Julian Zegelman: “Investing in ICOs is like being in a relationship with a bipolar person”

I know this sounds corny, but I think meditating to Satoshi's image.

Tell me something I don't know.

Everybody's gonna load into a rocket, and Elon Musk is gonna take everybody to the moon.

I was gonna ask you a bunch of legal questions.

I'm not an alcoholic anymore. Leave me alone.

I used to be an alcoholic.

Well, you know, you can't be sexy all the time, right?

Your previous girlfriend.

Yeah, yeah, exactly. And previous girlfriend. Exactly. My previous girlfriend. Exactly.

Hey, guys, this is Kathryn Ross. We're here with Julian Zegelman in Las Vegas. So, thanks for joining us. I was gonna ask you a bunch of legal questions, but you've mentioned that you're not a lawyer anymore. How did that happen?

Right. So, you know, so it's like being a recovering alcoholic, you know, when you've been drinking for a long time and people remember, like, you used to drink. Not that I would know. You know, I personally don't drink. But you go to meetings and everybody's like, oh, you were an alcoholic. And the person was like, I'm not an alcoholic anymore. Leave me alone. Like, I like skiing now or snowboarding, like, you know, one of the cameramen. So I used to be a lawyer for a very long time, but in parallel, I was always drawn to business, and I was always drawn to creativity of business, which to me was creating new opportunities. And so in parallel to being a lawyer, I was an entrepreneur. I co founded four companies. Two of them got acquired, two of them failed. I learned a lot from that. And in 2000. Yeah, I learned a lot from the failures.

And so what do you do now?

So what I do now is I'm a general partner at TMT Blockchain Fund, which is a venture capital fund investing in blockchain technology.

So many questions.

Excellent.

Okay, so what does a regular VC company do in the crypto space? So you're only focused on crypto projects.

So I like the word blockchain because. And you bring a wonderful distinction because I like to bring the distinction between three separate but related things, which is blockchain as a technology tokenization and token economics as a socioeconomic phenomena, and cryptocurrencies, which everybody's excited about and today everybody's sad about it, and I haven't even looked. I don't even know what it is today. Could be 30,000 per bitcoin following.

So you prefer the blockchain part of it, right?

Absolutely.

Okay, so you focus on blockchain projects. That would be correct.

So what we do at TMT investments. And our background is in traditional venture capital.

It sounds like you're pitching somebody. So what we do. Okay, I'm joking. Go on.

Oh, no. And you're happy to invest? We still, you know, we've raised a portion of the fund, right? Always. You gotta pitch. When? Las Vegas, maybe. You won a lot of money yesterday and you want to deploy some of that into venture capital. Absolutely. So what we do in the real life language, we invest in companies that happen to use blockchain to solve real life problems. In other words, they've got customers, and customers pay them money or will pay the money in the foreseeable future. And we bet on the fact that somebody will buy their product.

Mm. So how do you research for a product? How do you do your due diligence?

So I'm gonna be very contrarian and very boring and entirely non sexy right now. So all that slashing. Well, you know, you can't be sexy all the time, right? I mean, you gotta take a vacation from that too, sometimes.

Yeah. Okay. I'm gonna be sad for a while.

Go on. You'll recover. I'll put the sexy, you know, face on a little later. But the way we look at it is in a very traditional way, boring way. All the flashy Lamborghinis, big conferences, people saying they're gonna wipe out the banking system, they're gonna wipe out the government, everybody's gonna load into a rocket and Elon Musk is gonna take everybody to the moon in exchange for tokens. It's got great entertainment potential, but we don't invest there. So I talked to a lot of university research groups. I talk to some of the leading blockchain research groups at Stanford, for example, MIT, Caltech, Oxford, etc. I talk to people who are leaving large corporations and sometimes leaving the blockchain teams at large corporations to launch something else. I look at serial entrepreneurs, I look at coders. We go to a lot of hackathons. We look in places where there are people who are going to build real technology. Then we dig deeper and we look at real technologies that could solve actual problems. And then we dig even deeper and we say, how do you build a sexy product or service out of this combination of a real technology that gives a solution to a real life need?

So from your standpoint, this product or their future actions does not necessarily involve ICOs, right?

Most of the time it doesn't. And I won't be preface it with the fact that we have invested in ICOs and we probably will continue to invest in ICOs. So we've invested both in some large, very large, very high profile ICOs and a lot of our portfolio right now is confidential, but we've done that. And also we invested in what we call special situations, which is especially early in 2017. We looked at opportunities that we believed had very good short term profit potential, but we did not necessarily want to stay in them long term. And, and so, you know, we entered and we exited and some of them we still hold a portion, et cetera. But that's probably maybe 20% of the fund. 80% of the fund is bridging the world of traditional venture capital, which is catching up slowly but still behind on the blockchain curve with the potential, the explosive potential of blockchain as a platform.

Technology holds also to the tokenization part of that.

Absolutely.

You do not want to work with that project. No.

And that's very interesting because we believe that tokenization is very related and oftentimes same as ICOs. But ICOs a fundraising mechanism and there are companies out there, not a lot, but we believe there's going to be more and more that use tokens, but they don't do an ico. They either have funding already or they use other more conventional mechanisms. We believe that tokenization will be a huge wave in the peer to peer economy. Marketplaces, e commerce. It's probably to the future what some of the early credit card processing companies over the Internet were to the Internet in mid to late 90s. So we're very excited especially about existing mid sized companies with big growth curve and robust internal economies that could be switched into tokens. So let's say you've got a company with loyalty points and it's growing and people are using those points, not just saying I got another point, what the hell am I going to do with it? And you know, forget their passwords, but they actually use it. That's a beautiful candidate to switch tokens for points, introduce some cost savings, introduce ease of trade, transparency, all the things we like to talk about that blockchain brings. That's a wonderful example of tokenization done right and a great investment opportunity VCs firms have.

It seems like they have been pretty much away from the industry. Why do you think is that?

Wonderful question. I think personally, and I think that's changing more and more traditional. Andreas and Horowitz, our colleagues there, just raised the big fund this year.

Yeah, the interest is definitely increasing, but not so high, I would say still.

I think two factors, maturity of the technology and the market. And also the risk profile, I think in 2014, 2015, the market was too small and the things that were VC grade were very few. And typically it was hardware solutions. Some early mining opportunities. For example, BitFury was initially venture backed, you know, one of the largest. Bitcoin. Yeah. And so there was this tiny universe of opportunities and the VC finding, I think the statistics, don't quote me on that, but I think in all of 2016, something like $40 million at most was invested into blockchain by VCs. And obviously ICO is worth a lot more. That's changing. So I think maturity of the technology in the market and risk profile. So maturity, it was too early and finally now the technology is further along risk profile. If you remember what was going on 2016, 17, it was all ICOs. If you had a blockchain project back then I knew people who would look at term sheets, sometimes term sheets from our fund, sometimes term sheet from another fund. And I would say thank you so much, but no thanks. And within three weeks they had their ICO website up and within a month they would raise three times the money they got offered from VCs. Entirely non diluted, meaning they wouldn't even have to give up anything. You know, they'd say, oh, I have a utility token, let's go, I have 40 million now. And you know, why would they give up a third of the company for 10 million? That market is changing and VCs we didn't want to get into that because A, that's insane, you know, and B, the risk profile, the legislation wasn't there. The understanding of what will happen after.

Well, yes, it's kind of a gray area and extremely. Yeah, we don't like gray area.

Yeah, VCS don't like gray area because think about it, think about like you starting a new relationship and your partner is bipolar. And I mean, I don't mean to be mean to anybody with a psychological condition, but I just try to bring.

Somewhere for your future.

A new relationship is gray area. Anyways. A new relationship with a bipolar person is like going into space with no high risk ratio. Right, high risk ratio. And that's what, you know, I see you investing.

Great example.

A startup is risky, any startup. And then you snap the uncertainty of ICO and unregulated markets on top of that. That's like risk on dynamite.

I see. Do you think we will see more interest from the VC's point?

I think absolutely. And I think what was very telling is deals like Telegram, Filecoin, et cetera, which technically are private ICOs, if you think about it, because they were selling tokens, but they did it in compliance with applicable securities laws and very similar to the way they would have done a large venture capital deal. So I think we're gonna see more VC money going into regulated token sales, especially if the liquidity improves for the tokens. And we see that already. And I also think that certain, for example, B2B business to business companies have blockchain solutions that have no use for tokens and those are raising money quietly from VCs the same way any other type of company would raise. So I think VC money is definitely flowing into the space, but it's still, I think, early. I don't think it's a common phenomenon yet.

I've looked through your social media platforms just to prepare for the interview, and I saw that you advise a lot of projects, is that correct?

I used to. So sometimes I'm a firm believer that you learn by doing. And right now I'm focused on advising a few select companies that are in our portfolio, in the funds portfolio. I don't do any additional advisory work, but the period from probably 2015 to 2017, I was advising quite a few companies.

What does an advisor do for a crypto company?

So I can talk about my experience because I think there was a huge difference, difference with.

And that depends on your expertise, obviously.

Expertise on the company stage and what's expected. So I was always focusing on two core areas of expertise which I have. One is legal compliance and risk management.

My previous girlfriend.

Yeah, yeah, exactly, exactly. My previous girlfriend. Exactly. And the other one was on corporate development. So recruiting other advisors, recruiting early customers. What is the strategy to get business partners, etc. How do you make the project more sustainable and real early on? So that's what I used to do a lot as an entrepreneur, you know, getting partnerships, getting early corporate investors. So when I advise the projects, that's the two areas I focused on.

What, in your opinion? Professional, obviously. What is the biggest issue a blockchain or crypto or token tokenization related project have at this point?

Well, I think it's the fact that in real world today we still, I think two to four years away from when the technology and the customer education and the market need converges in this enormous wave of growth and economic growth. So the issue is very simple. A lot of companies in blockchain space at Lightyear is behind where they need to be for traditional VC funding. And that used to be okay because the ICO mechanism was there and that's still sort of okay this year because there is a lot of new VCs jumping into this space willing to try it out. But I don't know if it's gonna be okay next year. For example, if you run a software company, you need to have at least minimum viable product. Early customers, early traction. There are metrics on how much money you're gonna be making a month to raise.

Well, we all saw the Silicon Valley TV series.

Yeah, exactly. In blockchain. Oftentimes people come to you and saying look, I've got this idea for a new blockchain protocol and, and I just published a research paper on it and I'm going to raise 20 million. And it's exciting and scary because they may be the next Google or this may be a lab experiment to the tune of $20 million.

So the trust and uncertainty are the main issues.

Yeah, I think trust, uncertainty, and we're still early in terms of market adaption. There is a problem with market adaption.

So what do we need to do to bring, you know, to build the bridge between this particular problem?

Well, I think looking back at previous cycles, I think the killer two things, I think the overall consumer education is not there yet. I think that the solutions on the market today, for example crypto wallets, crypto exchanges, et cetera, but they're still for the blockchain geeks. I think as more people pay attention to user interfaces, ease of use, regulatory compliance and regulatory ease of use, etc. Some of the applications we all in the industry think maybe the killer apps, they'll start to gain more momentum and that's going to push the market forward. Because right now this is still a very closed ended community, much larger than it was when I first got into the space in 2014 grew immensely.

How would you get a person excited about the industry? Well, just a regular person on the street. What would you tell them? Hey, have you heard about this blockchain technology? How to get excited?

It's very simple and I know this sounds corny, but this is Internet 3.0 or 4.0. I lose track. I got into the tech space in mid-90s when it was Internet 1.0. We didn't even know it was 1.0. So it is the new Internet, the new Internet of peer to peer interactions, peer to peer commerce. A lot of the big ideas are real and I believe in them. Just like. But I also don't believe just like Internet did not change every single human activity. Right. If you want to play tennis with a friend, you still go and play tennis with a friend. Similarly, I don't think blockchain will be an answer for all, you know, commercial and social needs. But I think it's going to impact a lot of areas of our life, and as we go along further, it's going to impact more and more.

But did you work with the legal side of the crypto?

Yes. A lot. Absolutely. That's how I first got into it.

Yeah. I have a question. How did a lawyer. How does a lawyer become a crypto lawyer? So they just wake up and become one or how does that happen? Are there any courses, trainings, or I.

Think meditating to Satoshi's image?

That's it.

That's it. You meditate.

So I might as well be.

Satoshi touches you. Absolutely.

Oh, I always thought, what's up with that?

And then you see satoshi and, you know you're done.

Of course.

Of course.

Yeah. I have a pretty great sticker, but it's fatal.

There you go. That's it. Oh, that's good too.

Yeah. You know, everybody has their own beliefs. Right.

Everybody's gonna. Oh, bobbili. Right. If you're into litecoin, you can meditate too.

Bobbly touch him.

Yeah, yeah. There you go.

I'll be back.

But seriously enough, you touched up on an excellent point that I think as we did a legal panel earlier today, and we had different lawyers, all of them very active in blockchain with different expertise. Different expertise. And I think being a blockchain lawyer is a question as well. What's blockchain? It's securities law. It's privacy law. It's contracts, it's enforcement.

I've always thought that as it's technology, can it be considered a technology? Can it be regulated as a technology?

I think it is a technology.

It causes a lot of issues.

But, you know, I think technology, I think you need to have a general understanding of technology and a love for technology and the ability to learn and adapt fast. And then you need to have an underlying solid foundation in an area low that's imposed. That's, you know, that's impacted by blockchain. Because I know criminal lawyers who are blockchain lawyers. They help people when there is, you know, a criminal matter and there is cryptocurrency involved. I know litigators who are blockchain litigators because they've done enough cases to understand some unique aspects. A lot of securities lawyers make great blockchain lawyers because now more and more tokens are regulated as securities.

What to your Opinion is the most crypto friendly, blockchain tokenization friendly country so far?

Well, there are a few. I mean, I am personally a huge fan of Malta.

You just like the climate.

I love the climate and the people. And you can swim there. It's a little harsher to swim in Gibraltar.

And the food is great, right?

And the food is great, actually. So you know what? Let's make everybody go to Malta. They need more conferences in Malta. Yes. Black show in Malta. Absolutely.

Another country except Malta, frankly.

I think one I'm a hidden gem that actually gets a lot of deals done, but people don't think about it is Cayman Islands, especially for setting up blockchain funds, setting up certain larger deals, et cetera. Because on one hand it's an established jurisdiction with decades of interactions with all the key onshore jurisdictions like us, European Union, Asia, et cetera. It's got great banking infrastructure and some of the banks are now getting into the blockchain space. And it's not inundated by blockchain projects to a point where there's a lot of noise and there's a line because I remember this happened to Singapore. Everybody went into Singapore, the good guys and the bad guys. And then Singapore, I think the regulators get a little scared and said, ooh, let's take a break.

But Singapore is now overcrowded with the project.

I think overcrowded regulators now understand what's happening and there's more scrutiny, which is good. I think that's a good process. But they think it's just this fashion fad for the next great jurisdiction. I wonder when it's going to be over, because every year a new country says we're the crypto. When they do it four times in a row in two years, it's becoming comical.

Okay, so this is just a PR stunt for a country might be as well.

Well, no, and I think it's not always a PR stunt. I think there's countries who are actually doing a lot in that space and that's great. And it's great that they're the innovators, but they think it's to a company who thinks that they're going to become successful just because they're registered in country X and not country Y. I think that's a very immature understanding of the market.

So you think the company should be based there as well and to play by the rules?

I think that the company needs to understand its business model, needs to understand the legal and licensing requirements applicable, and then needs to potential users, probably potential users, banking System, find partners, find the bank that's willing to bank and understand which year is that bank is very comfortable with which not so comfortable. And then make that decision as opposed to, oh, wow, I saw this on Cointelegraph. Malta is great for blockchain. I got me a ticket to Malta. Let me register a Maltese company. I've come across serial ICO entrepreneurs. It's that gal or guy who's at five conferences a month for the past three years, and every three months they get a new company and a new jurisdiction.

I have a lot of them.

Yes, we all have. And they're great people and they're entertaining. But I feel like, you know, you show them the map of the world and they know the world by crypto friendly jurisdiction. They'll be like, oh, Singapore, Gibraltar, Malta, Isle of Man, you know, Mauritius.

So the question I just have to ask is, are you a crypto trader yourself?

Yes, I am. I am. I'm embarrassed to say, but I am embarrassed. Embarrassed to say.

Why that particular one?

Well, because a lot of, you know, it's interesting when you talk to a lot of VCs, I'm a very atypical, I think, representative of the industry because, you know, I tend to be serious in investing, but not other things. And a lot of folks in the VC industry feel that crypto trading is very volatile.

Tell me something I don't know.

Right, right. Et cetera. And they stick on what they know. I trade. I trade. I trade in a very careful manner, but I trade.

This reminds me of the. At the beginning of the conversation, I used to be an alcoholic.

I trade. Yes. I trade.

Yeah.

Because there was a time when I was trading a lot. And it's interesting.

Still sounds like an alcoholic meeting.

It really is, because you get addicted. You get addicted. You call. I was trading on my own then. I had a trader that I still work with. He's a wonderful, wonderful trader. But, you know, it's like, you get addicted. You look at this, you're like, ooh, it's up, it's down.

And you never sleep and you never slip.

Exactly. Because, you know, you do the deals, you talk to people. A lot of the deals outside the.

US crypto markets are open 24 7.

They're open 24 7. Right.

Okay. So do you have any kind of recommendations for a person who's just entering the market and would like to trade, not invest, trade. Do you have any recommendations personally?

Yeah, well, it's the same advice. Somebody told me the very first time I wrote my first angel investor check. I was probably in my mid to late 20s. I got a bonus at a law firm I was working at. And I wanted, you know, I thought about, okay, what can I do with it? I can, you know, put it into my pension fund. But, gosh, I'm like, 26. I can put into a startup company. And asked a mentor, and the mentor said, you know what? Do whatever you want, but make sure the amount is not larger than what you can afford to lose. And anytime anybody's asking me about trading bitcoin futures, horses, whatever it is, I say, you know, educate yourself, read a lot, form your own strategy. If you can, watch what others are doing, have a diversified portfolio. The modern portfolio theory works. But most importantly, don't put all of your money in there. Like, you know, if you're not sleeping at night worrying about your crypto portfolio.

You'Re not doing it right.

You're not doing it right. It's an extremely volatile asset class with a much, much higher risk profile than any, you know, other similarly liquid instruments out there.

I see. Okay. Thank you so much for being with us. Yeah. Cointelegraph, like subscribe and Hodl.