🎙 Blockchange Ventures' Ken Seiff: Betting on Crypto's Base Layer and a Multi-Chain Future

Ken Seiff is the managing partner of Blockchange Ventures, one of the longest-standing venture funds focusing on early-stage blockchain startups. One of his very first forays into crypto was as one of the investors in Ethereum’s token sale. He went on to focus on various other Layer 1s at Blockchange, investing in Polkadot, Solana, Near and Flow, among others.

Ken’s investments look to capture not just the potential value of the venture itself, but the overall growth of a space that is still in its infancy, and his bet is that taking exposure at the base protocol layer is the best way to do that. We talk about how having invested in early internet startups influences his thinking about the blockchain space, what he looks for in teams, and how DAOs are changing and disrupting the landscape for VCs.

Podcast audio and video was edited by Daniel Flynn and Gary Leuci. Transcript was edited by Samuel Haig.

🎙Listen to the interview in this week’s podcast episode here:

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👀 Only paid subscribers have access to the full interview transcript below.

Cami Russo: All right, here we are with Ken Seiff, general partner of Blockchange Ventures, one of the longest standing venture funds focusing on early-stage blockchain startups, but a pretty private VC in crypto. I'm really delighted to have Ken here on The Defiant podcast. Ken, welcome, it's great to have you here.

Ken Seiff: Cami, great to be here, thank you for having me.

CR: Small disclosure - Blockchange actually invested in The Defiant itself, just so you guys are aware. Ken and I have known each other for a while now. If you've read my book, you'll know that he is a great character in The Infinite Machine as well... Ken, do you want to give a brief overview of Blockchange itself, what its edge is, what its focus is? And then we'll get into your own background and how you got into crypto?

KS: Great, sure, I'd be happy to. We like to say we invest early in what we expect will be the biggest outcomes of the blockchain sector, and that tends to come in a couple of categories. We got there because we believe that the blockchain itself was fundamentally the second half of the internet - the first half being the ability to exchange data, the second half being the ability to exchange value. We felt that much of what took place on the internet in the internet's first half would be replicated in the internet's second half. So much of the way we think about this the space has been formed by what worked for the internet and what didn't work for the internet, so a lot of our filters relate to that.

We probably made one adjustment that is fundamental to how we think about investing, and that is the protocols for the internet were already built, and they were collaborative in the early days. So by the time companies started to be built on the internet, they had a foundation of protocols. And that's not the case here, the protocols here are built by small teams, there's probably going to be many of them, and you can own the protocols. So that should have some ramifications for what the biggest outcomes are, all of which is to say, nobody knows, we have a thesis on how to identify them, and we've deployed that now since 2017 as a fund, and I've been investing in the space since 2012 or 2013 personally.

CR: Perfect. I'll definitely want to dig deeper into your investment thesis, but first, how did you start investing in crypto? What got you interested in this space? And [could] you go into your pre-crypto background?

Stumbling into Ethereum’s founders

KS: Sure. So I started as a founder. I often describe myself not as a venture capitalist, but as a recovering founder. I started a clothing company, which then led to my first internet startup in 1995. The company, called Bluefly, was an early participant in web 1.0, and we built a retailer of excess inventory in the fashion space. We sold brands like Ralph Lauren, Tommy Hilfiger, Prada, Gucci, and the like, and we sold them at discounts of 40% to 70%. That worked really well in the early days of the internet, and we built one of the larger apparel retailers on the internet. It was a public company, and I did that for about 7 years.

I did some advisory work and consulting for a couple of divisions of Amazon. I sat on Google's retail advisory council. I became an angel investor, co-founded a company called Poppin in 2009, I think. I like to describe it as Apple-meets-Staples. It's a much smaller collection of office supplies, but in colors that allowed companies to reflect their corporate brands on their employees' desktops, and helped carry the branding and the brand itself throughout the office. In 2013, I started a venture fund with a family office from China and became an early-stage retail-tech investor. We did pre-seed and seed investments, and did that for three years.

Coincidental to that, I had been buying Bitcoin personally. I discovered Bitcoin through a woman who worked for my wife who asked to be paid in 2012 I think. And when she asked to be paid in Bitcoin, I didn't know what it was. And I called Paychecks, and I called ADP, and I called Quickbooks Payroll and said 'I want to pay someone in Bitcoin, if you can make that work, you can have the whole company's payroll account,' which was two employees - her and my wife. And nobody knew what Bitcoin was. So I went to the accountants who represented us and I asked them if I could pay in Bitcoin, and they came back and said the tax law is just too unclear on how you would do that.

And I thought it was kind of an interesting innovation and began to dabble, and bought some Bitcoin. Early to mid-2013, somebody who worked for me and had run social media for one of my startups mentioned to me in passing that she had bought a burger in Berlin using Bitcoin. So here were two instances of young women who were thinking about Bitcoin from a purchasing and commerce standpoint, and as a retail-tech investor, that was a signal. So I began to dig in deeper, and as I dug in deeper, bought more... It was not long before Bitcoin went on a tear in 2013 and ended the year in a fundamentally different place than where it started. My holdings were much more meaningful to me at that point, so I ended up in Texas at the Texas Bitcoin Conference and spent three days in Austin learning about Bitcoin and the stuff that could be built on top of Bitcoin.

And while I was there, on the first day, I met Gavin Wood and Vitalik Buterin, who were in the process of writing their yellow paper on Ethereum. I was fortunate enough to have spent much of those three days with Gav, and was very, very impressed by both of them, and stayed in touch with Gav until the ICO - when I invested in Ethereum. This is all contemporaneous with having a venture fund.

The next couple of years were pretty uneventful. Bitcoin languished, Ethereum was very very quiet. I learned, at that point, how poor decentralized projects are at communicating because they have essentially an anonymous wallet and no way to be in touch with you. So it was very hard to understand or learn where the project was without speaking to Gav or somebody else on the team.

When the project launched, then Gav left to go start a company called Ethcorem which has since become Parity. I invested in that first round in Parity, in part just as a thanks for having done such a great job at rolling out Ethereum. So very quietly between 2012 or 2013 and 2016, I had made three investments almost accidentally in blockchain. And that was right about the time that I had to make some decisions about my retail-tech fund, which was called Beanstalk Ventures. I'll pause here in case you have any questions about that before I continue.

CR: Yeah, I think it will be interesting to hear how you were thinking about whether to stay in traditional tech. Since you were already going deeper and deeper into crypto, what was the thought process of going fully into crypto? Or maybe continuing to do it on the side?

Making the jump from retail-tech to blockchain and crypto

KS: So that's a great segway, because at the end of 2016, I had made these three investments, and I had just finished investing my second retail-tech fund. They were both very small funds and doing well, I think - hard to tell because everything was equity, so you don't really get a measure of liquidity or the ability to liquidate positions quickly in traditional ventures. But my own personal financial health was much more reflected, I think, in my Bitcoin and Ethereum positions, which were liquid.

And as I began to understand a little bit more about the blockchain, Bitcoin, Ethereum, and what Parity was doing, I had a couple of large LPs in my fund - they were large LPs, they were relatively modest investors because we had small funds - who were as interested in what Ethereum and Bitcoin were and what they were doing as they were about where they had their money. And two of them offered to invest in me if I wanted to take some money on the side to do a blockchain SPV or something, and I had never had that much ease at raising capital - it was always a fight and a lot of work [with] decks, and memos, and due diligence, and back and forth on email, and multiple calls. And here were two offers from two of what I felt were my smartest LPs to invest in a new space that I had not spent 20 years in, I had spent three years very part-time in.

And that led me to an insight that it would be a lot easier to raise money in blockchain, in part because it was so new, in part because there were no experts yet. There weren't really traditional venture fund players in the space. I had been a seed investor, and this was a seed category, and I'd actually been a pre-seed investor, and this was as much a pre-seed category as anything else. So a lot of the evaluation process would be similar, obviously, the technology is not, but some of the issues would be the same.

So during the first half of 2017, I made the decision to just learn more about the blockchain before I spent any time starting my next retail-tech fund. In those first six months, I made 10 investments including another one in Parity, Filecoin, Tezos, Civic, and many more. And by the summer, I was addicted to the space, I couldn't get enough of it. I couldn't read enough, I had gone from spending 30 years or 25 years in retail at that point, to not reading WWD - which was the bible of the industry - and instead reading white papers and consuming as much as I could.

So all of a sudden, I just woke up and I realized I was no longer in the retail-tech business, I was a blockchain investor with now 13 investments under my belt. I called Gav and I said 'I think I'm going to launch a fund or take some money from two people and have sort of a multi-family office approach to this'. Gav said to me: 'well if you're going to take their money, would you take some of mine?' And without a lot of strategic thinking, I said 'would you ever want to be a general partner in the fund with me?' And he said 'how would that work, I have a full-time thing with Parity?' And we talked about it for a couple hours and decided it would be fun and productive to start it together, knowing of course that Gav wouldn't really have a lot of time to put in, but he's obviously incredibly smart, sees around corners, and is as good at the tech in this space as anyone... arguably better. So we started the fund with Gav and a third person, Caroline Cassie, who had been working with me at Beanstalk. The three of us launched the fund, raised $30M in the fourth quarter of 2017 - which was actually relatively easy, it may have taken four months to raise the money.

CR: It was a great time to raise, at the top of the market at the time.

KS: It couldn't have been a better time to raise, and we deployed that money in 18 months, I think, maybe even less - probably 18 months from our first investment until we finished the fund. Then we launched a second fund at the end of 2018, and we launched a third fund in February of this past year. The funds have gotten progressively larger, and we've gone from fighting to raise capital, to really simply allocating - we have certainly more capital than we want to take on at this point. The space has been very good to us, and we have certainly had our share of luck at finding deals really early that turned out to [be] early success stories.

CR: For sure, you were one of the first, you were in the Ethereum ICO, you were in Parity - just those two investments have proven to be hugely successful. How big is Blockchange now?

KS: Just to be clear, neither of those are in the fund. The fund is invested in, just to give you some examples, Solana, Polkadot, Near, Flow, Filecoin, Figure, Audius, and Bitcloud. I think we're at over a hundred investments now, I don't know exactly how many we're at, but it's been quite a few.

CR: What's the AUM of the fund right now?

KS: Well, that first fund. just to give you an example, I think when you count the distributions we've made - and they've been pretty significant - I think we finished the year on that first fund at over 10 figures. I can't swear to that, I'll have to come back to you on that, but [am] pretty sure about that.

CR: And going back to yourself for a second, what do you think makes you defiant? Would you describe yourself that way?

Defying conventional wisdom

KS: I think you can't be in this space and not have some defying qualities. I certainly couldn't get on this podcast and not say that I'm defiant, I'm definitely defiant. But for me, when I think of that word, I think about independence of thought. When I first saw Ethereum, even more so than Bitcoin, Ethereum really connected with me. I took it to, I think, somewhere between six and eight of the most successful VCs that I know to say 'here's one you might want to look at', in part because I wanted some feedback and some additional insight on it because it was a category I didn't know very much about and I wanted to see who else might know more, and not a single one of them invested to my knowledge. And a number of them chose not to invest because the fully diluted market cap at the time was around $28M, and they thought that was too high for a company that hadn't launched and just had a white paper.

So for me, I think what in that instance made me defiant, was that I wasn't thinking about the probability of a big outcome, I was thinking about the possibility of the size of the outcome. When you look at investments, if you're a successful venture investor - and I wouldn't have put myself in that camp because the funds were so small - you have a track record and a batting average, and you can look at it and say 'when I put money into this company at this valuation, the probability of failure is this, and the probable outcome is this many dollars, and therefore I should make the investment or not'. I only had made one other blockchain investment at that point so I didn't have a track record. I certainly defied the conventional wisdom at that point and decided that this could be big and that it didn't matter what the entry valuation was at that moment in time, and I think we're now seeing it. That same sentiment existed when Polkadot was raising its money at $300M, and a lot of people I know who I discussed it with passed because that was a crazy valuation for a startup with almost no code. I think in some ways you have to be very independent-minded, almost defiant, to be willing to think in a way that's different. And by the way, it could have turned out very badly for me, I could have written two checks into two companies that had very big valuations, and they could have gone to zero. And it's possible they'll still go to zero, we're so early on, nobody's success is assured today.

CR: For sure. The defiance there was not looking at this investment in the traditional way that a VC goes through that process. Instead of looking at the valuation, looking at kind of the bigger potential of the space, just seeing that it's so early on that just getting in right now, the upside is a lot bigger than the risk.

KS: That it would be bigger than I think the rest of the world assumed. I would say there were two other levels. Another was [that] I had nothing to lose by learning. So to write a check and learn, if you believe the space could be big, it's a lot easier to learn when you're in it than when you're reading about it from the outside. So that is a piece of the variable for me which I don't think is part of the trajectory or decision-making of most investors, at least not at that time.

And then I would also be defying the conventional wisdom when you have eight VCs who say 'no' to something, and they're all very successful VCs - much more successful than I was at that point in time. There's a certain defiance to simply taking a different path. And I wasn't trying to be defiant, I didn't recognize it at the time as traveling a different path. It just was very comfortable for me to make my own decision.

And I would say that that's not been true my whole life. There was a period when I was a founder where I looked to my investors to help me make decisions, and that often got me into more trouble than just trusting my own instincts about what would work and what wouldn't work. And it took me a long time - I think it took me until I was about 30, maybe even a little bit older than that - to figure out to really trust my own instincts and not depend on the wisdom of others.

CR:Yeah, I think that's a really important lesson, that you just have to learn on your own. And then, how did this initial hunch that this would be big evolve into a more formal investment strategy? Like what you mentioned before, the things that you look at when making investment decisions?

Comparing crypto to the early days of the internet

KS: I started in a very self-serving way. We were trying to raise money, and almost every investor we spoke to said 'what is the blockchain', and I'd work really, really hard to define it. I read books, I read blogs, I read tweets, and I talked to other investors, and you'd hear these buzzwords - 'trustless', 'decentralized', 'validators', and 'nodes'. For me, I don't think I was smart enough to take any of that stuff and actually understand it, and then be able to translate it for the average investor I was talking to. That went on for a couple of months, and I was failing to answer the question in a way that made me confident that I could answer the follow-up questions.

So I tried it from a slightly different perspective, and I said 'imagine it's 1995, or 1993 - when I first started to use the internet - and if I had to describe what the internet was then, but I now know it 20, almost 30 years later, today, how would I describe the internet’? And that sent me on a quest for a few weeks to try to define the internet. And eventually, I came to a very simple conclusion: that the internet was simply any two entities exchanging data, and if you agree with that, you could then take any internet business and describe it as 'Entity One' exchanging data with 'Entity Two', which exchanges data with 'Entity F'.

So Uber is 'Entity One', a person sending their GPS coordinates and the data of their credit card to 'Entity Two', Uber, who then sends it to 'Entity Three', the driver, and the driver comes to the data of the GPS coordinates. Or Facebook is 'Entity One', a person sending some text and some videos and the data of who their friends are to 'Entity Two', which is Facebook or Meta, which then sends it to the data of the contacts, so it disseminates it to multiple entities. And every internet business could be described that way. And that led to a much faster path to describing the blockchain, which is to say that 'any entity exchanging any form of value with any other entity or entities' is a really clean and simple description of the blockchain. The difference is, we didn't have any blockchain companies so you couldn't give the Facebook and Uber examples because it was so early, just like you wouldn't have been able to give those examples in 1993.

And then I realized that the forms of data that existed in 1993 were very different than the forms of data that existed post the popularization of the Internet, so we certainly had GPS coordinates, credit card info, birth dates, and bank balances in 1993, but we didn't really have the data of a social graph, or the data of purchase intent. So as the internet became more sophisticated, the forms of data took on many more sophisticated shapes and sizes. Right now, we have lots of forms of value. But again, they're like the weather, and the GPS coordinates of the internet, these forms of value today are store of value, or Bitcoin, or a stable coin is a method of exchange. Or a contingent value like a wager, or an insurance policy, or things that you can own like a deed or a share of stock. So we have very simple forms of value today, we have not yet seen or discovered, or created the more complicated forms of value. The equivalence for the blockchain of social graphs or purchase intent, for example, so we're in the very, very early days.

But reaching that conclusion helped me to understand that on an order of magnitude, the blockchain and the internet probably were going to be very similar in terms of their impact. And there are a lot of reasons why I say on the same order of magnitude, and it's very hard to quantify because there's 30 years of growth and explosion of data, and maybe three or four years of growth and explosion of the transference of value - maybe not even that much because we're still building our protocols, and when the internet started, its protocols already existed. So when the companies of the internet started to get built in the 90s, they were building on a single set of protocols and not developing the protocols. That has very different implications for what works when, and what the shape of the winners will look like, but it doesn't change the fact that we're going to be exchanging a lot of value over the blockchain in 20 years.

CR:So you have invested in many different Layer 1 protocols, and I guess that stems from this view that the base protocols of this new blockchain-based internet or system is just getting built, and from there, there will be an application layer that we have maybe just started to see, but is nowhere near fully developed. So is your strategy now to take positions on all these different Layer 1s on the assumption that one of them, or maybe a couple of them, will end up being the winner or the underlying protocol upon which most applications are built later on?

KS: So yes, and there's a big difference between the way the protocols were built for the internet and for the blockchain, but given the choice. Would you rather own TCP IP, or HTTP, or part of SMTP, or Apple or Google or Facebook? There's only one question you'd need to ask to make that decision, in my view, and that is ‘could I change the business model and extract a toll?’ And if so, my gut is that the protocols would be far more valuable than any individual company that sits on those particular protocols. That is not true… of every protocol, but in this case, I think it is true.

And we didn't have that opportunity on the internet, to own the protocols, because they were a gift from governments, educational institutions, and collaboration. Here, this industry just started differently. We have Bitcoin, where the founder or founders of Bitcoin are likely billionaires today. The founders of Ethereum are likely billionaires today. Then this industry starts to grow up, and you realize one or two or four founders, maybe 10 founders at most in some cases, made so much money in such a short period of time, if you're sitting on the outside and you’re technical talent, you start to say ‘hey, I think that four-person company has some flaws in it’. And what four-person company doesn't have flaws in it? So they said ‘well, I'm just going to build a better protocol’. So you had this Cambrian explosion of protocols simply because there was so much talent and so much money at stake.

So we ended up in a multi-chain world very quickly, and I think that's likely to get worse and persist. I think we'll have some micro-chains that serve very specialized purposes, and we'll have sector-specific chains, and we'll have general-purpose smart contract chains. But we're going to have a lot of chains and frankly, they're going to need to talk to each other, because you could imagine a world not where there's multiple protocols, but where there's just two sets of protocols if the internet had ‘Internet One’ and ‘Internet Two’ and you built Paypal on one and eBay on the other, neither company would have come to the size and scale that it came to if they couldn't have worked together. So the idea that multiple protocols are likely to exist leads to a conclusion that if there's a way for those protocols to communicate with each other and operate together, or interoperate, the intermediary there - the interoperability protocol in this case - could be a very big winner. And that was our thesis in 2017 behind making, at the time, our largest investment today, in Polkadot.

So I think, on the one hand, that led us to want to take positions in protocols, and it's really hard at that stage when you don't really have a lot of users of the protocols to figure out who's going to win, so we had a fairly broad strategy for investing in Layer 1 protocols that we thought were tackling big markets and where there would be network effects. So that underpinned much of our early investing.

CR: Got it. And now that there is more development, like 2017 was a lot of promises and ‘we're going to build this thing and it's going to be the best thing ever’, but now there's actual users, applications, and activity on top of these Layer 1s. So How has your strategy reflected this?

KS: Every investor has their own set of filters, and usually there's something about people, there's something about the technology or product, something about traction, something about the market, and maybe they have other filters as well - potentially customers and things like that.

I think what we did, is we looked at what worked on the internet and paid close attention to the sequence, and tried to make some estimations about how the blockchain would be different based on the fact that it was multi-chain, that the protocols weren't really well built yet, and which sectors in which industries would be early adopters. And while we tried and invested in a couple of companies pretty early on, we learned from failing. We invested in one company in the really early days - a super hot company, we were lucky to get into the ICO, and it was an existing company that was pivoting onto the blockchain. We spent some time with the team and we didn't think they were particularly good executors, so we sold our tokens at a small and modest profit. And I think that view has panned out, but in hindsight, we went back and we said ‘why didn't it work?’ And one of the things we looked at was what companies had pivoted successfully on the internet from a traditional business into an internet business that became one of the biggest outcomes, and we couldn't identify anyone.

So that… became a guard rail, which is if you see a business that's in an existing industry and it's pivoting into the blockchain, that doesn't mean it can't be successful, but it's not likely to be one of the biggest outcomes. And we were set up to invest early in the biggest outcomes, so it's a real guardrail and I don't think we've done it since

Some recent investments have included Braintrust, which I think is inventing an entirely new category of business. Today, they are a marketplace between large enterprises and really sophisticated high-quality developers in engineering talent, but tomorrow, I think we'll see other categories of freelance workers on the platform. I think we'll see an extraordinary number of large jobs go through platforms like that where they don't need to go through consulting firms and pay someone 67% of the proceeds just to assemble a team. There are other ways of doing that with reputational scores, trust, and even staking - to stake that your work quality will be of a sufficient level to do a job.

We very quickly coined a category of the sector we wanted to invest in after we invested in Layer 1 protocols, we called it the ‘holy shit sector’. People always say ‘what sectors do you invest in?’ And I could never get comfortable saying ‘I invest in these sectors’ because it turned out that when we went back and looked at the internet a little more carefully, the biggest winners invented sectors - they created new categories of business. So we pigeonholed all of that into the category of the ‘holy shit sector’ because it was our view that the biggest outcomes are likely to come from categories of business that don't exist, and when you see them or hear about them, you can't unsee them, unhear them, and I always say ‘holy shit, I never thought about the world that way’.

So we just named it the ‘holy shit sector’. We've since added other new categories of business that we think haven't arrived yet that might arrive. By the time DeFi arrived and had its name, it was pretty well established. There are categories that are starting to emerge that aren't well established yet, so they don't really have category names or they have emerging category names. So we pay a lot of attention to that stuff. If it's a new category of business, we really like monopoly outcomes. You don't know [for sure], but there are some businesses that would appear to have a natural tendency to a monopoly or an oligopoly - we like stuff that has moats around it in some way, shape, or form. We love stuff that has technology or product moats, or really significant economies of scale. And then we're very partial to extraordinary teams, and we've invested in a lot of extraordinary teams. I think it's that combination of a monopoly outcome that's massive, and an extraordinary team that is mission-driven that leads to the biggest outcomes.

If you look at all the great founders who built the greatest investment outcomes in history, almost all of them have been offered a billion dollars at some point for their company - which is a lot of money and enough to live on for your life, and your kids' lives, and their kids’ lives - and these founders turned it down. And the only difference between the founders who turn it down and the founders who don't turn it down is the founders who turn it down are mission-driven, they’re trying to build something that lasts beyond their lifetime and beyond their generation of leadership. And that's something we've gotten more and more sensitive to evaluating when we talk to founders and when we meet with founders and look at businesses. It's really important to understand how someone got to the idea in the first place.

CR: I really love that framework you are looking at how to invest from - not which are the sector winners, which I think is a very kind of common theme, but more of ‘is this a mission-driven team, and can this project become a monopoly, or the dominant company or protocol in whatever sector it's in?’ I think that's a really kind of a unique way of investing.

I’m curious, have you invested in DeFi? Did you get into any of the DeFi protocols or did you decide to stay on the sidelines of that sector?

KS: We've definitely invested in DeFi protocols. We've been an investor in a number of them from Uniswap, to Acala, to Parallel. If I had to guess, probably 10. I would not say that we have purpose-built a DeFi category, it was much more accidental. We've invested in so many protocols that the protocols often send us who they think are their best team, so it's been a very rich source of deal-flow. A number of those early projects that built on a lot of the protocols were DeFi projects. So we got to see them because it's an early category, and we invested in many of them. We passed on some we shouldn't have passed on. I'm very fortunate because I have a terrible memory, so I tend not to remember the ones I passed.

CR: What do you think is your biggest regret?

KS: I would say, I had such conviction in the early days of Polkadot and Solana, and our two largest investments is a fund in those two Layer 1s, but I knew I should do more, and I didn't because they were already large investments. I think I regret much more when I have conviction about something and know I should do something, and I don't do it as fully as I could. So my bigger regrets are where I didn't step on something a lot harder and a lot faster than I did, and we've corrected that.

We have a lot of conviction around Braintrust. We have a lot of conviction around Figure. We have obviously a lot of conviction around Polkadot, Solana, Audius, and a bunch of others. And we've since become much more aggressive at writing checks. Even if it's not in the seed, pre-seed, or Series A round, we've just gotten more aggressive when we see something… I'm not predicting these are going to be trillion-dollar outcomes, but when we see something that with a tailwind, a downhill slope, and perfect luck, could be one of these trillion-dollar outcomes. We're not afraid to invest when it hits the billion-dollar valuation in this later stage than we'd set up to do.

CR: On investing at these valuations right now when the market is looking awful, what does it look like out there in the private market? [With] valuations coming down, is the strength in the hand of investors at the moment? Or has the private market not caught up with the public market yet in crypto?

Investing in a bear market

KS: So first of all, I would say I don't agree with the thesis that this is an awful market on two levels. One, this is not even close to the worst crash crypto has had, and two, I'll bring you back to 2001 in the depths of despair post the first real crash of the internet. There were a bunch of people who quit their jobs because ‘the internet was over’. Amazon stock had fallen from, I think, $100 to $4 or $5. There was true despair and the markets had been cratered maybe not as much as what we've experienced on the blockchain a couple of times, but similar in context.

The one thing you can be sure of is that if you believe the internet is going to be a meaningful invention and innovation, that was the best time to buy because the market was low because the tourists had walked away. But the momentum was there. The talent was still coming in a little less slowly. The money was coming in a lot slower. There were far fewer investors at that moment in time, but that also led to far less competition, so the companies that started in that era had no competition or limited competition. They were more efficient with capital. They had an easier time recruiting from the pools of talent, a harder time drawing people in, but they also got multiple years of a head start and first-mover advantage without well-funded overnight competitors.

So this could be a great time for investing. This could convince a bunch of traditional funds to maybe put a little less effort into it because there is a lot of money spilling into this market. We've seen extraordinary capital raises and announcements of capital raises in the last sixty days. Many of the funds, including our own, that went out to raise capital in the fourth quarter or the third quarter had more demand than they could supply, so they became allocators and allocated entry into the funds. So that there's a lot of capital on the sidelines.

I'm not sure this is exactly the same moment in time, I don't know that a 50 or 60% drawdown or wherever we are that's lasted for a couple of days means much. I mean, I take you back to just March of 2020, it didn't take long for that massive drawdown to not only recover but launch into one of the greatest bull markets that blockchain has ever seen - I'm not predicting that here, I think the variables here are different. They’re not better, they’re not worse, they're just different. So that has to be taken into account.

The only thing of which I have a lot of conviction is that the curve to the right is going to be very steep and very jagged. We're going to see lots of steep ups and lots of drawdowns, and some doldrums in between. It's going to probably mirror what we've seen for the last ten years, maybe with less steep peaks, valleys, and shorter doldrums going forward as the market matures. But this is not going to be linear growth. When you have tens, or 30, or more protocols that are going to be worth $1T in a ten or fifteen-year span, you can't expect to do it in a straight line. It's going to be jagged like this, and you just have to be patient and wait it out.

If [the pull-back] lasts a long time, for sure the private market valuations will come down. If it lasts a short time with this much money on the sidelines, it's not likely to change very much.

CR: Okay, so right now, things aren't so different from where they were in the private markets compared to the fourth quarter last year?

KS: I think after three days, or five days, or whatever it's been, if it stays like this for four weeks, yes, it'll change.

CR: At the moment, you're right, there's been so much capital raised by crypto funds that as there continues to be crypto startups that need to raise, there's still money that needs to be allocated. From the investor side, moments where the market is down, like you were saying, are actually the best moments to get in. So it is kind of a good position to be in at the moment, potentially.

KS: It's the best moment to get in as an investor, and it's also the best moment to get in as a founder because if you're a really strong team with a really big idea, you're less likely to face competition now.

Just to reiterate, I don't know that we're in a down-market right now, I think it's too short a downdraft to call it a down-market. Yes, prices are way down, I acknowledge that, but with this much money on the sidelines, I don’t know if it's going to change anything, if it's short term. If it's long-term, for sure. But if it's long term, it's going to be a great time to start a business. And if it's short term, the capital's going to be there and support it, and it's just going to be a more competitive environment.

CR: Speaking of competition, I wanted to ask you about DAOs becoming more and more active as venture capitalists. What does that mean for the traditional VC business model? Are you thinking of ways where Blockchange could become more decentralized? Do you have to now include in your value proposition how you compare with DAOs? How is it affecting you?

KS: I think venture has been through a couple of waves. First, there was this wave where there were very few venture funds, and the few that were there had a really extraordinary monopoly on the market. Then there was a way where there were a lot of venture funds, a lot of capital, a lot of success, a lot of arrogance. You saw a wave of founders who became VCs and brought a founder-friendly culture to the space, which was a massive transition for the venture industry.

And you see all these operators who are now VCs and doing a really great job and having not only a great performance, but they have great deal-flow because they can be sympathetic and understand what founders are going to go through, and that what a founder says and what they're feeling may be slightly different.

I mean, I started our fund because I didn't love the way traditional venture investors operated and I thought there was a better way, a more humane way, to deal with founders and to support founders. The DAO is an iteration. It's a really interesting innovation in the space, but it's only going to be as effective as the decision-making, in the same way that the decisions that VCs make determine their outcomes.

I think the DAO that bid on the constitution is a really interesting story. There's a lot of lessons that are going to happen and best practices still haven't been established. But they had to prove that they had access and control of the capital before the auction house would let them bid. And because of the volatility of what they were holding, they didn't get full credit for what was in there. They were bidding against a multi-billionaire who had one huge advantage, which is he knew what their top bid was because the DAO was public, so he just had to go a dollar more than what he knew they could bid.

So there are best practices that have not been established for DAOs. I think some DAOs are going to be very successful, and some will make a lot of sophomoric decisions. The DAOs that are successful will raise capital really quickly in the same way that a venture fund that's successful can raise capital really quickly. Size of investment and size of fund really matters, and if you're optimizing for returns, which most investors are, there's a tradeoff between the size of the fund and the potential for return. It's not a 100% correlation, but it's much harder to deploy a lot of capital and deliver the results of deploying a little bit of capital.

So I think DAOs are very viable, and I think they'll start to fund businesses in categories that venture isn't in. Venture is a traditionally white, male business that has a penchant for certain kinds of businesses. There are a lot of other investors in the world who'd like to back lots of other companies that funds are terribly interested in. Just take the fashion business, which I used to be in. It's very hard for a traditional company in the fashion business to raise venture money. An e-commerce company, yes, but not a traditional brick-and-mortar business. But there are lots of people who think they can pick the next great brand, and if you do pick the next great brand, the results are pretty extraordinary. So I think DAOs will start to creep into sectors that don't have professional capital in them, in addition to the sectors that do. In addition to blockchain companies, I think we'll see them go into a variety of sectors that have not attracted investment capital.

CR:That's a really interesting take, and I think we're already kind of seeing that with this new category emerging in the past year of online communities becoming like its own category in crypto, things like Friends With Benefits. And that's not something that we had ever seen before as an investable sector, like ‘okay, you have friends online, that's not a business’. But now it's becoming a business. So that is like an ideal place where DAOs can really shine, right?

KS: I think Afterparty is a perfect example of that. They have made a real dent in Los Angeles at attracting a Hollywood community with an NFT orientation, but a physical presence. It’s still very, very early on, but [they are] a wonderful team, really thoughtful, thinking it through. I go back and I look at businesses, the biggest outcomes in the internet oftentimes didn't have a business model in the early days, or their business model looked really dumb to a traditional investor.

Amazon's business model looked really, really dumb for years, and now everyone turns around and says ‘well, it was AWS that saved them’. AWS was a very powerful driver, but Amazon did some incredibly thoughtful stuff in the early days, from one-click shopping, to Amazon Prime not spending marketing dollars. Amazon, today, probably takes 45% of all new dollars on the internet each year. When they launched, Walmart had the largest share of the retail market at 3.5% - so Amazon has taken a highly fragmented market, and every year they're getting 45% of the new business in the overall e-commerce market, and they've turned it into a monopoly. That's not because of AWS, AWS may have funded that, but the strategy early on and the business model early on didn't look so intelligent. But it was, because who would want to compete with a company that was losing so much money? They were just amassing economies of scale and market share from which they could leverage 10 years out or 15 years out. Google didn't have a business model in the early days, neither did Facebook.

I think one of the things that we're going to see is that many of the biggest outcomes of blockchain don't have obvious business models on day one. And I think that's true of many of the protocols. I think that business models of protocols are yet to be established, but I also think because they're open-source, somebody's going to figure it out. And when they do, it's going to be replicable to all the other Layer 1s, or at least most of the other Layer 1s. And the winners in the space, if that's true, could be extremely big. The same is true of companies that are going to be built on the blockchain. We're going to invent new categories of business where the business model may not be obvious on day one, but where the traction of users or customers is significant, and eventually, many of them or some of them will find really powerful business models like Google did and like Facebook did.

CR:It's so interesting. In the case of Layer 1's business models, it's like this whole new category in itself because it's not like a traditional business model, it's more like a token model. It has a lot more to do with monetary policy, economics, and game theory than about ‘okay, where do you seek fees, or revenue, or rent in the traditional context. Here, it's like a whole new way of thinking about how something becomes investable, or profitable, or how a token will accrue value. So I think you're right that we're kind of just seeing how it plays out.

KS: Yeah, and what it looks like today may not be what it looks like in five or eight years. We haven't had a billion brains looking at the Layer 1 model and saying ‘hey, wait, there's a better way’. We've had thousands, or tens of thousands of brains looking at it and saying ‘this is the best way we can think of with this collection of people’, and most of the people in the space so far are not commercially oriented - they're technologists. When the commercial minds come into this space, I think we're going to see a lot of business model innovations that layer onto the most successful companies with the most traction, even if they don't yet have the revenue, or profit, or economic model for their token holders, or for their shareholders.

CR: To start to wrap up, I’m interested in what you're getting pitched that's interesting or surprising right now? From the pipeline that you're seeing, are there any trends that you're starting to pick up on that might gain steam this year that might not be obvious right now?

The emerging trend of decentralized social media

KS: Yes, but very early stages, and for obvious reasons, I won't get into them. I think last year, as an example, we saw the play-to-earn category emerge. Lots of stuff to still be worked out there, but super interesting. YGG, Axie Infinity, and many others now fit into that category.

We also saw a community-owned model emerge over the last year, both in the form of DAOs [and] also in the form of companies like Audius and Braintrust where the token model could really power growth and adoption of these platforms in ways that traditional web 2.0 businesses would be at very significant disadvantages. I think we'll see more of both of those as time goes on. Once the model is there, you'll have a bunch of really smart people on the outside saying ‘I can apply that model to this problem’, and I think those kinds of trends and the emergence of categories aren't always so obvious when you see the first business in it. You see this sort of business saying ‘I'm doing something different’, but the transitivity between what they're doing and what other companies in other categories or other sectors could do to create a new category, I think, is a little harder to see.

The other one which emerged last year and may be on the cusp is the decentralized social model, the DeSo model. I don't mean DeSo the protocol, although we're investors there and very big fans of the founder, but if there were ever a category in existence that had the trends set against it, it's the current social networks - it's their monopolies, it's their current place in the political landscape as a target, it's the people who've left them who turn around and say ‘these are bad companies doing bad things’. So I think the decentralized social movement might have a gravitational force on its side, and it will almost for certain be one of the next major categories that grows up on the blockchain. And we've seen social networks have huge outcomes, so it would not surprise me if the ability to share a social graph could lead either to huge outcomes for the companies that can jump-start network effects because of it, or to the platforms that underlie them like the DeSo Network - which is creating a shared graph. It's very early to tell, but those are some of the categories that I think started to emerge last year, and I think there's some new ones that have started to emerge just in the last four to six months.

CR: Yeah, totally agree on the decentralized social media idea. You're right, everything is stacked up against web 2.0 social media - everyone hates them, everyone hates Facebook, it's become kind of a meme, public enemy number one is [Mark Zuckerberg]. The only question is it's been tried before, there's like a graveyard of decentralized social media projects, so the question is what will be different this time? Who will succeed? But I agree, there are many people thinking about it, working on it. We wrote a story about Aave, they've been teasing this decentralized social network - I think it might be related to this project called Lens… So Aave is working on it for sure. There was Bitcloud, which I know you invested in last year, that was another experiment. So I don't know what will be successful or what will make this decentralized social media take off where it hasn't before, but I think it's a matter of time until someone gets it right.

KS: And it may be that it happens in waves right. If you look at the portals and the browser wars of 1990, there were an awful lot of companies that looked like they had it figured out - from Netscape, to AOL, Lycos, Excite, Ask Jeeves, MSN, and Yahoo, and then it… was Google who figured it out. But as an investor, you could have made a lot of money along the way by investing in each of those and parlaying it if you were smart enough to exit. But you could look back and say ‘well, it kept failing’, or you can look at it and say ‘a category emerged, and it took some time for the category to be defined’. And I think the latter is more likely to be true. I think that there are going to be some small wins in the near term and I don't know when the big wins will happen. They could happen in the near term, they could take longer. But I think it's inevitable that um, that they'll be built on top of a blockchain, the next generation of them.

CR: Yep, I agree. Alright, this has been a fascinating conversation. Ken, really appreciate you taking the time, we'll have to wrap it up, we’re over an hour now. Thank you so much for sharing all your thoughts, ideas, and views on the market with me, it's been a pleasure!

KS: Thank you so much for having me, Camila.