Founder Fundraising Advice and Mango Markets Roundup

Transcript

before we jump into the app quick reminder that nothing on bell curve is financial advice everything is just a meme hope you guys enjoy first thing that goes when you see bear markets like this is the terms you still have the high valuation you still have the amount raised but it's going to be really really you know painful terms for the founder because if they want to raise that much at that valuation it's like okay you tell me the valuation I'll tell you the terms and and I think that you know is probably the direction that we're heading so when we're talking about secondary it's it's become less and less of a factor in conversations with term sheets foreign [Music] welcome back to another episode of bell curve you got the Roundup you got you

know hosting today Mike is on a flight uh cross-country flight on an international flight actually today so we got Vance and Michael joining we're talking crypto we're talking macro we're going to talk about kind of a day in the life of a crypto VC what the framework guy's been up to recently um but Michael Vance welcome to show guys thank you sir good to see you how we doing how we doing how's the week been good it's good I mean uh what are we doing right now um kind of like typical stuff I would say you know taking pitches working with portcos um buying some stuff you know like slowly but you know other than that I mean we're not writing letters to our congressmen nor the FED to get the the

market making I think that's more of like a doberman macro investors yeah I mean you know we're just kind of hanging out honestly like so we actually are I was gonna add uh that there actually are a lot of really attractive deals right now and I think um you know they're bigger in size and and they're kind of later stage but there's actually a lot of a lot of deal flow going on right now which is um usually a good indication that things are going to start to come back at some point soon are you talking about the downright I'm starting to see some down rounds in like the crypto SAS businesses that are are the like maybe series C Series D they're raising it like 50 discounts are those the kind of deals that you guys are

interested in right now no I mean we're were early stage so you know sometimes pre-seed usually seed series a rare that we would do like a B plus um just given our Fun Size given our strategy we want to be at the early stages and really kind of work from that angle I I would be shocked if there were any up rounds in like the B plus from anything that raised in 2021 you know so now it's on the early side the early deals that I've been doing are it used to be like in the 30 40 million dollar valuation range which was like it was high and everyone just accepted that as high and you're still doing it and now like I think the deal I did this week was 15 million so it's just like I feel like valuations in the early stage have

come down a lot yep but the deals are still getting done still getting done I think the one thing we're waiting for is like the class of 2021 that raised kind of in that era is going to have to come back to Market and you know the demand side of the equation is like nowhere near where it used to be uh just in terms of investors and dry powder and the supply side is like gonna obviously increases these people come back to Market so the clearing price is going to be lower um I think it's going to be very asymmetric as to how low it goes based on where the round closed and then what stage it was last year like the like you know there's a handful of crypto startups that have you know sub or over 10 billion dollar valuations like those are just like you know you you would be

implying that you know open C is worth more than coinbase uh you know like it doesn't doesn't make a lot of sense um same with like Alchemy so I think those are gonna be the the most free rated ones so you think those those late ones you think take what a 50 haircut you think they try do you think do a do you think they raise or are they basically just like cut everything so we don't have to raise a massive down round cut everything but also like there's kind of like some some fancy footwork you can do with valuations when you get into like the Down Round potential you know scenario where you're like you know like not a 50 discount uh so if we were at 13 billion do it at 10 and we'll give you a bunch of warrants so like at least

when we're trying to make Acquisitions or like you know give people comp everything's marked at the peak yeah but I mean these businesses are not worth what they were a year ago you know like even with openc and a few volumes are down 97 should their market cap take a 97 hit like I don't know about that but there's some sort of Disconnect there I mean the big thing is when you think about the later stage stuff you have to do it more so on a calm spaces because you have traction you have data points you have stuff that you can evaluate these businesses off of ostensibly and if you look at any of the market comps for growth rounds of companies that spacked went public in 2020 2021 I mean the average price is down 85 so it's not only just like a crypto specific thing I

think it's just any sort of growth company right now that isn't by default profitable or cash flow margin or a contribution margin positive you know any of these businesses are going to take a hit if they wanted to rewrite their their valuation but advances point we haven't started to see it yet but I wouldn't be surprised if you start seeing the uh slight down round plus warrant deals start to come through what about in the early stage like where are you guys let's look at the last like five deals that framework did are they infrastructure deals are they gaming or the nft like what are the last five deals that you did or that you can talk about so we've got like three categories that we focus on um gaming is obviously a big one and you know we're more on the infrastructure

side than the single title side like we're waiting to see which games work and which permutations of like you know blockchains and clients and server-side gameplay like actually make sense and and we're gonna have a lot of data points in q1 and I expect us to just be more aggressive kind of in q1 after we understand that um but like we're doing deals um or some some are unannounced so we can't really get into those uh but you know like gaming is is a big Focus D5 is still a big Focus for us and I think a lot of it is just like the people who are spinning out of Citadel or grw or like the largest you know hft shops like that's kind of where we see the new Talent on the institutional like maybe more regulated context come from um and like payment forward or flow and

private order flow are kind of like part and parcel of those markets and then the last one is just like infrastructure broadly and like we see you know we're on track to hit like three four thousand pitches this year we're starting to that we at least see and so like we understand where all the pain points are we understand where things are you know breaking where there's room for middleware where there's room for you know SAS and like that's pretty easy to see the stuff that's more consumer in nature that's uh that's like I would say you know it's kind of like split between nfts and games and like we're only gonna do games nfts for us like I feel like if you're investing in nfts as a broad category at this point you're probably like a year late and you're not where the market is

heading either you guys saw three or four thousand pitches this year yeah we have we have you know six investors seven investors um they're seeing you know on average you know five or ten things you know per day um and so these things add up and you know that like most of our job is just disqualifying like 80 of the pitches just you know from the ribs how does someone break through the break through that first mold is it like if you look at the last five or ten deals that you did how many of them came through intros and referrals from existing Founders first like maybe all of them all of them probably um and so probably about of the three three four k whatever whatever that number is I'd say that's probably 40 to 50 of that is through like someone that

we know the rest of it is either like cold or we saw it on Twitter or you know we're you know patting the pavement you meet someone at a conference kind of stuff um and and maybe that also leads to one meeting at a conference leads to five more later on when they just start sending you things so I would say the best way to break through is have a reference from someone that we trust and know um and also have a good connection to whoever that person is and our best resource for dealflow is our existing Founders just because they're seeing everything you know they're talking with potential Partners um they've got friends in the industry who you know they working or co-working with uh like that type of stuff is the best thing and then you start to find these little pockets where like in the

D5 era it was you know we invested in synthetics and we got to know the Australian D5 Community really well and that led to probably like four or five other Investments um you know they're they're sort of a pocket as well uh going on in San Francisco as well where you get kind of connected into the tech scene the crypto web 3 scene here and you start to get to know people um same thing with India um and Western Europe as well so you can kind of like find a pocket and then that leads to a bunch more opportunities that arise let me ask you a really specific question here that another founder was asking me because uh he's thinking about raising and he had a really specific question that that I didn't have the answer to which is it's about taking money off the table so in the early

rounds like if you're raising your seed or series a like you're probably not asking to take money off the table but once you get to that maybe it's serious a but maybe it's series B like at what point is it fair for a Founder to ask the VCS to take some money off the top via a secondary right and and yeah that's the first part of that question I think it's very different if it's working or not um in this case it's working they've got like 50 employees they're generating generating good good uh maybe they have like 100 employees they're generating good revenues um so so what I would say is then it really depends on if it is working it depends on how much the founder owns so making

sure that they maintain their incentive model um making sure that it's an amount that makes sense if you're talking about pulling you know two to five million off the table in a in a series a like that's gonna be a non-starter if you're talking about pulling off like 200 300K because you want to you know have some cash in the bank to get a new apartment or put a down payment on a house like that's a different story uh but I do think that you know it's the incentive model to make sure that the founder is still the larger shareholder or you know the founding group is still the largest group of shareholders highly incentivized to make this thing work the amount of money is not money that allows you to just like go and chill um but maybe alleviate some stresses in your life as you've been grinding for

the last few years um and then also the third variable is making sure that it's fair to everybody else so if it's just you know the co-founders and there's someone who's like a first employee probably should offer a pro rata opportunity for them um but you know that those are kind of the ways that we think about it that's interesting you're thinking about taking money off the table yeah this is the investment pitch right there what's the thing you asked for advice you get money you ask for money you end up getting advice exactly um uh no I just think it's something that like a lot of crypto Founders are thinking about as they raise I mean like we don't we don't have VCS like we're in a different place um thankfully uh but there are I think a

lot of Founders who have basically been on that what feels like VC hamster wheel and they're like I I mean I think a lot of founder psychology it it gets tough in a bear market for folks who have been on that VC hamster wheel for what feels like maybe five years or something and they're like man like I'm thinking about raising the next round it'd be nice if let's say I raised like 50 mil if I could take like I don't know you take 10 of that round you take that off the table I think a lot of VCS wouldn't want to do that though a because you disincentivize the founder and B you um you're giving money that doesn't go into building the company right you give them money it doesn't go into engineering it doesn't go into marketing it doesn't go into scaling the company

it goes into their bank account so yep and the the think about with stuff like this I mean I mean just like deal points in a term sheet essentially and the valuation always or any amount raised always is going to be sort of like the headline figure of whatever you know the term sheet is it's like oh here's a term sheet for like five on fifty but what's baked into that which I think you know kind of goes UN untalked about without you know not among VCS is the terms are really what matter you know it could be like Equity preferred where you got 2x participating and you know it's just really really Draconian uh terms that are baked into that high valuation and

super huge amount but when times are good like we had over the last 18 months 2021 2020 you had really LAX terms and so you would see a lot more of these opportunities because people would say hey hey founder take my deal I'm going to give you really last terms it's going to be a good valuation good amount raised and I'm going to let you take 10 off the table you know that would be something that gets discussed as a negotiating point now now that we're seeing you know things come down down the first thing that goes when you see bear markets like this is the terms you still have the high valuation you still have the amount raised but it's going to be really really you know painful terms for the founder because if they want to raise that much at that valuation it's

like okay you tell me the valuation I'll tell you the terms and and I think that you know is probably the direction that we're heading so when we're talking about secondary it's it's become less and less of a factor in conversations with term sheets what's a term that Founders don't think about enough and you see maybe other obviously Frameworks the best VC firm out there so uh you guys are very founder friendly but maybe you see other VC firms being a little Draconian and like what what's a term or two that you see Founders not thinking enough about and then they wake up three years later and they're like ah that one term is really screwing me over I mean we are founder-friendly I I I'll say um but like you know we're we're pretty honest with most of the deals that we're doing where it's like you know we're not

going to be the highest valuation term sheet that you get um you know we'll probably get pretty close uh if it's competitive but like you know you're gonna have to take some sort of discount for working with us like all of the value-add stuff is not in the term sheet it's like everything we do after um but yeah I mean the things that Founders don't think about enough I would say are um the first one is the first one is uh the knock-on effects of raising at a high valuation your seed round um so let's say you raise you know at 100 million and you raise enough for two years and you come back and you kind of don't have great metrics not a whole lot to show for it uh you know if you're raising a Down Round that's pretty bad for

employee morale that's like it becomes like a really tough conversation and even getting the deal done and you have potential you know some terms in the original term sheet where if you raise the town around you get like additional dilution um and that's called you know full ratchet uh delusion and like that can really hurt a company so I would say like you know it feels good to raise money and like make yourself like a paper millionaire but there's also things that like manifest on the other side of that that are negative if you don't perform and like you know in the next year I think our advice to Founders is like don't expect hyper growth don't expect to hit the metrics that will allow you to raise you know your series B free and clear like it's going to be somewhere in between pretty marginal

potentially like not a huge up around potentially flattered down and the higher evaluation you raise that initially the worse that gets um the second stuff I would say is uh just like broadly um employee compensation uh whether that be on the token side or you know a stock option pool a lot of people just think that's an afterthought um and you know it's it like you need to compensate all of your employees fairly like your first 10 employees um you know outside of your co-founding group should probably own 10 of the company um it's not all for you to just hoard you know like Scrooge McDuck Style with all the gold coins in that in that bath like you need to actually give people incentives

yeah the the two that I was gonna say before van said that are are anti-dilution that's something that people just don't think about um especially because you're signing the deal you've got great terms you're excited about the future you don't expect there to be a two-year bear Market where you might have to have a an anti-dilution Clause come into effect um and then mismanagement of the employee stock option pool is what I was going to say and you know that comes in two flavors what van said is definitely one of them where you know you've been too stingy and people just aren't incentivized to stick around and you have the first Changing of the Guard of new uh people coming in because you lost all the people because they didn't have enough equity you know they or or you know the the terms were not good enough

for them um and then the other one is you can't really change the employee stock up you can if you have board approval but you can't really change the employee stock option pool unless you have a new round and it's it's usually pretty hard to do that um where whereas each round you kind of refresh the employee stock option pool and so if you give away too much or you don't have enough in the pool to begin with you're kind of stuck because then you can't raise or you don't want to raise because it's going to be a Down Round potentially and you don't have any more Equity to give out to any new employees and so like what do you do it's like you're really in a tough place so tell me another works though so you so let's say a company has five million

shares uh you will allocate 500 000 500 000 for the a million yeah probably a million to begin with um because as you raise more that dilution is going to come into effect and really it's like you're dividing up the same pie you know if it's 20 um or or 15 let's say 750 000 shares uh and and you give up all of that the next round let's say you you you increase the amount of shares by 20 so it goes from five million to 6 million but then you also have to have a new refresher on the ESOP so then you get into the math of like figuring out okay is it gonna be like six and a half million shares you're gonna refresh it back to 15 or

you're gonna refresh it back to 12 or is it going to be 10 20 I mean that this is a term that usually gets put into the term sheet of like here's the valuation here's how much you're going to raise here's how much the ESOP is going to be um because you know if you can't if you're not doing that at a new adjusted valuation in a new new funding round it's gonna be really difficult because that's just deadly to everybody so the board usually rarely approves that unless it's dire how how um how articulate and like well versed are the founders when they come to you guys with this stuff like are most people coming in and they know all this stuff they know how to do it they've they've read all the books they've talked to the lawyers or are they coming to you guys being like I know like I

could get screwed or like I know that like there are things that matter but like I need you to kind of work with me and teach me how to do this what I would say is so first off there's a standards Set uh you know the nvca I think is what it stands for the national Venture Capital Association like there's a standard for for all of these types of terms um so it may not be the founder that's well versed in this but the founder is probably listening to their lawyers and and counsel who are extremely well versed in this and that's their job I would also say just like especially at the stages where we're talking about you know seed and series a the term sheets are pretty standard you know you don't see these like onerous Draconian like terms and like liquidation preferences

like that stuff that gets put into the B plus because that's where you need the protection if you're writing a 50 million dollar check you need to have downside protection there for that fun fun and the fun Dynamics to work for us it's pretty vanilla um so I would say it's not usually a tough discussion or debate when we send these term sheets or have these this have these uh valuation discussions it's more just like hey here's the terms here's where where you're valued let's have discussions later on down the road about up rounds down rounds what to do natural fundraising but for us it's pretty kind of dry interesting I want to talk macro actually um any other like VC advice for Founders who are listening to this anything else you'd keep in mind oh yeah don't do advisor deals those are

those are stupid what would that be like you know you give away X percent of the company to for someone to be like an advisor yep most the time you just don't hear from those people very often well what I was going to say is at a very bare minimum you have to have investing and you like have a very clear conversation it's uh okay you're gonna get 10 basis points in the company that's gonna invest over three or four years here is the minimum set of things that you need to do to earn these shares every year and you know we're going to adjust it as we need to but like if an advisor is getting shares just for like showing up putting their name on something that that's a really bad look in a red flag I'll take the other side of that

blockworks has a couple of advisors and we gave them a smidge of equity in the early days they have been one of them is Sean Griffey who runs a company called industry dive not crypto it's a big Media company they just sold for half a billion um yeah he I mean he's been incredibly helpful we also have Matt Hogan who's one of the yeah the chief investment officer of bitwise that's a missionless our big event at permission permissionless was from Matt Hogan yeah it's worth it who like in the early we were we were talking about doing a big conference and we're like it's going to be like one day macro one day like nfts one day like D5 and he's like you don't realize how big D5 is going to be go all in on D5 make this huge conference like plant your flag and we're like I don't

know he's like take the risk do it and so Matt Hogan is the one who actually sparked the idea for permissionless I think that was my favorite conference this year yeah it was great we love it uh let's talk macro um uh this is pretty crazy week with macro like fomc minutes came out the CPI print hit uh employment numbers came in last Friday Michael what are you looking at in macro right now that's interesting inflation I feel like in the matters frankly um and it's not just you know the headline CPI number it's really the core components um the owner equivalent rent is really kind of the big um the 800 pound gorilla at this moment everybody who has private data so the

Redfin zillows of the world suggests that rent and owner equipment rent should be falling off a cliff right now it's actually spiking uh and so there's some lag in owner equivalent rent showing up in from BLS data into you know inflation numbers but nobody really knows exactly what that lag is uh and right now I think the the first month actually start to fall was in like February or March of this year so we're coming up on like nine months of this being you know pretty pretty tough uh and and spiking of uh rent in the actual data set that is used which is I think a 40 variable into the overall picture of inflation so there's all these data points that suggest you know used car

prices are falling off a cliff Healthcare talks should be going down eventually and rent should be going down but it's just not showing up in the data right now which is frustrating there's this good here I'm going to try to share this can you see this yep yep uh Andreas Larson uh who hosts a podcast actually with block horse called the macro trading floor had this good tweet he's like huge us CPI day whether the trend has turned in inflation is the only thing that matters for equities and he shared this chart of when the peak was in during Q4 of 1974 the the orange chart here is uh inflation going or yeah inflation going from like what three to twelve percent as that happened the s p

tanked and basically you can see like the quarter that CPI peaked out inflation turned excuse me that the s p turned around so I think I think you're right Michael like that is that is the biggest thing that matters right now asset prices and and in uh in interest rates have an inverse relationship so as inflation goes up the FED needs to raise federal funds rate inflate uh to fight inflation and that has a negative effect on asset values s p is a good right good index there right do you think that we can have a um any sort of Bull marketing crypto like a real sustainable Market in crypto before macro turns around probably not but like you know it there's like macro like turning around

and there's like you know macro being like semi-cooperative um I think those are pretty different things and like right now we're kind of uh we're riding this like wave of uncertainty as to like where things net out I think once we get a picture of like where things actually net out and and you know it's just going to be a little bit more accommodative and so like we're gonna find our footing generally like I pay I pay attention to the macro stuff you know as well but I'm a little bit more I would say just like sanguine probably more bullish than Michael um I I think things are you know driven by you know positioning and expectations so like where are people today um how are they you know interpreting the world and where do they think it's going to go and you know on the

positioning side people are very bearish people are very under-invested people are you know Stables that are at an all-time high uh in crypto like you know there's all these things which which would suggest people have really left the market you know volumes are down all these speculative activities down so positioning is like probably near Lowe's um and expectations are also near lows like people think the world's gonna end like somebody told me yesterday that like you know like you know a couple next couple days like nuclear war then like rates are going to go to 20 and it's like all right like that's uh concerning obviously but that's kind of where the consensus is and so if positioning improves if expectations improve like things are going to improve and so yeah like I'm I'm more bullish like I think all bear markets have one

thing in common and that's at the end and so you know like no I'm not really interested in people's you know uh digestion of like the minute by minute inflation numbers I'm more interested in people who have like interesting takes as to where things go in a year um like that's where all the alpha is made and like you know the people telling me nuclear war is going to break out that that is honestly interesting it's like okay that's like probably a new but like way more bearish than anyone would expect perspective I also think it takes from people who are like in the freight industry and in the trucking industry and they're like hey the shit's falling off a cliff like you know inflation's gonna nuke like just wait uh are also very interesting and so like I tend to skew towards more of

where the data is on a real-time basis which suggests that you know this isn't really going to be a problem next year um and yeah I mean you know I'm uh I'm a bull just to be clear I'm a bull too I think the the things that really so markets move faster than economics and markets right now are suggesting that inflation is going to come off a cliff pretty fast here um the other thing that moves and and the other thing that moves faster the markets it's crypto and crypto markets uh so I I'm not necessarily thinking that this will be a sustained bear Market I mean there could be you know exogenous things like um you know a nuclear war or you know one of the things that's been coming up

over the last two weeks is UK pension troubles um you know increasing rates causes the bond market to have the second worst year that it's had yet and you know much of Pension funds are heavily invested in bonds so I think they're having a really tough time right now and we can get into that as well if interesting but um I think generally um I can't remember who was talking about this but markets bottom in the first third of any sort of recession Trend or bear market and and then they start to come back up and so you're going to start to see a Divergence I think of you know these markets reacting to this negative news and then you know actually coming back up faster than the economics well and and definitely fast so Vance at the beginning of the

conversation when you said that you guys are starting to buy or that you're starting to buy right now are you buying because you're like are you trading things right now are you buying crypto because you just like you don't really know if we're at the bottom but you just think that the prices are good right now and you just want to hold things and like start dollar cost averaging into stuff like why are you buying right now and can you say what you're buying or like some sense of what you're buying no you're oh oh we forgot to read the disclosure again crap uh I'll put that in at the beginning um I mean I I think the bearer Mark the bear argument certainly sounds more intelligent and like whenever we say anything that's like remotely bullish or

like even not bullish just like optimistic people are are really up in arms um I think the reality of of the data is that you know we have decades actually two centuries of data that suggests you know when the market gets shellacked as hard as it did this year you know statistically you're very very likely to have some sort of immune reversion and so like you know you could argue with us all you want but you'd have basically no evidence you know whatsoever and we'd have all the data in the world would suggests that you know they're wrong and so you know what do you do um you do things slowly you you accumulate things that make a lot of sense slowly there's a good tweet from Michael burry which came out yesterday where he said that um you know obviously Tech nuked in 2001

you know 2002 um and and you know what was the 2002 to 2008 what was the bull market in if anything um and you know the s p took a long time to get back to all-time Highs but like really what performed well was value and things that made a lot of sense that had strong management teams that had cash flow where you know people had sold all their shares like you know it was kind of Left for Dead and left for A New Perspective in buyer set and I think that's where we're gonna go it's either things are going to be more based on fundamentals there's going to be a lot of dispersion between winners and losers and it's going to be demarcated on who actually has traction is occurring cash and you know we're not buying things because like we think crypto is cool uh

we're buying like if if you know there was a better thing to invest in you know we would go and invest in that but like right now we're just looking at the fundamentals of these projects and there's a lot of interesting things and you know at the end of the day you have to buy when the prices are low that's what we're paid for um and if we're just sitting here and the market recovers our LPS are gonna be like you know what the um and so we have a duty to actually like lean against the prevailing bearish Trend um again because we have all of the data the other side has basically all of the anecdotes um but I don't think those are very strong I would say we also have the benefit of time you know we're talking about Venture funds that you know by by

default are multiple years in deployment phase and then multiple years in in um in disbursement phase and and so I think eventually you know this all we're constantly looking one to two years at a minimum out on sort of the macro side to guess you know what is the mapper going to be in a year from now in two years from now so we can help advise our companies on you know is it the right time to raise now should you wait for six months 12 months 18 months and then from just like a general perspective of when we think we want to you know be selling these assets or realizing gains on these assets is like five years out so like you know macro people are are trading on like a month-to-month quarter to quarter basis and that's just not what we do

yeah well said you guys want to talk about crypto the week let's do it I'm talking about mangoes this time I'd feel bad for them um this is this was a sorry do you want to do the intro I just have a lot of context with this uh I want you to do it yeah so mango got hacked um and basically what they had happened was um mango is a decentralized protocol where you can trade against an oracle price instead of trading against an or an order book and you know what that means is you know if I'm trading against an order book I'm trading against real people or at least market makers um who you know are putting bids or Aspen and you can tell what the liquidity is what

the price is ETC and the benefit of that is that you know there's nobody who can manipulate the price somewhere else and then you get you know you kind of take it in the shorts on whatever exchange you're on because like the price isn't real like the price is always going to be real in some sort of context with the order book or amm model um with the Oracle model you're relying on another exchange to tell you what the price is um and if that exchange is pretty liquid on that pair you can manipulate where the Oracle is pretty easily and on the other side you know you can take huge directional bets forward against that price with no slippage um and so you know like we actually have a good deal of experience with this um the Korean Won attack Michael I remember you we remember that from

synthetics uh the maker attack on synthetics as well that was another one where people would manipulate the spot Market trade against the Oracle print and you know cause some sort of either front running or just you know basically Arbitrage on the synthetic side which we were unable to stem and that was really painful we actually had the d-list maker from the synthetic system um and then the Korean Won attack like basically precipitated a recapitalization of the entire system um so like these things can get very serious um what was the Korean one attack so that that one in particular was more of an oracle outage where you had two institutional Partners who were provided and and you know institutional data providers who were uh providing price feeds for the Korean Won they both

simultaneously went offline I think ultimately it was determined to be like an AWS outage or something but basically what it did is it allowed Korean won to go to zero which means you could buy infinite amount of Korean Won for one dollar of value uh or you know whatever it was the conversion rate so it just someone was able to print like something like two trillion dollars worth of Korean Won and then basically held like the protocol hostage because they said hey I have this value and basically the protocol said hey if you have this value all of that goes to zero anyway so like congratulations you just strapped the bomb to your chest and like walked into a negotiation and and so I think generally like that type of situation was solved really simply by adding chain link oracles

because that didn't exist in in the ecosystem prior um whereas this Market manipulation in illiquid markets that that's something that just kind of persists in in projects and systems that don't have this type of control in place and right now in this synthetics example nothing gets listed unless it has a liquid enough market and there's also you know other internal protocol upgrades that have been gone into actually prevent this stuff from happening so like front running has it's not a solved issue but it's been worked on and it's kind of like math you know there's it's never going to be exactly solved but it's going to be something that you can work on over time and they happen but it's just kind of the for this mango situation is it's like deja vu in a lot of ways and unfortunately synthetics

never had this bad of a bad of an issue but you know it's just something that you know we worried about in 2019 and 2020 when we were you know solving this and working on it with them or they were working on it um but it is uh representative of how dangerous these trading against a price Oracle can be yeah and and the the criminal not the criminal mistake but like the cardinal sin that they had was basically like listing really illiquid stuff and giving people infinite you know infinite liquidity on the fill if you trade against the price and uh yeah I mean it was even worse that it was their own token like that's just like kind of unforgivable you know you just need better risk management than that and yeah they lost 100 million dollars

and now the hacker is like you know kind of put up this funny governance proposal to like which he also voted on with all of his mango to uh you know all of it so like there's also Salon is like more of a closed ecosystem so you know you're really not going anywhere with this money um and you know the hacker funded it with his FTX wallet and like people think they know who he is now so you know I think net net is just like this is bad for mango and it's bad for like the regulatory uh uh perception of mango um so yeah not great Vince how would they I think I understand everything except how would if you were mango how would you have presented prevented this from happening so like how how we did it with

synthetics was Delphi basically made this huge report on like what is the minimum amount of liquidity that we can have for something to be listed with infinite slippage or sorry no slippage on an infinite fill um and like you know at the beginning of synthetics there was this idea that like we can list any asset with an infinite slippage and like we kind of learned the hard way that that was actually not the case um and you know now there's all these very stringent kind of standards for what we list and how but you know I just don't think they had that or I think they didn't even think through it uh you know or or maybe they just wanted more liquidity for mango but it's just a bad book infinite slippage isn't just not going to be something that really works in the context of crypto unless you're

talking about like Bitcoin and ethereum only um everything else is going to be low liquidity enough where you can probably find some way to manipulate in some way shape or form and and so now synthetics also has slippage-based pricing so like the pricing of what your fill actually is via the Orca is based on how much you would be taking out relative to the market and the liquidity in that market Vance what are your thoughts now that okay so this mango thing happened like what what are your I guess takeaways from this like what are you thinking about now that this just happened I mean it doesn't really change my perspective on a lot this is more like bad bad team and bad practice than like bad product um I think they're going to spend a lot of time with regulators and their The

Regulators are going to ask a lot of like tough questions so they probably wouldn't have otherwise gotten like it feels like the field of D5 is thinning because people are just nuking themselves accidentally um or or just like I don't know the field of D5 is thinning I think that's really positive like the best teams are consolidating market share they have more Capital to go off and leverage the space and innovate like I think that's positive um I don't want to get it to the point where like you know only FTX is able to do any of this stuff and like we all just like fall under their umbrella um so yeah I mean we just need to stop kind of making these mistakes because like these are well-documented mistakes in crypto that have been made before like when you call this a lot of people

were like this this was a hack and chain analysis put out this nice tweet thread or like report they're like this is the biggest hack month in crypto history when I hear you describe what happened on Mango though this feels like just taking advantage of them of a market basically like not really a hack or maybe I'm misunderstanding it no I mean it's like it's not a hat like the purists would say it's not a hack the code worked as intended code is law or whatever but like I don't know where where we draw the line is like is there malicious intent like do you intend to steal retail funds and like if you're trying to do that like you know we're kind of diametrically opposed when Soros broke the bank of England like that there was mole you could say there was malicious like he knew how bad it was

going to be but he's like the market is set up in a way that I will profit tremendously if I take advantage of this Market uh imbalance even though it has even though there's like bad intent that I mean even though he knew how bad it was going to get well uh huge difference a huge difference though I mean he was playing within the confines of the rules whereas the cftc which is probably going to be the governing body for mango markets is set with a mandate where they do after with potential criminal uh uh action for anyone who's manipulating markets and this is absolutely a market manipulation uh it may be it may maybe exactly code is Law and the way that it worked but

it's an exploit nonetheless and if and if you're able to manipulate markets for financial gain I I would imagine that this would not be viewed very favorably by them yeah like George Soros had the idea that the pound was overvalued uh and he shorted it like this person didn't have a perspective on whether mango was under or overvalued he just knew that he could manipulate the price and and steal money that's fair that's fair um you guys worried about all these hacks and like are you does this make you maybe let me rephrase it does it make you more hesitant to play around in different protocols and like allocate capital and size to different

like new protocols they're two separate things play around in different protocols and allocate Capital to different protocols you know that the latter of the two comes with risk whereas playing around it's like hey you know let's test out this user experience test out this flow like there's interesting stuff being created in defy every single day and I think that's that's the stuff that's pretty exciting on the flip side um in one of the companies that we backed um who I won't mention but um you know one of the conversations that they had recently is with a really large ETF provider um and they said that they want to build an ETF for essentially um you know based on crypto but they don't want to have to leverage something

like FTX or coinbase or you know any other centralized provider because they don't trust the centralized custodian to be able to manage this so they actually want to build something that is permission kyc'd but something that's on chain so they can actually Val you know actually audit these these smart contract and view the code on chain and see how it works and you know they can do their own research essentially and so I think there's an element of like yes these hacks are bad but the thing that really matters in in the future of D5 in my mind is that auditability that public perspective where you can just see what's on chain you can see what's happening you can verify for yourself um where the assets are what the exchange looks like and how how it works I think a lot of of this stuff is super

complicated which is why you know it took someone like this and mango markets for being out as long as it had been to uh to have the situation come up but you know the if you can verify things on chain that's just a differentiated ability um and and provides more trust ultimately um so long as everything functions properly yeah good points all around any last thoughts on Mango before we move on or hacks or any of this stuff uh I mean most most of these hacks in my opinion are are like there's maybe 10 people you know 10 to 100 people in the world that can do them um and you know like you look at a smart

contract and it's not like there's like a big red clearing hole where it's like you know you press this button you know it'll spit out money back here yeah I think I think a lot of these are more of inside jobs or like you know inside context of some sort than people really understand um can you say more about that I saw that tweet that went viral from like GCS or GCR whoever it was and they're like most we've long we've long said that before this sweet like you know this is just kind of like you talk to you talk to people you know there's maybe there's maybe like 10 000 people who can write like production level solidity code in the world that's probably being generous it's probably closer like one to ten thousand there's even less than that

that can actually pull off you know packs of this sophistication um or or other you know levels of Association the participant set is just very small or the potential participants met and so like yeah we kind of know who these people are at least where they're coming from the other thing I would say is uh yeah I had no idea who did this um but the the model for security I think in this in this universe and shout out to one of our portfolio companies in unify has this model where essentially they put up a bounty for 10 of whatever could you know funds funds lost and it's just sort of an agreed upon number that you say okay if you're able to hack you know a million dollars off of this

platform and you can prove that you could do that there's a bug Bounty for 100 grand and you can go off and get that 100 Grand as a white hack white hat hacker um I I think what's also going to happen with a lot of these hacks is you're going to start to see the inability to get the money out if you take mango markets for 100 million dollars and look at what the the person who hacked the system is doing they're saying hey I'll give you back 90 of the value if everybody agrees that I can keep 10 right like it's becoming kind of an industry standard and and I'd be curious to see you know how that continues but my guess is it will probably proliferate because you just won't be able to move these assets onto any centralized platform and actually get dollars out of

it or cash out of it eventually right good points let's move on um there's actually something I want so I was going to move into the yoga Labs sec I'm not sure like how much there is to talk about there but I do want to talk about that but actually I think you guys are in an interesting position um as we head into the midterms uh we're we're like three weeks away when one of the midterms November 8th I think is uh is the date of these things uh I remember Michael when we had we got beers in San Francisco you were telling me that you guys were um pretty involved in like just the political space and crypto and you're trying to make sure that uh that's more of a hot button issue uh in DC these days can you guys give an update on just

like your experience in DC with I don't know how much you can talk about with the pack um and like just where where like how you see crypto shaking out in these midterms we've just been blown away by the reception of people who want to learn uh who want to be you know part of the you know larger crypto Community um and yeah I mean you kind of have these waves of of political of industries that contribute to political you know causes you know like the NRI NRA was one you know big Tech was another um and they kind of go from party to party um and I think people realize that crypto is just like an overwhelming popular force in America there's 70 million Americans that hold crypto you know a lot of the biggest issues of

today Free Speech the right transact you know censorship like those are being asked and answered on blockchains primarily um you know Ukraine you know crypto was the largest donor like these things are kind of having this Confluence and you know whereas people were unable to have a perspective a year or two ago now it's kind of like they have to have a perspective and so you know a lot of people have you know basically signed up for um we're not signed up for but just kind of Express their willingness to be you know Progressive on the crypto cause and and you know help push it in a way that has more legislation or or at least people are more open to hearing about um and you know it's just been overwhelmingly positive I would say and and we'll see kind of what happens when

when the midterms happen but um yeah it's it's been a lot of fun and I think it's kind of also spurred this political action that's pretty ground roots or Grassroots within crypto itself like Dave Hoffman suing you know the treasury Department you know coin Center like it feels like we kind of have this Groundswell and base of support today whereas we didn't have that a year ago so overwhelmingly positive is what I would say yeah I remember um the infrastructure bill I think it was where where there was some language that was put in there on you know how how to treat crypto how to uh tax it you know what are requirements for custodians um and you know that that I think was was pretty outdated language um and it did actually get changed but

there was this to Vance's point this Groundswell of people calling up their Congress people calling up their Senators to to try to get that stuff changed and It ultimately you know did um and that was sort of the the galvanizing moment you know and maybe that was a year ago I can't remember when that was but that was sort of the moment where I was like okay like 2022 is coming up and then we got 2024 after that like there's a there's a chance here to actually get some positive regulations put in place and you know one of one of the things that we've been talking about internally is like you know everybody's been so afraid of Regulation and so afraid of you know something that is just like undue and too early to be implemented yet but I think that the fact of the matter is

like yes we're afraid of bad regulation but we should be supportive and excited about good regulation because if you finally have a road map for how you know the stuff should work in in the context of you know the American system or the US system and and probably then gets exported elsewhere around the world it's going to be something that's positive for this industry because right now you know when we're talking to Founders it's kind of like okay well you know here's the flavor of the month of like how to operate how to fundraise how to how to launch you know what what can you do what can't you do you have to move outside the country like there's just so many variables in play and it changes pretty rapidly if we have a playbook for how to run this stuff inside the us it's going to be a massive

growth engine for the economy and right now especially with the rest of tech just getting shellac uh and you know I I don't see any really kind of exciting stuff on the horizon maybe artificial intelligence but that's going to be something that lives inside of the massive corporations because they have the data set to be able to run that it's just going to be a question of like do we want growth or do we not want growth um and web3 I think is the biggest growth engine potential that we see on the horizon talk about good regulation versus direct regulation what do you think of this uh SEC probe into yoga labs um I mean like this is all kind of like hearsay obviously like the like the SEC you know there's varying degrees of like probing there's like you're getting a

Wells notice you're getting sued you're getting a request for information or maybe they're just like asking you questions and so like first of all I don't know if this is entirely true and I don't think like you know the SEC is just going Head Over Heels after you got I think they're probably asking questions to one of the largest issuers of digital assets in the space and like that's probably okay I wouldn't take it for anything more than that um and you know if it kind of evolves into something more serious like I like Yuga to be able to handle this like they're extremely well capitalized I've heard really good things about the CEO and the core team like you kind of want the biggest people fighting the hardest battles and I think it's I think it's fine people people freak out about this stuff

I'm just like this is like you know just chill I think that's kind of it for some of the big news uh there's some other side things like there's a couple big ZK announcements coming up or that have happened over the last couple of days this week like scroll um announced an upgraded ZK evm test net uh polygon deployed their ZK evm testnet I think Ave unit Swap and lens are all going to build on that uh ZK sync announced their layer 3 Pathfinder um obviously Cosmos is in the narrative right like I I feel like it's like L2 like it's like scaling season and like I don't know if you've got you've got some cool stuff with like l2s uh I was looking at the arbitrary and optimism data like the amount of I think is active users just past Avalanche I want

to say yeah um so like that's that's interesting to see the ZK evm stuff is interesting to see Cosmic arbitrum acquisition which was great acquisition by the way like that yeah that's great what do you guys know the um do you guys know that team the prism Labs team don't I mean love their work don't know them um but like a few things are becoming pretty clear to me number one the l2s are not just scaling they're getting like adoption and it's working um that's the first one number two uh there's very clear Revenue model for ethereum to accrue values from these l2s like that's even better um and then if EIP 4844 comes out these are another 10 to 100 x cheaper

like that's ball game you know I don't understand what the other chains are really going to do like maybe there's some other programming languages things like that but like the case for all at once becomes much less clear like you have to remember that a year ago or you know 18 months ago the argument was that ethereum was the victim of its own success it did not scale it is not scalable the road map was not credible either the merge happened 4844 is happening the l2s are scaling each is accruing revenue it's deflationary it's like all the puzzle pieces coming together I'd get so big like I like you know I'm talking about Ethan

I don't know this stuff feels very obvious uh to me um and also into Michael as well like to our team but you know you go on Twitter and people are just like so negative and uh yeah I mean I'm talking to Santiago about this too he's like I am loading up on eth like it's it just feels so obvious I mean I'm super optimistic I'm not talking about what we're buying or what we're not buying uh yeah the words are like you've got to get a new host here this yellow guy just we need the other mic back yeah yeah like I'm like I'm reading Gabe Laden's tweets about like you know like he's like the thought leader for the free to own side and like we're bringing the users in and like he's like

we're onboarding everyone on to eat that one and yeah I mean it's just gonna be I think it's gonna be an awesome year like whenever whenever Michael and I kind of like you know take it in the shorts get like newt a little bit you know and the market gets bearish our motto is like give it a year next year will be better like this year was bad next year will be better like next year's gonna be I think great uh and I'm excited for that that's the same time in a row we've uh we've been in the Foxhole yeah that's what blinders on keep going yeah I agree that's what we're doing at blockworks too I agree awesome guys um anything else that we're missing for the week we're launching permissionless soon 2023. oh I'm stoked for that the last

one that I think is is important and and Michael sent this to me today for the first time uh I think since like it's been like a few months the Senate is now favored to go Republican so like a lot of the stuff that you're seeing in markets are having like these externalities now and I think that feedback loop is is pretty interesting um and it kind of gives you the potential to think a little bit more optimistically about like okay where where are our markets and and just the world going um like I think there is a case where you know the like you can take it very not to like get super into the optimism case but like okay the Russia Ukraine stuff is

really bad and the gas price is high well like that just accelerated the nuclear transition by like probably 10 years so like that's actually a net positive um you know like okay like people are really up in arms about inflation and like you know they they really want it to go down they're pissed about the gas prices like okay potentially like a more responsible you know fiscal and monetary policy is coming about like I think there are a lot of reasons to be optimistic and it's starting to show up in the political landscape which I think is really interesting yeah Market markets will uh front run all this stuff and so I think as we start to see the the truth along effects of markets um you know we're starting to see that but you know it's going to be it's going to be reactionary and it's going to be

something that you know it's not going to be bad forever it's going to get positive eventually yeah like the like I think the thing that people are talking about is like the midterms are so important like that decides the future of the country for the next two years if it's you know Democrat House and Senate it's going to be a lot different look than if it's you know gridlock if if the Republicans win either of the of the chambers like that is I think one of the things that's driving the most uncertainty in the market and potentially why you saw a rally today where the market was interpreting you know potential red sweep or at least read you know part of that that side as being more bullish than anything else so you know I'm trying to find a reason why the market is rallying today I just have no clue I

think that could be part of it I think that is it I would assume I think that is it which is like there's some interesting polling data that came out that says that uh not looking good for the Dems so I would assume that the market says that's a good thing for us yeah cool guys well uh I like ending on an optimistic note this is a great conversation appreciate it I always enjoy this um yeah have a good rest of the week fellas later guys as well see you in London see you in London [Music]