Security Tokens Disrupting Venture Capital #tokensvsVC


– Thanks so much, everyone, for coming. First of all, I just wanted to
introduce our wonderful host, with the most, it’s Tobin Dommer, tonight. He’s actually the fintech
guy at Sheppard Mullin based in Palo Alto, right? – Yeah, yeah. I come up here as often as I can. Thanks, everybody. I’m the corporate partner
at Sheppard Mullin, happy to have this great panel. One of my favorite topics is
sort of the interplay between fintech companies and venture
and the new funding models so, look forward to it. – Thanks, Tobin. So now I’m gonna pass it over to Mark. Mark is our moderator for the evening and he’s gonna introduce the panelists and we’ve got some brilliant panelists so I’m looking forward
to the conversation. Thanks, Mark. – Thanks Pemo. We do have a great panel tonight. It’s a very timely subject as we’ve all been reading, and as I’ve been writing about for both SiliconANGLE and theCUBE, which is our TV channel. Let’s go ahead and get
things going right away here, and have each of you just take a minute to just briefly, introduce yourself, and describe your involvement
in this crazy business known as fintech, and blockchain
and, the token economy. So can we go? – Greetings, hi. I’m David Blumberg from Blumberg Capital, up here, down the road in San Francisco. We’re also in New York and Tel Aviv, and invested in companies in
about five different countries, US, Israel, Germany,
Canada and UK, so far. The world is open, and
I know a lot of crypto and blockchain folks are in non-US places. That doesn’t bother us. We’re very open-minded about that. Traditionally we’ve been an enterprise investment firm, mostly IT. We’ve done a lot in fintech, probably 26, 27 companies
in fintech right now, managing about 550 million, I believe, in total assets under management. About 55 companies in
our portfolios right now across different funds. I think we like to say that we add value, and like to lead deals, and go on boards. Crypto, so it’s to chain some of those. We’ll talk about that upcoming. Seed in A round is where we like to go in. Few hundred thousands to five million would be our typical
traditional investment size. We’d like to syndicate with
great folks along here, and always looking for
wonderful investors. because definitely we believe
that you drive the Ferrari. We’re the pit crew. Gotta change the oil, fill the gas, and help you get further
to the finish line. – [Mark] Okay, Miko. – I thought it was Lambos. (participants laughing) So, my name’s Miko. I invest with a firm called Gumi, which is a specialist strategic
investor base in Japan. So, it’s really all about early-stage cryptocurrency investment, both equity and token side. We really want to align with founders and ultimately, we wanna introduce them into this kind of market,
which is both an extremely, exceedingly large cryptocurrency market, possibly by some measures,
largest in the world, as well as an extremely difficult market. So, we just wanna help. So that’s our role in the industry. Have a couple of other hats. I do have an advisory surface
for token sellers as well as I’m a founder of an
exchange called Evercoin. So I think those are all the hats. Basically, that’s me. – [Mark] Pierre. – Hi, I’ll make this short. I think Pemo has broadcast this event to about as many people
as I imagined in Twitter everyday, five times a day. So if you didn’t catch
our backgrounds there, sorry to hear that. I’m an operator. I’m working with a company called Tierion running business development, but I’m also an advisor to
a number of small funds, as well as a couple startups in the space. And have been active in
this space since about 2014. – Hi everyone, Ken Nguyen. Great to be here. Thank you, Pemo, for having us. I run a investment
platform named Republic, it’s republic.co, dot co, not dot com. We are basically a token-selling platform, whereby projects can go to
token sale, token resale and their jobs in a comply manner given that all of these things are securities offering after all. On the other side we
also do large campaign for traditional tech to
fundraise from their supporters in addition to venture financing. Republic itself has a pretty interesting financing background. We are completely seeded by AngelList, the parent company. We fundraise from VCs the seed round. A month ago, we did a token presale backed by Binance Labs
and Passport Capital to launch our own security’s token. On the other side, we do
have an advisory platform that are looking to structure
tokenization of hard assets. Obviously, the issuing tokens
would all be securities. So, from different perspective,
really looking forward to the conversation today. – Hi, I’m Ben Narasin. I’m a venture partner at NEA. If you don’t know, New
Enterprise Associates is one of the largest
venture firms in the world. It’s a very classic venture firm. We’re now in our 40th year. I’ve been there for about a year. Before that I was a
seed investor for a year as a general partner in another firm. Been an entrepreneur for
25 years before that. Relative to this category and topic, I think when Pemo asked
me, because I’m more focused on the reality
of traditional venture which has been something
I’ve either been doing, or been observing, or
been participating in as a feeder for the last 12 years, but I’ve been doing fintech since 2007. Lending Club, Kabbage,
Circle, Realty Mogul, and various other companies. About six years ago, got
introduced to Bitcoin through one of those companies and thought, at the
time, it was pretty much a speculative game and decided
that I, as an investor, didn’t want to be a speculator, which is still where I’ve ended up today. – All right, great. Well, good job, and
let’s dive right into it. I wanna start first with
the V word, volatility. Since we’re talking about security tokens, as we all know, this has
been an interesting month in terms of the
roller-coaster of token value. In fact, one of the stories
that I filed last week talked about how the token
market lost $43 billion in a five-day period earlier in August. So, is this time-dependent? Or, is this just a kind of a natural cycle we can all expect in a nascent industry? Who wants to start with that? – I think we’ve all
been thinking about that this warning of, winter is coming. So, to me, I think this is
kinda more like Ice Age, which I think is great because, to me, I’m very comfortable
’cause my notion is that this is really
washing out weak hands. So, ultimately, even if
you have mass extinction at the scale of 99.9% of entities, if you actually look at the
ones that do come out of that, they’re gonna be colossal. They’re gonna be really,
really good investments. So, from the perspective
of diversification, just means that investors
need to be smarter, and more selective, and more diversified. So, those are just habits and good habits. – When you were speaking of where, the way I see it is like
a Christmas sale in July. I mean Ethereum’s 75% off. (participants laughing) No, I’m kidding. I’m not actually advising people to stock up on any of these coins. From my perspective it’s really
more long-term potential. In the interim, drastic volatility. I think it’s just natural
to such a nascent industry that attracts global attention. But, what the technology represents, and in very-early-stage
project doing ICO presale that’s what we focus on in Republic, myself personally, as well. So less about trading on daily volatility, and more on long-term potential. – I think there’s a
little bit of a difference in this market versus, certainly, traditional venture capital ’cause traditional venture capital is really about building companies. Supporting entrepreneurs
to build long-term value. Generally, the fastest
way between two points is a straight line, but we know there’s a
lot of pivoting going on, and figuring out the product in traditional early-stage venture. I think the problem and
the benefit of crypto and tokenization is the same issue. It’s the issue of liquidity. So, the fact that it’s a good
thing to unlock that liquidity to a certain degree is also the negative
because it allows people to slip out of the noose too early before things are ripe. The added risk is that there’s this issue of speculation in the
very, very short term. Day traders compared to the patient money that needs to back entrepreneurs. So I think, again, it has some use cases and generally, it’s not appropriate, and in certain cases,
it will be appropriate, and it’ll probably get
better and better over time as compliance, and all the things you guys are mentioning get added. But I think the first volatility
is not necessarily good. I don’t think it’s good. It’s not what most entrepreneurs want. It’s not what most investors want. It is what gamblers want. Gamblers, speculators,
are looking for that and in places like Korea, where gambling in casinos is not allowed, this has allowed people
to play those markets. It’s also great for places
with really unstable currencies ’cause they’re trying
to protect themselves against those currencies. So, I’m not talking to the panelists, but this whole topic mixes up
quite a few different topics in finance. So it’s complicated to
separate the strands. I’m talking too much, but I just wanna throw that out that I think there’s some
good points about it, some very negative points about it. It’s not, traditionally, what
most early-stage entrepreneurs have been looking for. – [Mark] Pierre or Ben, do you have a comment on that? – The volatility thing is fascinating. I mentioned earlier that
my own belief system was we’re in a speculator’s market, not an investor’s market. Speculating is a valid
inform of investment. It is not the investment of my companies provides new capital to be speculative. People that speculate on currency futures or gold futures or oil
futures, that is a job. I assume that all people who put money into those folks to do exactly that. But to David’s point, investing is, one, it’s a long-term game, and two, it should come for
a lot more than capital. The thing about the
volatility that scares me, it’s very good for the entrepreneur or the person that raises
money, than the person that quote, unquote speculates
or invests in the coin. Well I would argue a little bit that many of these coins would be akin to investing in penny
stocks during the day when they were printed
on pink sheets of paper, and distributed to
brokerage firms once a day. It’s not unlikely that it
will trade by appointment, and the spreads will be so gargantuan that you could just, if you
could be the market maker, wow, you can make tons of money. But I remember, one of
the things that made me really scared about whenever Bitcoin was just
an inch shy of $20,000, one of my son, my son’s
21, he’s in college, one of my son’s friends
came to me and said, “Thinking about putting
grandma into Bitcoin.” (participants laughing) I was like, oh, that just
doesn’t sound like a great idea. He’s like, “No, don’t
worry, I’ll watch it.” (participants laughing) (speaking amidst laughter) Okay, well, it’s a
highly speculative thing, and I don’t know if grandma
needs this money to get by but you wanna make sure if
grandma’s on fixed income that fixed income continues. We were at 19.8 and two weeks later, you know we’re at 8500. So, you know, I know
grandma’s not in Bitcoin and I think that it’s, look, if you sell, if you go out, I’ll admit, that if it was possible for
me, with high certainty, to know that can sell $50 million worth of some random thing, which
I never have to do a thing to support it ever again,
and it can go to zero, and I can’t get in trouble,
man would that be tempting. I hope I’d be a big
enough person not to do it because I think it’s somewhat evil. But, there’s the person
that got the capital, it’s not equity in their business. It is arguably a security or a mechanism for affecting certain things, but the only sort of virtual token that I’ve ever seen that I thought made sense was
in a science fiction book. The guy who wrote The Martian has a second book out, and his virtual token is enough to take one gram of matter to Mars. His story’s about people
that live on Mars. That made a lot of sense. It’s entirely tradeable. Anyway, told. (participants laughing) I don’t know about that but
it’s a pretty good story. – Sorry, you just wrote
my next headline for me. Don’t Put Grandma in Bitcoin. – Send Grandma to Mars. – Yeah, yeah. – So Mark, I wanna take
a slightly different tack because I wanna unpack what
you said a little differently. The activity we’re seeing today is this notion of people building things on this idea of utility tokens, with a definition around what
they feel a utility token is. Granted that the legal
system is trying to identify what’s happening today as securities, but having said that,
if it were securities they would behave differently. So I guess when I look at the
activity of utility tokens, that is a, as we’ve all discussed here, highly-speculative, yes, all of the things we’re talking about. But when we’re looking
at it as securities, and that is where we move
into more traditional roles. So now we start to look
at a more stable currency and not a currency,
more stable asset class that where the movement, there
may be a ton of speculation, but if we look at it as
a fundraising vehicle for an entrepreneur,
once they have the money, they can go build what they need to build. The fact that that token
was gonna be moving and doing things inside, I
don’t envision security tokens as something you will use
to pay for the machine. So this is the one thing
that we need to understand about the separation of
utility and security, if they’re even gonna be differentiated, is what can you do with the security because today I can’t
take a piece of stock, and start to use it to pay for the things that I’m using on a machine. So I think we’ll see a very
different set of behaviors. The stuff that’s happening
now, well, again, it’s not backed by anything. There’s nothing at stake. So, I think that’s a
very different behavior. – I think it’s worth clarifying and get everyone on the same page when we use the term security tokens. – [David] I was about to
say that it’s meaningless, but go ahead. (participants laughing) – [David] You’ll define it, and you’ll say it’s completely ridiculous. – There are a few types, but maybe two. I would say that in our
conversation with the SEC and regulators, and on the Republic team has six securities attorneys and liberal academics
here in the room as well. It’s pretty much generally accepted that there is no such thing as a new token that is not a security token unless it is completely
stable, stable coin or that you can use it
for consumptive purposes. That is, you use it and burn it. If a token, it doesn’t matter
what utility it may have from the Filecoin to
Blockstack to whatever else, if it fluctuates or will
fluctuate, people buy it hedging on the upward fluctuation, it is considered security. – [Miko] Not necessarily,
Bitcoin, Ethereum. – Yeah, no, but the, I meant new. That’s what I’m saying. New tokens, new projects and then these projects. – Until they become
sufficiently decentralized. – Correct. And then within the new
phase in the first offering so that’s one. I think the security token contacts that perhaps you may have in mind, an asset-backed token which has an element simliar to stock, and bonds, and shares that you receive financial back in addition to that volatility, which will remain forever securities as long as we know. – Yes, so I just wanted to retort and say, that was really good. For me, I’m objecting to
the idea of security token because I never had a
particularly good conversation including that phrase, but I think you handled it really well. It just, when you get to the
phrase, asset-backed token, that happens to be
regulated as a security, now we can have a conversation,
and it’s beautiful, right? The reason why I’m objecting to it is, the only lens that
matters to the regulator. So the point being that, if
you say that there’s a thing called a utility token
that’s not a security, you’re just dumb, and
you’re gonna go to jail. So like, you should just not even think that this conversation intrinsically has a meaning, in the sense of if you think there is a thing
called the utility token that’s not a security, nine falls out of 10
you’re gonna go to jail. So the point being, I think
you said it beautifully, well, I’m not even gonna
go down a different hole, but you did good, I’m with with you. – There’s a challenge in the industry in that the vast majority
of offshore projects do not understand that, have offered until very recently, feeding the US, and
there’s plenty of people who are still doing it now, and yet, the SEC is not enforcing. So are those who are
trying to be compliant are just behind the curve. They have to undertake a huge expense or will the SEC go after 99% of all of the unlawful projects, and that remains to be seen. – All right, well we’ll dive
into the regulatory side but I also wanna get to kind of the security versus venture capital topic ’cause that’s obviously
what we’re here for. So we know, I mean it’s been
written by my colleagues this is the age of the security token, it’s the dawn of a new era but at the same time, it appears to be a legitimate funding mechanism
disrupting venture capital. What’s your take on that? How is this playing out
as you see it right now in the venture capital community? – Well, I guess also better
to define venture capital. I do think that token fundraising buyer or taken sales is indeed venture capital. Venture capital is just
financing early stage project. But if you’re talking about
venture capital firms, then the pros and con. The con is that I think
almost new projects now are trying new companies,
any tech-heavy team of any startups are trying to find a way to incorporate blockchain
into their business model, and fundraise from the ICO avenue. That necessarily leave less talent. I think that a lot of VCs are constrained by their LP agreement, and they cannot deploy
capital into token sales. On the other hand, we start to
see the tokenization of VCs, which brings in, which
would make it easier for them to fundraise. So I think it’s on both sides of the coin. – I think the LP agreements
are a little overblown because I was talking
with a general partner at a tier one VC. His perspective, I was like, hey so how are you structuring
tokenized investment in your, part of your regular fund? How do you justify it? ‘Cause we’re talking about
doing a gig together. He said, “All right, so did
you renegotiate your LP?” He said, “No, we’ll just do it.” I think LPAs will deal with it. – [Ben] I just don’t. – Are they gonna sue us? – I’m gonna have to comment on that. (participants laughing) Saying in one breath, “Tier one firm,” and another breath, “We’ll just do it, and
LPAs will deal with it,” I don’t know. – [Miko] It is a tier one firm. – Okay well. – [Miko] I can say that
I won’t say the name because I don’t want to. – My judgment of that
firm would be different. I don’t have a way of
expressing that I can express. Sorry, it’s not appropriate. But having said that, I will spend just a modest amount
of time on this topic. I actually talked to when all of, so as I see is starting to occur. Now let’s face it, there’s
sort of one other things I learned a long time ago. I had a fintech entrepreneur, the one that introduced me to Bitcoin six, seven years ago. His business was going quite well at a relatively steady pace. I said why aren’t you going faster? He said, “Ben, this isn’t
like the regular business “that you’re invested in. “If I go faster, and I’m
wrong, I go to jail.” This is not break things, and fix them. This is jail time. So I guess I would say if there’s a risk of jail time, and you’re comfortable with that, and you’re offering them, that’s something you’re
entirely entitled to consider. We did have other at the
beginning of all this start to talk, ’cause I was the fund and we brought in counsel. The way they expressed is
that most venture firms’ LPAs, I’m not referring to any specific one, say that, because actually this goes back way before Bitcoin or at least blockchain related transactions to the advent of convertible note. Convertible notes are not equity. Convertible notes are not
even really debt anymore because they manipulated them so much that there is this hybrid
Frankenstein creature that we don’t think would ever survive a court battle to be expressed as debt. But in order to be able to invest in those as of call it eight, 10 years ago with all the different
incubators that were coming out, the phrase that was added
to most LP agreements was equity or equity-like instruments. Lawyers will opine on whether a ICO or a token is an equity-like instrument. I’ve heard them opine in both directions. I’ve heard a single lawyer
opine in both directions. (participants laughing) He said, “You can look at it either way.” But I’ll tell you this, when my entrepreneurs come to me, and ask me about something
they’re trying to decide about, and there’s any risk at all that something really horrific happening, my answer is if it’s a possibility that something bad
happens like somebody dies or you go to jail, or
you incur the wrath of the US government, or have
massive financial fines, I’d say, let’s not take that risk. The US government has a
ridiculously long memory. While they’re not, there are
a certain number of things that transacted, which the
SEC opined as being okay, and they would not pursue, if you’re not one of those, whether it’s two years from now or 20, I don’t want to be one waiting around for the day that somebody new takes over, and decides it’ll be great to go retrieve that $500 million of money that was put into this asset class that they no longer feel positively about. – So let’s do a little bit of history. First, we distinguish
between utility tokens and security tokens. Your view, the new ones, are similar. They’re all utility. It’s been problematic for tax purposes. One, very problematic, and for the obvious reasons
that have been raised. But let’s go then, we’ve been also conflating
to other topics, which is the company raising the money, and the venture fund structuring itself as a securitized fund. Okay, by blockchain, and spots, and so on. So when it’s old is new again, so in the pins trading, I’m
old enough to remember this, there was a famous
company mainly in the UK called Triple I. It’s a big VC fund back
in the ’70s, ’80s, ’90s. There were a few others but there were not many. Very, very few venture capital funds chose to go public, and
trade on the markets. Can anybody understand why? Partly was public disclosure
that they had to do. (speaking faintly) Second, it was that they almost always trade it at a discount to the now. So why would you want to do that? So you expose yourself, and you’re trading at a discount. So Triple I, I think went out of business, and I think they’ve come back in, right? I don’t know if they’re,
maybe Ben would know. Do you know the form that they paid? (Ben speaking faintly) – Okay, maybe not. They definitely went out. I think there’s some others
that are probabilistic but most VCs worked this out, do not choose to go, probably
for a variety of reasons. I think that’s demonstrative of certain important traits for us. One is again letting our
entrepreneurs have time, patient outright. Remember there was just a
controversy in the press. I think the president or the CEO of Coke talked to President Trump. He said, “Oh we shouldn’t
do quarterly reporting. “How about semi-annual?” He said, “Oh, maybe that’s interesting. “We’ll look at that.” The markets are saying it’s a good idea, not important, whatever. But the point is that there
is some degree of value that we find from entrepreneurs in not being the bright glare of corporate quarterly reporting
for some period of time. That’s one. Then there’s a whole bunch of other issues that is just not defined. Again, I think Ben you’re right. Most of the LP agreements
for funds right now don’t really countenance it. So we for example will not, we did not choose to invest in any silly ICOs that were not securities that were just utility
tokens, we couldn’t do that. Some of our companies have
thought about issuing, and that’s certainly they’re going there ’cause it, if we just own this thing, and they do it. They chose not to because the market has been quite sort of chaotic. So I think there are a lot
of boulders in the path. So far, this is not at all clear cut. We are, I’m pretty sure in our next fund, we will probably avail
ourselves of the opportunity to invest in security
token kinds of investments in the future. So I think we’re gonna mostly see, by assuming we want the flexibility but not sure how we’ll
have to go pursue it. – I still remember the
first active discussion I saw inside an awful firm was how to think about ICOs as really into delusion
and pro-mat-ter-rac. – [David] Exactly. – All right, because you
can invest in a company, and then that company
can go on to do an ICO. Well, that ICO is not
equity in the company. But at the same time,
it’s providing capital, and now the entrepreneurs
don’t need capital anymore. Let’s use an extreme example,
I’m just making this up, although it is interesting
that for two years, every entrepreneur that ever approached me that said they have an
ICO opportunity said, “By the way, 85% of these
are scam but mine is not.” You know I saw 200 entrepreneurs. So I’m trying to figure out. Well that’s interesting, so there must be
thousands of entrepreneurs out there scamming us
that I haven’t met yet. But if you find that company, and they go out and
raise all that capital, and they no longer need capital. So that can change the
behavior of the company, and the entrepreneur
around everything else. So there was a lot of discussion about do funds need to reserve the right to a pro rata portion of, and I’m talking about traditional firms because there are firms that have been A, formed purely to invest in blockchain and ICO related products. There are also, I was approached when I was in-between firms, by an entrepreneur that I like a lot, who wanted to create a venture fund purely backed through an ICO because his view is what David’s point on the public scrutiny is
very, very accurate. The one thing that
venture funds do not have is regular liquidity, all right. It’s a 10 to 12-year lifespan. So you put a dollar into a venture firm, it’s not like three years later, they have Uber, and they sell it, and they give you money. So it’s gonna take quite a
while to get to liquidity. So one of the ideas that’s
been floating around, I think there’s one, maybe
two firms have done this, is we raise our funds through an ICO, and those units can trade. But they do have all
kinds of issues around it. So I think that a lot of firms have tried to figure out different things. Do they want to play, at all in the ICOs themselves? Do they want to play in the companies that will go on to fund through ICO? Is that ICO plus or minus? How would it impact the
firm, and its ownership? Does that need to be baked in? And at what point do we
have to figure that out? Not just in future LPAs
but in term sheets. I haven’t seen those yet but I know that some firms have really thought about this a lot. One have the right to a pro
rata share of the token sale. If I own 25% of your company, I’m not saying that we do this, I’m just saying that one entrepreneur could come to our firm, and they could say, we’re
gonna put in this money, and have 25% ownership, we want to have the right
to buy the 25% of that ICO ’cause we don’t yet understand how it’s gonna impact the firm every time. – All right, so what I’m
kind of hearing a little bit in response to this is David, you kind of talked about, well if you can’t beat them, join them. Sounds a little bit like that. Or we’re gonna think about what are the right strategy is? Then move when the time is right. It’s all timing, and all that. I guess that what’s interesting about this is in preparation for this panel, there were a number of
stories I saw in the internet basically said venture capital
is going to be disrupted. Get ready for it. So what should the venture
communities response be? I mean in your view. If we believe that that’s
certainly a possibility, how should they respond? – Well sorry, before we go there, I mean my concern is a narrow view in terms of what the venture capital bring to the table. It puts a punctuation
how is money comes in and gets deployed. A lot of it has to do with deal flow. In other words, these
are all different avenues by which money can come in, and whether it’s in a
crowdfunding platform or VC. What they bring to the table is their ability first
of all to see deals. So the notion that a lot of individuals are now gonna get that chance
to invest, and see deals is the first plus. The money side of that, I
think is very secondary. So I see a lot, I mean most
of the ICOs I see today, and again this notion of security is still troublesome for me right now, just understanding the separation. But most of the action, be it still accredited investors it’s still all of that things we see in professional seed investors
and VCs coming in. So I think the money can
be as very secondary, and I will look at the value that venture capitals
bring in in other ways that basically is hard to disrupt. – Only I’ll just use a
quick example of this because I have no negative
feelings about ICOs. If anybody here can go
scrape up $50 million or web people wanted to give it you and with total freedom, more power to ya. I’m not giving you $50
million with those terms. I have an entrepreneur who just, it hasn’t been announced yet
so I won’t be that specific, but he just became a unicorn and probably one of the
most exciting businesses, it is the most exciting business I’ve ever been involved in. We have breakfast the other day. He said, “I want to thank you so much “for helping me pick,
not just the right firm, “but the right partner.” He said, “I didn’t understand at the time “when you said you should
take X, Y, Z’s money.” I was a seed investor. Just trying to help them raise. They have lots of opportunities with all of the most
famous firms in the world. I very strongly endorse this one person. He said, “I thought you were doing it “because it would look good in the press.” It’d be good to have this person who happens to run the fund in question. He said, “Now I realize
how much it does matter.” We’ve done three rounds. That firm did two, maybe three of them. I introduced them to the company that made them into a unicorn. The terms were all clean, and easy, and beautiful, and just. I mean this guy has
plenty of normal business so what he has not have
to spend a lot of time on is all the pain-in-the-butt realities. It’s not that he hasn’t had to do the work to raise the money. Nobody gave him a gift of capital. But the quality of the people that have been involved to allow him to do things that he would probably not have been able to get done with the speed, and at the precision and detail. He considers that to be
world-changingly awesome. When you raise money, I
mean I’m a fan of AngelList, but when entrepreneurs ask me if they should go on AngelList, I say who’s your lead? I have two entrepreneurs of my own that are now very, very
effective AngelList syndicators. I feel there’s some similarity here. They both tell me the same thing. They’ve got to syndicate all these folks. They’ve got SPVs they can spin out of. Everybody looks at the big writeup, and they go down to
who’s the lead investor? Oh, I’ve heard of him. Great, I’m in. The anchor-in, what
does a lead investor do? Like what’s the lead
investor’s responsibility? Think about that for a second. It’s not just that they
write the biggest check, they normally do. They negotiate the terms. They do the diligence, they do the work. They do the work for everybody else to say, yes, this is a real business. I’m not saying that VCs have not ever have the wool pulled over their eyes. Certainly seen examples of that. But it’s an enormous amount
of work to lead a round. If you do it right, I mean
it involves quite a bit. You could argue that other investors should be more confident because of that work that was done. I think that’s a valuable thing. It’s probably something
that you wouldn’t see in more of a free-form
crowdfunding style model, whether that’s ICO, VC or AngelList. – Since I’m the only one in the panel who is currently entrepreneur, and fundraising for a startup that happens to be also
an investment fund, an investment platform. My view, I still want fundraising. It’s that the role of angel capitalists and venture funds cannot
be displaced in that. Just like Ben said, with capital comes what is even more valuable, and that would be advice
for years to come. That does not mean that crowdfunding, which is what we do for retail investors, $10 at a time to invest in Republic even with your credit card, and take it to the extreme level, which is token sale around the work people are participating. That sorts of capital
also bring the community, people will evangelize for you, and certainly easy money. So the two can very much go hand-in-hand, and not by any mean, mutually exclusive. I think that’s why you
see whether with Republic or with any of these major
token projects out there, did you raise from the
Union Square Ventures, the NEA, or Highland Capital, Andreessen, and all of the noted VCs as an indication of validation, and as your end for advice, and then go out to the market to fundraise from people who just follow, and don’t have time to do due diligence. So I don’t think it’s
disrupting venture capital as much as enhancing the ecosystem for all participants all around. – [Mark] Okay, all right. David, you can? – I have a story of a certain history. It’s gonna be a fun one. There’s a famous story of
a VC going to the Valley, who early on wanted to
invest in a young company. It was in the software business. The entrepreneur didn’t want to meet him. So the VC phoned the secretary
of this entrepreneur, found out when he was heading back to visiting the Silicon Valley, flying back to New York City, bought a ticket, fun-nel-gal his way with the desk help to get to sit
next to this entrepreneur. The entrepreneur sitting there going like, “Why are you hassling me like this?” “I want to invest in your company.” “I know you want to invest in my company, “but I don’t need the money. “I’m already cash flow positive. “I don’t need it.” “I know you don’t need
my money, you need me. “You need my time, my help, my advice.” That was Dave Mark Barton. The company, the
entrepreneur was Bill Gates. The company was Microsoft. He took his money, Bill
Gates took the money. Didn’t need it, took it. The guy sit on his board
for decades I think. It was a super productive relationship. So there is definitely
value beyond the money. – All right, before we
get to the questions, I don’t want to lose sight
of the regulatory question because that has been one
that’s down in the news for quite a while. I happened to be in New
York earlier this month and covered the Fintech
Week conference there. I was a little surprised
because the feeling at least at that event was very positive. The Treasury Department had just indicated they’re going to be very
receptive to fintech companies. The OCC had floated the idea of a national charter for companies. The SEC is apparently willing to listen, and try to get it right, according to some of
the people in the room. What’s your take on this right now? Where does the regulatory
picture stand in your view? Do you think that could be
a problem down the line? – So it’s the lack of clarity, and I think it’s a major
problem for entrepreneurs. Before going to tech, I was a securities
litigator, Goodwin Procter, and was the general counsel for AngelList. I have been very involved
in trying to navigate and understand the changing
regulatory framework as applied to crypto. At the end of the day, before crypto, people have been selling stock to accredited and
non-accredited on Republic. There is a way, a complying way to do all of these things. It obviously comes with cost, with time. If you’re willing to be compliant, and mitigate the risks
by going through all the hoops to get to your role, that may it be retail distribution or accredited investors only, there’s absolutely a way to do it. But to wait for an exemption
for crypto as an asset class, and free of all securities implication, I think is a dream that
will never come true. – That should be some
concern in the sunset, there is a lot of tokens out there today. So before we see what’s gonna
happen with the new tokens, we are still waiting for those rules to, well, if you talk to somebody in the SEC or attorneys that are dealing
with the SEC right now, there’s clarity in the sunset, the rules are there. So, as you’ve put it,
everything is a security. So now you have to operate back and say, okay well all of those people who are out there, what’s gonna happen? What are the remedies? If the remedy is that they
have to return the funds, how does that happen? Will it happen in crypto? Will it happen in dollar value? Who will get that? The people who own the tokens today or who owned them at the
time that they’re sold. So there is a whole lot
of stuff that’s undefined. So I think we’re gonna have a little bit more chaos and mess. We have yet to see, the SEC’s going after low-hanging fruit, at least the clear
fraudsters as the first line. We haven’t seen them go after
projects that I would say, behave as properly as they felt they could without being outright fraudsters. So we haven’t seen any case being brought against those folks yet. We really do need to see some of those to get some sense of what’s going on. – [Mark] What about Ben? – Tax business friendly administration. Well, kind of like the
administration on this city. This administration is trying to unwind everything the last administration did. There’s no reason to
believe that the same thing couldn’t happen again. I said earlier that US government has a very long memory. Very quick story that has
nothing to do with technology. David and I have the most stories ’cause we have the most age. (laughing) My grandfather was an
entrepreneur his whole life. He used to be a solar entrepreneur, and then they changed the tax code, and that wasn’t anticipated so he became a chemicals entrepreneur. He bought a warehouse and a factory that manufacture chemicals. The EPA came to him one day and said, “We have records that 20 years “before you bought this facility, “a single barrel of toxic waste “was buried in the back facility. “We need you to prove
that you have mitigated “or it was mitigated before you owned it “or you have to pay us a fine.” Well my grandfather fought
that until the day he died. Because what he discovered
was there is no, what’s the thing in the rule of law where if you did something bad but it’s long enough away? – Statutes of limitations. – There’s no statutes of limitations with the US government. They can chase you forever. All they need is somebody new
running the administration, and I’m not talking about
the president necessarily, but could be the SEC, that has a view that’s
different than the past. As far as I can tell, I don’t know. Maybe a certain lawyer could answer this. I don’t know that they have
to care how long ago it was. My view is simple. Like death taxes, and anything to do with the government, I never want to have to
mess with any of them. (participants laughing) – I think though that one
of the important points to emphasize is that part of the construct of censorship resistance is not predicated solely on anonymity but it’s actually
predicated on this concept of an internet money that has
routing capabilities right. Because of routing capabilities, by the way, I’m saying that this isn’t predicated on anonymity because I believe that
global AML is coming. So I feel like KYC and AML will be non-negotiable planet-wide. So I think that’s coming. But there is censorship resistance with respect to things
like domicile competition. So in a sense, what I’m seeing is I’m seeing capital routing
around the United States. I’m seeing US investors
investing out of Cayman theaters, and basically seeing
basically the whole dance. Same thing with China, which is do you think that
the Chinese ban on crypto has stopped Chinese crypto? It’s stronger than ever. Chinese crypto is ragingly strong. The ban has done nothing. So essentially, routing has
taken care of the problem. Because it’s the internet. – Okay, so that is one
difference that people said, well it’s between previous and today that the big difference is that fractional ownership
has existed in certain things like the Green Big Cracker was an example. But fractional ownership, there was only one team that I know of that was like that. Most teams are much more
consolidated by one family or one group, a small group. So fractional ownership, is it positive? The globalization aspect really, and the arbitrage of jurisdictions is very important here. Again, that’s why we messed in a few Bitcoin related companies that were using Bitcoin
hopefully for remittance, and payments, and so on. In the US, in the last few years ago, they didn’t work out because our country is
too strong, too stable and it wasn’t a pain point enough. In places like Venezuela, or Malta, or I don’t know, different place, but your attention’s on Malta, because of Cyprus, I think. When the government came in– – [Pierre] You’re always in the EU, right? – That’s right. Cyprus actually, I think
the bank at one point, the government came in and like expropriate the
bank accounts in one day. In Venezuela, we know what’s happening. So those places, certainly
these kinds of currencies make a lot more sense. So we’re still a long way. So this whole regulatory arbitrage, and the uncertainty is very problematic. Usually Ben and I spar, and I tend to be, I thought I was more
on the libertarian side of less speculation,
you were a little more. This is the place where
I think we do need more. We certainly needed,
what you said, certainty. ‘Cause it’s too fuzzy, it’s
too quick-sodded right now. That’s not good. Maybe you’ve got first speculators, and people doing monkey business but for those of us who want
to be serious investors, certainty is good, and a
bit of more transparency. So that we understand the rules, and everyone’s claims that there’s a fair level
playing field or positive. Those are few points on that. – Rules and fairness. I’m a huge fan of that, you know, having probably one of the stable coin. When something roll out, cross-border, instantaneous, no fee transactions, which is now the description
of most of the coins that are out there right now. The tax is quite heavy
if you do a transaction. It has been tried over and over again. Now it’s working. If you go back to 1993
at the launch of the web, there was cyber-cash,
there was cyber-coin. I loved these things. I don’t know what happened to them. They either died or got bought. When Lehman failed, I wanted to start a digital currency backed by gold, and if only there had
been a blockchain protocol at the time, I could
have actually done that. Wouldn’t that be cool
for me to sit up here and tell you about my $48 billion of gold that I amassed somewhere, and you can trade it in dollar chunks. So I think that the possibilities are empowered by I think companies backed using blockchain can
do some amazing things. I don’t believe they have
to, be to, must do an ICO. It’s more I’m fascinated
by the technology, and what it empowers. I’m wondering if there’s room
for more than a few coins that already seemed to
be working pretty well. So I’m not negative at all in this but the topic of sort of how it displays is now, entrepreneurs make decisions, it’s a very different one than the underlying products
that can be empowered. The decision you make for how to fundraise is one that only you can make. It’s gonna be made on a whole
lot of different criteria including return horizons,
and return beliefs. If that serves your needs, that’s great. I’m not negative on that at all. And I do think, generally governments should stay out of business, and we will be better because of that. (participants laughing) – Well certainly. The other area that
I’ll also touch is that I think that what’s gonna
happen with security tokens as an asset-backed tokens. It’s really gonna dwarf
everything we’ve seen because this notion that
you can all of a sudden, start to, speaking of democratization, for example, REITs,
there are minimums there. Because it’s such a hassle
to do the paperwork necessary to distribute to REIT holders. So imagine now that you
are the $10 investor that wants to come to Republic. Now Republic offers a
REIT or access to a REIT. That’s huge, and so we are opening it up to other nations, other worlds, where people just don’t have the means to gain access to that kind
of, those kind of assets. – Yeah, so you’re really talking about counting unit account, unit of account in the kind of minimum,
viable liquidity-tuple. Yeah, that’s good. – Okay, I’m gonna take the mic here. I’m gonna come out to the audience ’cause this is your opportunity at asking question of the panel. We’ve got a good discussion so far. I’m gonna play moderator here. I’m gonna field with the mic because live stream are taping us. So who wants to go first? Okay, go ahead. – So thank you very much. So I’m very much convinced
about the importance of the venture capital funds. But what do you think about the global, the LP investors into the
venture capital funds? Because not everyone
talks about tokenization of venture capital. So how about tokenization
of the LP investors, and what are their roles are for you? – I think was trying to mention that when I was mentioning there’s fundraising at the company level, and then the venture capital fund. So let’s take that right
head-on in the issue of LPs. What do LPs want? They want long term returns that are higher than the stock market. That’s because we take more risks, so we should get more reward. So the big issue that they don’t like is being locked up for say 10 years in a typical traditional venture fund. So there are some other ways, that they’re starting to
make themselves available but are alternatives. I’m not saying that this is bad. I’m in favor we’re all really positive about this industry. In general, it’s early, early innings. Maybe it’s even pre-game right now. So there’s a lot more fix but let me just give
you a couple of examples of how you can get liquidity these days. The secondary market has
opened up dramatically. That’s because IPOs got pushed through too much regulation to later. People are delaying. So that means a lot of
people are cash-poor and stock-rich. So they needed money to buy a house. So we started, VCs started
becoming more flexible on allowing secondaries. Also, it works the other way. Even funds now can sell. We’ve sold Nutanix before its IPO. NetSuite, we sold to like Wellington and Fidelity, and some
of these big groups, who are the traditional IPO buyers. They were saying, “Wait a minute, “we don’t have enough IPOs anymore, “we’ve gotta get that growth earlier. “We want to take some risk off the table “with high profit, “and we’ll be able to
neutralize like that.” So there are these new
water finding its level methods for entrepreneurs and funds to access the markets. It’s not nearly as
liquid as what it will be with the securitization but it’s not complete black and white, as it was in the past. – Yeah, I mean to me, the
thing that’s really intriguing would be contemplating the reaction of a general partnership
to a tokenized LP, right. I think, I don’t have
visibility but then I think funds actually have a
pretty high variability with respect to partner disposition. So I think you’ll see a
lot of different firms looking at that very differently. I think as a fund myself, and a GP sounds great. We’d love to have a tokenized LP. – A couple of funds that I
had a chance to chat with actually works on this very seriously because for those that allow it, and so if an LP wants to
exit their fund, the funder, it’s quite a lot of paperwork. It’s not just paperwork,
it’s the exit negotiations. It’s time-consuming. The fund has to agree
that the LP can get out. The LP has to find a counterparty. So there’s a lot of
friction in that process. Probably for a good reason. – Discount. – Discount, that’s right.
– Or a premium. – There is a liquidity discount, right or illiquidity discount. So these are things that are
really difficult to deal with. So and a tokenized model, a lot of that can be built into the token. So the movement can be a
little bit more flexible. So where some funds are
beginning to consider this, I’m seeing more not into the existing fund but if they’re raising a new fund, it becoming a real option, can consider. – It seems like those having
more new funds entirely, there was one fund, I can’t
remember the name of it, that did an ICO to fund
itself as a venture firm. There’s actually a fund
that was based on Bitcoin and invest in one of
my portfolio companies that never had to raise again, ’cause they raised from
about five years ago. All of the investments paid in Bitcoin. As Bitcoin has increased in value, their bank balances increase. So they just feel like that. – Actually most of the
ICOs from a year ago. – Now this is going way back. – Yeah, yeah, okay questions. Let’s see, sitting back here. – Hi, thank you very much for the insights but I have a question. To take a step farther, do you think that the
blockchain technology or tokenization will be able to disrupt the book entry system
that the US stock market, bond market use with DTC at the moment? – This is one of my favorite place to think about how
blockchain can do things. This is why I’m not so
focused on the layer on top. The fact that you can have an internal decentralized
record of an asset and a transaction just
seems incredibly powerful. The title is a great example. We used to think that title is ridiculously antiquated, a rip-off. I mean everybody thought I bought a house, I’m the fifth owner. It was almost 100 years old. I’m paying title insurance to somebody to tell me that, yeah I can own it the way I think they can. I mean five people in 100
years have owned this house. Last owner for 27 years. Little odd. So but I think that all kinds of assets that can be secured with that. When I trade my company public the fees you pay to the
American Stock Transfer are not the minimums at all. Even as a investor, when I
see my early seed company didn’t go public or have liquidity events, and they’re funneled through that. So you can, as long as it’s reliable. Now having said all that, you could also do it
through an Oracle database. The thing that I always want to understand is why is it that much
better that it’s distributed. Because you’re gonna create a tax in time, and some sort of
transaction reality and lag. So why is it better than
a controlled set of data, and is it absolutely trusted. There has been some conversations I don’t have enough
knowledge to speak to them but there’s been some argument that this is not a ridiculously
difficult thing to hack. So we have distributed ledger that is arguably in some way hackable at the root. Then all of a sudden, you lose confidence, and all those transactions are no longer gonna be reliable. I don’t have the ability to speak to that. Maybe somebody do. – From the perspective of provenance, I think that’s absolutely a key use case. But I think the other use case that makes entire sense is actually exchange and trade settlement. So if you look at
traditional asset transfers, the settlement process is actually it takes weeks, right. So it’s really an astonishingly
bureaucratic process. It is expensive, and then actually it reduces the kind of
ability in liquidity markets. Yeah, I do think that
there are actually now exchanges that are truly focused on traditional financial instruments that are dealing with settlement. I actually know one that’s Malta-based that’s going to be trading only pure European financial
instruments that are equities, that are the things we’re
used to buying and selling. But all the settlement and
custody will be handled using crytographic assets. Either on behalf of clients, or directly to the clients who are capable in holding those assets. So there’s a very, very clear demand. – Sorry, let me also point
you to Axoni, A-X-O-N-I. They recently close a
significant round from JP Morgan, and I believe Goldman Sachs is also in it. Axoni is New York based. They are working directly with the DTCC. They tried a deal with exactly this issue. It is the blockchaining
effectively of the DTCC’s function, where the DTCC will play a different role and they can plug it in. So they will not be necessarily the owner but the platform. – Just to expand the point
about corporate investments in this area and corporate
interest in blockchain. I think it was in 2015,
of the top 10 funded venture companies dealing with blockchain, none of them had corporate investors. In 2016, I think all top
10 had corporate investors. So we’re seeing a real rush of the corporate world into that. I think that’s a good sign. Because they will have the biggest use in the enterprise world. Remember I said, we failed
with a couple of companies who were Bitcoin to consumer
related back in the day. It’s been much more successful
and used in other countries but in the US, in the big
boys’ market of enterprise, Goldman Sachs, and JP
Morgan, as he has mentioned, that’s a good sign because they can help trade
as counterparties with us. If they’re willing to
adopt that as a standard, that will be a positive sign. – But sorry, I think that
the one point to understand on what’s happening in
the corporate world, the realization for a lot of them is that it’s not necessarily the nature of a blockchain per se. So in blockchains, we’re
accustomed to taking transactions, putting them in blocks,
linking the blocks. The stuff that we’re seeing out of R3 for example with Corda, what’s happening with Hyperledger. These are more about
transactionally based, linking transactions. So it’s more about what you were saying, which is the settlement side, which is cumbersome and friction-ful, and really changing that for a model that says, hey, we really need to address this friction issue. It’s not so much that decentralized, all of these buzzwords that we used in the public blockchain world are not what’s interesting to the folks on the inside. – Okay, other questions here. Let me get this thing to the guy on the other side of the room. All the way in the back. You’ve been waiting all night for this. There you go. – Thank you. In terms of the interoperability, I think that if you look
into your crystal ball, the ability to let’s say
fractionalized ownership, I could buy a portion of a Picasso, and pay my rent with that. You know, quickly, sufficiently. How far off do you see that? Is that sort of the utopian situation? – Yes, that’s gonna be 2019 given that in Republic,
we are working on that. (participants laughing) So tokenization project
will take a few months to map out the framework, laying out the technical infrastructure, identifying sources of money, and take it to market. So I’ll be disappointed at myself if this time next year we
have not already launched a range of traditional
assets, on tokenized assets. – We’ve seen, inching
back from Switzerland, in Zurich and saw companies
proposing this for gold, tokens backed by gold. Then we’ve seen it for real estates. That people are addressing
all the obvious assets for fractionalizing ownership. It makes sense. – Are there any fractionalized
ownership in assets long before blockchain came around? – For sure.
– We’ve had virtual markets and everything from poker players to art. There’s been a lot of interesting things happening with home ownership, where you can sell off
a portion of your home to various owners. – One counter point, just
the point out on gold. I’m not a gold person but what they are saying is you could own shares in a gold index, what everyone calls it AU
or something like that. It trades on Nasdaq. You got gold stuff behind it. But you didn’t know it was that gold. Whereas with blockchain, you can actually get down to the bar, and you know where it is, and it’s your gold specific. But the painting, that’s
all the more so important. So that specificity of this is unique. – It’s fair but there is one
major market based reality. Somebody does have to, you can
have all that functionality but if no one chalks up a van Gogh they’re willing to sell, you’re sort of luck on
your van Gogh token. Gold has already been
fractionalized down the line through multiple players. I know this only because I wanted to do my digital gold
currency with Winningfield. However, what (speaking faintly) help with is exactly that point. But there was a lot of scammy, there wasn’t a lot of belief. If you actually want to sort
of dig into this really deeply, you can go read all these gold bugs that talked about how none other ways you can trade gold as truly as
reliable as you think it is. All that gold that’s in the there’s GLD, there’s others. Gold is pretty simplistic in how it’s managed for countries. There’s Fort Knox-es of thing, they have big bins of gold. When Switzerland needs
to move $400 million to another country, they
literally take a tag, and move it from gold to gold. So there’s been a lot
of attempts to do it. The thing that I always wonder about, and there may be people
that can opine on this, is you still got to show
the attachment to that unit. You still have that
marketplace dynamic underneath. One of the reasons that
some of the things in gold have been, back in the day when people are looking
at ETFs around gold, one of the arguments was that over time, it’ll collapse ’cause
there’s not enough gold in the universe to feed the fear of those pushing people into gold during a time when we believe
that banks would collapse. So how does it work when all of a sudden, here’s my guess by the way. If it’s 100 cents to the
dollar in gold today. Then it goes up, and then goes
to 90 cents to $1 in gold, and the rest is speculative. Then it goes to 80, and 70, and 60. ‘Cause whoever is running that currency is gonna say, “Sorry about the currency.” They can say, “You know
what, we’re just gonna back “with a little bit less
of real gold right now.” The gold standard goes away. – All right, we have
reached the end of our time. Please give this panel
a warm round applause. (participants applauding)

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