LISA MARRONE: Thanks, guys, for coming and giving me your lunch hour.
I know the pizza was probably the draw more than I was.
That's cool.
So I'm Lisa.
I graduated from the JD MBA program last May.
And for the past year and change I've been
working at August Capital, which is a Sand Hill Road venture capital
firm focusing on Series A investments in technology.
And Greg told me, you know, it will really be a hit if you come and talk
about blockchain and crypto.
And so I've done my best to put together how we think about it
from an investment perspective.
And I hope that's useful to you.
Again, feel free to interrupt with questions.
It's a lot more fun that way.
A little bit about me--
so I went to Thomas Jefferson High School--
maybe there's some TJ grads in the audience--
then worked at Bain in New York for three years,
did a brief stint at the White House working
at the National Economic Council.
And that was the inspiration to come back to grad school and do a JD MBA.
It was here that I first met David Hornik, who is featured
in the photo gallery over there.
He was here last year giving a talk with me and is a partner at August
and a graduate of the law school.
And that's how I got connected to venture capital
and thought that that would be a really fun thing to do.
It turns out it's a dream job, because you
get to talk to super smart people all day
and don't really have to make any PowerPoints
or Excels, except for this PowerPoint.
But that's cool.
So yeah, that's a little bit about my journey.
Earlier this year, one of the things that VCs do is we blog a lot.
And earlier this year I decided I would join the VC bandwagon
and publish what I was looking forward to investing in in 2018.
So it got published in Tech Crunch, which is pretty cool.
And these are the things that I was excited about.
And one of them, relevant to this presentation,
I said I'm searching for blockchain's killer distributed application.
Of course, the irony of that is it's 2018,
but the concepts around blockchain have been around since ancient times.
This is something called a Rai stone.
Turns out, there's a Micronesian prehistoric culture,
Micronesian island of Yap.
And this was their currency.
They are limestone blocks.
They're about four meters in diameter, probably weigh on the order of tons.
And obviously, you can't physically transact a four-ton limestone block.
And so what the islanders did was they decentralized knowledge
about the ownership of the currency.
It became an oral history that was decentralized.
And when a Rai stone transferred from one person to another,
everyone in the island simply moved their oral understanding
of who owned the stone.
And I think that's a very beautiful analogy for exactly what blockchain
enables today.
It's a distributed understanding of who owns what, who
has transacted with whom, et cetera.
So Google Rai stones.
They're super cool.
How do I think about investing in blockchain?
There was a blog written by the team at Union Square Ventures a couple of years
ago, which is where these charts came from,
that I think explains this really well.
When you think about the web and think about the difference between protocols
and applications, applications have taken the lion's share of the value.
The protocol layer, HTTP, TCP, a utility that's
shared by all of the major applications.
Why have the applications taking the lion's share of the value?
Well, it's no surprise, because there's siloed data.
What's proprietary to Google and Facebook
and Twitter and Amazon is the vast amount of data
that they've aggregated about each of us and our browsing behavior,
and our friends and our networks, et cetera.
And that's where the lion's share of the value has accrued.
When you think about blockchain, it's very different.
In blockchain, there's a lot of reasons to believe that the protocol
layer is actually where the value will accrue and the application less so.
And that's because blockchain by definition is a shared data landscape.
The protocols enable any application on top of them
to access all of the data that exists within the protocol.
And so there's not that same proprietary siloed data
within a distributed application.
Moreover, with a protocol there's economics
of the tokens that incentivize both development
and adoption of the protocol more quickly than we saw with the web.
And why is that?
Well, traditional network effects--
say Facebook's getting started--
the overall utility of Facebook when it was 10 people first using it
at Harvard, pretty low.
An incremental value of one new person joining the network
helped to make it more valuable until it reached a critical density.
And then at that point, you get good viral effects,
network effects that take over.
And that period of time from n equals zero
until n equals density is called the bootstrapping
problem in network effects.
With tokens, because the first users of the blockchain utility
are compensated with tokens and they get more token value
for being early adopters than people who join later,
you actually have this financial utility curve
that's inverse to the application utility curve.
And so there's reason to believe, as you all know,
that token network effects will actually be
a lot stronger than the network effects we saw for the traditional web.
So that shows that the protocol layer is actually where a lot of the excitement
was.
You'll remember that I had written that I was searching for blockchain's
killer distributed applications.
You're probably like, OK, Lisa, what's your point?
I think realistically, I was probably wrong.
I think that really, what I mean by searching for the killer application is
searching for that next great protocol.
And if you look at the distributed application landscape,
it's still pretty nascent.
There's an amazing website called the State
of the dApps, where you can see in real-time how many distributed
applications are being developed on top of ethereum.
As of the time I put this together, there were 1,500 of them.
You can see the categories.
Most of them are in games and social.
You've probably heard of Cryptokitties.
It's like one of the best distributed apps out there.
But even Cryptokitties, which was invested in
by Union Square Ventures and others back in April,
is still today maybe a company worth tens of millions of dollars,
whereas bitcoin, Ethereum, et cetera, are worth tens of billions of dollars.
And so I think it proves the point that the protocols are
where all the action is.
The applications might develop in time, but are still pretty early.
We at August Capital invested in a really cool company called Spring Labs.
And Spring Labs is trying to build a protocol
layer for financial institutions.
Today, if you walk into a bank and want to apply for a loan,
you have to submit pay stubs and a copy of your driver's license,
and probably a letter from one of the credit
bureaus that tries to prove that you are who you say you are.
And the credit bureaus represent $40-billion businesses.
But as we know from the Equifax hack, they're not particularly secure.
You the consumer have no access to your own data,
no control over your own data.
And they don't even really provide all the services
that financial institutions need.
They don't do anything with anti-money laundering,
anything besides just the basic know your customer analysis.
And so what Spring Labs is trying to do is
take what today is a really centralized process
and decentralize it, and make it such that Bank of America or Wells Fargo,
et cetera can ping a network to find out,
hey, has Lisa been verified before?
If so, I'm going to compensate the institution who verified her.
And if not, I'll do the work and then be compensated
in the future whenever anybody else needs to verify her identity.
And so I think its a really smart use of this protocol layer network
effects to create a decentralized way of storing data
that today is very centralized.
And if anybody is interested in Spring Labs
or wants to talk about job opportunities there--
shameless plug-- I'm happy to chat.
As a law school graduate, I would be remiss
if I didn't talk about how is all this being regulated?
As a venture investor, when dealing with something like blockchain,
one of the things we think about aside from where is the value accruing,
what are interesting applications, is what's the regulatory risk here.
And crypto has certainly been full of controversy
in the past couple of months in regards to will it be
regulated as a federal security or not.
And if you turn to the federal security laws,
all securities have to be registered with the SEC.
That's the very basic thing you need to know.
And then the question becomes, what's a security, and is a token a security?
So a security-- one of the things that counts as a security
is what's called an investment contract.
And that was defined in a really important case called Howey
as a contract, transaction, or scheme whereby
a person invests his money in a common enterprise
and is led to expect profits solely from the efforts
of the promoter or third party.
It's a lot of legalese, but it's been boiled down to a four-point test.
One, was there an investment?
Two, was there a common enterprise, which
just means a whole bunch of people pooling together to work jointly?
Three, do the people who invested expect to make money?
And four, do they expect to profit solely from other people's efforts
rather than from contributing to the system themselves?
And so these security laws are implicated in different ways
depending on how the investment in blockchain is structured.
You've probably all heard of the ICO.
And another phrase for an ICO is the direct token presale.
And typically what happens here is the developers of the protocol put together
a white paper.
That white paper is distributed pretty broadly
to both accredited investors and retail investors alike.
And the white paper describes the network
that will be built but is not yet built. And it
says you can buy tokens directly in that future developed network.
And then they raise a ton of money.
Some of these ICOs have raised tens of millions of dollars.
And then all of that money goes towards the development of the network
and compensating the developers, et cetera, et cetera-- everything
that you need to start a business.
Contrast that to the SAFT, which was the brainchild of a law firm called
Cooley and modeled after a standard document developed
by YC for investments often in the very first institutional round
of a company's creation.
That is called the SAFE.
This is the SAFT, the simple agreement for future tokens.
And it's very similar to what happens with the ICO,
but importantly different in a couple of key ways.
Same thing-- there's a white paper that's developed, usually
before the network is existent.
But importantly here, accredited investors
invest in an equity in that company rather than directly in the tokens
based on this SAFT.
And then money goes to the developers, they develop the network,
and it's only once the network is existent
and there's actual utility to those tokens--
so in the case of Spring Labs, it would be networks created.
There's now tokens.
Banks can transact them.
Then me, Lisa, a retail investor, could buy one of those tokens
and participate in the token economics that way.
So on the left-hand side, the ICO--
these tokens are probably regulated as securities.
We've already seen some action on the part of the SEC
that suggests that they believe that.
On the right-hand side, it's still a little ambiguous.
The SEC has not yet ruled.
But the SAFT itself that investors invest in is certainly a security.
And then there's ambiguity as to whether those tokens, the utility tokens,
is going to be regulated as a security or not.
But it certainly seems a lot more likely that because those tokens have a value,
people aren't buying them because they expect
that they will increase in value.
They're buying them because the network exists,
and each token represents some sliver of utility
to participating in that network--
so probably more likely to be regulated not as a security.
And so our investment in Spring Labs was done via a SAFT.
And that's been our view at August.
There are certain kinds of investors who are participating directly
not just in cryptocurrencies themselves, but also in ICOs.
And that's a super interesting thing to observe as a VC,
because it almost poses an existential risk to what venture capital is,
because it's decentralizing what we do.
So if I were you and I were thinking about,
are there blockchain projects out there that I'm interested in joining?
How do I triage this regulatory risk for myself?
There's a couple things that I would clearly avoid.
No matter what, make sure that the project you're joining
is motivated to at least try to comply with regulations, right?
There should at least be a good faith effort to try to be above board.
There's a whole host of financial regulations having
to do with money transmitter licenses.
You have to register with FINRA, all this stuff.
And then there's a ton of products that are trying to register offshore
in an attempt to save on taxes.
It's probably the case that blockchain tokens
are going to be regulated as property rather than as capital gains.
But from everything I've read, it doesn't seem like there's actually
that much to be gained by registering offshore,
so it's probably more of a red flag than anything else.
And then look for companies that are raising money off
of this SAFT structure.
Like I said, proactively trying to comply is always a good thing.
If you want to learn more, these are a bunch of the leading lights
both from a technology perspective and also from a regulatory perspective.
So Brian Armstrong, founder of Coinbase.
Linda Xie puts together some really wonderful content
on Medium about different cryptocurrencies,
and also about different events that pool together some
of the smartest people in the space.
Elizabeth Stark is creating a layer on top of the Ethereum network
that increases the transaction time.
Kathryn Hahn is a fascinating example of someone
who's transitioned from the legal world--
she was, I think, a federal prosecutor for a while, a Supreme Court clerk,
and now is leading Andreessen Horowitz crypto fund.
And so she's a really deep thinker in how all of this will be regulated.
And then Matt Huang, along with Fred Ehrsson,
just launched a crypto-focused one called Paradigm.
And they're both very smart.
And that's it.
Please ask questions.
Yes?
So that's great.
As a VC, you explore lots of great tokens.
But I want to know how you get consistent returns from these things.
It's a super volatile market.
How do you know when to sell out, especially
because these products haven't quite come to market yet,
or maybe they're on exchanges.
I just wanted to hear more about that.
Yeah.
We have not yet invested directly in tokens.
We haven't invested in bitcoin, Ethereum, or any of the alt coins,
I think for precisely that reason.
It's way too volatile, and we don't view ourselves as experts--
we don't view ourselves as public equity investors in the blockchain equivalent.
What we do via this SAFT mechanism is treat it
just like we treat equity in any other company.
So we're investing now.
We know the company is really nascent.
It's got maybe 15 employees, and they're going
to build over the course of years, and probably our investment in them
will last a decade.
And at that point in time, we hope that it
will be a big business that happens to be built upon blockchain technology
but it's not really exposed to the volatility of cryptocurrencies
themselves.
Obviously, to be successful their tokens will need to develop some value
and actually be used and things like that.
And that's a bet that we're making, we don't know yet how it will turn out.
But if those tokens accrue in value, it's
because the business fundamentals good and strong.
AUDIENCE: So like within the next year, you guys won't make any money?
LISA MARRONE: No, probably not.
Which is true of any of our investments, right?
We invest in, let's say, Warby Parker or--
we have a company called Git Lab that's growing really fast.
You don't really-- it accrues in value in that we invest at the Series B,
someone else invests at the Series C, and you see an uptick in valuation--
you hope it's a really large uptick because the company is growing fast.
But we as investors don't get liquid, so to speak, until it
either goes public or gets bought.
And here, I guess you could ask the question when investing in blockchain,
what's the exit going to be?
Is a company built on blockchain going to go public just like any other
or will we go public by eventually selling what sliver of the token pool
we have to others in more of a secondary transaction?
It's possible.
But our capital doesn't demand that we exit on the order of years,
the way our fund is structured.
AUDIENCE: What's the future of crypto crime?
LISA MARRONE: Of what?
AUDIENCE: Crypto crime?
What's the future of it?
LISA MARRONE: Of crypto--
AUDIENCE: Crimes.
LISA MARRONE: Crypto crimes?
That's a really interesting question.
It turns out, if you look at the history of just tech innovation generally,
often the boundary of innovation happens at this border
between illegal and legal.
And some of the earliest adopters of the web were using it for illicit means.
Some of the earliest adopters of crypto obviously using it for illicit means.
I think-- I think that policing of crypto crimes
will require some interesting coordination
between public and private sectors.
We're increasingly seeing you know the folks from Silicon Valley
kind of do short stints in DC and then come back.
And I think that that's what's going to be required for government to get up
the curve quickly and to be able to even know what they are looking for in terms
of the forensics of crypto crimes, which are much harder to detect than Web 2.0
crimes.
But I don't know much more than that, unfortunately.
AUDIENCE: I know [INAUDIBLE] I mean, obviously,
if there's something that [INAUDIBLE].
And then is there concern or any risk analysis
that governments would broadly have regulations that would inadvertently
affect somebody just trying to build broadly off of blockchain,
and just respond to what they feel like are--
LISA MARRONE Totally.
And that's happened.
AUDIENCE: Would they actually do things that [INAUDIBLE] other applications
also with blockchain?
LISA MARRONE: Yeah, totally.
We've seen many SEC actions brought against companies
that decided to do an ICO.
And why is that dangerous to a startup?
Well, it takes a ton of time and resources
to defend yourself against an SEC action, not to mention the scrutiny
and the negative publicity affects whether a consumer might
want to use your product.
And so we do think about that.
We think a lot about trying to proactively partner with the regulators
to make sure that at every step in Spring Lab's development,
they know exactly where they stand vis-a-vis the regulators.
Yeah.
I think that that's a really important point.
Certainly, if you're the CEO of one of these companies,
you want to make sure that you're thinking strategically
about the regulatory angle of it.
Yeah?
AUDIENCE: So I'm curious to know if Spring Labs is the only investment
right now [INAUDIBLE].
And the reason I ask is because ultimately, Spring Labs
is a fintech company.
And usually when we think about blockchain,
cryptocurrencies is the first thing that comes in our mind,
because I feel like a lot of people are quick to jump
to financial applications of technology.
So I guess my broader question is, is your investment thesis
that finance is probably the first viable segment that
could be transformed [INAUDIBLE]?
Or would you guys be open to investments in other types of distributed protocols
that might touch on other verticals?
LISA MARRONE: Yes, definitely open to investing in other verticals.
I think that the core of what's interesting in Spring Labs
isn't actually the financial services component.
It's that they're using blockchain to help solve an identity verification
problem.
And when you abstract that out of fintech to all sorts of other segments,
it applies the exact same way.
So our thesis was, hey, we think that blockchain the technology is perfectly
suited to solving what Web 2.0 has really struggled to solve,
which is identity.
We expected Facebook to do it.
We thought maybe Amazon would do it.
No we did it.
Maybe Facebook's working on it now, but they have other issues.
And so Spring Labs is doing it for, you're right,
they're a very focused vertical.
And you can imagine--
take supply chain as another great example.
There, it's not the identity of an individual human,
but it's the identity of an individual pallete, an individual piece of fruit.
How do you verify that this is a thing that came from this place?
And I think that there are all sorts of other myriad ways
that identity is going to be tracked.
we were just talking about educational institutions.
How does Harvard verify that each of you actually took CS 50 and passed it?
How does Harvard verify that you in fact graduated?
And over the course of your life, do you really own that data?
Not really.
And so each time you apply for a job or apply to grad school,
you're going to have to go back to Harvard, pay some money for them
to print a form and mail a letter.
And wouldn't it be a lot more powerful if that
existed in a decentralized network?
Yeah?
AUDIENCE: [INAUDIBLE]
LISA MARRONE: Great question.
One area that I think is really interesting and still incredibly
nascent is blockchain for health care.
There you have the added complexity of not just regulation of tokens
and the financial repercussions of that, but HIPAA and all the regulations
that come into play when you have personal health care information.
But you think about medical records--
I think that's a variant of the identity problem we were just talking about.
And then compliance with medical billing is another area
that could be really interesting.
So I think health is an interesting example.
Supply chain.
Certainly, financial identity.
What else?
The core idea within Cryptokitties of digital assets
is also really interesting.
There already is within gaming a whole economy of digital assets.
And you can imagine in the future that we're all
going to own a basket of things, some of which are physical world items
and some of which are digital items.
And so using blockchain as the record of transaction for those digital items
will be another use case.
Yeah?
AUDIENCE: Have you guys thought about the physical electrical
natural resource requirements?
Because that's-- right, I hear about so many great applications,
but the biggest lament after it is like, I feel like for the [INAUDIBLE]
example, how are we going to have [INAUDIBLE] cross every single item,
and how much of that-- of the entire [INAUDIBLE] needs to be stored and each
individually.
LISA MARRONE: Totally.
The question was, how do we think about the energy implications of building
upon blockchain?
I think that it's a great point.
We definitely think about it.
We think about it from the lens of, OK, you
look at blockchain as the technology.
As a technology, what is it good at and what is it bad at?
Well, what is it good at?
It's a fancier database.
It's a distributed database.
What is it bad at?
It's actually kind of slow, and it's very energy intensive.
And so it's good for applications that can't
be solved by a centralized database, like identity.
And it's bad for things where you have to ping the database really quickly,
really frequently.
That's why a Spring Labs, where maybe you ping the database once
on the order of a year per customer, and it's probably
bad for a marketplace or a financial exchange and things like that.
And that's why you're seeing folks like Elizabeth Starkness try
to develop the lightning layer on top of Ethereum
to help accelerate development of applications on top of it.
So we definitely think about it as part of the, why now?
Is this actually the right time to be investing,
or is this still maybe a year or two too early in the development
of the technology before things really start to take off?
It's a tough thing as an investor, because you
don't want to wait until it's too late.
But we've invested in tons of companies that
were a year or two ahead of their time and just
didn't work out because adoption wasn't ready to take off.
AUDIENCE: Uh, how the underlying protocol-- the cryptocurrency value
and the application on top of the technology affect each other?
So earlier this year, the cryptocurrency values were just like off the roof,
and then now it's really low.
How does that affect the application that's built on top of it?
And also, when a business becomes successful,
how does that impact the value of the cryptocurrency [INAUDIBLE]??
LISA MARRONE: The question was, how does the value of the protocol tokens
affect the applications being built on top of the protocol?
Cryptokitties, a great example there--
back at its peak, I believe that there were 120,000 daily active users
of Cryptokitties.
This was like November 2017.
And then they got $12 million invested from Union Square Ventures
and another really top tier firm.
Now if you look at the daily active users, it's down in the 1,200's or so--
really has taken a dip, in large part because the value of the Ethereum
token underneath is a lot lower than it was back in the peak of November 2017.
So I do think that there is a strong correlation between the protocol
value and the application value.
Probably part of the reason why the app layer
is still as nascent as it is, and an interesting question to ponder--
like, how do you as the application try to mitigate yourself
from that volatility?
I don't know the answer to that, but it's interesting.
AUDIENCE: So why don't you invest in cryptocurrenies themselves?
LISA MARRONE: Well, we've seen a lot of VCs choose to do that.
And I think--
I mean, so our investment in Spring Labs is because it's
an agreement for future tokens.
Eventually, we will get Spring Labs coins.
There are plenty of VCs that are directly invested in bitcoin, Ethereum,
Ripple, et cetera.
And most have done exceedingly well, because they
have accrued in value so dramatically.
And I think if you really believe that the protocol
layer is where the value is, that actually might be the right answer.
AUDIENCE: With the Spring Labs application [INAUDIBLE] process,
I imagine there's banks that hire [INAUDIBLE]..
LISA MARRONE: Yeah, it's a great question.
And an important point to remember, that when investing in blockchain
there's kind of a two-level analysis.
First it's ignoring the blockchain part of the business.
Is it a good business?
Does it have good fundamentals?
If it's a marketplace, does it function as a marketplace?
And then looking at the tech stack and making sure
that that's all solid and makes sense.
So if you take Spring Labs as a marketplace, you're right.
It requires, importantly, the financial institutions to want to use it.
Unless Bank of America is willing to ping Wells Fargo
and get compensated in Spring Labs tokens, it's never going to take off.
And I think that certainly, our diligence
was in large part talking to financial institutions
with whom Spring Labs had already partnered to better understand
why they were excited about using it.
And they view this KYC process as a cost center.
And so being able to partner with an entity that
wants to help reduce that cost, they view it as a win-win.
But still, you're right that the earliest adopters
are going to have to believe in the value of that token,
because they're going to accrue a higher amount of token
before its value is really demonstrated.
AUDIENCE: A question that kind of leads off
of what you just said-- there are just so many verticals in the market
right now.
And you know, Gina mentioned just one succeeding.
There will probably be multiple blockchain technologies,
and there's going to need to be some technology
to talk chain to chain and all that.
And I'm wondering, how much research have
you guys done into that to figure out--
Spring Labs won't be the only people doing this kind of stuff.
And just to comment on something else that was said
was as it relates to energy consumption-- in addition
to proof of work, there's proof of state.
There's other consensus algorithms.
And I'm wondering if you guys looking at any of that technology side of things?
LISA MARRONE: Yeah.
The mining side of things has also been an area ripe for VC investment,
analogy much more to the server infrastructure layer of the web.
We have not played there.
I don't know if I have a really satisfying answer for you
as to why we haven't played there, aside from no particular domain
expertise on our end.
But I think it's fascinating, because some
of the biggest companies existent within the space writ large
are actually huge mining operations.
And so just intellectually, it's interesting.
AUDIENCE: Yeah.
I mean, I think Ethereum [INAUDIBLE] a hybrid system.
So I don't think energy consumption will continue
to be a problem that it is now, unless they can find that it's just not
as secure or trustworthy of a validation scheme,
to make sure that all the chains sync up and the data's accurate.
LISA MARRONE: Yeah.
Your point about in the future, there's going to be a whole slew of protocols
is absolutely true.
Unrealistic to believe that because Spring Labs
has taken financial institutions as its vertical
that they're going to somehow have a monopoly over all transactions there.
I think it's going to be just like what we see for the web.
There's going to be healthy competition by vertical.
And then someone's going to build a really interesting business trying
to be the interoperability layer as between all of these different tokens.
That might be Coinbase.
I don't know.
AUDIENCE: How do you think that the regulations and the taxes and user
responsibility affect the development of this technology?
LISA MARRONE: Kind of to the point earlier about crypto crimes,
I think that entrepreneurs are incredible humans
and are always pushing the boundary, kind of regulation be damned.
And so I haven't seen so much reticence to develop for fear of regulation.
I think what we're seeing is now a little bit more enthusiasm
for proactively partnering with regulators.
The legal standards are kind of becoming well known enough,
and there's also lawyers who are now decently expert in the law
as it pertains to crypto that even a really fledgling startup can
get pretty high-quality advice about how to navigate the regulatory landscape.
And I think that investors are kind of voting with their dollars
as to investing in those companies rather than companies
that are being a little shadier.
And so I think all of those things are forces
for good in the development of the technology,
because the more examples we have of amazing companies, amazing investments
that are built upon blockchain, the better it will be for folks like you
to be in this room thinking like, oh, OK, I
want to start a company in this space.
Yeah?
AUDIENCE: I'd love to hear more about your experience
with the SAFT with Spring Labs, because probably I'm more familiar with IPOs.
Did you have equity in Spring Labs?
[INAUDIBLE]?
And so you also are going to be entitlted to future Spring Labs
token when they produce them.
You have probably agreed about some amount?
LISA MARRONE: Correct.
So the question was about the SAFT, and how it works technically.
So set aside the SAFT for a second.
Let's think about the SAFE.
When YC invests in a company via a safe, what they're investing in
is a sliver of the company that will convert upon the first priced round.
So it's basically saying like, we don't really
know yet how much U Company is worth.
We're willing to wait until, say, an August
Capital steps in and says at Series A, OK, you're worth $24 million.
And then that note converts in at the $24 million valuation.
Here, with the SAFT we're saying, we're going to invest now.
We don't yet know what the tokens are going to be worth.
But we're going to give you some money upfront that's
going to be worth a certain percent of your company.
And at some future date when we know what
the tokens are worth via the pricing of the token economics,
our sliver will convert into whatever number of tokens it's worth.
So you're right, that from an investment now perspective
it's just like buying equity in a company, nothing to do with the tokens.
And that's why it's very clearly--
it's a nice legal form, because it's so clearly security as governed
by the SEC, and you don't really have to worry
about the ambiguity of what a token is.
AUDIENCE: So what happens to your equity upon this conversion?
Is each token now representative of equity in Spring Labs as a whole?
Or is it just a financial vehicle for the bank
to do identity verification [INAUDIBLE]?
LISA MARRONE: You're right, it's blending utility and security.
Upon that conversion are--
that's a good question.
I don't know exactly whether there is still any equity remaining
outside of the tokens.
But certainly, some sliver of our equity converts into tokens.
And I think at that point you could wonder, OK,
are we as August Capital really holding those tokens for their utility
or are we expecting that they will accrue in value?
If so, that's an investment, not a utility.
Maybe there's a provision in there about cashing out at some set date.
I don't know.
I'll look into that.
AUDIENCE: Can you imagine a proposed cryptocurrency role
where folks are less concerned about the asset value of the tokens
from a [INAUDIBLE] where blockchain becomes
more of a utility or a commodity kind of model where you're
solving real problems that exert costs or friction
on the economy, and the speculation part kind of begins [INAUDIBLE]??
LISA MARRONE: I would love to live in that world.
The question was, can you imagine a post-speculative blockchain world?
Yeah.
I think we think often about trying to look at the companies
we invest in as companies, not necessarily
as blockchain companies, kind of pre-imagining,
that commoditization in a way.
There's certainly a lot of utility to investing fully for speculation,
and a lot of people have made a lot of money in that way.
In fact, speculation is how a lot of this technology
is going to get adopted, because there's just economic motive there.
But yes, I think 10 years from now, 20 years from now,
blockchain will be a layer in a host of applications
with which we interface daily and isn't necessarily the driver of value
in those applications, just enabling.
Yeah?
AUDIENCE: You kind of talked about ICOs as [INAUDIBLE] venture capital.
And I'm curious your thoughts, and other [INAUDIBLE]..
LISA MARRONE: Yeah.
The question was about ICOs as the existential threat to VC.
It's a great question.
I think that from the perspective of an entrepreneur, if you had a choice of,
hey, I can broadcast to the entire market what I want to build and just
sit back and wait and people can kind of come to me and decide to write checks
or not, I would take that all day every day
rather than having to drive up and down Sand Hill pitching people
like me trying to get them to be like, yes, I will give you $10 million.
So I totally get it from the entrepreneur's perspective.
What I think it does from an incentive to build perspective
is a little perverse.
If you raise $80 million before you have a business model and product market
fit, I worry about whether the company that
will be born of that initial upfront investment
will be as healthy as what the traditional venture capital
model allows.
But of course, I'm biased by the position I have within a VC firm
to think that my model is the better model.
I think that firms have taken all sorts of different positions on this, August
probably being among the more conservative.
You see Andreessen Horowitz dedicating a separate crypto fund.
There are tons of emerging crypto funds, like Paradigm.
Yale University just announced that it's investing some of its endowment dollars
in Paradigm, which probably means it's now directly invested
in some cryptocurrency assets.
So yeah, I mean--
I think if you're an investor who wants to hedge your bets,
yeah, you should probably be treating ICOs seriously,
accounting for that regulatory risk.
Yep?
AUDIENCE: How do you diversify your blockchain portfolio?
So you have an identity project.
Are you trying to get multiple identity projects?
Are yoy thinking, OK, maybe [INAUDIBLE].
LISA MARRONE: Yeah.
The question was, how do we diversify our blockchain portfolio?
We think about diversifying our portfolio
across a whole host of dimensions.
Certainly, one is by sector.
So if you look at our portfolio, it's about half
consumer-facing, half enterprise-facing.
And within those, probably the bulk of our investments
fall in one of four pillars.
One's enterprise infrastructure.
One's application layer.
One's financial technology.
And one's consumer e-commerce and marketplaces.
And so I think we would expect our blockchain investments
to be spread across those four pillars, just as any other investment that we
make that's incremental.
We don't tend to invest into companies that
are going after the exact same space, just because we're
fiduciaries on the board and can't invest in two companies that
are directly competitive.
That said, financial service is obviously a massive market.
Could I quite easily imagine two companies
both based on blockchain both going after different parts
of the financial services infrastructure that we would both invest in?
Totally.
So I think it's very much an ad hoc opportunistic thing based
on the quality of the team that's pitching,
the quality of the business model that they're pitching,
and the size of the idea behind it.
I'm guessing that this marks the end of lunch hour and the return of class.
Any final questions?
Thank you guys.
This was fun.