1 00:00:00,000 --> 00:00:00,620 2 00:00:00,620 --> 00:00:04,769 LISA MARRONE: Thanks, guys, for coming and giving me your lunch hour. 3 00:00:04,769 --> 00:00:07,060 I know the pizza was probably the draw more than I was. 4 00:00:07,060 --> 00:00:08,690 That's cool. 5 00:00:08,690 --> 00:00:09,500 So I'm Lisa. 6 00:00:09,500 --> 00:00:13,820 I graduated from the JD MBA program last May. 7 00:00:13,820 --> 00:00:16,100 And for the past year and change I've been 8 00:00:16,100 --> 00:00:19,910 working at August Capital, which is a Sand Hill Road venture capital 9 00:00:19,910 --> 00:00:24,580 firm focusing on Series A investments in technology. 10 00:00:24,580 --> 00:00:28,610 And Greg told me, you know, it will really be a hit if you come and talk 11 00:00:28,610 --> 00:00:31,000 about blockchain and crypto. 12 00:00:31,000 --> 00:00:33,800 And so I've done my best to put together how we think about it 13 00:00:33,800 --> 00:00:35,197 from an investment perspective. 14 00:00:35,197 --> 00:00:36,530 And I hope that's useful to you. 15 00:00:36,530 --> 00:00:38,465 Again, feel free to interrupt with questions. 16 00:00:38,465 --> 00:00:41,240 It's a lot more fun that way. 17 00:00:41,240 --> 00:00:42,560 A little bit about me-- 18 00:00:42,560 --> 00:00:45,980 so I went to Thomas Jefferson High School-- 19 00:00:45,980 --> 00:00:48,380 maybe there's some TJ grads in the audience-- 20 00:00:48,380 --> 00:00:52,070 then worked at Bain in New York for three years, 21 00:00:52,070 --> 00:00:54,320 did a brief stint at the White House working 22 00:00:54,320 --> 00:00:56,900 at the National Economic Council. 23 00:00:56,900 --> 00:01:02,270 And that was the inspiration to come back to grad school and do a JD MBA. 24 00:01:02,270 --> 00:01:06,350 It was here that I first met David Hornik, who is featured 25 00:01:06,350 --> 00:01:07,790 in the photo gallery over there. 26 00:01:07,790 --> 00:01:11,330 He was here last year giving a talk with me and is a partner at August 27 00:01:11,330 --> 00:01:13,030 and a graduate of the law school. 28 00:01:13,030 --> 00:01:15,697 And that's how I got connected to venture capital 29 00:01:15,697 --> 00:01:18,030 and thought that that would be a really fun thing to do. 30 00:01:18,030 --> 00:01:20,090 It turns out it's a dream job, because you 31 00:01:20,090 --> 00:01:22,070 get to talk to super smart people all day 32 00:01:22,070 --> 00:01:24,005 and don't really have to make any PowerPoints 33 00:01:24,005 --> 00:01:26,130 or Excels, except for this PowerPoint. 34 00:01:26,130 --> 00:01:28,430 But that's cool. 35 00:01:28,430 --> 00:01:34,040 So yeah, that's a little bit about my journey. 36 00:01:34,040 --> 00:01:38,810 Earlier this year, one of the things that VCs do is we blog a lot. 37 00:01:38,810 --> 00:01:42,980 And earlier this year I decided I would join the VC bandwagon 38 00:01:42,980 --> 00:01:48,110 and publish what I was looking forward to investing in in 2018. 39 00:01:48,110 --> 00:01:50,630 So it got published in Tech Crunch, which is pretty cool. 40 00:01:50,630 --> 00:01:52,713 And these are the things that I was excited about. 41 00:01:52,713 --> 00:01:54,900 And one of them, relevant to this presentation, 42 00:01:54,900 --> 00:01:58,940 I said I'm searching for blockchain's killer distributed application. 43 00:01:58,940 --> 00:02:01,400 44 00:02:01,400 --> 00:02:04,850 Of course, the irony of that is it's 2018, 45 00:02:04,850 --> 00:02:08,880 but the concepts around blockchain have been around since ancient times. 46 00:02:08,880 --> 00:02:12,230 This is something called a Rai stone. 47 00:02:12,230 --> 00:02:18,230 Turns out, there's a Micronesian prehistoric culture, 48 00:02:18,230 --> 00:02:20,080 Micronesian island of Yap. 49 00:02:20,080 --> 00:02:22,340 And this was their currency. 50 00:02:22,340 --> 00:02:24,710 They are limestone blocks. 51 00:02:24,710 --> 00:02:29,210 They're about four meters in diameter, probably weigh on the order of tons. 52 00:02:29,210 --> 00:02:34,160 And obviously, you can't physically transact a four-ton limestone block. 53 00:02:34,160 --> 00:02:38,390 And so what the islanders did was they decentralized knowledge 54 00:02:38,390 --> 00:02:40,640 about the ownership of the currency. 55 00:02:40,640 --> 00:02:43,380 It became an oral history that was decentralized. 56 00:02:43,380 --> 00:02:47,750 And when a Rai stone transferred from one person to another, 57 00:02:47,750 --> 00:02:52,310 everyone in the island simply moved their oral understanding 58 00:02:52,310 --> 00:02:55,580 of who owned the stone. 59 00:02:55,580 --> 00:03:00,770 And I think that's a very beautiful analogy for exactly what blockchain 60 00:03:00,770 --> 00:03:01,470 enables today. 61 00:03:01,470 --> 00:03:05,480 It's a distributed understanding of who owns what, who 62 00:03:05,480 --> 00:03:12,240 has transacted with whom, et cetera. 63 00:03:12,240 --> 00:03:13,640 So Google Rai stones. 64 00:03:13,640 --> 00:03:16,790 They're super cool. 65 00:03:16,790 --> 00:03:19,940 How do I think about investing in blockchain? 66 00:03:19,940 --> 00:03:24,680 There was a blog written by the team at Union Square Ventures a couple of years 67 00:03:24,680 --> 00:03:28,370 ago, which is where these charts came from, 68 00:03:28,370 --> 00:03:30,590 that I think explains this really well. 69 00:03:30,590 --> 00:03:33,980 When you think about the web and think about the difference between protocols 70 00:03:33,980 --> 00:03:38,920 and applications, applications have taken the lion's share of the value. 71 00:03:38,920 --> 00:03:43,850 The protocol layer, HTTP, TCP, a utility that's 72 00:03:43,850 --> 00:03:47,240 shared by all of the major applications. 73 00:03:47,240 --> 00:03:50,310 Why have the applications taking the lion's share of the value? 74 00:03:50,310 --> 00:03:54,130 Well, it's no surprise, because there's siloed data. 75 00:03:54,130 --> 00:03:56,150 What's proprietary to Google and Facebook 76 00:03:56,150 --> 00:03:58,880 and Twitter and Amazon is the vast amount of data 77 00:03:58,880 --> 00:04:02,780 that they've aggregated about each of us and our browsing behavior, 78 00:04:02,780 --> 00:04:06,850 and our friends and our networks, et cetera. 79 00:04:06,850 --> 00:04:09,950 And that's where the lion's share of the value has accrued. 80 00:04:09,950 --> 00:04:13,940 When you think about blockchain, it's very different. 81 00:04:13,940 --> 00:04:16,880 In blockchain, there's a lot of reasons to believe that the protocol 82 00:04:16,880 --> 00:04:21,470 layer is actually where the value will accrue and the application less so. 83 00:04:21,470 --> 00:04:28,310 And that's because blockchain by definition is a shared data landscape. 84 00:04:28,310 --> 00:04:32,060 The protocols enable any application on top of them 85 00:04:32,060 --> 00:04:36,530 to access all of the data that exists within the protocol. 86 00:04:36,530 --> 00:04:39,830 And so there's not that same proprietary siloed data 87 00:04:39,830 --> 00:04:41,810 within a distributed application. 88 00:04:41,810 --> 00:04:47,060 Moreover, with a protocol there's economics 89 00:04:47,060 --> 00:04:50,870 of the tokens that incentivize both development 90 00:04:50,870 --> 00:04:57,980 and adoption of the protocol more quickly than we saw with the web. 91 00:04:57,980 --> 00:04:59,300 And why is that? 92 00:04:59,300 --> 00:05:03,580 Well, traditional network effects-- 93 00:05:03,580 --> 00:05:06,040 say Facebook's getting started-- 94 00:05:06,040 --> 00:05:09,910 the overall utility of Facebook when it was 10 people first using it 95 00:05:09,910 --> 00:05:11,710 at Harvard, pretty low. 96 00:05:11,710 --> 00:05:15,730 An incremental value of one new person joining the network 97 00:05:15,730 --> 00:05:20,140 helped to make it more valuable until it reached a critical density. 98 00:05:20,140 --> 00:05:23,140 And then at that point, you get good viral effects, 99 00:05:23,140 --> 00:05:24,710 network effects that take over. 100 00:05:24,710 --> 00:05:27,220 And that period of time from n equals zero 101 00:05:27,220 --> 00:05:30,340 until n equals density is called the bootstrapping 102 00:05:30,340 --> 00:05:32,620 problem in network effects. 103 00:05:32,620 --> 00:05:41,290 With tokens, because the first users of the blockchain utility 104 00:05:41,290 --> 00:05:47,260 are compensated with tokens and they get more token value 105 00:05:47,260 --> 00:05:50,220 for being early adopters than people who join later, 106 00:05:50,220 --> 00:05:52,990 you actually have this financial utility curve 107 00:05:52,990 --> 00:05:55,600 that's inverse to the application utility curve. 108 00:05:55,600 --> 00:05:57,909 And so there's reason to believe, as you all know, 109 00:05:57,909 --> 00:05:59,700 that token network effects will actually be 110 00:05:59,700 --> 00:06:04,630 a lot stronger than the network effects we saw for the traditional web. 111 00:06:04,630 --> 00:06:09,460 So that shows that the protocol layer is actually where a lot of the excitement 112 00:06:09,460 --> 00:06:10,420 was. 113 00:06:10,420 --> 00:06:13,840 You'll remember that I had written that I was searching for blockchain's 114 00:06:13,840 --> 00:06:15,430 killer distributed applications. 115 00:06:15,430 --> 00:06:18,910 You're probably like, OK, Lisa, what's your point? 116 00:06:18,910 --> 00:06:24,160 I think realistically, I was probably wrong. 117 00:06:24,160 --> 00:06:28,420 I think that really, what I mean by searching for the killer application is 118 00:06:28,420 --> 00:06:30,590 searching for that next great protocol. 119 00:06:30,590 --> 00:06:33,220 And if you look at the distributed application landscape, 120 00:06:33,220 --> 00:06:35,920 it's still pretty nascent. 121 00:06:35,920 --> 00:06:38,500 There's an amazing website called the State 122 00:06:38,500 --> 00:06:42,160 of the dApps, where you can see in real-time how many distributed 123 00:06:42,160 --> 00:06:45,160 applications are being developed on top of ethereum. 124 00:06:45,160 --> 00:06:49,600 As of the time I put this together, there were 1,500 of them. 125 00:06:49,600 --> 00:06:51,070 You can see the categories. 126 00:06:51,070 --> 00:06:54,660 Most of them are in games and social. 127 00:06:54,660 --> 00:06:56,470 You've probably heard of Cryptokitties. 128 00:06:56,470 --> 00:07:00,010 It's like one of the best distributed apps out there. 129 00:07:00,010 --> 00:07:03,970 But even Cryptokitties, which was invested in 130 00:07:03,970 --> 00:07:07,300 by Union Square Ventures and others back in April, 131 00:07:07,300 --> 00:07:10,710 is still today maybe a company worth tens of millions of dollars, 132 00:07:10,710 --> 00:07:15,996 whereas bitcoin, Ethereum, et cetera, are worth tens of billions of dollars. 133 00:07:15,996 --> 00:07:18,370 And so I think it proves the point that the protocols are 134 00:07:18,370 --> 00:07:19,650 where all the action is. 135 00:07:19,650 --> 00:07:23,860 The applications might develop in time, but are still pretty early. 136 00:07:23,860 --> 00:07:27,000 137 00:07:27,000 --> 00:07:33,750 We at August Capital invested in a really cool company called Spring Labs. 138 00:07:33,750 --> 00:07:37,790 And Spring Labs is trying to build a protocol 139 00:07:37,790 --> 00:07:40,300 layer for financial institutions. 140 00:07:40,300 --> 00:07:45,280 Today, if you walk into a bank and want to apply for a loan, 141 00:07:45,280 --> 00:07:49,930 you have to submit pay stubs and a copy of your driver's license, 142 00:07:49,930 --> 00:07:51,820 and probably a letter from one of the credit 143 00:07:51,820 --> 00:07:55,420 bureaus that tries to prove that you are who you say you are. 144 00:07:55,420 --> 00:08:00,010 And the credit bureaus represent $40-billion businesses. 145 00:08:00,010 --> 00:08:04,180 But as we know from the Equifax hack, they're not particularly secure. 146 00:08:04,180 --> 00:08:07,300 You the consumer have no access to your own data, 147 00:08:07,300 --> 00:08:09,070 no control over your own data. 148 00:08:09,070 --> 00:08:11,410 And they don't even really provide all the services 149 00:08:11,410 --> 00:08:13,300 that financial institutions need. 150 00:08:13,300 --> 00:08:16,240 They don't do anything with anti-money laundering, 151 00:08:16,240 --> 00:08:20,161 anything besides just the basic know your customer analysis. 152 00:08:20,161 --> 00:08:21,910 And so what Spring Labs is trying to do is 153 00:08:21,910 --> 00:08:24,820 take what today is a really centralized process 154 00:08:24,820 --> 00:08:29,150 and decentralize it, and make it such that Bank of America or Wells Fargo, 155 00:08:29,150 --> 00:08:33,440 et cetera can ping a network to find out, 156 00:08:33,440 --> 00:08:36,260 hey, has Lisa been verified before? 157 00:08:36,260 --> 00:08:40,030 If so, I'm going to compensate the institution who verified her. 158 00:08:40,030 --> 00:08:42,490 And if not, I'll do the work and then be compensated 159 00:08:42,490 --> 00:08:46,390 in the future whenever anybody else needs to verify her identity. 160 00:08:46,390 --> 00:08:52,270 And so I think its a really smart use of this protocol layer network 161 00:08:52,270 --> 00:09:00,910 effects to create a decentralized way of storing data 162 00:09:00,910 --> 00:09:03,680 that today is very centralized. 163 00:09:03,680 --> 00:09:05,830 And if anybody is interested in Spring Labs 164 00:09:05,830 --> 00:09:08,590 or wants to talk about job opportunities there-- 165 00:09:08,590 --> 00:09:12,850 shameless plug-- I'm happy to chat. 166 00:09:12,850 --> 00:09:16,330 As a law school graduate, I would be remiss 167 00:09:16,330 --> 00:09:20,880 if I didn't talk about how is all this being regulated? 168 00:09:20,880 --> 00:09:26,140 As a venture investor, when dealing with something like blockchain, 169 00:09:26,140 --> 00:09:32,650 one of the things we think about aside from where is the value accruing, 170 00:09:32,650 --> 00:09:38,290 what are interesting applications, is what's the regulatory risk here. 171 00:09:38,290 --> 00:09:43,060 And crypto has certainly been full of controversy 172 00:09:43,060 --> 00:09:47,860 in the past couple of months in regards to will it be 173 00:09:47,860 --> 00:09:50,890 regulated as a federal security or not. 174 00:09:50,890 --> 00:09:54,910 And if you turn to the federal security laws, 175 00:09:54,910 --> 00:09:57,580 all securities have to be registered with the SEC. 176 00:09:57,580 --> 00:10:00,850 That's the very basic thing you need to know. 177 00:10:00,850 --> 00:10:06,100 And then the question becomes, what's a security, and is a token a security? 178 00:10:06,100 --> 00:10:10,450 So a security-- one of the things that counts as a security 179 00:10:10,450 --> 00:10:13,150 is what's called an investment contract. 180 00:10:13,150 --> 00:10:16,090 And that was defined in a really important case called Howey 181 00:10:16,090 --> 00:10:19,270 as a contract, transaction, or scheme whereby 182 00:10:19,270 --> 00:10:21,544 a person invests his money in a common enterprise 183 00:10:21,544 --> 00:10:23,710 and is led to expect profits solely from the efforts 184 00:10:23,710 --> 00:10:25,105 of the promoter or third party. 185 00:10:25,105 --> 00:10:29,488 It's a lot of legalese, but it's been boiled down to a four-point test. 186 00:10:29,488 --> 00:10:31,900 One, was there an investment? 187 00:10:31,900 --> 00:10:34,000 Two, was there a common enterprise, which 188 00:10:34,000 --> 00:10:38,790 just means a whole bunch of people pooling together to work jointly? 189 00:10:38,790 --> 00:10:41,770 Three, do the people who invested expect to make money? 190 00:10:41,770 --> 00:10:47,020 And four, do they expect to profit solely from other people's efforts 191 00:10:47,020 --> 00:10:52,810 rather than from contributing to the system themselves? 192 00:10:52,810 --> 00:10:56,920 And so these security laws are implicated in different ways 193 00:10:56,920 --> 00:11:00,970 depending on how the investment in blockchain is structured. 194 00:11:00,970 --> 00:11:03,790 You've probably all heard of the ICO. 195 00:11:03,790 --> 00:11:07,990 And another phrase for an ICO is the direct token presale. 196 00:11:07,990 --> 00:11:12,980 And typically what happens here is the developers of the protocol put together 197 00:11:12,980 --> 00:11:14,200 a white paper. 198 00:11:14,200 --> 00:11:16,390 That white paper is distributed pretty broadly 199 00:11:16,390 --> 00:11:21,700 to both accredited investors and retail investors alike. 200 00:11:21,700 --> 00:11:23,530 And the white paper describes the network 201 00:11:23,530 --> 00:11:26,985 that will be built but is not yet built. And it 202 00:11:26,985 --> 00:11:32,740 says you can buy tokens directly in that future developed network. 203 00:11:32,740 --> 00:11:34,380 And then they raise a ton of money. 204 00:11:34,380 --> 00:11:38,620 Some of these ICOs have raised tens of millions of dollars. 205 00:11:38,620 --> 00:11:41,590 And then all of that money goes towards the development of the network 206 00:11:41,590 --> 00:11:44,830 and compensating the developers, et cetera, et cetera-- everything 207 00:11:44,830 --> 00:11:47,120 that you need to start a business. 208 00:11:47,120 --> 00:11:52,720 Contrast that to the SAFT, which was the brainchild of a law firm called 209 00:11:52,720 --> 00:11:58,120 Cooley and modeled after a standard document developed 210 00:11:58,120 --> 00:12:03,190 by YC for investments often in the very first institutional round 211 00:12:03,190 --> 00:12:04,750 of a company's creation. 212 00:12:04,750 --> 00:12:06,290 That is called the SAFE. 213 00:12:06,290 --> 00:12:10,390 This is the SAFT, the simple agreement for future tokens. 214 00:12:10,390 --> 00:12:14,290 And it's very similar to what happens with the ICO, 215 00:12:14,290 --> 00:12:18,380 but importantly different in a couple of key ways. 216 00:12:18,380 --> 00:12:23,200 Same thing-- there's a white paper that's developed, usually 217 00:12:23,200 --> 00:12:25,390 before the network is existent. 218 00:12:25,390 --> 00:12:28,570 But importantly here, accredited investors 219 00:12:28,570 --> 00:12:34,810 invest in an equity in that company rather than directly in the tokens 220 00:12:34,810 --> 00:12:36,700 based on this SAFT. 221 00:12:36,700 --> 00:12:39,550 And then money goes to the developers, they develop the network, 222 00:12:39,550 --> 00:12:42,610 and it's only once the network is existent 223 00:12:42,610 --> 00:12:45,310 and there's actual utility to those tokens-- 224 00:12:45,310 --> 00:12:48,510 so in the case of Spring Labs, it would be networks created. 225 00:12:48,510 --> 00:12:49,780 There's now tokens. 226 00:12:49,780 --> 00:12:51,810 Banks can transact them. 227 00:12:51,810 --> 00:12:57,130 Then me, Lisa, a retail investor, could buy one of those tokens 228 00:12:57,130 --> 00:12:59,920 and participate in the token economics that way. 229 00:12:59,920 --> 00:13:03,760 So on the left-hand side, the ICO-- 230 00:13:03,760 --> 00:13:06,520 these tokens are probably regulated as securities. 231 00:13:06,520 --> 00:13:09,310 We've already seen some action on the part of the SEC 232 00:13:09,310 --> 00:13:12,250 that suggests that they believe that. 233 00:13:12,250 --> 00:13:15,630 On the right-hand side, it's still a little ambiguous. 234 00:13:15,630 --> 00:13:17,950 The SEC has not yet ruled. 235 00:13:17,950 --> 00:13:24,520 But the SAFT itself that investors invest in is certainly a security. 236 00:13:24,520 --> 00:13:29,200 And then there's ambiguity as to whether those tokens, the utility tokens, 237 00:13:29,200 --> 00:13:31,160 is going to be regulated as a security or not. 238 00:13:31,160 --> 00:13:36,400 But it certainly seems a lot more likely that because those tokens have a value, 239 00:13:36,400 --> 00:13:38,416 people aren't buying them because they expect 240 00:13:38,416 --> 00:13:39,790 that they will increase in value. 241 00:13:39,790 --> 00:13:42,150 They're buying them because the network exists, 242 00:13:42,150 --> 00:13:45,610 and each token represents some sliver of utility 243 00:13:45,610 --> 00:13:47,280 to participating in that network-- 244 00:13:47,280 --> 00:13:52,960 so probably more likely to be regulated not as a security. 245 00:13:52,960 --> 00:13:57,850 And so our investment in Spring Labs was done via a SAFT. 246 00:13:57,850 --> 00:13:59,320 And that's been our view at August. 247 00:13:59,320 --> 00:14:03,670 There are certain kinds of investors who are participating directly 248 00:14:03,670 --> 00:14:08,020 not just in cryptocurrencies themselves, but also in ICOs. 249 00:14:08,020 --> 00:14:11,020 And that's a super interesting thing to observe as a VC, 250 00:14:11,020 --> 00:14:15,606 because it almost poses an existential risk to what venture capital is, 251 00:14:15,606 --> 00:14:17,230 because it's decentralizing what we do. 252 00:14:17,230 --> 00:14:19,800 253 00:14:19,800 --> 00:14:23,260 So if I were you and I were thinking about, 254 00:14:23,260 --> 00:14:28,090 are there blockchain projects out there that I'm interested in joining? 255 00:14:28,090 --> 00:14:31,700 How do I triage this regulatory risk for myself? 256 00:14:31,700 --> 00:14:35,320 There's a couple things that I would clearly avoid. 257 00:14:35,320 --> 00:14:39,740 No matter what, make sure that the project you're joining 258 00:14:39,740 --> 00:14:44,740 is motivated to at least try to comply with regulations, right? 259 00:14:44,740 --> 00:14:50,710 There should at least be a good faith effort to try to be above board. 260 00:14:50,710 --> 00:14:53,650 There's a whole host of financial regulations having 261 00:14:53,650 --> 00:14:56,260 to do with money transmitter licenses. 262 00:14:56,260 --> 00:14:59,260 You have to register with FINRA, all this stuff. 263 00:14:59,260 --> 00:15:02,590 And then there's a ton of products that are trying to register offshore 264 00:15:02,590 --> 00:15:05,530 in an attempt to save on taxes. 265 00:15:05,530 --> 00:15:07,810 It's probably the case that blockchain tokens 266 00:15:07,810 --> 00:15:13,330 are going to be regulated as property rather than as capital gains. 267 00:15:13,330 --> 00:15:16,300 But from everything I've read, it doesn't seem like there's actually 268 00:15:16,300 --> 00:15:18,940 that much to be gained by registering offshore, 269 00:15:18,940 --> 00:15:21,940 so it's probably more of a red flag than anything else. 270 00:15:21,940 --> 00:15:24,910 And then look for companies that are raising money off 271 00:15:24,910 --> 00:15:27,370 of this SAFT structure. 272 00:15:27,370 --> 00:15:32,350 Like I said, proactively trying to comply is always a good thing. 273 00:15:32,350 --> 00:15:39,220 If you want to learn more, these are a bunch of the leading lights 274 00:15:39,220 --> 00:15:44,120 both from a technology perspective and also from a regulatory perspective. 275 00:15:44,120 --> 00:15:47,530 So Brian Armstrong, founder of Coinbase. 276 00:15:47,530 --> 00:15:51,640 Linda Xie puts together some really wonderful content 277 00:15:51,640 --> 00:15:56,110 on Medium about different cryptocurrencies, 278 00:15:56,110 --> 00:15:58,690 and also about different events that pool together some 279 00:15:58,690 --> 00:16:01,330 of the smartest people in the space. 280 00:16:01,330 --> 00:16:04,780 Elizabeth Stark is creating a layer on top of the Ethereum network 281 00:16:04,780 --> 00:16:09,970 that increases the transaction time. 282 00:16:09,970 --> 00:16:13,750 Kathryn Hahn is a fascinating example of someone 283 00:16:13,750 --> 00:16:16,480 who's transitioned from the legal world-- 284 00:16:16,480 --> 00:16:20,920 she was, I think, a federal prosecutor for a while, a Supreme Court clerk, 285 00:16:20,920 --> 00:16:24,790 and now is leading Andreessen Horowitz crypto fund. 286 00:16:24,790 --> 00:16:30,410 And so she's a really deep thinker in how all of this will be regulated. 287 00:16:30,410 --> 00:16:33,526 And then Matt Huang, along with Fred Ehrsson, 288 00:16:33,526 --> 00:16:35,650 just launched a crypto-focused one called Paradigm. 289 00:16:35,650 --> 00:16:38,800 And they're both very smart. 290 00:16:38,800 --> 00:16:39,850 And that's it. 291 00:16:39,850 --> 00:16:41,280 Please ask questions. 292 00:16:41,280 --> 00:16:44,780 293 00:16:44,780 --> 00:16:45,668 Yes? 294 00:16:45,668 --> 00:16:47,162 So that's great. 295 00:16:47,162 --> 00:16:50,150 As a VC, you explore lots of great tokens. 296 00:16:50,150 --> 00:16:53,956 But I want to know how you get consistent returns from these things. 297 00:16:53,956 --> 00:16:55,350 It's a super volatile market. 298 00:16:55,350 --> 00:16:57,340 How do you know when to sell out, especially 299 00:16:57,340 --> 00:17:00,160 because these products haven't quite come to market yet, 300 00:17:00,160 --> 00:17:02,040 or maybe they're on exchanges. 301 00:17:02,040 --> 00:17:02,520 I just wanted to hear more about that. 302 00:17:02,520 --> 00:17:03,320 Yeah. 303 00:17:03,320 --> 00:17:06,170 We have not yet invested directly in tokens. 304 00:17:06,170 --> 00:17:10,400 We haven't invested in bitcoin, Ethereum, or any of the alt coins, 305 00:17:10,400 --> 00:17:11,900 I think for precisely that reason. 306 00:17:11,900 --> 00:17:15,290 It's way too volatile, and we don't view ourselves as experts-- 307 00:17:15,290 --> 00:17:21,260 we don't view ourselves as public equity investors in the blockchain equivalent. 308 00:17:21,260 --> 00:17:24,260 What we do via this SAFT mechanism is treat it 309 00:17:24,260 --> 00:17:27,470 just like we treat equity in any other company. 310 00:17:27,470 --> 00:17:29,090 So we're investing now. 311 00:17:29,090 --> 00:17:30,710 We know the company is really nascent. 312 00:17:30,710 --> 00:17:33,620 It's got maybe 15 employees, and they're going 313 00:17:33,620 --> 00:17:39,350 to build over the course of years, and probably our investment in them 314 00:17:39,350 --> 00:17:41,330 will last a decade. 315 00:17:41,330 --> 00:17:43,790 And at that point in time, we hope that it 316 00:17:43,790 --> 00:17:48,500 will be a big business that happens to be built upon blockchain technology 317 00:17:48,500 --> 00:17:51,740 but it's not really exposed to the volatility of cryptocurrencies 318 00:17:51,740 --> 00:17:54,290 themselves. 319 00:17:54,290 --> 00:17:58,541 Obviously, to be successful their tokens will need to develop some value 320 00:17:58,541 --> 00:18:00,290 and actually be used and things like that. 321 00:18:00,290 --> 00:18:03,740 And that's a bet that we're making, we don't know yet how it will turn out. 322 00:18:03,740 --> 00:18:06,950 323 00:18:06,950 --> 00:18:09,410 But if those tokens accrue in value, it's 324 00:18:09,410 --> 00:18:13,874 because the business fundamentals good and strong. 325 00:18:13,874 --> 00:18:17,670 AUDIENCE: So like within the next year, you guys won't make any money? 326 00:18:17,670 --> 00:18:19,910 LISA MARRONE: No, probably not. 327 00:18:19,910 --> 00:18:22,100 Which is true of any of our investments, right? 328 00:18:22,100 --> 00:18:25,910 We invest in, let's say, Warby Parker or-- 329 00:18:25,910 --> 00:18:28,820 330 00:18:28,820 --> 00:18:33,600 we have a company called Git Lab that's growing really fast. 331 00:18:33,600 --> 00:18:39,170 You don't really-- it accrues in value in that we invest at the Series B, 332 00:18:39,170 --> 00:18:42,720 someone else invests at the Series C, and you see an uptick in valuation-- 333 00:18:42,720 --> 00:18:45,940 you hope it's a really large uptick because the company is growing fast. 334 00:18:45,940 --> 00:18:49,610 But we as investors don't get liquid, so to speak, until it 335 00:18:49,610 --> 00:18:52,430 either goes public or gets bought. 336 00:18:52,430 --> 00:18:57,030 And here, I guess you could ask the question when investing in blockchain, 337 00:18:57,030 --> 00:18:58,830 what's the exit going to be? 338 00:18:58,830 --> 00:19:04,310 Is a company built on blockchain going to go public just like any other 339 00:19:04,310 --> 00:19:11,390 or will we go public by eventually selling what sliver of the token pool 340 00:19:11,390 --> 00:19:14,750 we have to others in more of a secondary transaction? 341 00:19:14,750 --> 00:19:16,540 It's possible. 342 00:19:16,540 --> 00:19:22,640 But our capital doesn't demand that we exit on the order of years, 343 00:19:22,640 --> 00:19:24,668 the way our fund is structured. 344 00:19:24,668 --> 00:19:25,616 345 00:19:25,616 --> 00:19:30,727 AUDIENCE: What's the future of crypto crime? 346 00:19:30,727 --> 00:19:31,643 LISA MARRONE: Of what? 347 00:19:31,643 --> 00:19:32,601 AUDIENCE: Crypto crime? 348 00:19:32,601 --> 00:19:33,910 What's the future of it? 349 00:19:33,910 --> 00:19:34,951 LISA MARRONE: Of crypto-- 350 00:19:34,951 --> 00:19:35,664 AUDIENCE: Crimes. 351 00:19:35,664 --> 00:19:36,830 LISA MARRONE: Crypto crimes? 352 00:19:36,830 --> 00:19:40,080 353 00:19:40,080 --> 00:19:41,930 That's a really interesting question. 354 00:19:41,930 --> 00:19:46,460 It turns out, if you look at the history of just tech innovation generally, 355 00:19:46,460 --> 00:19:50,060 often the boundary of innovation happens at this border 356 00:19:50,060 --> 00:19:53,110 between illegal and legal. 357 00:19:53,110 --> 00:19:57,710 And some of the earliest adopters of the web were using it for illicit means. 358 00:19:57,710 --> 00:20:03,200 Some of the earliest adopters of crypto obviously using it for illicit means. 359 00:20:03,200 --> 00:20:10,880 I think-- I think that policing of crypto crimes 360 00:20:10,880 --> 00:20:13,730 will require some interesting coordination 361 00:20:13,730 --> 00:20:15,950 between public and private sectors. 362 00:20:15,950 --> 00:20:19,730 We're increasingly seeing you know the folks from Silicon Valley 363 00:20:19,730 --> 00:20:24,930 kind of do short stints in DC and then come back. 364 00:20:24,930 --> 00:20:28,520 And I think that that's what's going to be required for government to get up 365 00:20:28,520 --> 00:20:32,180 the curve quickly and to be able to even know what they are looking for in terms 366 00:20:32,180 --> 00:20:42,050 of the forensics of crypto crimes, which are much harder to detect than Web 2.0 367 00:20:42,050 --> 00:20:43,290 crimes. 368 00:20:43,290 --> 00:20:47,850 But I don't know much more than that, unfortunately. 369 00:20:47,850 --> 00:20:50,610 AUDIENCE: I know [INAUDIBLE] I mean, obviously, 370 00:20:50,610 --> 00:20:53,040 if there's something that [INAUDIBLE]. 371 00:20:53,040 --> 00:20:57,072 372 00:20:57,072 --> 00:21:00,990 And then is there concern or any risk analysis 373 00:21:00,990 --> 00:21:06,740 that governments would broadly have regulations that would inadvertently 374 00:21:06,740 --> 00:21:11,150 affect somebody just trying to build broadly off of blockchain, 375 00:21:11,150 --> 00:21:14,385 and just respond to what they feel like are-- 376 00:21:14,385 --> 00:21:15,260 LISA MARRONE Totally. 377 00:21:15,260 --> 00:21:16,040 And that's happened. 378 00:21:16,040 --> 00:21:18,512 AUDIENCE: Would they actually do things that [INAUDIBLE] other applications 379 00:21:18,512 --> 00:21:19,474 also with blockchain? 380 00:21:19,474 --> 00:21:20,640 LISA MARRONE: Yeah, totally. 381 00:21:20,640 --> 00:21:26,750 We've seen many SEC actions brought against companies 382 00:21:26,750 --> 00:21:30,980 that decided to do an ICO. 383 00:21:30,980 --> 00:21:34,590 And why is that dangerous to a startup? 384 00:21:34,590 --> 00:21:36,620 Well, it takes a ton of time and resources 385 00:21:36,620 --> 00:21:40,610 to defend yourself against an SEC action, not to mention the scrutiny 386 00:21:40,610 --> 00:21:43,550 and the negative publicity affects whether a consumer might 387 00:21:43,550 --> 00:21:45,300 want to use your product. 388 00:21:45,300 --> 00:21:46,880 And so we do think about that. 389 00:21:46,880 --> 00:21:54,470 We think a lot about trying to proactively partner with the regulators 390 00:21:54,470 --> 00:21:59,180 to make sure that at every step in Spring Lab's development, 391 00:21:59,180 --> 00:22:04,590 they know exactly where they stand vis-a-vis the regulators. 392 00:22:04,590 --> 00:22:06,230 Yeah. 393 00:22:06,230 --> 00:22:10,179 I think that that's a really important point. 394 00:22:10,179 --> 00:22:12,470 Certainly, if you're the CEO of one of these companies, 395 00:22:12,470 --> 00:22:14,803 you want to make sure that you're thinking strategically 396 00:22:14,803 --> 00:22:16,636 about the regulatory angle of it. 397 00:22:16,636 --> 00:22:17,622 Yeah? 398 00:22:17,622 --> 00:22:23,538 AUDIENCE: So I'm curious to know if Spring Labs is the only investment 399 00:22:23,538 --> 00:22:26,003 right now [INAUDIBLE]. 400 00:22:26,003 --> 00:22:29,565 And the reason I ask is because ultimately, Spring Labs 401 00:22:29,565 --> 00:22:30,440 is a fintech company. 402 00:22:30,440 --> 00:22:32,231 And usually when we think about blockchain, 403 00:22:32,231 --> 00:22:35,134 cryptocurrencies is the first thing that comes in our mind, 404 00:22:35,134 --> 00:22:37,342 because I feel like a lot of people are quick to jump 405 00:22:37,342 --> 00:22:39,807 to financial applications of technology. 406 00:22:39,807 --> 00:22:43,090 So I guess my broader question is, is your investment thesis 407 00:22:43,090 --> 00:22:48,648 that finance is probably the first viable segment that 408 00:22:48,648 --> 00:22:50,584 could be transformed [INAUDIBLE]? 409 00:22:50,584 --> 00:22:55,290 Or would you guys be open to investments in other types of distributed protocols 410 00:22:55,290 --> 00:22:58,260 that might touch on other verticals? 411 00:22:58,260 --> 00:23:02,030 LISA MARRONE: Yes, definitely open to investing in other verticals. 412 00:23:02,030 --> 00:23:04,460 I think that the core of what's interesting in Spring Labs 413 00:23:04,460 --> 00:23:06,920 isn't actually the financial services component. 414 00:23:06,920 --> 00:23:11,480 It's that they're using blockchain to help solve an identity verification 415 00:23:11,480 --> 00:23:12,260 problem. 416 00:23:12,260 --> 00:23:16,360 And when you abstract that out of fintech to all sorts of other segments, 417 00:23:16,360 --> 00:23:18,000 it applies the exact same way. 418 00:23:18,000 --> 00:23:22,040 So our thesis was, hey, we think that blockchain the technology is perfectly 419 00:23:22,040 --> 00:23:25,410 suited to solving what Web 2.0 has really struggled to solve, 420 00:23:25,410 --> 00:23:26,370 which is identity. 421 00:23:26,370 --> 00:23:28,100 We expected Facebook to do it. 422 00:23:28,100 --> 00:23:29,720 We thought maybe Amazon would do it. 423 00:23:29,720 --> 00:23:30,680 No we did it. 424 00:23:30,680 --> 00:23:34,980 Maybe Facebook's working on it now, but they have other issues. 425 00:23:34,980 --> 00:23:37,170 And so Spring Labs is doing it for, you're right, 426 00:23:37,170 --> 00:23:39,860 they're a very focused vertical. 427 00:23:39,860 --> 00:23:42,590 And you can imagine-- 428 00:23:42,590 --> 00:23:44,699 take supply chain as another great example. 429 00:23:44,699 --> 00:23:46,865 There, it's not the identity of an individual human, 430 00:23:46,865 --> 00:23:51,080 but it's the identity of an individual pallete, an individual piece of fruit. 431 00:23:51,080 --> 00:23:55,800 How do you verify that this is a thing that came from this place? 432 00:23:55,800 --> 00:23:58,490 And I think that there are all sorts of other myriad ways 433 00:23:58,490 --> 00:24:03,020 that identity is going to be tracked. 434 00:24:03,020 --> 00:24:07,160 we were just talking about educational institutions. 435 00:24:07,160 --> 00:24:12,930 How does Harvard verify that each of you actually took CS 50 and passed it? 436 00:24:12,930 --> 00:24:15,880 How does Harvard verify that you in fact graduated? 437 00:24:15,880 --> 00:24:19,050 And over the course of your life, do you really own that data? 438 00:24:19,050 --> 00:24:20,430 Not really. 439 00:24:20,430 --> 00:24:23,100 And so each time you apply for a job or apply to grad school, 440 00:24:23,100 --> 00:24:27,020 you're going to have to go back to Harvard, pay some money for them 441 00:24:27,020 --> 00:24:29,150 to print a form and mail a letter. 442 00:24:29,150 --> 00:24:31,370 And wouldn't it be a lot more powerful if that 443 00:24:31,370 --> 00:24:35,350 existed in a decentralized network? 444 00:24:35,350 --> 00:24:36,320 Yeah? 445 00:24:36,320 --> 00:24:41,655 AUDIENCE: [INAUDIBLE] 446 00:24:41,655 --> 00:25:00,570 447 00:25:00,570 --> 00:25:01,800 LISA MARRONE: Great question. 448 00:25:01,800 --> 00:25:04,830 One area that I think is really interesting and still incredibly 449 00:25:04,830 --> 00:25:08,340 nascent is blockchain for health care. 450 00:25:08,340 --> 00:25:15,480 There you have the added complexity of not just regulation of tokens 451 00:25:15,480 --> 00:25:21,090 and the financial repercussions of that, but HIPAA and all the regulations 452 00:25:21,090 --> 00:25:24,390 that come into play when you have personal health care information. 453 00:25:24,390 --> 00:25:28,080 But you think about medical records-- 454 00:25:28,080 --> 00:25:33,360 I think that's a variant of the identity problem we were just talking about. 455 00:25:33,360 --> 00:25:38,850 And then compliance with medical billing is another area 456 00:25:38,850 --> 00:25:41,690 that could be really interesting. 457 00:25:41,690 --> 00:25:45,450 So I think health is an interesting example. 458 00:25:45,450 --> 00:25:46,840 Supply chain. 459 00:25:46,840 --> 00:25:49,330 Certainly, financial identity. 460 00:25:49,330 --> 00:25:49,830 What else? 461 00:25:49,830 --> 00:25:52,350 462 00:25:52,350 --> 00:25:56,220 The core idea within Cryptokitties of digital assets 463 00:25:56,220 --> 00:25:57,775 is also really interesting. 464 00:25:57,775 --> 00:26:00,620 465 00:26:00,620 --> 00:26:05,490 There already is within gaming a whole economy of digital assets. 466 00:26:05,490 --> 00:26:08,310 And you can imagine in the future that we're all 467 00:26:08,310 --> 00:26:13,400 going to own a basket of things, some of which are physical world items 468 00:26:13,400 --> 00:26:15,690 and some of which are digital items. 469 00:26:15,690 --> 00:26:20,820 And so using blockchain as the record of transaction for those digital items 470 00:26:20,820 --> 00:26:23,667 will be another use case. 471 00:26:23,667 --> 00:26:24,645 Yeah? 472 00:26:24,645 --> 00:26:28,068 AUDIENCE: Have you guys thought about the physical electrical 473 00:26:28,068 --> 00:26:30,232 natural resource requirements? 474 00:26:30,232 --> 00:26:32,898 Because that's-- right, I hear about so many great applications, 475 00:26:32,898 --> 00:26:36,286 but the biggest lament after it is like, I feel like for the [INAUDIBLE] 476 00:26:36,286 --> 00:26:39,674 example, how are we going to have [INAUDIBLE] cross every single item, 477 00:26:39,674 --> 00:26:44,949 and how much of that-- of the entire [INAUDIBLE] needs to be stored and each 478 00:26:44,949 --> 00:26:45,490 individually. 479 00:26:45,490 --> 00:26:47,640 LISA MARRONE: Totally. 480 00:26:47,640 --> 00:26:53,410 The question was, how do we think about the energy implications of building 481 00:26:53,410 --> 00:26:54,760 upon blockchain? 482 00:26:54,760 --> 00:26:56,972 I think that it's a great point. 483 00:26:56,972 --> 00:26:58,180 We definitely think about it. 484 00:26:58,180 --> 00:27:00,280 We think about it from the lens of, OK, you 485 00:27:00,280 --> 00:27:02,530 look at blockchain as the technology. 486 00:27:02,530 --> 00:27:05,130 As a technology, what is it good at and what is it bad at? 487 00:27:05,130 --> 00:27:06,390 Well, what is it good at? 488 00:27:06,390 --> 00:27:08,090 It's a fancier database. 489 00:27:08,090 --> 00:27:10,180 It's a distributed database. 490 00:27:10,180 --> 00:27:11,050 What is it bad at? 491 00:27:11,050 --> 00:27:15,680 It's actually kind of slow, and it's very energy intensive. 492 00:27:15,680 --> 00:27:19,000 And so it's good for applications that can't 493 00:27:19,000 --> 00:27:22,085 be solved by a centralized database, like identity. 494 00:27:22,085 --> 00:27:25,210 And it's bad for things where you have to ping the database really quickly, 495 00:27:25,210 --> 00:27:27,520 really frequently. 496 00:27:27,520 --> 00:27:31,840 That's why a Spring Labs, where maybe you ping the database once 497 00:27:31,840 --> 00:27:36,520 on the order of a year per customer, and it's probably 498 00:27:36,520 --> 00:27:41,320 bad for a marketplace or a financial exchange and things like that. 499 00:27:41,320 --> 00:27:44,230 And that's why you're seeing folks like Elizabeth Starkness try 500 00:27:44,230 --> 00:27:46,410 to develop the lightning layer on top of Ethereum 501 00:27:46,410 --> 00:27:51,670 to help accelerate development of applications on top of it. 502 00:27:51,670 --> 00:27:56,350 So we definitely think about it as part of the, why now? 503 00:27:56,350 --> 00:27:58,630 Is this actually the right time to be investing, 504 00:27:58,630 --> 00:28:02,530 or is this still maybe a year or two too early in the development 505 00:28:02,530 --> 00:28:06,250 of the technology before things really start to take off? 506 00:28:06,250 --> 00:28:09,190 It's a tough thing as an investor, because you 507 00:28:09,190 --> 00:28:11,800 don't want to wait until it's too late. 508 00:28:11,800 --> 00:28:15,842 But we've invested in tons of companies that 509 00:28:15,842 --> 00:28:17,800 were a year or two ahead of their time and just 510 00:28:17,800 --> 00:28:22,561 didn't work out because adoption wasn't ready to take off. 511 00:28:22,561 --> 00:28:28,028 AUDIENCE: Uh, how the underlying protocol-- the cryptocurrency value 512 00:28:28,028 --> 00:28:32,625 and the application on top of the technology affect each other? 513 00:28:32,625 --> 00:28:36,920 So earlier this year, the cryptocurrency values were just like off the roof, 514 00:28:36,920 --> 00:28:38,410 and then now it's really low. 515 00:28:38,410 --> 00:28:41,080 How does that affect the application that's built on top of it? 516 00:28:41,080 --> 00:28:43,690 And also, when a business becomes successful, 517 00:28:43,690 --> 00:28:48,650 how does that impact the value of the cryptocurrency [INAUDIBLE]?? 518 00:28:48,650 --> 00:28:53,150 LISA MARRONE: The question was, how does the value of the protocol tokens 519 00:28:53,150 --> 00:28:57,920 affect the applications being built on top of the protocol? 520 00:28:57,920 --> 00:29:00,380 Cryptokitties, a great example there-- 521 00:29:00,380 --> 00:29:05,960 back at its peak, I believe that there were 120,000 daily active users 522 00:29:05,960 --> 00:29:06,710 of Cryptokitties. 523 00:29:06,710 --> 00:29:09,680 This was like November 2017. 524 00:29:09,680 --> 00:29:14,540 And then they got $12 million invested from Union Square Ventures 525 00:29:14,540 --> 00:29:17,420 and another really top tier firm. 526 00:29:17,420 --> 00:29:23,060 Now if you look at the daily active users, it's down in the 1,200's or so-- 527 00:29:23,060 --> 00:29:27,290 really has taken a dip, in large part because the value of the Ethereum 528 00:29:27,290 --> 00:29:32,750 token underneath is a lot lower than it was back in the peak of November 2017. 529 00:29:32,750 --> 00:29:37,820 So I do think that there is a strong correlation between the protocol 530 00:29:37,820 --> 00:29:39,710 value and the application value. 531 00:29:39,710 --> 00:29:42,890 532 00:29:42,890 --> 00:29:45,680 Probably part of the reason why the app layer 533 00:29:45,680 --> 00:29:50,300 is still as nascent as it is, and an interesting question to ponder-- 534 00:29:50,300 --> 00:29:56,750 like, how do you as the application try to mitigate yourself 535 00:29:56,750 --> 00:29:58,234 from that volatility? 536 00:29:58,234 --> 00:30:00,484 I don't know the answer to that, but it's interesting. 537 00:30:00,484 --> 00:30:04,930 AUDIENCE: So why don't you invest in cryptocurrenies themselves? 538 00:30:04,930 --> 00:30:09,020 LISA MARRONE: Well, we've seen a lot of VCs choose to do that. 539 00:30:09,020 --> 00:30:11,230 And I think-- 540 00:30:11,230 --> 00:30:14,320 I mean, so our investment in Spring Labs is because it's 541 00:30:14,320 --> 00:30:15,910 an agreement for future tokens. 542 00:30:15,910 --> 00:30:19,060 Eventually, we will get Spring Labs coins. 543 00:30:19,060 --> 00:30:23,860 There are plenty of VCs that are directly invested in bitcoin, Ethereum, 544 00:30:23,860 --> 00:30:25,990 Ripple, et cetera. 545 00:30:25,990 --> 00:30:29,190 And most have done exceedingly well, because they 546 00:30:29,190 --> 00:30:31,245 have accrued in value so dramatically. 547 00:30:31,245 --> 00:30:33,370 And I think if you really believe that the protocol 548 00:30:33,370 --> 00:30:37,270 layer is where the value is, that actually might be the right answer. 549 00:30:37,270 --> 00:30:40,198 550 00:30:40,198 --> 00:30:44,380 AUDIENCE: With the Spring Labs application [INAUDIBLE] process, 551 00:30:44,380 --> 00:30:47,846 I imagine there's banks that hire [INAUDIBLE].. 552 00:30:47,846 --> 00:30:57,530 553 00:30:57,530 --> 00:30:59,420 LISA MARRONE: Yeah, it's a great question. 554 00:30:59,420 --> 00:31:03,270 And an important point to remember, that when investing in blockchain 555 00:31:03,270 --> 00:31:05,910 there's kind of a two-level analysis. 556 00:31:05,910 --> 00:31:09,110 First it's ignoring the blockchain part of the business. 557 00:31:09,110 --> 00:31:10,027 Is it a good business? 558 00:31:10,027 --> 00:31:11,318 Does it have good fundamentals? 559 00:31:11,318 --> 00:31:13,760 If it's a marketplace, does it function as a marketplace? 560 00:31:13,760 --> 00:31:15,843 And then looking at the tech stack and making sure 561 00:31:15,843 --> 00:31:17,430 that that's all solid and makes sense. 562 00:31:17,430 --> 00:31:20,540 So if you take Spring Labs as a marketplace, you're right. 563 00:31:20,540 --> 00:31:25,310 It requires, importantly, the financial institutions to want to use it. 564 00:31:25,310 --> 00:31:29,000 Unless Bank of America is willing to ping Wells Fargo 565 00:31:29,000 --> 00:31:34,080 and get compensated in Spring Labs tokens, it's never going to take off. 566 00:31:34,080 --> 00:31:38,930 And I think that certainly, our diligence 567 00:31:38,930 --> 00:31:42,230 was in large part talking to financial institutions 568 00:31:42,230 --> 00:31:45,860 with whom Spring Labs had already partnered to better understand 569 00:31:45,860 --> 00:31:48,410 why they were excited about using it. 570 00:31:48,410 --> 00:31:53,870 And they view this KYC process as a cost center. 571 00:31:53,870 --> 00:31:58,910 And so being able to partner with an entity that 572 00:31:58,910 --> 00:32:03,170 wants to help reduce that cost, they view it as a win-win. 573 00:32:03,170 --> 00:32:06,110 But still, you're right that the earliest adopters 574 00:32:06,110 --> 00:32:09,470 are going to have to believe in the value of that token, 575 00:32:09,470 --> 00:32:12,950 because they're going to accrue a higher amount of token 576 00:32:12,950 --> 00:32:16,785 before its value is really demonstrated. 577 00:32:16,785 --> 00:32:18,713 AUDIENCE: A question that kind of leads off 578 00:32:18,713 --> 00:32:20,890 of what you just said-- there are just so many verticals in the market 579 00:32:20,890 --> 00:32:21,780 right now. 580 00:32:21,780 --> 00:32:24,510 And you know, Gina mentioned just one succeeding. 581 00:32:24,510 --> 00:32:27,130 There will probably be multiple blockchain technologies, 582 00:32:27,130 --> 00:32:29,330 and there's going to need to be some technology 583 00:32:29,330 --> 00:32:31,677 to talk chain to chain and all that. 584 00:32:31,677 --> 00:32:33,385 And I'm wondering, how much research have 585 00:32:33,385 --> 00:32:35,590 you guys done into that to figure out-- 586 00:32:35,590 --> 00:32:38,140 587 00:32:38,140 --> 00:32:41,365 Spring Labs won't be the only people doing this kind of stuff. 588 00:32:41,365 --> 00:32:43,490 And just to comment on something else that was said 589 00:32:43,490 --> 00:32:47,126 was as it relates to energy consumption-- in addition 590 00:32:47,126 --> 00:32:49,052 to proof of work, there's proof of state. 591 00:32:49,052 --> 00:32:50,510 There's other consensus algorithms. 592 00:32:50,510 --> 00:32:56,809 And I'm wondering if you guys looking at any of that technology side of things? 593 00:32:56,809 --> 00:32:57,600 LISA MARRONE: Yeah. 594 00:32:57,600 --> 00:33:03,240 The mining side of things has also been an area ripe for VC investment, 595 00:33:03,240 --> 00:33:08,050 analogy much more to the server infrastructure layer of the web. 596 00:33:08,050 --> 00:33:09,150 We have not played there. 597 00:33:09,150 --> 00:33:12,115 598 00:33:12,115 --> 00:33:14,490 I don't know if I have a really satisfying answer for you 599 00:33:14,490 --> 00:33:19,620 as to why we haven't played there, aside from no particular domain 600 00:33:19,620 --> 00:33:21,370 expertise on our end. 601 00:33:21,370 --> 00:33:23,790 But I think it's fascinating, because some 602 00:33:23,790 --> 00:33:27,630 of the biggest companies existent within the space writ large 603 00:33:27,630 --> 00:33:30,692 are actually huge mining operations. 604 00:33:30,692 --> 00:33:32,745 And so just intellectually, it's interesting. 605 00:33:32,745 --> 00:33:33,370 AUDIENCE: Yeah. 606 00:33:33,370 --> 00:33:39,680 I mean, I think Ethereum [INAUDIBLE] a hybrid system. 607 00:33:39,680 --> 00:33:42,150 So I don't think energy consumption will continue 608 00:33:42,150 --> 00:33:47,190 to be a problem that it is now, unless they can find that it's just not 609 00:33:47,190 --> 00:33:51,808 as secure or trustworthy of a validation scheme, 610 00:33:51,808 --> 00:33:58,439 to make sure that all the chains sync up and the data's accurate. 611 00:33:58,439 --> 00:33:59,230 LISA MARRONE: Yeah. 612 00:33:59,230 --> 00:34:06,680 Your point about in the future, there's going to be a whole slew of protocols 613 00:34:06,680 --> 00:34:09,190 is absolutely true. 614 00:34:09,190 --> 00:34:12,340 Unrealistic to believe that because Spring Labs 615 00:34:12,340 --> 00:34:15,670 has taken financial institutions as its vertical 616 00:34:15,670 --> 00:34:19,040 that they're going to somehow have a monopoly over all transactions there. 617 00:34:19,040 --> 00:34:22,389 I think it's going to be just like what we see for the web. 618 00:34:22,389 --> 00:34:24,610 There's going to be healthy competition by vertical. 619 00:34:24,610 --> 00:34:27,940 And then someone's going to build a really interesting business trying 620 00:34:27,940 --> 00:34:31,865 to be the interoperability layer as between all of these different tokens. 621 00:34:31,865 --> 00:34:33,259 That might be Coinbase. 622 00:34:33,259 --> 00:34:34,522 I don't know. 623 00:34:34,522 --> 00:34:38,330 624 00:34:38,330 --> 00:34:42,650 AUDIENCE: How do you think that the regulations and the taxes and user 625 00:34:42,650 --> 00:34:47,066 responsibility affect the development of this technology? 626 00:34:47,066 --> 00:34:49,094 627 00:34:49,094 --> 00:34:51,719 LISA MARRONE: Kind of to the point earlier about crypto crimes, 628 00:34:51,719 --> 00:34:57,190 I think that entrepreneurs are incredible humans 629 00:34:57,190 --> 00:35:03,230 and are always pushing the boundary, kind of regulation be damned. 630 00:35:03,230 --> 00:35:11,060 And so I haven't seen so much reticence to develop for fear of regulation. 631 00:35:11,060 --> 00:35:17,150 I think what we're seeing is now a little bit more enthusiasm 632 00:35:17,150 --> 00:35:20,900 for proactively partnering with regulators. 633 00:35:20,900 --> 00:35:25,430 The legal standards are kind of becoming well known enough, 634 00:35:25,430 --> 00:35:31,385 and there's also lawyers who are now decently expert in the law 635 00:35:31,385 --> 00:35:35,570 as it pertains to crypto that even a really fledgling startup can 636 00:35:35,570 --> 00:35:40,890 get pretty high-quality advice about how to navigate the regulatory landscape. 637 00:35:40,890 --> 00:35:43,980 And I think that investors are kind of voting with their dollars 638 00:35:43,980 --> 00:35:47,090 as to investing in those companies rather than companies 639 00:35:47,090 --> 00:35:49,140 that are being a little shadier. 640 00:35:49,140 --> 00:35:51,230 And so I think all of those things are forces 641 00:35:51,230 --> 00:35:53,550 for good in the development of the technology, 642 00:35:53,550 --> 00:35:59,510 because the more examples we have of amazing companies, amazing investments 643 00:35:59,510 --> 00:36:03,140 that are built upon blockchain, the better it will be for folks like you 644 00:36:03,140 --> 00:36:05,120 to be in this room thinking like, oh, OK, I 645 00:36:05,120 --> 00:36:08,920 want to start a company in this space. 646 00:36:08,920 --> 00:36:09,920 Yeah? 647 00:36:09,920 --> 00:36:12,128 AUDIENCE: I'd love to hear more about your experience 648 00:36:12,128 --> 00:36:17,704 with the SAFT with Spring Labs, because probably I'm more familiar with IPOs. 649 00:36:17,704 --> 00:36:20,542 Did you have equity in Spring Labs? 650 00:36:20,542 --> 00:36:23,870 [INAUDIBLE]? 651 00:36:23,870 --> 00:36:27,882 And so you also are going to be entitlted to future Spring Labs 652 00:36:27,882 --> 00:36:30,322 token when they produce them. 653 00:36:30,322 --> 00:36:32,280 You have probably agreed about some amount? 654 00:36:32,280 --> 00:36:33,196 LISA MARRONE: Correct. 655 00:36:33,196 --> 00:36:38,080 So the question was about the SAFT, and how it works technically. 656 00:36:38,080 --> 00:36:39,970 So set aside the SAFT for a second. 657 00:36:39,970 --> 00:36:42,640 Let's think about the SAFE. 658 00:36:42,640 --> 00:36:49,420 When YC invests in a company via a safe, what they're investing in 659 00:36:49,420 --> 00:36:57,104 is a sliver of the company that will convert upon the first priced round. 660 00:36:57,104 --> 00:36:59,020 So it's basically saying like, we don't really 661 00:36:59,020 --> 00:37:01,780 know yet how much U Company is worth. 662 00:37:01,780 --> 00:37:03,940 We're willing to wait until, say, an August 663 00:37:03,940 --> 00:37:08,380 Capital steps in and says at Series A, OK, you're worth $24 million. 664 00:37:08,380 --> 00:37:11,800 And then that note converts in at the $24 million valuation. 665 00:37:11,800 --> 00:37:16,030 Here, with the SAFT we're saying, we're going to invest now. 666 00:37:16,030 --> 00:37:19,280 We don't yet know what the tokens are going to be worth. 667 00:37:19,280 --> 00:37:22,534 But we're going to give you some money upfront that's 668 00:37:22,534 --> 00:37:24,700 going to be worth a certain percent of your company. 669 00:37:24,700 --> 00:37:26,408 And at some future date when we know what 670 00:37:26,408 --> 00:37:30,760 the tokens are worth via the pricing of the token economics, 671 00:37:30,760 --> 00:37:36,040 our sliver will convert into whatever number of tokens it's worth. 672 00:37:36,040 --> 00:37:39,820 So you're right, that from an investment now perspective 673 00:37:39,820 --> 00:37:43,690 it's just like buying equity in a company, nothing to do with the tokens. 674 00:37:43,690 --> 00:37:45,940 And that's why it's very clearly-- 675 00:37:45,940 --> 00:37:51,584 it's a nice legal form, because it's so clearly security as governed 676 00:37:51,584 --> 00:37:53,500 by the SEC, and you don't really have to worry 677 00:37:53,500 --> 00:37:55,945 about the ambiguity of what a token is. 678 00:37:55,945 --> 00:37:59,410 AUDIENCE: So what happens to your equity upon this conversion? 679 00:37:59,410 --> 00:38:04,280 Is each token now representative of equity in Spring Labs as a whole? 680 00:38:04,280 --> 00:38:07,470 Or is it just a financial vehicle for the bank 681 00:38:07,470 --> 00:38:10,870 to do identity verification [INAUDIBLE]? 682 00:38:10,870 --> 00:38:16,200 LISA MARRONE: You're right, it's blending utility and security. 683 00:38:16,200 --> 00:38:18,862 Upon that conversion are-- 684 00:38:18,862 --> 00:38:19,820 that's a good question. 685 00:38:19,820 --> 00:38:24,250 I don't know exactly whether there is still any equity remaining 686 00:38:24,250 --> 00:38:25,240 outside of the tokens. 687 00:38:25,240 --> 00:38:29,050 But certainly, some sliver of our equity converts into tokens. 688 00:38:29,050 --> 00:38:35,260 And I think at that point you could wonder, OK, 689 00:38:35,260 --> 00:38:38,980 are we as August Capital really holding those tokens for their utility 690 00:38:38,980 --> 00:38:41,410 or are we expecting that they will accrue in value? 691 00:38:41,410 --> 00:38:46,450 If so, that's an investment, not a utility. 692 00:38:46,450 --> 00:38:51,130 Maybe there's a provision in there about cashing out at some set date. 693 00:38:51,130 --> 00:38:51,790 I don't know. 694 00:38:51,790 --> 00:38:53,710 I'll look into that. 695 00:38:53,710 --> 00:38:58,610 AUDIENCE: Can you imagine a proposed cryptocurrency role 696 00:38:58,610 --> 00:39:04,120 where folks are less concerned about the asset value of the tokens 697 00:39:04,120 --> 00:39:09,320 from a [INAUDIBLE] where blockchain becomes 698 00:39:09,320 --> 00:39:17,170 more of a utility or a commodity kind of model where you're 699 00:39:17,170 --> 00:39:22,853 solving real problems that exert costs or friction 700 00:39:22,853 --> 00:39:27,899 on the economy, and the speculation part kind of begins [INAUDIBLE]?? 701 00:39:27,899 --> 00:39:29,940 LISA MARRONE: I would love to live in that world. 702 00:39:29,940 --> 00:39:33,721 The question was, can you imagine a post-speculative blockchain world? 703 00:39:33,721 --> 00:39:34,220 Yeah. 704 00:39:34,220 --> 00:39:38,600 I think we think often about trying to look at the companies 705 00:39:38,600 --> 00:39:43,430 we invest in as companies, not necessarily 706 00:39:43,430 --> 00:39:46,520 as blockchain companies, kind of pre-imagining, 707 00:39:46,520 --> 00:39:47,930 that commoditization in a way. 708 00:39:47,930 --> 00:39:52,459 709 00:39:52,459 --> 00:39:55,375 There's certainly a lot of utility to investing fully for speculation, 710 00:39:55,375 --> 00:39:58,010 and a lot of people have made a lot of money in that way. 711 00:39:58,010 --> 00:40:00,500 In fact, speculation is how a lot of this technology 712 00:40:00,500 --> 00:40:05,470 is going to get adopted, because there's just economic motive there. 713 00:40:05,470 --> 00:40:08,750 But yes, I think 10 years from now, 20 years from now, 714 00:40:08,750 --> 00:40:12,860 blockchain will be a layer in a host of applications 715 00:40:12,860 --> 00:40:20,240 with which we interface daily and isn't necessarily the driver of value 716 00:40:20,240 --> 00:40:22,175 in those applications, just enabling. 717 00:40:22,175 --> 00:40:24,820 718 00:40:24,820 --> 00:40:25,433 Yeah? 719 00:40:25,433 --> 00:40:29,137 AUDIENCE: You kind of talked about ICOs as [INAUDIBLE] venture capital. 720 00:40:29,137 --> 00:40:33,068 And I'm curious your thoughts, and other [INAUDIBLE].. 721 00:40:33,068 --> 00:40:36,870 722 00:40:36,870 --> 00:40:37,890 LISA MARRONE: Yeah. 723 00:40:37,890 --> 00:40:42,930 The question was about ICOs as the existential threat to VC. 724 00:40:42,930 --> 00:40:44,130 It's a great question. 725 00:40:44,130 --> 00:40:46,980 726 00:40:46,980 --> 00:40:52,110 I think that from the perspective of an entrepreneur, if you had a choice of, 727 00:40:52,110 --> 00:40:58,350 hey, I can broadcast to the entire market what I want to build and just 728 00:40:58,350 --> 00:41:02,400 sit back and wait and people can kind of come to me and decide to write checks 729 00:41:02,400 --> 00:41:05,670 or not, I would take that all day every day 730 00:41:05,670 --> 00:41:08,580 rather than having to drive up and down Sand Hill pitching people 731 00:41:08,580 --> 00:41:13,170 like me trying to get them to be like, yes, I will give you $10 million. 732 00:41:13,170 --> 00:41:17,550 So I totally get it from the entrepreneur's perspective. 733 00:41:17,550 --> 00:41:24,390 What I think it does from an incentive to build perspective 734 00:41:24,390 --> 00:41:25,610 is a little perverse. 735 00:41:25,610 --> 00:41:30,900 If you raise $80 million before you have a business model and product market 736 00:41:30,900 --> 00:41:34,785 fit, I worry about whether the company that 737 00:41:34,785 --> 00:41:37,230 will be born of that initial upfront investment 738 00:41:37,230 --> 00:41:40,470 will be as healthy as what the traditional venture capital 739 00:41:40,470 --> 00:41:42,840 model allows. 740 00:41:42,840 --> 00:41:48,240 But of course, I'm biased by the position I have within a VC firm 741 00:41:48,240 --> 00:41:51,090 to think that my model is the better model. 742 00:41:51,090 --> 00:41:56,850 I think that firms have taken all sorts of different positions on this, August 743 00:41:56,850 --> 00:41:59,100 probably being among the more conservative. 744 00:41:59,100 --> 00:42:02,730 You see Andreessen Horowitz dedicating a separate crypto fund. 745 00:42:02,730 --> 00:42:05,760 There are tons of emerging crypto funds, like Paradigm. 746 00:42:05,760 --> 00:42:10,800 Yale University just announced that it's investing some of its endowment dollars 747 00:42:10,800 --> 00:42:14,010 in Paradigm, which probably means it's now directly invested 748 00:42:14,010 --> 00:42:15,435 in some cryptocurrency assets. 749 00:42:15,435 --> 00:42:18,060 750 00:42:18,060 --> 00:42:22,740 So yeah, I mean-- 751 00:42:22,740 --> 00:42:27,948 I think if you're an investor who wants to hedge your bets, 752 00:42:27,948 --> 00:42:33,500 yeah, you should probably be treating ICOs seriously, 753 00:42:33,500 --> 00:42:35,360 accounting for that regulatory risk. 754 00:42:35,360 --> 00:42:39,670 755 00:42:39,670 --> 00:42:40,170 Yep? 756 00:42:40,170 --> 00:42:44,018 AUDIENCE: How do you diversify your blockchain portfolio? 757 00:42:44,018 --> 00:42:46,423 So you have an identity project. 758 00:42:46,423 --> 00:42:49,325 Are you trying to get multiple identity projects? 759 00:42:49,325 --> 00:42:51,700 Are yoy thinking, OK, maybe [INAUDIBLE]. 760 00:42:51,700 --> 00:42:57,279 761 00:42:57,279 --> 00:42:58,070 LISA MARRONE: Yeah. 762 00:42:58,070 --> 00:43:01,650 The question was, how do we diversify our blockchain portfolio? 763 00:43:01,650 --> 00:43:04,720 We think about diversifying our portfolio 764 00:43:04,720 --> 00:43:06,830 across a whole host of dimensions. 765 00:43:06,830 --> 00:43:09,060 Certainly, one is by sector. 766 00:43:09,060 --> 00:43:11,060 So if you look at our portfolio, it's about half 767 00:43:11,060 --> 00:43:12,980 consumer-facing, half enterprise-facing. 768 00:43:12,980 --> 00:43:16,490 And within those, probably the bulk of our investments 769 00:43:16,490 --> 00:43:18,590 fall in one of four pillars. 770 00:43:18,590 --> 00:43:20,180 One's enterprise infrastructure. 771 00:43:20,180 --> 00:43:21,890 One's application layer. 772 00:43:21,890 --> 00:43:23,360 One's financial technology. 773 00:43:23,360 --> 00:43:27,210 And one's consumer e-commerce and marketplaces. 774 00:43:27,210 --> 00:43:30,260 And so I think we would expect our blockchain investments 775 00:43:30,260 --> 00:43:38,480 to be spread across those four pillars, just as any other investment that we 776 00:43:38,480 --> 00:43:40,440 make that's incremental. 777 00:43:40,440 --> 00:43:43,940 We don't tend to invest into companies that 778 00:43:43,940 --> 00:43:47,810 are going after the exact same space, just because we're 779 00:43:47,810 --> 00:43:53,630 fiduciaries on the board and can't invest in two companies that 780 00:43:53,630 --> 00:43:55,520 are directly competitive. 781 00:43:55,520 --> 00:44:00,380 That said, financial service is obviously a massive market. 782 00:44:00,380 --> 00:44:03,920 Could I quite easily imagine two companies 783 00:44:03,920 --> 00:44:07,640 both based on blockchain both going after different parts 784 00:44:07,640 --> 00:44:11,240 of the financial services infrastructure that we would both invest in? 785 00:44:11,240 --> 00:44:12,890 Totally. 786 00:44:12,890 --> 00:44:18,410 So I think it's very much an ad hoc opportunistic thing based 787 00:44:18,410 --> 00:44:21,327 on the quality of the team that's pitching, 788 00:44:21,327 --> 00:44:23,660 the quality of the business model that they're pitching, 789 00:44:23,660 --> 00:44:26,611 and the size of the idea behind it. 790 00:44:26,611 --> 00:44:32,570 I'm guessing that this marks the end of lunch hour and the return of class. 791 00:44:32,570 --> 00:44:34,110 Any final questions? 792 00:44:34,110 --> 00:44:37,280 793 00:44:37,280 --> 00:44:38,540 Thank you guys. 794 00:44:38,540 --> 00:44:40,330 This was fun. 795 00:44:40,330 --> 00:44:41,462