Blockchain Capital's $580M Dollar Bet on Crypto | Spencer Bogart & Aleks Larsen

Transcript

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contract vulnerabilities with vouch you are not just insuring your startup you are investing in peace of mind so you can keep on building you'll hear more about vouch later in the show welcome back to another episode of Empire as promised we got the blockchain cap folks on the Pod we have Spencer and Alex GPS at blockchain cap Spencer Alex welcome to the show thanks for having us great to be on yeah yeah yeah pump to have you guys here all right lot to talk about um you guys just raised 580 million two different funds haven't seen a fund raise like that in a long time it's also 10y year anniversary of the fund I think that makes you guys one of the maybe the longest running crypto fund Spencer I'll throw it to you can

you just tell us I'm going to pick into this fundraise a bunch just want to know as much as possible about this raise because it's it's a colossal amount of capital in this market two years into the bare Market tell us everything that we should know about this fundraise how long you've been raising who you raised from as much detail as you can yeah so let's see I suppose probably you know what helps explain the ability to kind of like raise that amount of capital in this market environment is really probably the how institutional in nature the lp base is right so you know historically allocators to crypto Venture funds are pretty much going to be maybe some family offices and high networds right it's been very fortunate

that over the past uh let's see almost six years now we've kind of been building up a larger and larger base of institutional clients and so that just means you know uh pensions and endowments Sovereign wealth funds um and then also strategic Partners um so we're fortunate to count um folks like PayPal and Visa strategic partn ERS and like in general the the nice thing about having this kind of those those large institutional allocators they tend to be very consistent right as long as you're maintaining the relationship with them you're putting up the performance that they want to see they're typically going to keep investing from One Fund to another regardless of Market cycle right and a lot of these LPS have been with us through multiple Market Cycles so

they're already a little bit numb to it in the same way that we are right they're like oh great so you're telling me that um there's a dir of capital in the industry and you guys are going to deploy into that like great sign me up that's that's going to be a great vintage um so so that's probably like what explains you know being able to pull in you know 580 million total of course that's across two funds in the depths of a crypto winter and bare Market here what was your target for that fund out of curiosity was it a billion was it 600 or it's actually almost exactly at the Target so so there's two different funds so we have our our sixth early stage fund that's what we've been doing for the past decade like this is our bread and butter early stage seed series a equity tokens

um the the whole kind of gamut there um that one we had a target of 400 and it came in at 380 and then on the we have an opportunity fund um and so this is series B and later and we had a target of 200 and it came in at exactly 200 so um you know for both of those they were very very close to their targets um you know when we originally started thinking about those Target sizes it was not as brutal of a crypto winter so I'm not going to pretend like it was really easy but again we're fortunate to have the lp base that we do that that sticks with us and was it like a big overlap like it was just rolling funds uh from a prior vintage that they you know

capitalized crystallized on and they just rolled out some of the gains into this new fund what is the overlap like what is the composition of that LP base is it like 100% you know repeat or you know how much of that is new it's a good question I'd actually have to pull the numbers to be 100% certain but like we can do some math here so our last fund our last early stage fund was 500 or sorry 300 million in size um and so we're looking at about 600 total across them so like even if we rolled everybody with the exact same commitments that'd only be half of it now in this case I think you know pretty much everybody rolled over into the new fund um a lot of them you know upsized into it but then we also added in some new some new LPS into the mix as

well was there any thought about going about raising too much Capital right you've seen some maybe someone like some of the biggest funds you it becomes really difficult to deploy that much Capital into crypto there are folks like maybe Benchmark who I think they I think it's Benchmark they cap their funds at 350 somewhere around there was there any conversation about like is this too much Capital to deploy into crypto at this point oh yeah we definitely talked about a lot I mean the the fact is crypto is a pretty immature technology overall it's been around for a relatively short amount of time and you know I'm constantly amazed at at how many interesting types of applications and um and use case have been developed so far

um but you know at the end of the day like we're still exploring a lot of the white space here and the opportunity set isn't in the you know I'd say like many tens of billions right now like the capital you saw get raised over the last couple of years and so when when thinking about it you know our in our last fund which was 300 million we felt under capitalized and so we knew that we we were going to go higher than that but thinking about a billion plus started to make that math really difficult we want to be able to participate at the earliest stages and have that be meaningful at the fund level and so we found a nice middle ground that I think is in our view appropriate for the stage of the market right now in the opportunities that we're seeing yeah and

so from a structure standpoint you know there are funds that have raised like a billion dollars but it's not all called Capital right because it's you know maybe 10 20% of that's been called you guys are structured purely as a venture fund so you're not calling that you know 500 plus out of the gate you're kind of like saying hey we're going to deploy this over a three to five year period And so and then Harvest that at the towards the tail end is that accurate 100% accurate and and the other thing about like the the way that we've thought about fund growth a lot is you know there is this inherent uh attraction for all asset managers to manage more Capital right like that's their business right but we've always had this perspective that

we need to stay aligned with our LPS which means that the fund sizes need to be relatively constrained so that we're oriented towards performance right we need to deliver performance for them and that's the only way the business is going to be enduring across you know the next two decades and for us the way that we try and translate that is from going from one fund to the next we need to grow it at rate slower than the growth in the opportunity set in the industry and as long as we do that we're not going to be saturated in the market and we're not going to be um deluding the returns for for our limited partners yeah a lot of times uh I mean back in my days and parying just talking LPS a lot of what they grant that it was structured as a hedge fund we would go

out the market like not constantly there would be windows and I remember one of the things that LPS had looked at a lot was you told us you were going to do X you did Y in terms of the strategy and in crypto as you said Alex look at the design space the opportunity set is ever evolving and how much of like how much of your LPS were looking at that like was there a recurring set of questions where they like hey look we love what you did here but we didn't like you went this way and we didn't like it and was there something like that that ended up hurting you quote unquote obviously you were successful in raising what you wanted but I'm curious if there are some LPS that have been with you for a long

time that just said hey look not anymore like we we just we're out and was it because of the industry regulation risk or just you as managers stewards of capital I'm kind of curious how you think if if there's something there that you can give us not really um you know I think we've done a pretty good job of being consistent and that you know part of that is having been doing this for for a decade now we've been investing through all the major Cycles in crypto and I think have refined a strategy that at this point is is you know fairly stable and we're not you know seeing a new fat and and kind of jumping on that and like moving the entire ship in a different direction like we're I would say pretty steady um and and our our

partners on the lp side um I think have come to expect that and and we haven't really deviated from it much and I think like you know so much of of life in general I guess is expectations management and that's a lot of what we've worked on with our limit partners of like here's what you should expect from us and we want to be constrained enough where they understand what they're getting into but not so constrained that we nichy ourselves right like it's amazing to me it's funny when when you know we were raising four funds ago one of the main major push backs we'd get from limited partners was I don't know the industry just seems really small it's too nichy which is funny now because sometimes perspective limited partners ask us why don't you

guys just focus on just do defi or just do infr structure I'm saying listen I don't think that makes sense for where we're at because the ability to cover the various sub sectors of our industry is to the benefit of our LPS and so like we guide that into the expectations that like we are going to go across the industry and some of the Investments they're going to look different than what you're expecting and like the reason why you're coming to us is to deploy this capital on your behalf and that's what we're going to do now like there's a very delicate balance there of both respecting the guidance and input from your limited partner and letting them steer the ship right and that Dynamic is actually the exact same as we have as investors in the founders that we back right we want to be there as a

sounding board we want to set expectations with them but we're not going to step in and call operating shots for them right we backed them to make those calls they're the ones in the trenches every day they're the ones looking at the data they're the ones talking to clients so like it's their decision to make and we're here to help like help them think through it and pull it out of them but not to never to overrule them and so we try and mimic that relationship with our limited partners of like listen you're going to see us do some stuff that seems off thee wall because crypto is going to be a little bit off the wall it's not just going to be putting your mortgage on the blockchain right like you're going to see some crypto things that you've never seen before and like you should be

excited about that because that's going to be kind of like the I think that's going to be the line share of the opportunity y of course we're not supposed to talk about returns but I mean I think the biggest Point here is are you outperforming Bitcoin and eath and of course some funds because of their size or because of the market just go back to bitcoin and and just holding the Benchmark and you know in the absence of an ETF like you know that's kind of I guess LPS are fine with that because they don't want to do it themselves I am curious as you think about youve raise a fund now um You can call the capital the opportunity set is interesting a lot of the kind of open question now is you know the relative opportunity between holding Bitcoin holding eth versus doing your series a

or precede and I'm curious how you think about that and how you think about deploying this Capital that you've raised yes so I mean I think over the past 10 years it's been very difficult if not impossible to outperform uh Bitcoin and E depending of course on on when you enter with the market um looking forward I mean these are these are large market cap assets at this point they don't they don't move at the same rates that that they used to at least with respect to to the prices now um and and so we think that that that starts to change these are obviously really strong benchmarks to have and in our thinking when we look at underwriting an opportunity it's certainly something that we consider

like does this have the potential to to outperform eth uh in particular as it relates to like an ethereum based protocol or application I think is perhaps the most relevant question that you should be asking when you're looking at underwriting something and so that's our goal I mean we're we're absolutely here to outperform ethereum and um you know and Bitcoin from here and I think based on where those assets are at today like we have a much better chance of doing that um especially with you know the the quality of the founders that we've seen enter the space over the last two to three years Spencer I noticed in your um in your fundraise announcement a lot of the things you pointed to there weren't like nft data it wasn't gaming metrics it was I actually think you put it very uh

eloquently is like in the depths of a crypto winner you said Six Trillion inate coin volume 700 million of defi protocol Revenue 700 billion of Dex volume and three billion of outstanding loans across the two largest lending protocols feels very and then you had other stats as well feels very def5 focused to me is that the thesis moving forward or is that almost the pitch that you made to LPS in the room they got excited about D5 maybe gaming and nfts fell flat why was the why was this kind of the thing that you you honed in on honestly just my personal like kind of Interest right like I mean that you know you just did a good job laying out the numbers there and I think like actually pulled just across chains for the stable coin volume I think it's like

seven and a half eight trillion over the past year of of volume Six Trillion on ethereum alone right so I I pulled it up after I kind of put out that that tweet or that that press release but um for one like h a product product Market fit right there right like in the depths of a cry crypto winter like 7 and a half trillion of stable coin volume 700 billion of Dex volume 700 million of of protocol Revenue like that's product Market fit right there and I think that Spencer hold on so many people are questioning that crypto doesn't have product Market fit what are you talking about I know I know it's absurd right like these numbers are objectively like massive right and this is when people are still writing it off like people are not even paying attention right now and you're putting up those kind of numbers

like and the reason why I'm focusing on defi is because you know from the outset we have had the thesis that dii would be the thing that works first and that we think that blockchain technology crypto can be applied across many different sub sectors but sequencing matters of when those things are going to hit this whole industry was born out of Bitcoin is a financial asset and the Bitcoin network is a financial Network so it it has always intuitively made sense to us that the first vertical you're going to see impacted is going to be financial services financial products right so it's no no surprise and I think what's happening in defi matters for all of the other sub sectors like let's take let's take like The Gaming use cases let's

take the consumer the social all of those the basic Primitives are Financial in nature it's ownership it's transactions it's the ability to exchange like all of it kind of comes from from defi so like that's what I'm watching is the canary and the Coline to understand like what else might work in other places yeah in terms of um you know how you think about you know the SE sequence of defi getting off the ground I mean you could have you could look at any sort of Legacy def5 protocol relative to Ethan it's grossly underperformed even before rat started moving now you think about Catalyst you

could see that as a great opportunity now when you look at fundamentally like there's protocols out there that are trading at distress PE multiples like you walk around Silicon Valley you talk to venture capitalists tell them hey this is an early stage company growing 100% plus year-over-year um you know you could argue the addressable Market is you could say it's ftech and you tell them it's profitable they'll hand over fist even in this environment give you a check you know instacart's not even profitable and go public at multiple billions of dollars and these Protocols are are not right and so how do you think about the timing of your Venture fund you have to at some point return Capital to your investors how much of timing and catalysts and your horizon for how this Tech is going to actually

live up to its promise and acquire users and like it's tough right I mean cuz as you said Alex we're a decade in and we have 10 users in defi it's great Tech 10 users so how do you think about like is is is this the next decade is is this fund where we see millions of users in in in crypto like because timing is everything in many ways yeah I mean I think you know defi was born in an environment where the infrastructure wasn't ready to accommodate um mainstream usage right like eth got bloated really quickly transaction fees were were through the roof um the the defi thesis at its core I think is powerful and to your point like these

are massive markets that defi is going after just like Bitcoin is going after a massive market and stable coins go after massive markets in general I mean that that's one of the most exciting things about crypto like you would expect a new technology maybe to go for like Niche use cases initially but crypto goes straight for the Jugger knuts um and you know with with dii specifically you know global permissionless finan cial services are I think at a very fundamental level better suited to serve the internet economy and will grow with it and so you know that that's kind of at its core like our our thesis in terms of timing you know you're not a daily active user of of a mortgage I forget who gave that quote originally but I liked it a lot and so you know the user numbers for defi

certainly we couldn't expect to look like a game for instance but the amount of capital that the system has amassed I would say is is quite impressive the volumes been very impressive too and then we got to a point where retail was a major driving part of that um and then started to get caught in um in basically unsustainable transaction fee environment um wi which you know I think really put a damper on on adoption at a time when the attention and the spotlight was was all over defi so I think there's a couple things happening there one uh the infrastructure simply wasn't ready for defi we're getting there now and I think in the life of these funds we're going to have infrastructure that's high performance

that's cheap to use that's secure um and we we've seen a lot of progress on that front so today the things that are possible to build in the dii realm are you know much more accessible to people around the world than than things were three or four years ago uh the other thing that's been I think holding def5 back and this is still where we you know don't have Clarity is on the regulatory side like there there there is no clear path for for a defi founder to to scale their applications serve products to users in particular in the United States and so in in some sense like innovation in that space has been paused um we're still seeing you know interesting things but like to me the really like the zero to one um events in in defi mostly

already happened I'm open to to there being new innovation leaps there but like defi amms like dexas that are that are open and um lending pools where we kind of the the really powerful core primitive that power defi today and we saw you know huge amount of like let's say like one to end Innovations on those where like you tweak the amm a little bit and try and get a more optimal um trade route and we haven't seen a lot of those really be powerful enough to get people excited so um you know what what I think what I think we're waiting on here is like this next leg of of users like dii is kind of I mean like Financial Services generally I think the power users of those tend to be in

tional in particular when you think about the next leg of of innovation defi like derivatives comes to mind for me and these are not really retail products these are products for sophisticated users of financial tools um and and so you know a lot of this really I think comes down to how fast institutions can get comfortable using this new Financial infrastructure so it bleeds into into tokenized markets we're seeing um I think some some pretty exciting developments on that front with you know folks like Black Rock um angling to enter the space uh would wouldn't be surprised to see them do something big in in the next couple of months um and uh and it's just going to take take a long time until then you have you know

the major potential user here remains like crypto Deens and DOW treasuries and perhaps forward-looking Neo Banks Alex it was funny leading up to this podcast you remember the um remember last time we had dinner in New York the topic we were talking about it was the it was the Unis swap fee switch which is such a there's no way in this market anyone would ever even consider that which tells me I mean that I I forget when we had dinner six months ago nine months ago why not would you consider in this market state of regulation in the US is so much worse today than it was six to nine months ago and the reason Unis swap can't turn on their fee switch is uh for regulatory reasons I I would argue I

don't know if you guys would agree with that but um I'm curious so Alex you mentioned regulations what what this is all leading into is when you look at the future state of where you guys are allocating Capital especially in defi how much of it is going to be outside of the US because of what's happening in the States because Prime historically you've allocated a lot of your Capital inside the US I'm curious how you see that changing moving forward yeah I mean I I would say like over the past 10 years we've probably invested 70% inside of the US 30% exus I mean crypto of course is is a Global industry and um we have a lot of connectivity with groups all around the world that are just innovating on this stuff but um in particular over the last

two years that's kind of flipped and so we're we're probably closer to like 5050 us xus with a pretty strong Trend towards xus which is unfortunate we want to see this industry built in in the United States the US had an early lead I think on on the R&D and the brain power in crypto and honestly the the regulatory environment in the US has been um not constructive at all and they're they are putting the us at a strategic disadvantage when it comes to crypto market so expect that Trend to continue for the time being but you know we're we're optimistic that the US gets on the right side of History eventually Spencer anything you would You' add there no 100% I mean it's definitely

Global we we we try not to focus geographically like the thing we have to be conscious of is you know rule of law and of course a regulatory overhang so like here's a weird thing about investing in defi is you know if the primary value of cruel mechanism is not going to be an equity but it's going to be in some some token or digital asset and it exists on a blockchain like the good thing is it's really hard for a corrupt regime to just seize that right whereas My Equity you kidding me like you know like all of a sudden you know some despotic dictator like decides they're like oh wow you built a nice company there you know what I don't like these foreign investors being on this cap like nah I don't really like this ownership guess what you don't own anymore and like the

chances of us winning in court you know depending on the jurisdiction like we're not going to win in Russia right like congratulations the business has been seized like in the odd chance that you actually deliver like you know a successful outcome on a company like your winners get taken away from you but the cool thing about crypto is like if it's going into a crypto protocol like the risk is lower there right like I I don't have to worry about like suddenly it being seized overnight so it's a funny Dynamic but but s you also touched on something earlier which is like you know thinking about defi protocols if these were just traditional fintech companies you're right I think investors would be writing checks left right in center hand over fist right take the money and I think people should be very

frustrated and pissed off at the pace of innovation in fintech and traditional Finance like if we let's look at the past 15 years the major innovations that fintech has delivered it's been buy now pay later so like affirm and Clara right great I can pay for my sandwich and for installments that's kind of cool um you can fractionalize shares that's Robin Hood um over collateralized lending to startups that's brex uh apis that's plaid right so now now my bank can talk to my fintech app and maybe payments there's been some stuff in the pay by the waya is not necessary in a world of compos

oh that's exactly where I'm going with this and like so there's one other category that's delivered a bunch of winners in fintech in the past 15 years that's payments so it's been digital payments we get striped crossborder payments and remittances we get revolute remitly transfer wise right now let's consider all of those Innovations in a crypto context actually you know but before I even go there here's the reason why people should be pissed off that like the pace of innovation is not faster and Finance it is the invisible thing in your daily life all the time when we make it a little bit better it has a ripple effect through the entire economy right it might be invisible but like it produces economic surplus for everybody and like we should demand more we should demand a faster pace of innovation so

now going back to those categories we just discussed there's like 250 350 billion dollars of market value from the companies I just mentioned right there like just from those companies created from all of these it items which by the way San as you just hinted at crypto does all these things out of the box except for one there's one that it doesn't do it's the buy now pay later we don't have that yet sorry like you won't be able to pay for your sandwich and like pay for it in for installments but like all the other things like go think about it like fractionalizing shares in a crypto context how weird is that to think about like bro just move the decimal point that's it that's it you fractionalized good job and like Robin Hood's a$1 billion company right like the ability for like you said sany for

my bank to talk to my fintech app like hello this is what smart contracts do out of the box like they talk to each other you can like anybody can integrate them yeah and let's see like over collateralized n startups like by the way how shocking is it that that like and by the way I'm not trying to like fault any of the founders of these companies they did a great job these are fantastic companies right they did a good job but like think about brex brex was found it forget like maybe 2013 and their major Innovation was realizing realizing that wait a minute if a company has $10 million of cash in the bank I can probably give them a $1 million credit line like because the the regular lenders out there were just like I don't know I don't see any I don't see revenue

and cash flow bro I have there's $10 million in the bank like you bring up well you bring up a great point because one I think it's regulatory capture like there's a great slide 100% finance is just regulatory capture like healthcare um and it's just embedded in that is is a whole issue of local Fiat shitcoins and Central Bank policies and look the government wants to control the money supply and finance is one of those things heavily regulated and I get it you know it's people's money you know um we've had our own faults in crypto like FTX FTX is not a crypto problem it's a finance problem meaning counterparty risk and not having transparency into the operations which if you want to be

critical of FTX you're not critical of defi you're critical of the traditional Financial system and the regulatory Arbitrage that has created the lack of clarity and yada y y but the problem is um you know I I the second point I wanted to make is like in my appreciation I would have you go talk to any bank right now to your point around brecks the reason why large banks are not servicing smaller uh businesses is because they have been saddled with a bunch of new regulations that are ever evolving and there there's two departments in banks that keep growing Finance like accounting and compliance the back office so back office and compliance are the two only departments that keep growing in Banks because it is incredibly costly now to run a bank and so what does that mean

that they can only service their most profitable largest clients and so there's a whole underserved Market I'm not talking about like emerging economies I'm talking about even in the US there's a whole set of businesses that don't have access to just simple Finance products but you know with crypto I think if you talk to a bank today we had a great guy uh JP Morgan's head of crypto here and they're like we love crypto because we can cut a bunch of costs in the back and you tell me Atomic execution great transparency great the problem is like you don't have privacy and without privacy they're not going to come and build on chain they're not going to use ethereum to settle stuff so I'm kind of curious again it goes back

to this point around timing like I hear you you need a catalyst uh there arguably is some tech that still still needs to get built for these players to show up up and start using defi um and so from uh kind of like themes or interesting ideas that you're looking at like what are some of the more exciting kind of pieces of innovation that you you guys are excited about that you want to fund that haven't been built um defi or just generally infrastructure related yeah I mean you know on I guess with like you know a lot of our infrastructure investing has been in response to uh problems at the application layer that we saw over the last you know five years of investing in

categories like defi gaming consumer and nfts and so on uh we we got really excited in particular about ZK um different use cases of ZK um on scaling and then some of the new things coming out of companies like Risk zero on the ZK co-processor side you know on scaling I think it's fairly widely considered um the to to be consensus that you know ZK rollups are or the at least for now the way that we're g to scale ethereum so you know we we got really really excited about that we went and led matter labs's series C we really like the product that they have we really love the team um with with that you know you get a a better security model you're um you are

verifying correctness on chain and a really succinct proof so you can push a huge amount of computation off the chain and you know without sacrificing correctness so what that lets you do if you're is is basically you can lean out on the risk Spectrum with offchain data availability that means you can accommodate games you can accommodate microtransactions all sorts of new use cases that haven't uh been you know economically feasible until now and that frankly still aren't with the the current uh state of of rollups which have scaled ethereum by you know by by roughly 10x right like it's it's maybe 10x cheaper to use to use a rollup today that that needs to be 100 to a THX

cheaper and so you know ZK rollups are are the way that we get there um and um you know the the opportunity I think to to create a new environment where you do transactions and this kind of modular way where ethereum really is like sprouting new uh execution environments on top of it adds a lot of potential from uh from a developer you know design space perspective so in the case of ZK sync in particular they introduce an llvm based compiler under the hood that'll eventually let developers write smart contracts in in popular programming languages so we get to like deviate a little bit from the evm and then really crack open the design space for the types of of applications people can build and the types of tools they

can use to build those applications you also get really neat features like native account abstractions you can build much better authentication schemes much better key recovery schemes and better user experiences overall where applications could you know pay gas for their users allow users to pay in any any token move if they want to pay gas in usdc great you can do that um and then eventually you'll get privacy as well and so I think some of those like institutional use cases get unlocked by by virtue of of new execution environments with differentiated features um as well as kind of solving the issues that like the crypto native users had in the last cycle so that that's on the scaling side we think that's that's sort of well underway and more and more applications are are

deploying first on on L2 so that's been great I think L2 beat has this like wonderful chart of like all L2 activity superimposed on ethereum activity and the scaling factor is like how many you know overall transactions happen in the ethereum context if you include l2s it's like a little under 6X right now um so um you know that that to me is is a really good sign of progress obviously that number needs to get much much higher um but um but yeah but but but there's progress underway on you know on the other side ZK Cod processors these are like I I think not particularly well understood today but like more generalized versions of what um what the ZK rollups are doing so it's really like

you could think of it as like a verifiable computer that could handle arbitrarily complex computations off chain and then return the results of that computation to ethereum you know alongside a z knowledge proof so that ethereum can verify that the computation is valid and this you know like blockchains by by Nature are like constrained in in the types of of computations they can run and that's been a lot of the reason why applications have been designed the way that they have in a fairly limited way um and and this lets you just I think vastly expand the the types of applications you could build again and include more computationally intense things so um so we see that those kind of new

infrastructure pieces as both like scaling ethereum scaling the performance of it lowering the cost making it more accessible but then also changing the the design space for for developers and allowing them to run all sorts of experiments build new types of applications we've you know we we've also been excited by things like reaking um by by uh you know what what igen lay has basically pioneered and then the identity space as well but um yeah have to harp on any of them Spencer how do you think about this because in the in the beginning of the conversation you said this thing you said the Lion Share of returns will be in things that you've never seen before it's not gonna it's not gonna be putting your mortgage on the blockchain um what do you think about this I mean

obviously Alex me mentioned like very deep infrastructure Investments I would call that what else do you think about when you think about these kind of like weird esoteric ideas that like haven't been seen before but you think that crypto enables so let's see so I I think the catalysts that that Alex just mentioned there are all fantastic like they're a little bit behind the scenes but they are like they're the hidden catalysts I think that enable developers to build the next wave of applications right so I think that th those are like the the major hidden catalysts but like when I try to impart on our LPS of like why are you here one of the main points I need to drive home with them is that crypto has a structural advantage in Innovation and this goes back to kind of

my complaints about the pace of innovation and fintech and trafi and Santi I totally agree with you this is like a regulatory capture problem it's an anti-competition stance it is not a it's wrapped up in the like let me protect you like and I won't go down the rant of like how it's literally like their own studies are like 99% ineffective in actually stopping elicit transactions like sorry a 99% failure rate like are you kidding me like the only thing that it's worse than the TSA I think the TSA catches like 5% of elicit items that are supposed to go through like on their own self tests right okay I won't go down that but like the important thing is that crypto has this structural advantage and Innovation because of this Dynamic of it

being an open platform that anybody can go and build on that is extremely rare in the world that anybody can pick it up with minimal platform risk right like the chances that the rules suddenly changed underneath them drastically reduced from what we've ever seen before and so you take this Dynamic where anybody can build and like you're going to unleash Innovation like the hard thing about Innovation is it's really hard to predict like people don't know where it's going to come from if we knew where it's going to come from we just impose it like have a dictator just say like go and do the Innovations do this one and that one and that one but we don't know so like you want to maximize the number of experiments you want to increase the number of Builders and you want them to be able to get out there

and try things and like literally that an open blockchain is that and then you add on to that it's like the first layer that's like I'd say the most important piece of the structural advantage in Innovation but then you take on this Dynamic where I can remix anything that's already out there right I can pull the stuff off the shelf I don't need to I don't need to recreate the wheel for everything new I want to build this stuff is out there I can take bits and pieces of it Stitch those together add something new and create a totally different application right like that's huge and then lastly just the fact that I can make all of those things talk to each other and integrate with one another like that is it's just such a powerful combination like it is this

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exclusive coverage for Empire listeners using Code Empire think about it this way with vouch you're not just ensuring your startup you are investing in peace of mind I have a question that I've always wondered that I guess applies to not only blockchain cap but I guess probably all crypto Venture firms I'm curious how you handle this when um curious how you handle it if you let's say you make a bet on an on an ecosystem let's say you're making a bet on l2s ZK let's say you make a bet on ZK um and you pick ZK sync it sounds like but then in a year from now you realize that maybe ZK sync isn't going to be the winner and there's this other investment opportunity that you see maybe it's like scroll or maybe

it's arbitrum or something else but we've already allocated to ZK sync how does either a venture Fund in general handle this or how does blockchain Capital handle this so yeah I mean we we try to put our founders first always within categories to the extent that that a new company is directly competitive with with something that that we're already invested in that makes it pretty difficult for us to do it and we would never do it without the consent of the founder so that that that's the first thing that we do you know there are certain cases where um you know where a Founder might say you know it actually could be useful to have you guys as kind of a shared stakeholder in each of these maybe there are ways

that we could work together maybe there there's um you know area for for um cooperation basically and we can kind of like take the view that the pi is going to be really big big enough for multiple players and if we just steer around each other and perhaps work together on certain things and then like own different parts of that market um then we can both do better than sort of like going down in a KNE fight against each other and so that I think has been the more common pattern that we've seen with with Founders they've been I I think surprisingly like happy to have sort of a mediator in in between them and that often avoids I think a lot of the um you know more more unfortunate um you know zero some thinking that that can

sometimes happen in like fiercely competitive markets yeah and how do you think about some of the re like the Recaps that are going on right now or some of the like 80% discounted secondaries like when you look at something like that is that exciting to you and maybe it's almost a I'd call It quotes around this old school crypto company like that's maybe been around for five six years and they're doing you know maybe they're raised at three billion they're down they're trading it like 400 million in the secondary are those kind of deals exciting right now or you're really just trying to do like the newest most Innovative companies no they certainly can be like our actually so we haven't talked much about our opportunity funds that's the second of the two that's the series B and later fund we actually so it's the

first time we've ever launched a different product we have always stuck to early stage there's been a lot of pressure along the way right a lot of prospective LPS that have said like why don't you go and launch this add additional type of vehicle like call it a um you know a hedge fund or a active participation fund like a bunch of different types of things people have come to us and we've said listen we want to stick to what we know and that's Venture and specifically early stage Venture now what happened in the one time the one exception we've made of launching a different product the opportunity fund was sitting there in the middle of the bull market and it might have actually even been Alex that first brought this up of like there is an absolute like gluttonous orgy in the like late

stage market like it is sick what's going on here and people are going to get wrecked so like a lot of these funds are going to disappear and like I'd say that's probably what defined in private equity and Venture specifically over the past decade was like just the absolute gluttony in that mid to late stage of the market and like those things always correct themselves and that's what we've seen and so like in this past Market cycle a ton of seed and series a St stage companies are funded a few of those are going to grow into that mid to late stage of the market and the capital's gone like there's not very many people that can allocate to it so he said listen if there's a time when we're going to step in and do this it's now so we start you know once the cycle

turned we went out there and and raised that capital and you know we've made two Investments out of it so far and you know I think we'll make another eight to 10 maybe H what is the state of that space right now series B series C like how how big are the discounts right now it's just so tough because in the market Cycles you know there's multiple ways for Founders to play this game right like they can say I want to maximize valuation I want to get the cheapest capital I can and that that is one way to play the game and then right now we're seeing the downside of playing the game that way which is you've oriented your investors your team around that last valuation and it's going to be really hard to ever get that valuation

again or at least it's be hard to get it if you need to raise capital in the next few years right so that puts you in this tough position of like potentially appearing to have lost momentum even if you've made forward progress so I think it is tough for a lot of companies in that stage the good thing is at least for most of the ones that we know they raised enough capital in the good times that they don't need to go out to Market and do a primary issuance H yeah that's interesting yeah it's tough because if you do that if you have to raise it this you know 70% haircut you've got a lot of it's the toughest part almost becomes motivating the employees who are never going to get see a dollar on their

Equity right so um 100% And that's part of what you're trying to guide them to but it's always hard because when it's coming from a perspective investor you know there's a conflict there right it's like you're just trying to talk me into selling some of my Equity at a lower price like yeah 100% like that's in my business I want to buyer Equity at the best price I can but I'm also just trying to make you aware of what can happen when a cycle turns and the the fall off and retention of your key employees is a major downside of that and it's like something to be aware of of like right you'd rather have them come in like you want them to be have ownership at a level closer to where you are right like not maxed out where there's no upside left on

it 100% yeah I think a lot of the folks who raised at the height of the market are facing that right now just talking to other Founders like maybe they raised at 100x Revenue their revenue is down 50% or maybe even 70% right now but they raised it a $700 million valuation now their revenue now the revenue is down to like three million well now you're looking at like a 200x multiple on so it's the numbers just don't add up so um Spencer you had this tweet I don't have it pulled up but I could try to find it you said something along the lines of like worldcoin is is is the single most misunderstood project in all of crypto and I I think that was uh you you got to fact check me I think

it was back in May I want to say or maybe early June I'm pretty sure you tweeted that are you feeling more convicted or less convicted about that now you know four months later equally convicted it's a long this is a long Horizon thing yeah yeah um you know like listen we we' probably need to do an entire episode on worldcoin because I have a lot to say about it um but the reason the place where that tweet comes from is because I know know because I was in that position right I'll give you some some backstory some context is someone on our team starts flagging in our internal slack Channel hey you know we're always talking about who else might be going out and raising and like where we should allocate our time and someone had flagged hey worldcoin I think might be coming up for

a raise soon should we go talk to them I'm the first to jump in there no like I want nothing to do with this like this dystopian thing with Hardware no way get it out of here don't waste your time let's let's allocate our resources elsewhere but it took a couple of the engineers on our team were like Spencer that's look that's fine that's your view I don't know if it's a very informed view they're like I've looked through the docs have you looked through the doc Spencer and I had to sit there and kind of you know eyes down like no no no I didn't they're like well you should probably go and talk to them and learn a little bit more about it um before you just kind of come off with this surface level judgment so we went and did that and I was still like hellbent on we're

never going to do this deal I'm just gonna I'm gonna prove to you that there's this is not an interesting opportunity and like the further we went the more I completely flipped to the other side I still think it's one of the most interesting most novel things that's going on in crypto like we see a lot of clusters of things there's nobody else in that category what they think operating at that kind of scale in terms of the vision of what they want to deliver and like I think at a project that at that scale there's going to be plenty of things to critique but they're not the things that people talk about like but I see people out there talking it's like just go please spend like it's the same thing that I did it's like please go spend a little bit time reading the documentation it's

very well documented actually very good like great engineering team um so yeah I don't know we'll have to save it for like a whole another episode because like Alex knows like once you get me going on it like I'll I'll rant for a while well I had a similar experience I didn't get like as bowled up as you did clearly but um I met Alex BL I went into the office in San Francisco yeah and met with and met with Alex B and um I was hyp skeptical I was like I consider myself to be like pretty outgoing friendly person like even in the office I was like I I'm like a little skeptical to even meet this guy and uh yeah I don't know it's a really impressive um combination of like Hardware Biometrics and crypto and um I

don't know I just I just tip my tip my cap to anyone who can work on something that challenging right so that's the way I framed it's like the most noxious combination of things like are you kidding me like Biometrics identity crypto like oh my God like that's that's a lot to take on um and listen hey we may or may not be successful but like it is the most viable effort that I've seen and there's some really interesting things going on underneath and like I think it can enable a lot yeah Alex what do you think so I kind of lik Spencer's framing there like it's I like a lot of things in crypto but that's probably the most misunderstood thing is World coin is there anything that you look at Alex

when you look at the industry where you're like look everyone's all hyped up on this thing like there's like what do you think is the most misunderstood thing in crypto right now yeah I mean we saw like a huge wave of interest um when you know when the llms started getting released and got really popular and then you know everyone's talking about AI times crypto this is going to be kind of the biggest intersection um in in in Tech um and you know we tried really hard to see that I think long-term we see sort of a huge amount of potential there I think there are some really big short-term challenges to realizing that the vision that that that a lot of people have in

in in that intersection um that you know made it difficult for us to to to get there we're still really excited about it but like you know maybe to be a bit more specific like a lot of people doing uh AI inference on chain I think the the selling point there is mostly around verification and trust and so like do you trust the black box of of chat GPT Bard and and you know Claude and the likes um I think today that's not really what people care about yet and you know trust is a fragile thing you you really start caring about it once it's broken so um it it's e easy to say now before that that's really been violated in a big way um and and the time will come when when that happens and and then I think you'll see a catalyst for for

using some of these these crypto and and AI um models um but you so that that that's kind of one of the big selling points I think I think it's going to be hard to convince people to use it right now especially if you have to take a hit on performance and cost um and you know the other one is autonomous agents or smart contracts like using AI it's really interesting concept it's niche for now it's far from any product Market fit AIS you know don't yet feel exact enough in in my view to put a lot of capital behind them without supervision so it feels like more like a subjective Oracle and I'm not yet sure what would be a really good use case for that and so you know I I think there's also a case to be made for decentralized

training uh and and compute uh perhaps labeling as well in the training case you know I think people make a cost argument uh remains to be seen if that materializes it appears to be for now at least theoretical um and if I understand the argument correctly it boils down to uh using latent Compu computational resources um but I think as we've seen with with mining different types of crypto networks that's not really what happens in practice you need especially in the case of of AI performant gpus those don't tend to be latent and so you end up with data centers that are chasing the incentives and you sort of revert back to the same economies of scale that give Microsoft Google Amazon an advantage you know I I'll color that with like as decentralization gets

cheaper and that overhead um get gets cut down over time more and more consumers are probably going to want permissionless censorship resistant versions of these these llms and other AI models and so you'll see interesting decentralized markets develop for those eventually but you need performance to be good enough to be kind of somewhat competitive and for the cost to be manageable and so like I would say shortterm like overhyped long-term huge potential I mean on that V I think you bring up a really interesting point which is like why would you decentralize right not everything needs to be decentralized because you're making a huge tradeoff in terms of performance um and and and cost and so I think that was like the biggest lessons

from like the 2018 cycle hangover it's like oh okay we shouldn't decentralize Airbnb and Uber because it's kind of nice to be able to call you know a centralized party if [ __ ] hits the fan and your host doesn't want to open the door um and so what are your I guess in that continuation like what are the biggest learnings of this cycle you know obviously there was a lot of blowups the Carnage is still kind of there and re and the blood you and so I'm kind of curious like how you guys think about like your biggest learnings from this this last cycle you know one one thing that comes to mind is that things go way too far like things that that don't work

can get huge uh be before they blow up and you know we were watching I think with some level of material frustration as like algorithmic stable coins were ballooning into the tens of billions of dollars of you know outstanding debt and that was a really frustrating moment because we were thinking well they weren't really supposed to get this big like the model is sort of inherently broken how did it how did it get to this scale and then can you land the plane it turns out no um at least that's really difficult and no one managed to pull it off um so you know I I think I was amazed at you know how much attention how many credible people you can you can get behind a broken and false narrative

um that that was surprising to me and certainly GNA have I think a more Vigilant eye um in in the face of like um you know face melting growth Spencer the hard thing with those two is like you know you go in you're like he we're not doing this like it's not going to work and then you watch it work for a while and you start to get nervous right like and you're sitting there like we were watching this with the Alo Stables we were like no it's not like we looking at them like these are cool like run the experiment please keep it small scale um and then you start to watch them and you're like oh geez are we just wrong and you just wonder if like do I just have am I just too biased to see that this actually works now right so we're

fortunate we didn't like switch positions we didn't like all of a sudden decide like great we're bowl and we're we're in like right at the top um but it is tough in those situations like and we saw that with like most of the major implosions like we had the same thing with FTX right like we passed we looked at the seed we looked at the series a passed both times not because we expected it to implode we didn't know that right I we did there was an obvious conflict of interest that was flagged but more importantly it was flagged in the sense of like that is the only competitive differentiator here right like just going out with the message of like I'm going to build a better coinbase is like okay great how what are you gonna do and like the messaging to me when I that [ __ ] was boom was we

have alamid I'm like uh oh yeah like where's the Chinese wall and they're like yeah well you know uh it's there but you know you could jump over it fairly quickly I'm like that's not a [ __ ] Chinese wall that's it exactly so like we're just like great easy to do but then for you know three years afterwards you're sitting there going oh gez oh I just cost un limited partners a lot of money by not doing that uh oh well that's that's exactly where I was going like how much I'm sure you had an LP call and say guys why didn't you invest in FDX sequ you missed it and in and in the game Adventure you can't afford to to miss these things right I'm like I'm just curious like if you're

will like I'm sure you got some LPS that were like were like why you're not in Tera why are you not in FTX why are you not like you know X or Y you know surprisingly not as much at least I didn't feel them anyways like because we you know each of us has different relationships to all ver LPS but um I didn't get a ton of that um surprisingly like I think that there's I think there's just a level of trust from the several years of working together um but honestly if i' had been on the other side if I was a limited partner probably would have made that phone call look Spencer I I I told myself I never you know manage outside people's M but whoever your LPS are they sound great I know feel very I'll maybe have to call you if ever want to do this uh again um

what are uh I mean algorithmic stable because I want to go back to that because look they're fascinating experiments there is this idea that one can become skeptical of things that have been tried in the past and look crypto no shortage I mean I think we've been in a journey over the last 12 years I've try everything see what sticks how much do you go back and revisit old Concepts and say hey maybe this time is different the infrastructure is different the whatever is different and I know when you ever you're not supposed to say this this times different in investing because it it's like it's not but credibly the infrastructure is different like as it relates to Tech you saw this in the internet too like pets.com didn't work but then you had you know basically a shift from cap to operating opics open

source like radically reduced costs and so that allowed for a business model that is sound to be viable but then of course you had record low interest rates and you funded instacart and you know things that never have terrible Unity economics but hey let's not go there I'm just kind of curious if you actually are constantly re-evaluating maybe even sectors or companies that you invested in didn't work and then you say hey maybe you know l2s it could work here it could work in a different type of blockchain environment I don't know 100% I mean I think we're constantly at risk of um of being captured by our own biases having been in in the space for a really long time we've seen a lot of these ideas that you know are starting

to to work a little bit today been tried you know five six years ago and and didn't work I mean I think a really good example of this is friend Tech like this is an iteration on a Model that that has been tried lots of times before and it didn't work and and so I think you know at least the way we think about it there's like there there's different reasons something can't work and we we draw different conclusions when we see things blow up or fail to get traction and I think you know a reason not to revisit something again and like kind of keep your door closed to that is like the the model is fundamentally really risky and like cannot under any circumstance survive the crazy volatility in crypto algorithmic stable coins fall into that bucket then there are things that just like aren't

feasible given the state of infrastructure today and where at the time of our investment committee looking at that you know three years ago we said well you know how are you going to manage the the fee environment today or for the next three four five years right you're not going to be able to stay alive long enough for this infrastructure to get good to the point where you can scale it um and and so in in that case like what we try to do our best to do is just put a pin in it and say look this will work one day when when the the networks are performing enough and lowcost enough and and the user experiences are good enough to get you know get regular users on board I think um yeah I mean you know friend Tech has been a fascinating um launch

and they they've done a lot of things well and you know there's probably some some element of of luck and good timing there people have been looking for like an exciting thing to engage with that feels new and you know they iterated on on that social model I think in some really nice ways too so yeah we try try and stay open-minded we're obviously at risk of um of of coming to the wrong conclusion but there's definitely two two different categories here there's like the not yet feasible and then the we should never try this again which I'm sure people will do algo Stables one more time but they they probably shouldn't guys great conversation is there anything else that is uh clearly missing from this chat or any big ideas that you guys want to talk

about that we've missed no I don't know if it's super important but like Santi going back to your point of like thinking revisiting things from the past it's such a tough one right because like once you've like ruled something out you've seen experiment not work it's really hard to have the open mind about when it is going to work again and that that is like one of these like natural things that's really hard about Venture I think and like I I try to frame it but it doesn't give me the answer but I try and frame it in terms of sequencing right so like for our industry you know this roughly matches not perfectly we should match it even better like our the way we've deployed our funds over the past 10 years but like first you have centralized Finance then you have centralized infrastructure then you get

defi then you get decentralized infrastructure and once you cross that I think that then it opens up the door to things like gaming consumer social like some of those categories but like if you try and pull the gaming forward like and do it when you're still at the the centralized infrastructure stage it doesn't work right the timing's wrong and we've seen this with like a bunch of our investments in the portfolio I mean we invested in I went I I was so bullish in dexes in 2017 like I went and scoured the market invested in three of them radar relay it was radar relay paradex and bankor right oh yeah so like so so it's amazing right like so so radar went on

and ended up getting acquired by core scientific like years later um paradex was acquired by coinbase like three months after we invested um and then bankor like kind of became the like the ugly child because it had a token which was funny and like it also did the largest Ico and people were like you know yes 100% And and then they said imp permanent loss was not a thing and you know I look at yeah 100% And now of those three the one that I was not supportive of was bankor not because of any of those things that you just mentioned but because this notion of the amm and this is where like you have to admit when you're wrong as a venture investor I was like no this is not how you price assets this is not an efficient way for pricing assets right

like an order book is how you price these things and both radar and paradex were going order book models it was offchain order book on chain settlement right like that's what's going to win and totally missed this notion of like no the deck serves a different purpose it's not about being the most efficient pricing mechanism it's about being able to price a longtail of assets and that was what the market needed right then and I'm like mapping over way too much of my trafi experience and not recognizing that things can look different in crypto I think that's the most important thing that I'm always trying to drive home with our limited partners like this stuff is going to look different it's not not going to be what you expect yeah no it's such a good point because you're right I mean so many

people like bankor would tell you they invented amm like they were the first ones arguably true and then I remember back in my days of Pari I was pitching like you know Unis swop was Raising round and and and everyone that had anything even the you know that came from Finance said guys this is flawed order books work better and the idea that I think is is there is like you're right like not everything will look the same and it requires a set of like flexibility in saying hey there's actually value here consumer preference being created when anyone could be a market maker maybe you don't care about impermanent law it's a good way to hedge it's a good way to cost average your way in you know there's so many different

things that I think we're so early but it's such a true example of you have to remain extremely open-minded about things that may work and you know Chris Dixon talks about this really fancy term skoric and you know we typically tend to like who how many people imagine that the smartphone would allow you to like do all the different things that you do today from streaming to hailing a cab and everything in between no one like the the Giants at the time Nokia Microsoft like everyone kind of dismisses like no everyone wants to have a you know a Palm Pilot and their Walkman like no no no like this is not going to work and so it's really

fascinating the pace of innovation in the space never ceases to amaze me um in cin you're dead right on that like and it is like I I love Chris's example of using like skoric stuff it's like you know I I've been framing these as like Legacy boosters and Horizon breakers like the Legacy boosters are things that like take all the stuff that we're already familiar with and do it like a bit better with the new technology like that stuff's great like a USC like a Fiat back like r or something like that right totally rwas like for the Internet it's email it's like okay great I can send this faster than the post office but then we have the Horizon Breakers right and that's like the things that are brand new that you couldn't do before right and that's where you get like social media that's

where you get Uber that's where you get Spotify right like essentially all the big internet stuff that we think about today right like those are the Horizon Breakers and like it's funny because you can actually go back through time and look at all sorts of new technology and this relationship has always been there like you can go back like electricity itself great what could we use it for well like one is light bulbs we could replace gas lamps and candles with light bulbs that's great you know what it also unlocked all of your inhome appliances electric appliances like you could have a refrigerator now that's crazy that's crazy right in in Computing at the beginner beginning like what do we do okay we move from Happ to use an abacus for complex calculations to use a

calculator cool but like what was the horiz Ron breakers like personal computers gaming consoles graphic design software right like this is stuff that like we couldn't do that before and like that's what's gonna happen in crypto it's gonna be all the weird stuff yeah Ian maybe a last question as you think about I mean this nice Capital that you've raised like how do you think about the ratio of the category of those two categories and how much you invest in Legacy boosters versus Horizon kind of like cuz you know not you you know you could be too early or you can make more money in Legacy booster but it's not as sexy it's not as like you know I'm curious how you think about deploying that in these two buckets I think the Temptation is always

to deploy to the Legacy boosters and the the bulk of the opportunities in the Horizon breakers like because I think everyone like that's the way we think it's closer it's being like okay I can get it's like a little bit faster and a little bit cheaper great like I can totally get that like and again it goes back to our example of dex's right like why am I initially dismissing this amm idea it's too different I'm missing what it's actually doing right now that one's funny because it comes full circle right like now things look closer to an order book but um definitely that's what I try and like you know when we're in our you know our investment committee and we're in our research discussions is like trying to ask that question of like which which category is it in and like both of them can be okay we're not going

to isolate to one or the other but we have to be conscious of this inherent temptation to just do all of the same things but on a blockchain nice that's a fantastic way to end it guys I mean I'm really excited uh I think a lot of our listeners also want to understand raising that Fund in this environment and sounds like you have a great LP base there and uh permanent Capital you know as as permanent as it gets you know 7 10 year Horizon is is what we need and I'm sure there's plenty of opportunities out there to deploy so um really really fun discussion guys um where can people find you Founders uh you you guys have a blog like learn about what you guys are doing what's the best way to kind of keep tabs on on how you're going to go go out and

deploy this this good cash yeah we we do have a Blog on our website you can also check out all of our personal twitters um you know a lot of our DMS are open so uh easy place to reach us fantastic Alex Spencer thank you guys appreciate the time thanks for having us was a treat guys thanks you so much for coming [Music] on