gonna take front row.

Whats kind of like zkSNARK breakout rooms, and you know, people are asking developers how many of you plan on incorporating privacy and about half the room raise their hands. So thats really promising. You kind of see, right now, its all about scalability.

Scalability is interesting, its sexy right now, its really kind of like this offense, but you know, with offense you kind of need that duality of defense, and I really think that privacy is something that is undervalued and underrepresented currently and I think 2018 its really gonna take a front row. I think in 2018 well start to see some popular dapps on Ethereum go live. Right now, people are just trading tokens and thats basically it, on Ethereum, and you can be able to do more interesting stuff in 2018. And then also, I think, well start to see some of the first stable coins as well, which Im pretty excited about because if youre entering into, you know, some sort of financial contract on Ethereum you dont wanna lose money due to China announcing some news about Ether and losing 30 percent overnight.

You want something thats, you know, relatively stable. I think some of those projects will go live and then, yeah, as he said, scalability is pretty important. I think, in 2018, well start seeing kind of, the first wave of lowhanging fruit practical solutions to scale in Ethereum, so Ethereums developer community is much less kind of abrasive than Bitcoins and theyre willing to make changes to improve it.

And so, I think the kind of first thing that will happen is therell be parallelized transaction processing, so youll be able to process transactions in parallel on Ethereum. So thats like a 8x performance increase. If you imagine, most computers today have four cores, each core has two threads, 8x, and then, beyond that, you know, it starts getting harder. You can make the Ethereum virtual machine more efficient.

Panel 3 VCs and Hedge Funds Trends, Due diligence, Advice to teams.

It was originally just kind of slapped together as a proof of concept, lets see if this thing works at all. Now that we know it works its time to make sure its actually efficient, and its not. Theres stuff that on Ethereum takes, you know, milliseconds, that takes microseconds on my iPhone, as an example of a simple computation. And then, after that, scalability gets a lot harder and it becomes a multiyear process, doing things like sharding and plasma but Im confident well get there.

I think for the 2018, so I think, right now, we have seen actually like a new model of like fundraising. Essentially, its like not a new model, but previously we had like ICO and now we have these IEOs, thats the Initial Exchange Offering. So, I think the whole model, were actually rolling back more into the venture model and we have seen many of the solid projects, so they basically just got raised at presale and just skip completely the crowd sale and just list on exchange like do so 100 percent and so thats something that we consider as IEO, Initial Exchange Offering and so that would become more and more often and I think the institution will play a more important role here when it comes to fundraising and because when more veteran founders get into the space and they have like previous access.

So first of all, they are veteran founder, theyre familiar how to raise funds, and they have the existing access like to VC or the other institutions so I think the model, were definitely rolling back more to the venture model and I want to talk about China specifically, actually. I think theres a misunderstanding about China ban everything so its like this complete like, dapp space, like actually like from what we have experienced and because we directly involved in the whole PBOC discussion is, the PBOC discussion and then, the China SEC, like VC et cetera and so the whole thing, actually, becoming even more vibrant than before so there are actually two reasons for that. First of all, the China ban is actually the best publicity ever for the average investor in China because like, they actually dont trust government but they had no choice previously, and then now, like, because of the rebound of the Bitcoin price, actually demonstrated the value of decentralization.

This is the first time ever in the history, so they realized, oh, theres something that the government cannot manipulate and this gets them really excited and so thats the first reason. And then so the second reason is, and if you actually monitor all the transaction volume like, even though the China government, like, they ban all the centralized exchanges and, like, pretty much the second day, everything gravitate towards fastly to overthecounter transaction, and the overthecounter transaction theres no control over and as long as you have like Alipay and then, like, Wechat Pay, because we all know that the digital payment, like, method is very advanced right now in like China and as long as you have those two payment methods and like Alipay has 400 million user, WeChat Pay has like 600 million user, like which means immediately over half a billion of like user, average consumer have direct access like to crypto currency and, like, so thats why I think its actually even more vibrant than before. Actually, we looked at one stat, and so before the China ban, there were about two million crypto currency holder like, in mainland China, like, which is actually, like so its very small and then like after the ban, so, like, the overall number of like crypto holder actual growth, so it like grow, like quickly, even than before, and so thats why I see like, like 2018, when it comes to global economy gain, China will still play a key role in mining, in investing, in entrepreneur. And so if you are a blockchain founder, or like crypto founder, so you really need to have this like, flat world mindset, I think this is a sector probably, its the first time in history that Silicon Valley has no unfair advantage in accessing of talents and capital. So you really have to be global from like day one.

Thank you. I wanna touch on one point that Joey said about stable coins, so once stable coin is introduced, what is the purpose of utility tokens? Before I answer that question, really quickly, because stable coins are a really interesting issue and I was hoping to follow on that as well, you know, first of all, Id say that I really hope stable coins succeed.

I think theyd be a boon for the entire industry. There are large applications that would be really incredible that might need stable coins in order for them to work. That said, theres a lot of things that I hope come into the world, that dont. Ive wanted flying cars for a really long time and we havent gotten those either.

So, you know, its okay, in a venture to be both skeptical of something and then even to hope that it succeeds, and maybe even potentially invest in it. When I think about stable coins overall, it feels like a technical salute, a technical solution to a problem that is fundamentally economic. At the core of what I see stable coins is, you tell the market what the price is, instead of the market telling you what the price is. That goes against everything Ive ever learned in economics and seen play out in markets. But again, I really hope they succeed, and even with a very low probability of success, stable coin could be so large that an investment could still make sense, even at a, you know, one percent, or 0.01 percent probability, the market is potentially huge.

So it could still make sense. I think the probability is much higher, and Ill give a reason why, so, theres two types of stable coins. Theres some types where, the moneys not really backed by anything and its very similar to kind of the way a central bank works, and you increase the supply when the prices goes up, when the prices goes down you incentivize equal to decrease the supply.

Some projects do this by issuing bonds. Its not that infamiliar. The only difference is, of course, theres no government backing it.

Whether that will work or not, I dont know. The other type of stable coin, though, is backed by collateral and in the short to mid terms, like in the next five years, it has a decent chance of not working and the reason is, the collateral that you would back it with, other crypto currency is super volatile, however, if you fast forward say, ten, 15 years, and think in the future where, traditional assets will be tokenized, things like stocks, bonds, commodities et cetera, you could very easily envision creating you know, a sort of, kind of, like, all weather portfolio, like Ray Dalio has, you could vol target it to have, like, four percent annualized fall and then if you have a collateral backed stable coin, say its backed with, you know, five to one collateral, and your annualized fall is four percent, that has a very, very slim chance of failing. Like the Peso probably has a higher chance of failing than that, you know, stable coin would.

And so Im confident that those will work. I think it, you know, it may be a long time though. And so I do agree with that and as far as the implications of them, you know, why you need utility tokens, thats a great question. So, a lot of them, you know, theres kind of a few classes of utility tokens. Theres ones that arent needed at all.

Theyre not needed today. They wont be needed in the world of stable coins either. Theres ones in the middle which are you know, payment tokens which are used to do payments on these networks. My thesis on those is that, they might be able to succeed if the application is popular enough and has a large enough network effect but when stable coins come out, its much harder to make a strong argument that those will have really lasting value.

And then the kind of other type, is things where the tokens really needed, and if you remove it the system just doesnt work. So an example of this, is a network that requires the ability to split into two, or it requires forking. If you used a stable coin instead, well, you cant just double the monetary supply, when you have a fork, so that obviously wont work.

And there are some computer science consensus mechanisms that require the ability to for a network to split into two universes in the event of a disagreement to work. So those are kind of very obscure technical case where tokens are needed. Yeah, I think, like, stable coins are really interesting, right, because its all like, you know, relative stable, its stable relative to what?

I think theres gonna be a lot of iterations on this, I do think that China is kind of taking the lead on this, from a few entities that weve been working with, digitizing, kind of the RMB, or digitizing these things is really something thats gonna be topped down. Once you have, like, that much liquidity, that kind of like, big of a float, you have this relative stability, kind of, you know, relative to your currency that youre using. I think its kind of interesting that question, you know, like, once you have stable coins, what is the function of utility coins? Even that kind of relation is problematic because it shows you, how much people relate crypto currency to value, when if you have this utility token it should be, kind of like implicit that youre using that token for the utility provided, not necessarily as like a store of value or you know, something like that. I would hope the utility token is kind of utilitycentric, rather than value.

I think like, for like stable coin and so there would be like multiple versions and it can be a very interesting competition, like, within the stable coin ecosystem and so there might be, like, coins like Basecoin and so probably the other version of like Basecoin and, like, similar with some more, like, improvement of the economic design. The other type of why the stable coin is because all the governments out there actually competing for the fiat tether right? And like, Japanese government, Chinese government, like Russia, Korea, et cetera. I think there would be the competition both from the private sector, so private sector so thats from like start a team, and then, the public sector, so thats the government backed, like, collateral based, so there are two specific fiat and I think it can be a very interesting game theory and competition, with each of the players out there. And when it comes to the utility token value because when we, so, if you think about how we value something right now, and its actually based on the adoption and the utilization of that specific product or service, that is essentially how we should value, like, utility token, but, right now its really hard, like, before anything that has attraction or like a good community around it.

I think we will figure out that how we can value the utility token, like, once we have like a few stable tokens that can be the best options. Yeah, I agree. One last thing from the trans is, what, for the developers and entrepreneurs here, who are thinking of starting a new company now, what kind of initiatives or type of projects are missing in the industry, that people should start working now so within in the next year or two, they can be very relevant? Yeah, I really cant kind of emphasize enough, I think, like, we really focus on that privacy kind of factor. I think were kind of at this interesting kind of intersection, now between like governments, you know, between Academia, and also between like corporations, and we kind of really see that, you know, with scalability, were doing these proof of concepts, trying to build these things, but they just kind of stay proof of concepts, even if you can kind of meet those scalability requirements because they want to keep a lot of these things private because of these other kind of requirements and because of the legality around it.

So I would really say that I think this is gonna be a huge push. I think its gonna be something that youre gonna have to implement into a lot of these platforms to kind of take it from proof of concept all the way to where youre actually using it in production. I think, one thing, currently missing in the space, is custodian, so we havent seen any good custodian project at all.

So thats something that I find missing right now. So, the other thing is, when it comes to our investment thesis, because we have been primarily focused on, four things, like, everything since like four, five years ago, so thats programmability, scalability, anonymity and like ecofriendly and so those are the four space that we are thinking that, like, we can constantly, like, make investments because those are the infrastructure and when it comes to platform or like application layer we identify CDN, VPN, like prediction market and decentralized exchange and, like, those are the good space to invest I think thats it, yeah. I would agree. I mean, I think that privacy is definitely one of the big ones. Im glad that you emphasized that.

I think its always been, I mean, not to downplay how important scalability is, its obviously really important and really, really challenging but privacy is a little bit underappreciated relative to scalability. People dont wanna have all of their contracts exposed to the whole world. Its just really not a desirable outcome so privacy will be interesting.

Decentralized exchanges will be interesting and were investing into both those things, as well as custody. So maybe, well jump to the next topic, is more advice to teams. Ill just make it a free forum. Each one can say like one, the most important advice that you can give to teams today, to kind of get up to speed and successful, hopefully. I mean, some of the stuff, that we covered earlier I think makes a lot of sense so, I mean, helping make sure that you align yourself with long term strategic partners that can help add value and help you build out whether its a company, its an application, its a protocol, its a token, you need people that can help you do that, doing things like lockups, help from an investors side and then just in general I mean you know, doing things in stages, is probably reasonable, I mean thats the way that people have built businesses and companies over a very long period of time.

I mean, its a relatively proven model and so you know, going out and expecting to raise 200 million dollars and build the perfect product in the first iteration might not be realistic and so taking kind of a measured approach is probably appropriate. Yeah, I mean, I that, like, the difference between kind of being rushed and just being driven. I see a lot of teams that are willing to put in tons and tons of hours to get these things kind of implemented, but I also see a lot of teams that are kind of, rushing.

They really feel under the gun. They feel like, you know, theres a very short window, they have to raise a ton of money and figure it out later. I think this legality issue thats coming up, we been hearing about it all day, weve been hearing about it currently, something thats kind of a huge factor, you know, do this, do this right. Thats what were generally trying to support in this space is, to be responsible with the way that you raise because every time something fails, every time somebody raises an obscene amount of money and doesnt really deliver that really generally hurts the ecosystem.

So thats what were really kind of hoping, you know, that people stop being rushed and just, kind of, do things correctly, the right way. Id say, so before you decide what you wanna do, like, figure out, like, what sort of project or product youre building and only then, after that, decide whether it makes sense to do a token sale or not. Dont go in and say, Oh, Im gonna do an ICO, because thats how you see, like, most of the projects in the space are bad, and thats one of the primary reasons. If you design, like, the thing you wanna build first and it happens that, it needs a token to work, thats great.

You should hit any of us up, but if you just like walk up and say, Oh, Im gonna do an ICO, and its in this sector, and I feel like doing an ICO, like, please dont. And then I think, the other thing is, once you start a project, some advice I have, just things that are like super annoying in the space that I see that you should avoid. One, dont let anyone advise you who asks to advise you, most of the time. Two, dont pay people to be listed on apps or sites or anything like that, if a wallet says they want, you know, 75 grand for you to be listed on it, tell them to screw off.

Three, if youre doing a token sale, you really should not, 99 percent of the time, be using one of these kind of token advisory, token services firms, heres the reason. If youre building something that actually needs a token, then doing the token sale, writing the smart contract to do an ERC20 token, thats gonna be the easiest thing youll do for a long time. Everything else, is a 1000x harder than that. So if you cant do that part on your own then theres no reason that you should even be in the business of building one of these things and the reason these kind of advisory services, are so dang annoying to me, is they take around 10 to 15 percent of the funds that you raise, and they take 10 to 15 percent of your entire token supply, and they dont add value in proportion to that.

Theyre worse rentseekers than even the worst bank you could possibly think of, like 10x worse, or 100x worse, so avoid that. 10 percent, really? Yep.

Yeah, so, I think, my advice would be, so first of all, dont do ICO just for the sake of like wasting money, because, so the token should be naturally integrated with your economic design and like, the workflow and the utilization and like functionality. Like it should be naturally blend into what youre building so it shouldnt be just for the sake of like wasting money. Purely for the sake of raising money, its a really bad idea. And secondly, just as Joey said, those advisory firm and they can do everything for you, even writing the white paper for you.

So if youre an entrepreneur like that, what is the value of you being an entrepreneur and like being a founder of the company and like the project? So I think the other advice I would have is be very adaptive, because the whole environment evolving very fast so were investor of Brave, so basic attention token, and so we invested last year and so somehow the whole concept, of like ICO, just like, because like Crowdsell has been around for a while so it has been around for like three or four years and this year its just like people just repackaging the same idea of like Crowdsell into ICO and then, which is a very easily understandable concept and then just like get a hit. So when Brave did an ICO earlier this year and then so, they have made some mistakes, say for instance, so they dont have like a specific cap for the individual, like, wallet address and then so right now its very, very concentrated and so, later on, like Zero Ax has a better model so that each individual investor can only invest up to like a few thousand and so like the whole mechanism actually evolving very fast and then so talking about like, the contrast, like different than SAFT, and we have seen probably 20 different mutation of SAFT, so like 20 different versions of like SAFT or like the token sale agreement and so, like, things actually evolving very fast and you have to be very, very adaptive and like, the other thing is that Id be really patient like Dfinity we invested in 2014, early 2014, like back then it was not Dfinity. So back then it was just Coinify and so they actually pivoted probably five, six, different times and now become so so now its Dfinity and so you have to be very patient and like if youre really thinking that you want to dedicate it in like blockchain space and its a still very nation and we are probably at the first like three minutes of the whole like universe of like blockchain so be very, very patient and then be like dedicated and so I think eventually you will actually see like all your hard work like really paying off and not just for like quick cash.

Thank you. We have time for about two to three questions. You mentioned custodian, in one of the things that you said that were lacking, today.

I didnt quite get it, in the context of a decentralized blockchain environment. Can you please elaborate on what you meant by custodian? Custodian lacks difference in like, how we can ensure the security of a specific proceed, so right now noone has a good solution and like, basically I think, like, if we are all a token, or too many people are coin holders, then we basically like doing battle, right?

And so, theres no such service or like project out there and so it can provide good custodian service and then, like, custodian service and so this very similar to insurance but like, its definitely more than insurance so it can be a combination of like technical challenge, plus like insurance, like plus the regulatory question as well, so its a package of the whole deck, how you can, secure the transaction from like one entity to another and so thats something that Im currently seeing not. There are like each individual like service providers, different and you can buy it like, nano ledger for like cold storage, and but like its very, very silo so we have to piece everything together by ourself and I think especially when more and more institution and like hedge funds come into the space and like this can be this can be critical. Some sort of decentralized private key management solution itself, because today the private keys themselves are to be managed by each end user or the exchanges.

For decentralized at key management, is just one element and so you also have to think about like auditing problem Got it. And so, thats why I think its very, very complex. Got it. Thank you. The VC model itself is like a centralized cartel, right?

I mean they are like centralized mining entities. So how are you guys, like restructuring yourself, like, I mean, its a decentralized world, capital has been decentralized, become a commodity, VCs role probably would diminish but how would you structure yourself? I mean, I do think theres a role to play, because youve got decades of experiences, to your earlier question, we do not have flying cars, I think its because of VCs because theyre not interested in building long term projects that involves a lot of capital thatll yield some cutting edge projects, thats why the government is involved in some of those large size projects. So where do you guys see that once the capital becomes commodity and everyone else is able to raise it, where is the role of venture funds and or hedge funds?

Youre right, absolutely, the model of venture capital I do think is changing. You know at the start of the year when we looked out and realized that some of the entrepreneurs in the space were completely bypassing venture capital altogether I mean, even prior to that we had noticed that a lot of the companies in the space didnt really wanna talk to the people on Santo Road. Fortunately I think a lot of the industry specific investors had a little bit of an edge there just because they could talk the same language but, you know, starting at the kind of beginning of the year, we started to notice that some of them were just bypassing all of the venture firms altogether. One of the things that we did to try and address that was to raise a fund via an ICO and so allow anybody to improve access, I mean, normally to have access to a venture firm you have to become an elite institutional investor. In our case, we were able to accept capital from 750 investors in 80 different countries around the world and able to provide kind of an improved liquidity profile for it as well.

So its definitely changing, I agree. Anyone else? Id say, commodities, or moneys been a commodity for a while, like ever since kind of low interest rate era and I think something more similar will happen to kind of VCs, what happened to VCs in the past, with Angel List. If you look at Angel List, tons of syndicates started popping up and as an entrepreneur if youre raising a seed round or youre in a Series A sometimes why would you go to a BC or DT or VC firm to raise it?

You would instead raise it from angels on Angel List. The good A for A level firms that are always gonna be around because theyre actually adding value and helping the companies and projects along, helping them solve real problems they face but kind of, if youre not in that level then yeah, I think you will be disrupted. Well take one more question.

How is the enterprise blockchain, how is it impacting your portfolios and what is it use, 2017, 18, and 19? The enterprise projects. Yeah, I mean, so overall with at least Ill speak from my perspective at Blockchain Capital were trying to provide our LPs with diversified exposure to the blockchain industry so that does include enterprise blockchain solutions we have enough humility to recognize that we dont know for sure where all these technologies are gonna go and where theyre gonna be applied and we wanna make sure that we pick what we believe are winners in every major category and enterprise blockchain is definitely been one of those. Its not an area where I think I have the strongest level of conviction but its definitely something that we have invested in and are not particularly exploring right now but would continue to invest in it if the opportunity was right. Anybody else?

I guess, actually, to add on that as well, probably one of the things the industry couldve done better early on was defining what is a blockchain, right? So instead we kind of have this spectrum from a database to something that is actually like decentralized like Bitcoin or Ethereum and you know, I think in some cases some of the enterprise blockchain projects might just be databases, kind of, repurposed and repackaged. You know, on the one hand thats a little bit unnerving but on the other hand the flip side of that is that if it takes kind of a shiny new wrapper to help people upgrade their database and receive significant new efficiencies then thats okay as well. Yeah, just to kind of add onto that, so its like doing projects for some of these large enterprises, Im not gonna name any names, theyre definitely like not the most interesting kind of solutions. Like a lot of them will want these kind of proof of concepts, wanna kind of see whats going on.

Like you mentioned before, like really knowing the definition of a blockchain, you know, youll build this entire proof of concept and theyll say, Alright, if one of our engineers makes a mistake, how do we roll this back? and its just like really frustrating, to have to be kind of doing that. If you spent months and months and months building this out, you think they understand. So I would say that you know, like, the things that weve seen so far, that are coming from these large corporations, theyre kind of a little slower to adapt. Theyre really trying to shoehorn this technology into existing verticals and use cases and a lot of times that really isnt the best kind of like way of doing this.

So I think some of these new more agile companies are really doing more interesting things. That being said I think theyre ready to bring this mainstream, were gonna have enterprise adoption. Theyre really gonna kind of like flush this out but I havent necessarily seen anything super interesting but I definitely agree, if theres something pops up were definitely interested. Yeah, we dont have any more time but thank you to our panel. ambient music

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