TRANSCRIPTION

Peter McCormack: Welcome to the podcast, thank you for coming on finally!

Brad Stephens: Thanks for having us

Spencer Bogart: Excited to be here!

Peter McCormack: How are you both?

Spencer Bogart: Doing well, fired up!

Peter McCormack: Business is good?

Brad Stephens: Business is Great.

Peter McCormack: All right, well I want to find out a bit more about venture capital with you guys today. It would be great as a starting point for you both to tell me your backgrounds, so I understand a bit more about how you came into venture, but also tell me about how you started the fund as well.

Brad Stephens: Sure, I can start on this. This is Brad. My brother and I ran a hedge fund from 2002 to 2012 that was basically venture capital in the public markets. We looked at kind of out of favor public companies that had fallen. Maybe they broke their IPO price, maybe they had a change in CEO, something like that and we'd go in and by 9.9% of them and treat it much like a venture investment.

So get involved and kind of really help these companies get back on their feet and get back into an exciting position again. So we did venture capital like investing for about a decade and then 2012, post financial crisis, didn't really want to be in the hedge fund industry anymore and got very into Bitcoin in about 2012, through a private company that we invested in, that was going to acquire Mt. Gox.

So I had to figure out what Mt Gox was and figure out what Bitcoin is. In that time, both my brother and I got rabidly excited about Bitcoin and started mining and then we needed startup companies to help fill in the holes of the ecosystem, basic infrastructure, wallets, exchanges, crypto credit cards was a big thing we were into in 2013 even though none of them quite made it. So that started us down this path of investing in crypto startups in the ecosystem and eventually turned it into Fund One.

That was basically an exchange fund, which is take 40 CEOs and have them give you either cash or $50,000 of their equity and pool it all together. So all 40 CEOs got to have access or I guess investment interest in, lots of other companies out there and not just their own. So it's the fear that we played into, which is you're very early and you're a pioneer in a big, big, big sector.

So you've got that kind of, big idea call right, but it's a travesty when all of a sudden your company doesn't work, but all the other ones around you did. So at least have exposure to everything else, as a kind of a hedge or maybe your startup doesn't work, but you at least directionally are correct with all the others. So that was Fund One.

Peter McCormack: Okay, I've never heard of that as a structure.

Brad Stephens: It was good for us, mostly from a networking point of view. Now we had the ear of like 35 CEOs, that actually took our phone calls because we were investing their money and then we were invested back in them too. So it really put us at the center of the venture ecosystem back then because it was pretty small.

Peter McCormack: Okay, Spencer, your background?

Spencer Bogart: Yeah, sure. So I think my first professional experience in financial markets, was post financial crisis, working at a fund of hedge funds. So that's a fund that invest in other hedge funds. So really the exciting thing about that was just reading the research that was coming out of a lot of these hedge funds, especially a lot of which were very macro economy focused and I thought, "wow, this is really interesting work. I can't believe people get paid to do this. How do I do a job like that?"

So one step towards doing that was I started earning my CFA credentials, my CFA charter. After working at the fund of hedge funds, I worked at a company called etf.com, which built a first of its kind, ETF analytics platform, really for people to go on and learn about any kind of ETF that was out there and what kind of liquidity, how its exposure looks etc. So that was fun startup experience. Then from there I went over to Needham & Company, which is a mid sized investment bank and worked on the equity research team. So that meant that I covered a suite of maybe a dozen companies in the space.

So like salesforce.com, LinkedIn, etc and you cover their quarterly earnings, you can track what's going on with the company and write public facing research for what's called the buy side, so investment funds that are investing in those companies to digest and understand should they acquire a position, should they lighten up on a position, etc. In theory, all of those kinds of SAS, so my sector was SAS and internet, so software as a service and Internet. In theory these are the most disruptive companies in the world.

But the problem was on the side, everything I was doing was kind of Blockchain related and so everything going on in the Bitcoin ecosystem seemed far more interesting than what was going on on a quarterly basis on Salesforce's earnings calls, which are interesting themselves, but it just doesn't compare to the kind of disruption that you're seeing within Bitcoin. So in early 2015, it kind of came time where I felt like there was not enough coverage of Blockchain technology at large and so I wrote Wall Street's first industry report, covering Blockchain technology, basically just outlining what is it, who are the major players here, who were some of the investors in the space?

That was kind of where I started to get to know Blockchain Capital and Bart and Brad. I segwayed that research into covering, very actively Bitcoin, which was fun to cover in 2016, writing public facing research on Bitcoin because as soon as you hit publish, you get a lot of angry phone calls, people telling you like, "you must have gone crazy here!" Then by the time it got towards the end of 2016 I realized that there was so much going on in crypto that I couldn't do well in it, without dedicating myself fully to it.

So at that point, I was probably spending 80% of my time at Needham on crypto related things, but said it has to be 100%, otherwise I'm going to fall behind. So over the course of that, I had been working with Bart and Brad just off and on, especially as people that were invested in the industry and at the center of it, to make sure that the things I was writing about, made sense. So when it came time, I let them know that I was going to go and do something in this space and it has ended up being a great home here at Blockchain Capital.

Peter McCormack: Okay, great. So going back to 2013, where did your conviction come from with Bitcoin? Because obviously it was quite new. It had a quite a significant bull run back in that year, but it wasn't established, there wasn't any regulatory framework, kind of a big risk to go into that? Where did the conviction... And did you both have the same conviction?

Brad Stephens: So once we had the option or the look at Mt. Gox and when did a lot of the basic research, actually one of the seminal pieces that I read was, Ribbit capital had written a few page investor letter talking about the case for Bitcoin and it really kind of opened our eyes to... Our family has a mining background. Our father has been investing in mining companies for 30, 40 years. So to understand digital gold versus gold, that was kind of our first major understanding that this is a store of value that can't be confiscated, won't have crazy hyperinflation.

Go back to Jimmy Song's focus on sound money, that was really kind of our first major look at it, that this is a global store of wealth that anyone could access. It shifted to means of exchange and thinking this was going to be the payment rails maybe kind of Roger Ver's view of the ecosystem, but none of that worked and none of the companies took off. As I said earlier, none of those credit card companies took off. It just really didn't thrive as a payment mechanism, but it did thrive or has continued to in that sort of global store value concept and that's what really hooked us first.

Peter McCormack: So you've been running the fund now for six years, so there's been a lot of change. So before we get into some of that...

Spencer Bogart: We've had some quiet years, I'll say that! There was times in like 2014, where I think Bitcoin would be mentioned in the press, maybe twice in the given year or maybe an article written about it in some obscure magazine and it would be literally like jumping up and down and cheering and first time it was ever mentioned on a CNBC or a news show, like" woo hoo! More people who now know about it, times a hundred that never did before." So I think in the early days, you're much more of an evangelist just trying to get the word out there to mostly the larger financial system

Peter McCormack: Yeah, I was out at the Oslo Freedom Forum with Alex Gladstein and I did a panel called Bitcoin Around The World with people from Iran, India, China and a couple of other countries. But before I started, I asked the whole room just to put your hand up, if you haven't heard a Bitcoin, no hands went up. It wasn't a Bitcoin conference, but it was the kind of people who would know about it. But it was still impressive that every single person left their hand down and when I asked if you own Bitcoin, half the room put their hand up.

So we're in a very different place. Also this was something Brian Quintenz said to me the other day, he said, "Bitcoin now doesn't have a branding problem. It's out there." I think that's absolutely great. So one of the places I'd like to start with you, because I've been on your website, I've been through your investments, but I also just read a recent article that you wrote on Medium about almost the history of where we've been.

That article reads very much to me like, "we've taken an interest and we've looked at other different protocols and projects, but we really identify the opportunity in Bitcoin, as a vertical opportunity." But you have invested in token based projects. So where are you in terms of Bitcoin versus Blockchain right now as a fund?

Spencer Bogart: Yeah, sure. So I mean we certainly appreciate everything that Bitcoin has accomplished so far and actively look for investments in that ecosystem and very much see it as kind of a zero to one type moment for the ecosystem. While there's plenty of innovation and new consensus protocols going on all across the ecosystem, so far we haven't found any of them have been sufficient differentiators to overcome Bitcoin's first mover and network effects. It's great that they've made small improvements, but I think so far again, they really haven't proven meaningful enough to overtake Bitcoin.

Now granted again, as much as I think that's the case and as much as I think that we're going to see development really start to coalesce around one or at most a couple of winning protocols, it's still relatively early in this ecosystem. So responsibility for us to our LPs, is to keep an open mind to everything that's out there and making sure that we are taking a good look at something that could be either a Bitcoin competitor or something that is a new upstart that might serve a totally different use case. So we pay attention to all of these things, but again, really see Bitcoin as the zero to one moment.

Peter McCormack: Okay. So where is your kind of views on say Ethereum now, which has obviously been the leading smart contract platform?

Brad Stephens: I mean it's changed over time. I think in early February 2016 we made, I think the venture ecosystem's first venture investment into anything ETH related, which was into Parity, mostly because of our relationship to Gavin Wood and kind of understanding what he was doing there. Subsequently, right after that we built a massive Ethereum mine up in Washington and mined Ethereum from like $2 to probably $9 pretty heavily. Then eventually sold the mine, rode ETH up, swapped into Bitcoin and now I've kept it in Bitcoin.

Peter McCormack: Well played!

Brad Stephens: It was nice! We should have held Ethereum a little longer, obviously, but I'm not complaining here, it was a major win for Fund Two. So we've invested in Ethereum and we've invested in a handful of other token projects. We invested in Block One, which obviously did EOS and we were able to exit that recently at a 66x return in less than two years, so I'm happy with that! But we're still more on a wait and see on a lot of these other chains. A lot of them have amazing technology, amazing developments, amazing PhDs behind them and just geniuses. But we're not seeing a lot of usage or adoption.

We talk about this internally in kind of a joking manner, but it's like those ghost cities in China where you have these huge cities built in the middle of nowhere, where people are hoping to bring all the of the peasants in from the fields, into the kind of the modern city workspace. They have perfect monorails and they have the amazing water system, they have all the functionality of a high tech city, but they're ghost cities, no one's there and that's what's really happening with a lot of these chains.

They might have better TPS and they might have all these nice bells and whistles that make them superior in some sense, but no one's using them yet. So what we're really trying to do with the front row seat here is, not just go blindly speculate on what's going to be the extra feature out there, but really follow adoption, follow the users, see what traction occurs.

We might miss some of these seed round deals and come in more on the A round, once we see some more traction. But a lot of these seed round deals for these next generation chains were $1 billion or $2 billion valuation and that's not the valuation you pay when you're trying to get a 100x or 200x on taking an early risky seed stage bet. So we're watching closely.

Peter McCormack: So I guess 2017 was kind of a unique year. Is it very unusual to be able to deliver say a 66x return? That kind of return on something that hasn't even achieved a product market fit, is it unique to crypto or does that happen in other markets?

Brad Stephens: Usually not in two years. I mean, there's a few notable exemptions out there like Instagram or something. There are some of these kind of large billion dollar exits that have occurred in a very short amount of time before they really got massive traction. But no, usually it's a slow build, there's a Series A, show some milestone, Series B, show some milestones and you kind of eventually build there, in a structured, metered way.

You just usually don't give three, 20 year olds $1 billion and say go build a multibillion dollar company. I mean, you think you're crazy if you said that to anyone pre crypto!

Peter McCormack: I think you could argue that Instagram had achieved some level of traction. People were using it.

Brad Stephens: It's just the speed to it, it was pretty fast.

Peter McCormack: I always think about those guys thought. At the time, $1 billion must have seemed like a great exit and now, I mean, what's that deal? Was it two years later, it was $19 billion, but you never know when to sell. Okay, so it sound like, it's not that you're any way going to be Bitcoin Maximalists because that wouldn't be particularly smart as an investor, but you are probably what Lily Liu said to me more like a Bitcoin Rationalist?

Brad Stephens: Yeah and it has proven market fit and how it serves a distinct purpose that works. I think there's going to be many, many more forms of utility that grow off of Bitcoin. But for the time being, it's the only chain out there that has a functioning utility that does exactly what it needs to do and people are using it.

Spencer Bogart: And it does that without having to make any crazy changes. So most of the things like, yeah, they have something really interesting that they're working towards, but they have some pretty significant tech hurdles to overcome. I mean overall, when you think about the space, anything public Blockchain related, you have to think about everything in terms of trade offs. So you can optimize for speed and that comes at a cost. You can optimize for privacy, that comes at a cost and so you have to think about all of these Blockchains of like, "okay, so they've optimized for one particular feature, but what did they give up in return?

Also is optimizing for that feature enough to again, overcome Bitcoins first mover advantage and its network effect?" So pretty early on in that experiment we saw Litecoin launch saying "okay, maybe speed's going to be a sufficient differentiator." Well I think we've seen enough evidence to know that that's not going to be the case now, despite the number of people launching new Blockchains that taunt how many TPS that they can do, that's transactions per second.

We've seen chains launch with superior privacy with Monero and Zcash and so far, those are great experiments, really glad for the people that are working for them, but so far it hasn't been enough to overcome Bitcoin's network effect. Then the interesting trade off is again what you mentioned with Ethereum and in terms of expressiveness. So this idea that if you make it really easy for people to build anything on top of it, will that be enough of a sufficient differentiator to overcome Bitcoin's network effect? So far it hasn't been. Is it too early? Maybe. We'll see.

Peter McCormack: I've got into an interesting discussion on Twitter yesterday with somebody. So Vitalik tweeted out, "what are the three best apps on Ethereum that most represent what Ethereum is to them?" Something along those lines and I replied back, "1, Ethereum Classic, 2 err, 3, um" kind of a little bit of a troll! Then somebody had come back to me and said, "what are the three best apps on Bitcoin?" I said, "it doesn't really need any."

Spencer Bogart: That's the difference.

Peter McCormack: Even with Lightning being early, I get all the utility I need from the Bitcoin base chain. I use it occasionally two or three times a month I'm sending or receiving money. Do I mind that I have to wait an hour or two? No, it doesn't bother me. It's secure. I trust it. The price is pretty stable. I mean it can go up and down, but it's not as crazy as other markets. That's one of the things I started to realize with Bitcoin, it's great as it is already!

Spencer Bogart: And there's a lot of value that to me, again, it's the burden the hand with, in this case, maybe 10 in the Bush. It already meets its use case very well. Everything else needs to kind of evolve into it.

Peter McCormack: Do you ever start to think that maybe... I met with Jimmy Song and he was with me and in Oslo. Then we recorded a show about Blockchains and the myth of the Blockchain and he's very much in the field that Blockchain is a very specific use and it's pretty much only works for Bitcoin. Do you empathize with that view or are you more open minded?

Brad Stephens: Jimmy is further on the Bitcoin Maximalist is spectrum obviously and we love him and he's such a great asset to the ecosystem and to Blockchain capital. But I think we need to have a broader world view of where this ecosystem is going to go. If it's corporate coin or one of 20 other different types of Ethereum, 2.0, 3.0 go on and on, that might find unique market fits, certain ones, maybe the EOS or the Trons of the world might take off in gambling or video games or whatnot.

There's lots of applications and uses out there for the different chains. Bitcoin has a proven space and I don't think for that distinct, capped amount, inflation resistant and sound money, Bitcoin has won that by a huge margin and I guess that race is over.

Peter McCormack: I guess you guys as a fund, you invest in the asset as well as investing in companies?

Spencer Bogart: We do as well.

Peter McCormack: Yeah, you are interested in both. Would you invest in tokens or would you prefer to invest for equity?

Brad Stephens: We haven't done some token rounds. We found in 2017 the valuations were just wild. We did do some through our B Cap, which is our ICO token fund. So that did a fair amount of SAFT investing and token related investing, much less of that in our more traditional funds, which have done less of that as well. A lot of it has just been evaluation difference.

All of a sudden, it's a $200 million SAFT evaluation and then there's some startup with almost the same amount of team and a similar attraction, that'll be a $6 million valuation. So equity evaluations have been far superior than these token valuations.

Peter McCormack: Okay, interesting.

Brad Stephens: Now you don't get the liquidity obviously, but we're a venture fund, we have 10 years to find returns with our investments. So we're not a hedge fund that's just trying to jump in and be a trader and trying to make a quick flip. I think so many of these funds out there are really just trading names and not really understanding companies.

They might need to understand the technology enough to know it's real, but they have short term movements and they'll buy here and sell here and think there's some arbitrage between this and that. That's really not our approach. Ideally, if we do buy into a token, we're going to hold it for two, four, six, eight years ideally.

Peter McCormack: I guess too much liquidity could also be a bad thing?

Brad Stephens: No, you always want liquidity!

Peter McCormack: But it seems to me the problem with too much liquidity with tokens is that the price just gets suppressed?

Spencer Bogart: I don't think that's necessarily a byproduct of liquidity. If a market is illiquid, then a little bit of selling will cause that. But liquidity in itself, like lots of trading volume, not necessarily

Brad Stephens: Also because they were really garbage products, that shouldn't have raised money at a $500 million valuation. Some of these valuations are crazy. So when you see some of these coins being down 90/95%, they probably came back down to the valuation where we would've paid for them as an equity round.

Peter McCormack: Okay, fair enough. So before I start talking about giving advice on how people can raise and learning a bit more about what you look into them, it'd be good to talk about a bit of the market, what's going on. I do have some more Bitcoin questions, but I really want to know what you guys think about Libra?

Spencer Bogart: Yeah, I think it's a great project and I'm really excited to see them kind of pull the curtains off. I'm just hoping that it can actually get live, particularly with all the regulatory pressure and then particularly trying to get all of these different members of the association, to kind of come to agreement, to actually get this thing launched into the market. But I think it's something that despite much of the public criticism, could actually provide a great deal of utility to a number of different people and then I guess selfishly, as someone who holds Bitcoin, I see it as a great on ramp into Bitcoin as well and certainly not something that's competitive.

Again, I think this really highlights the fight from whatever it's two and a half, three years ago now, of raising the block size or not to be able to be able to facilitate low cost payments around the world. Well sure enough, always the concern was that someone's going to step in like a Venmo and just offer that. What you have is essentially something like that here, something that's a little bit more decentralized than just a Venmo. But again, something where by compromising on decentralization, you can facilitate really fast cheap payments. So overall I see it as great.

I think it's fantastic that they're bringing so many people into the ecosystem and presumably brings this familiar form factor, so something that's kind of close to a Dollar, kind of close to other currencies, so for people it doesn't feel as intimidating to kind of step into and then sets them on kind of a learning curve of like, "okay, well what else is going on out there?" From holding this one cryptocurrency, it's no longer taboo anymore.

Then the other major reason why it's a great catalyst for Bitcoin is it lit a fire in the pants of all of these like large financial institutions that are now saying, "okay, I've got to build up infrastructure for this. That means I need custody, I need wallets, I need compliance, I need to do all these big hairy problems, that I just didn't really want to have to do to deal with Bitcoin. But now I feel like I'm being forced because of what Facebook is going into."

Once I've gone and done that and I've already built up that infrastructure, hey, you're only one step away from supporting Bitcoin at that point. So overall I've seen a lot of companies get a lot more serious about the space and a lot of everyday users start to ask reasonable questions about what's going on in our industry.

Brad Stephens: You can also have, take this further out a year or two, politicians come in here raising alarms, going crazy. Not only does Libra end up as kind of like the punching bag for the politicians for a while and they have the Dollars to do it, the resources, etc. But if they do end up getting Libra stopped and/or shut down, we just finally understood why sovereign grade resistance is relevant. So Bitcoin, again, looks like the big winner here.

So it's like, heads I win, tails I win. If Libra takes off, we get hopefully a billion new crypto users that'll eventually migrate somewhat into Bitcoin and grow the whole ecosystem. If Libra does get shut down or regulatory problems, boom. Now we know why Bitcoin is so powerful as a global reserve currency!

Peter McCormack: I hadn't even thought that through like that, but you're absolutely right. Also another thing about it is, I think the backlash was expected because of Facebook's history of Cambridge Analytica, invasions of privacy, etc. But when you start to rationally think about it, it does kind of make sense and I personally am a fan of it now. I wanted to come.

I don't think I'll use it really. I might send $10 here or there or 10 Libras or whatever the here and there. But I actually, and even though people are saying it's not a cryptocurrency, I want them to call it cryptocurrency, because I just think it's all roads lead to Bitcoin.

Brad Stephens: It normalizes that term. Cryptocurrency has been something that so many people have stepped away from saying, they've wanted to call them a million different things. Even Blockchain got turned into DLT, Distributed Ledger Technology, cryptocurrencies got turned into just kind of digital assets. So I think it's great that they're going out with the full force attack.

Peter McCormack: Do you think there's any flip risk, with Libra being seen as the acceptable face of cryptocurrency and harder regulations coming down on Bitcoin?

Spencer Bogart: Hmm, good question. I hadn't really thought about that side of it.

Peter McCormack: Yeah, me either. I guess at first blush though, the public perception is right that Facebook is this evil company that mines all of your data, it's arguable. I won't say it's not that. It also provides a great free service to billions of people in the world and connects them in a wonderful way and provides a great utility to many people.

But so having that company or any of these companies really at the center of it, makes them a target. Whereas in this case, it's very hard to say, "what that Satoshi Nakamoto has taken advantage of all of us?" There's just no target to direct the hate at and to hold up as a like, "this is why it's terrible."

Brad Stephens: I don't know how you could regulate Bitcoin more. I mean, even the FATF stuff that's come out recently, it was really just trying to push KYC and AML to, outside of the US and having kind of a global agreement on a lot of this. That's about as close as you can get and you're really just trying to have some KYC at that point of the onramps and the off-ramps. Outside that, you can't really control it.

Peter McCormack: No. Well, this was the conversation I had with Brian the other day because I can't remember her name, Maxine Waters, she wants to do a Senate testimony. She wants to call Facebook in to talk about this. I said, "the funny thing is you can't do that for Bitcoin" and I think that really, again, highlights a benefit for Bitcoin.

The other thing I'm quite excited about is the Libra/Bitcoin chart, because over a long enough timeframe, you're going to expose a bunch of people holding one crypto currency, they should be holding hopefully another cryptocurrency, because Bitcoin should continually, over the right timeframes, increase against Libra. So that's another thing I'm excited to see.

Brad Stephens: The chart will raise some eyebrows!

Peter McCormack: But that was my only thing that was a shame that it wasn't fully Dollar pegged, because you won't be able to then take the history back and just educate people, but I'm with you, let's bring more people in.

Brad Stephens: We ran into this problem when we were first trying to, kind of evangelize crypto years back too. The problem is when you are in the US, we have PayPal, Venmo, five credit cards, a debit card. We have great financial infrastructure. So adding some of these kind of Libra features, doesn't really do much for us, but you go to the rest of the world, there is a billion people that don't have bank accounts, that do have a Facebook account and can't buy, sell, trade, all these things. There's huge amounts of need globally. It's more in the developing world, not the developed world.

Peter McCormack: So I was discussing it, I had Caitlyn Long on the other day to discuss it and she said it's aggressively being marketed to the developed world.

Spencer Bogart: Should it. That's where the most utility will be.

Peter McCormack: She said, it will probably bring more financial discipline to the central banks within these countries, because they've gotten away in the past of being so ill-disciplined and that is a benefit, that is a good thing.

Brad Stephens: Well when the local warlord in some developing nation, decides to wipe out their currency and basically get rid of the middle class to keep themselves in the 0.01%, you can do that once more, because forevermore you do that once, people are going to go to Bitcoin from that one.

So you didn't have that option. There was no competitive option to go and have some other store of value other than your local currency in most of these countries and that was a means of never having a middle class. You just constantly inflate them down to nothing and the warlords sit on top of everything. So that'll change, since people have choice.

Peter McCormack: You're not tempted to get a Blockchain Capital node?

Brad Stephens: We run a full node downstairs.

Peter McCormack: A Libra node?

Brad Stephens: Ah, TBD!

Peter McCormack: All right, so you've thought about it?

Brad Stephens: We have and we just need to understand all the financial details associated to it and expected returns and more of the details. But it's interesting.

Spencer Bogart: But we do run a Bitcoin full node.

Peter McCormack: Yeah, I expected that! In my head though, I'm wondering is a 10 million pound node, is it still just like a tiny little box?

Brad Stephens: No idea.

Peter McCormack: I'd want a big box!

Spencer Bogart: Once a fulltime employee attached to it, couple hundred thousand costs per year, we'll see what it really means to run one.

Peter McCormack: All right, so let's move into Lightning. How do you feel about Lightning at the moment? Good and bad, the development of the infrastructure, the adoption?

Brad Stephens: Yeah, I love to see the development. I'm very encouraged by a lot of the progress to date. Do I think Bitcoin needs Lightning? No. If Lightning's going to be a big thing, is it going to be in 2019 or even 2020? Probably not, in terms of like some majority of the transaction volume really going over Lightning network instead of over the base layer. But yeah, I mean I see it as one of hopefully what will become many important projects that are building on top of Bitcoin at some point. Again, does Bitcoin need any of those? No. But do they add some additional value? I think quite likely.

Peter McCormack: It's a bit of a change in the narrative around Lightning, I found over the last kind of six months. I think people are starting to realize how good the base chain itself is and how happy people are with that. Back to your point Brad as well, about payment rails, so I personally am excited by Lightning, but I haven't actually found a use case for it. I haven't found a reason to use it yet.

Spencer Bogart: Feed chickens in Indonesia.

Peter McCormack: Well yeah, or I guess I could sell special episodes of the podcast, but I haven't found it yet.

Brad Stephens: I mean, we tinker with the Lightning a lot. We have a Lightning hackathon going on downstairs in a few hours. We've met with every single Lightning company we possibly can. We tinker with all the different projects out there and when you do start playing with it and kind of getting your hands dirty, you realize it's really early! The interfaces are weak. There's odd problems over and over. So we're still in, it feels almost like pre alpha type stage. But I think, I won't say I know, but highly likely that these problems and kinks will get figured out.

We have some of the smartest people we know working on it. All the companies in this space seemed to be well funded and there's exciting developments, but it's going to take longer. I think too much in this industry and we saw this during the ICO craze, people jump to the ideas and go, "look, we solved the problem with this idea" and they really forget there's a company that usually needs to be built around it.

There's hiring, there's culture, there's infrastructure, there's iterations of the product and from the great idea, sometimes it takes a few years to really get a working product out there, instead of these ICOs that were basically putting out a white paper and people were expecting this product to be done and live six months later, which was just a totally unreasonable timeframe for any company to really do something of quality. So I think Lightning is going to be very important, but I think there needs to be prudence on the timeline, to really get there to be in a functional state.

Peter McCormack: Do you ever think or consider that it might be quite hard for companies building on Lightning to be able to create a company that can make a good margin on what they're doing? Because one of the things I've looked at is, it seems to be very slim margins.

Bitcoin itself feels like a market that's hard to make money in. Great if you are an exchange, millions of transactions you can take a small amount of, but wallet providers, they don't make a lot of money and I spoke to wallet providers who've struggled with the revenue model. I look at somebody like Lightning Labs, amazing company, amazing people, Elizabeth is amazing, great products and what they're doing is incredible. But I also think where is the revenue? It must be a huge challenge.

Brad Stephens: It's great for the ecosystem. As an investment, they need to figure out what they're going to be as a revenue generating business eventually. But the work they're doing is really important. Radar as well, doing tremendous work as well.

Spencer Bogart: Yeah, and I mean I think it's challenging on two fronts. One is, we don't know what business models will translate well into this new type of a network. So you have kind of just overall business model risk. Then two, I mean by design, a great feature of something like Bitcoin or Lightning network is that it's free to compete, so anybody can come and enter and try and drive down your margins. So how quickly will that actually play out? In reality, it might not be as fast as what people expect.

I mean, if we rewind just three and a half years ago, a popular thesis going around Crypto circles was that exchanges will be a terrible investment, because they're all going to compete away their margins down to zero and obviously that has not been the case. I do think that will probably occur over a longer period of time, but certainly they are fantastic businesses to run over the past few years and I think will continue to be so for awhile.

So we could see something like that in Lightning network where someone's designing a little bit of a new business model, maybe it's liquidity hubs, routing, it's watchtowers, it's something along those lines maybe and maybe at first people assume that there'll be no margin to be had whatsoever, but really because of their trust or brand or something like that, that you're able to sustain margins for longer than expected.

Brad Stephens: I'll twist this a bit to more of your kind of earlier questions on trying to get out that venture capitalist mindset here, it was about a year ago, we started saying, "Lightning's going to be really interesting. I don't know why, but I just have this gut feeling, this is a really important development." So the great thing about our position is once you sort of open your door to accepting a technology, you meet with every single startup that ever is doing anything associated to it. Each one you learn a little something, you kind of fill out the picture, it's like puzzle pieces coming in.

Certain people have a lot of the pieces, certain people have one, certain ones need to be changed. So it's slowly coming together. But we're getting to have kind of a front row seat again, to hundreds and hundreds of really smart people out there that are doing creative fun things with Lightning on top of Lightning, tweaking it. Who knows what and every once in a while, there's a company that comes in and it's just like that A-ha moment of like, "ah, we found the killer something that's going to take Lightning from here to a 100x!"

But you don't know what that is and that's not really our job to figure that out. Our job is to meet with very, very creative, talented entrepreneurs and hopefully identify when someone has figured that out and fund them and give them all of our support and help we can.

Peter McCormack: So you do have those moments as a investor, where something comes in and do you have to kind of hold your cool in the room, not to give too much away and they leave and you're like, "wow, that was the shit!"

Brad Stephens: In the past, my brother and I have taken out a chequebook mid meeting before and written someone a cheque to make sure they took our money.

Peter McCormack: So what blows you away? What are the things that tend to blow you away?

Brad Stephens: Team over technology. There's certain entrepreneurs that, I'm just sitting here with like a shit eating grin and I'm so excited and I'm giving Bart and Spencer a little look of like, we have to switch from being really inquisitive and asking tough questions, into basically selling ourselves. How are we valuable?

What can we do for you? What are relationships and doors that we can open to help them out. It shifts when you... You feel it very distinctly when you're in the presence of founders that just have what it takes to build something amazing and it feels like a kind of a cult of personality or some type of energy and you just feel it, like this person is a winner and I want to back them whatever they do!

Even if it doesn't happen to be the route they're trying to do, you know there'll be able to pivot well in time, preserve cash correctly, communicate effectively and most importantly, if I'm getting that kind of bubbles or butterflies in my stomach and excitement, when they go out to raise future rounds, that skill will come through over and over and over again. So you know they'll be able to raise money well when they have that sort of charisma and excitement and vision

Spencer Bogart: And when they go talk to customers too! If we have that feeling then so did their potential clients and then also if they bring in a product of any kind too that we can play with, that also goes a long way. I mean we're all kids at heart and if someone shows you something that's just amazing and takes these experience to the next level or does something that I could've never done before, it puts a smile on my face every time.

Peter McCormack: Is it always a team or can it be an individual?

Brad Stephens: It can be an individual.

Peter McCormack: What is it about them? Is it energy? Is it the way they talk to you? Is it the way they present?

Brad Stephens: It's hard to put it in a box. It's really a gut feeling and it's extremely apparent. That doesn't mean every single one of our management teams we've invested in, has that. Sometimes you're really seeing someone that's got a product that's getting traction and maybe the management team is week, but they've nailed it on their product. Maybe they're just great technologists and not great marketers and then it's up to us to hopefully say, "hey, want to go from being CEO to CTO maybe, and we'll help you find someone that's more of a sales CEO to be that kind of front person?" So each case is different.

Peter McCormack: So is it kind of like dating?

Brad Stephens: Well when we invest into a company, theoretically, if they're successful, we'll be with them for 6, 8, 10 years. So it is a long relationship and you want to be able to have an ongoing rapport with someone and we've had to hold our noses and maybe invest in an asshole or two, but ideally not. You really want to be able to say, "hey, we're going to go through good times and bad times together and I'm going to have to be a bad cop and I'm also going to be your best friend." There's going to be a long relationship and you want to be able to like them and want to roll up your sleeves and spend a lot of time with them.

Peter McCormack: Is the Unicorn thing, is that something that you're looking for in every product or you're fine if it's something that might be a $50million or a $100million exit or are you looking at every product like it needs to be huge?

Spencer Bogart: It's not the outcome necessarily, it's the difference between where you think it can go, versus where it is now. So in terms of valuation, a lot of times we're doing seed stage investments that are valued well below $10 million. So we typically are looking for something that can have, at least we think a reasonable chance, at kind of a 10x outcome, especially for an early stage investment, considering that most of them just won't be able to make it, as just inherently very early stage startups are really risky. But again, if you're looking at something that's sub $10 million early stage, then you're looking at a 10x of could this be a $200 million company?

Peter McCormack: Okay, interesting. What are the unique differences about investing in crypto/Bitcoin compared to other markets? I'm going to throw in one one that I feel that stands out to me is that you deal with market cycles because Bitcoin is almost still its own ecosystem. There's not very many products or companies who have managed to bridge between crypto and traditional rest of the world. One that stands out is one of my sponsors BlockFi, they seem to have done that. They seem to have bridged traditional finance and crypto. So it seems to me that there's a lot of risk because most of them, their only customers are people who are already in crypto. That seems to be one unique thing. I might be wrong, correct me if I'm wrong. What other unique things do you deal with in investing in crypto?

Spencer Bogart: It's a good question but we definitely think... You see people come in too loaded on one side of the table or the other. Either they're so deep in traditional financial markets and haven't had enough time to understand how something like Bitcoin works, that they want to just turn it into what they already know or you get the other side of the market that you get someone who only knows Bitcoin and has never understood how a traditional financial market works and that's fine.

A lot of this is creating some sort of new financial system or at least a new asset, but it is relevant experience to help understand how traditional markets work today. While there's some inefficiencies in them, they have evolved and gotten better over time over the past 100 years and so having some of that context is generally helpful.

Peter McCormack: So if somebody is looking to raise around and they're considering approaching a company like yourself, you talked about the meeting, when you meet them, you see the magic, but what other things should they be doing? Should they be trying to bootstrap first or should they try and have a demo product? How do they reach out to you? What are the things you want to see from people?

Brad Stephens: We keep our emails on our website and we'll look at every single deal that comes through. Our research teams up to 9 now, so we have essentially enough horsepower to make sure we're touching and seeing everyone. So the very first thing is for us, is just basic scam of, call it, there's 20 categories of companies that could be in and there's 10 of those that we are just not interested in, that you can just reply back very kindly "I'm sorry, this is a pass" just because it's nowhere near what we want to look at.

So it's more of, I think we have interested buckets that we are looking for companies in and then we're just open for brand new concepts and companies and then there's certain areas that are just not interesting at all. So I think that first pass becomes really easy and then it's more, meet the team and kind of take the next steps in there and dive into potential business models and what's the market need and how big is the market and kind of the next logical VC questions.

Spencer Bogart: Then there's also lots of businesses that we come across that, again, we think can be great reasonable businesses, but they might not be venture return type businesses. So that happens a lot and I think sometimes when I talk to these entrepreneurs afterwards and let them know that I don't think it's a good fit for the portfolio right now.

They get a little bit disheartened about that. I think usually when you talk to them more, like "listen, I generally think that you can build this into a good business. It's just not going to be one that I can see going to IPO, getting acquired. It's something that you can run though and generate the cash flows directly to yourself" and we actually see...

Peter McCormack: Like my business!

Spencer Bogart: ...A good number that come through.

Peter McCormack: We don't want a media company! What are the buckets are are interested in?

Brad Stephens: Lightning obviously. NFTs and view that more like the video game space and MMOs and having assets in the real world that you can trade. 0x, is one of our portfolio companies, that's an exchange between a bunch of different NFTs out there.

Peter McCormack: That's one of the Coinbase ones as well? I think I saw that on their website.

Brad Stephens: Other areas, I spend an inordinate amount of time in security tokens. Also much in the Lightning vein, it's early days. We still are dealing with regulators nonstop, but I think eventually that's going to be a massive industry. So we're not really investing in STO projects per se, but the infrastructure needed, whether it's the exchanges are like securitized, that does compliance.

We still need the basic infrastructure like we needed in Bitcoin five years ago for security tokens and they're coming along slowly, because they have to go through regulatory steps in a much more painful, slow way. So we really like that space, but I definitely think it's really early.

Spencer Bogart: We've spent a lot of time also just looking at the, "DeFi" space, which to me I think includes Bitcoin. I think Bitcoin is the original DeFi, but it obviously also branches well into the Ethereum ecosystem as well and I think there's a lot of really interesting experimentation going on there. We haven't gotten comfortable enough to make an investment in any of those things, but we think they're all...

We always refer to them as directionally correct in that there are doing something interesting that could be useful in the future and just don't think the model's either quite there yet or there's some critical flaw associated with it or it doesn't quite provide the utility that it's promised. But again, you watch a lot of that playful tinkering and just kind of see what happens with it.

Peter McCormack: Yeah, I think I read you find my MakerDAO interesting? It's hard to ignore it!

Brad Stephens: Yeah, we talk about it all the time. It's a really important, interesting part of our ecosystem. We just have not made an investment there.

Peter McCormack: What should entrepreneurs look for in investors?

Spencer Bogart: People that want to work with you and not against you? I mean very much the whole point of doing, especially equity investments, is that you're in the same boat together, like neither of you guys wins without the other one winning. So it should feel like that in a relationship,

It shouldn't feel like a zero sum game between the two of you. I mean, granted there is some transactional relationship, especially at the start of that, where it's an investor trying to acquire some piece of your company and you're trying to maximize for the price, they're trying to minimize price.

But at the end of the day, if you guys both see eye to eye, it shouldn't be that hard to find a middle ground and if you're finding it really difficult to find that middle ground, then it might just not be a good fit.

Brad Stephens: I would add too, a commitment to the ecosystem. In the past six years we've seen a dozen major generalist VCs come in, get very excited, show how amazing their track record is, make one or two investments in this space, maybe the price of Bitcoin goes down and they walk away and they aren't interested anymore and they're not there for following rounds of financing. They're not staying abreast of the industry to be able to give any type of intelligent advice and that's tough if you're an entrepreneur, if all of a sudden you have someone that's super excited about giving money and then isn't there to care one bit two years from now.

So we're obviously talking our own book here cause we're a specialist firm that's dedicated to the ecosystem, but there are some generalist VCs out there that are more long-term dedicated and have been around a little more, but not many of those. So I think it would be nice to see more generalist firms make more of a long-term commitment to the practice. There's only maybe Union square and Andreessen Horowitz, probably two of the only ones that have really endured and stayed constantly focused on, "this is going to be a big market."

Peter McCormack: Have you ventured out to this space?

Spencer Bogart: Accidentally! They were going to be Blockchain company and then they decided not to add a Blockchain or crypto component to it! They're doing well, but we're supportive of that. There's no reason again why you need to have a Blockchain for everything. So if sometimes they're doing it and all of a sudden the products taking off and they had a roadmap that they were going to in some way integrate crypto or Blockchain and then it turned out that their business is doing well without it, that's great.

Brad Stephens: We have probably a dozen companies a week that we'll get business plans from, that have no need whatsoever for a Blockchain or crypto. I'll end up singing Jimmy Song's tune here, that I think people saw this as a way to kind of paint yourself in crypto and hopefully you'll be more attractive and get investors, even though that shit has no benefit to their business whatsoever. If anything, they add a friction token and make their entire ability to actually have their service get adopted harder through putting in a token.

Spencer Bogart: Brad, what's a friction token?

Brad Stephens: A friction token is an absolutely unnecessary token that makes customer acquisition and people to use your product, even more difficult by forcing them to go purchase this token and then use this token when there was no need whatsoever for the token in the first place. So you just added friction to your entire sales cycle or customer cycle.

Peter McCormack: Is that not all tokens?

Spencer Bogart: The majority? Yeah.

Peter McCormack: It was one of the reasons I kind of was disappointed the bear market didn't just carry on a bit longer and go a bit deeper, just to wipe some more stuff out, because I feel like Bitcoin has saved a few projects!

Brad Stephens: Well that's the thing, these are the walking dead. So something goes down 90%, is that still alive? Something goes 99.9%, is it still alive? These chains become zombie chains and then all of a sudden someone breathes life into them, because they think there's a micro alt rally, but they never die. Usually startups, you could say 70% or 80% of your startups eventually, they filed for bankruptcy and it's a zero. Some of these chains, they just slow to trade and they still just exist, like the walking dead.

Peter McCormack: So is that 2 in 10 ratio pretty much the same in the Bitcoin space?

Brad Stephens: It hasn't been in crypto. They talk about a J curve in venture capital, which is, you make a handful of investments and then your losers die first ,so the net asset value of your fund dips below the size of your fund, then hopefully the successful start getting marked up. So your kind of valuations of your fund dips low and then shoots up. We have had no J’s. If anything, some of our more troubled companies, get aqua hired for a million dollars per engineer, solely because there's a demand for people that have spent a few years tinkering with Blockchains and understand the technology.

Then a lot of these companies are still able to just to get funding because there's people really excited about the space. I think we've had a nice wind in our back in financing that we haven't... Even the full bear market of 2018, there's still companies getting funded a lot cause there's a lot of people passionately believing this is a major, major sector and a major technology and this isn't going away.

Peter McCormack: So you've still got the same conviction? More conviction?

Brad Stephens: Oh more, more. We used to be scared silly that all of a sudden Silicon Valley Bank would shut off the Coinbase bank account and it would just set the whole industry back like three or four years, because no one could get banking back then, so you needed some of those on ramps. At this point we are so past critical mass reached and there's no chance in my mind at all, that crypto just goes away. But that was a legitimate concern for a handful of years in there. But there are lots of points out there where the winds could change and this industry was just going to get crushed, before it ever got out of the crib.

Peter McCormack: And how far do you think this can go and let's just keep the Bitcoin for now. Do you see Bitcoin becoming a major asset, similar to say gold or do you see the full vision that some people have that this actually changes the financial system of the entire world?

Brad Stephens: Global reserve currency of the world.

Peter McCormack: You see that?

Brad Stephens: For sure, it's inevitable. It's just how long is the question there.

Spencer Bogart: And I mean even again right now, so what is Bitcoin most useful for right now? Well covered that it's a store of value asset. I mean you look at the store value, it's not even just gold that we need to be looking at, which is a $9 trillion market alone. You need to look at the art and collectibles market, which is a $4 to $5 trillion market. So I'm talking about high end paintings from the likes of Picasso and Van Gogh, 1963 Ferrari GTOs etc. These are assets that on the surface, people assume they buy them cause they're beautiful. That's not the case. They buy them because they're scarce. They buy them because they're a store of value.

After purchasing those assets, most of the time they sit in a vault or they sit in a museum and the purchasers have very limited, if any capacity to even consume the beauty of these pieces. Same with the cars, they sit in warehouses and in showrooms, they're not driven around. So those are all store value assets and also in many ways, the real estate market is a store of value asset as well. I mean the micro example that we like to use is up in Vancouver just a few hours north of here, the property market over the past decade has been significantly driven by overseas purchasers.

These aren't overseas purchasers that are buying them to go live in the homes, they're not doing it for rental income, they're not renting the homes. They're are literally homes that just sit there empty as a store of value. The problem got so bad in Vancouver, they had to institute an empty house tax, to kind of address this issue, just because of how pervasive it was and the fact that it was driving up the cost of living.

I think that the global real estate market's measured in the hundreds of trillions, but even if we assume that only 5% of it or so is used as explicitly a store of value and granted, even if I'm living in my house, it's also a store of value, so these things are not mutually exclusive, but if we just accounted for empty real estate, we're probably talking about another $5 trillion right there.

So we've got $9 trillion in gold, we've got $4 to 5 trillion in art and collectibles and then we've got another $5 trillion or so in real estate. So together we're talking about a market that's north of $15 trillion at a low investment and really likely in the hundreds.

Peter McCormack: But can Bitcoin swallow up large majority of that? Obviously it's not going to change our art, work and cars, but do you see the value of gold, could that potentially be destroyed by Bitcoin becoming the global reserve asset or do you think they have a kind of symbiotic relationship?

Brad Stephens: I think it's more of a demographic thing. My father loves gold. I think it's like a rite of passage of being an old wealthy human that you accumulate a bunch of this gold into your later years as preserving your wealth that you have it. The younger generation doesn't have that same affinity for gold. So I think the gold bugs of the world are slowly going to fade away with time and age and that is just a demographic group that will be replaced by the younger generation, that essentially wants that same store of value, but doesn't see any real inherent value in gold.

Peter McCormack: Does your dad have Bitcoin?

Brad Stephens: He did and then he sold it to us about three years ago, I think, very unhappily. He wanted to sell it and I just refused. So we bought it from him.

Peter McCormack: Does he get it?

Brad Stephens: He does implicitly.

Peter McCormack: So he's not like Peter Schiff?

Brad Stephens: No, no, no, he loves seeing what we're doing, he understands the thesis. He's just much more of like a physical, real world assets guy.

Peter McCormack: I think you're right though about it being a generational thing again. Christopher Giancarlo, at his Senate testimony hearing talked about, I think his nieces and nephews, they don't care about the stock market, but they get crypto. They just get it. I don't know if you saw my tweet yesterday as well. My son did a paper. He did a speech at his school about Bitcoin. Did you see it?

So I gave him the pointers. I said these are the things you need to research and he went away and did it, but then he came back asking questions, because his teacher had asked him questions about it. He said the great thing about it, because this is where I was so proud of him, he said the great thing about it to his teachers that they can only ever be, he got the number wrong, but he said there can only be 20 million and they can't print any more. So if more people want it, it's going to go up in value and I was like, "I'm so proud of you!"

Spencer Bogart: Humans are innately drawn to scarcity and that's it. Even as kids, right away, you click to things where you're like, "wait, there's only how many of these out there" and right away you try and grab one. So it's part of human nature.

Peter McCormack: I don't know though, I've been starting to post some things back up on Facebook recently, just for my friends. I think they think I'm annoying and probably just want me to piss off. But I'd been just putting out these messages that, Bitcoin isn't magic internet money, it is scarce. Trying to give them the kind sales pitch. I'm not getting anything!

Spencer Bogart: Just start with magic internet money. Just start with that and then people are like, "wait, but seriously, now tell me more about it" and then once they start asking questions, then you can give them the real stuff.

Peter McCormack: So just to finish off, two things, what are the things that you think are going to be most important for the ecosystem over the next year, two years? What are the things you want to see happening? Is it regulatory, is that ETFs?

Brad Stephens: Yes, clarity and regulation crossed my mind is first. The whole, I call it the US side of the industry, is basically on hold. People don't know what they can do or can't do and can we have token sales? Can you have DEXs? There's so many unanswered questions right now, that innovation's going to occur outside our borders for the time being or just kind of sit on the sidelines and capital formation hates uncertainty.

Spencer Bogart: There's some things I can think of that would be major catalysts, but honestly I think that you could take away all of those things and I think Bitcoin just keeps going and that's what's great about it. I really don't think it needs to change. I don't think it needs anything right now, except for as far as, again, hitting escape velocity and the number of people that are working on it. It's just time. Time is a huge factor. When you're looking at Bitcoin, it's three years old, you're relatively right to be dismissive of it.

At 10 years you have to start taking it a lot more serious. Think about it now, 10 years into its history. If you're 18 years old, it's been around for more than half of your life. So someone that's over 60, it's been around for a small percentage of their life. They're right to be somewhat skeptical of it, because in their span of their existence, this is still something that's relatively new.

If you're 18 years old and Bitcoin has been around for 10 years, you're thinking, "sure, some people tell me that like maybe I shouldn't trust this thing, but if it's something that's been around for more than half my life, I think I feel pretty comfortable with it."

Peter McCormack: In the other direction, if you're 60, it's going to have less of an influence on the rest of your life. Whereas if you're 18, this could be a major influence on the rest of your life. So you've got to look at it both ways. All right, cool, if people are interested in talking to Blockchain Capital or they've got maybe an idea, how do they get in touch? How do they contact you? Who do you want to hear from?

Spencer Bogart: You can email me at spencer@blockchaincapital.com or you can find me on Twitter, my handle is @CremeDeLaCrypto

Brad Stephens: brad@blockchaincapital.com.

Peter McCormack: Brilliant! Okay, thanks for coming on guys.

Spencer Bogart: Thanks so much!

Brad Stephens: Pleasure!