Looking For The Next Crypto Unicorn | Interview With $500 Million Fund Partner

What are the most common mistakes that startup entrepreneurs make nowadays?

Startups can go down a road of not talking to users for a long time and sort of they get the skew against what the market actually wants and what they're building. The most important thing you can do as a startup in the upcoming recession is not die.

What's up YouTube? I'm your host Giovanni and today we are talking about investments in crypto startups with Brett Gibson, partner at Initialized Capital. How are you today, Brett?

I'm great, great. Happy to be here. Thanks a lot, Giovanni.

So for those who don't know, Initialized Capital is an early stage venture capital firm with over 500 million under management and several unicorns in its portfolio such as Coinbase and Instacart. How did you arrive at Initialize Capital and what is your role there?

Yeah, so I'm a partner at Initialize. I was, I spent most of my career writing software and founding a few software startups. And one of the companies I founded was a company called Posteros. It's a blog platform we founded in 2008 and one of my co founders there was Gary Tan who founded Initialized Capital. So I worked on and off with him throughout the years and I was looking for a job in 2017 and decided to join Initialized and as a partner I invest in startups and I help work with the portfolio and advise the companies we invest in.

But you have a specific focus on software, right? So you are focused on the software side of the companies?

Yeah, yeah, definitely. And probably more specifically the engineering side. So I'll, you know, do general kind of startup advice for companies but also advise them specifically in engineering. And then, and then when I'm investing, you know, I having a more technical background and I focus on investments where that's useful and among those is, is.

The crypto space initialized capital funds company before they get product market fit, which means before they have a product ready to satisfy the needs of the market. What are the main criteria you look at before investing into a project?

Yeah, definitely, I think, I mean we definitely over index on the founders themselves and funding the types of founders who can navigate what it takes to get to product market fit. So, so before you actually know what the product is and what market exactly they're going to be serving, the founders are the strongest signal and oftentimes you'll see early product iterations and their ability to build product. It helps a lot. And then we're also thinking through if the fit works out, what the market opportunity looks like, and the size of.

It, you look at the team as one of the most important parts of the company you're investing into. So what kind of characteristic does the team need to have in order to inspire your confidence?

Yeah, I mean, I think a lot of us come from software backgrounds, so we were definitely attracted to people who are able to build. And so technical founders and founders who have a history of building and shipping products are very attractive. And then just, I think there's a lot of signal when a founder comes in and they kind of know everything about the business. They've done sort of deep research into all the aspects of what the market they're looking at and whose pain point they're addressing and why. And the deeper their thought around that, it kind of shows both they put the time in to figure out what's going on and that they have the kind of analytic structure and ability to hone the product to a place where it's going to resound in the marketplace.

What was the most profitable investment that initialized capital ever made?

So, I mean, you know, we're a fairly young fund, so, you know, we don't have as long a history as some funds, but to date, I mean, I think our early investment in Coinbase has been the biggest return of the fund so far.

What's the secret of the success of a company like Coinbase which became a unicorn?

Well, I mean, I don't know. There's a lot going on with Coinbase. I mean, some of it just has to do with their ability to get banking relationships in a time where it was hard for, for crypto companies to get banks generally. I think that their focus kind of on user experience. And I think that, you know, I think that we'll see, you know, as they're a centralized solution, but a lot of the first generation of, of things in the decentralized space are these centralized solutions that have deep hooks to the decentralized world. So you go on Coinbase and you could buy Bitcoin in a centralized experience, but you can move it off whenever you want. So it's still integrated with the entire decentralized bitcoin network.

Yeah, that makes sense. So if you had to identify right now a new Coinbase, like a company that you would bet on to become as big as Coinbase, what would that be in the crypto space?

I mean, you know, I'm, so far, I'm a fairly large believer in bison trails and what they're doing and the size they can reach, especially if the staking networks take up as much of the crypto market as we think. So I think there's kind of tremendous scale and the ability to run, to run the infrastructure on networks that are powering money around the world.

So I'm curious to know what percentage of the company's equity do you get in return after funding it?

It's been, it's changed over the years. We've had a few different funds of different sizes. In our most recent $225 million fund that is again due to most of seed deals, we have to target about 15% ownership after the seed round. You know, to make the economics of a fund that size work.

A couple of years ago during the ICO boom, crypto startups were raising capital very quickly, taking advantage of the hype surrounding cryptocurrency. As we know, most of those ICO were money grabs or just useless products. Did you notice any improvement in terms of quality in projects in the crypto space since then?

Yeah, yeah, absolutely. I mean, it's not to say that there weren't quality projects during the boom, but there was just a lot of noise and a lot of other or other sort of ICOs related projects being raised. But you know, since the fraud has come out of the market, you know, we've seen the people who are here to build for the long term and who are deeply sort of engaged in the space continue to build. So there's been a lot of impressive work since I think, and I think, you know, I think, you know, in a lot of, you know, a lot of the, a lot of very strong companies come out of downturns generally. You know, if you think of things that happened right after the dot com crash or right after the, the mortgage crisis, very strong companies were built because you get kind of steel founders who are really more mission driven and willing to stick it out. And I think the same is going to be true of what happened after the ICO crash and the crypto companies that were started maybe late 2018, 2019.

After the ICO boom, we saw other ways for crypto startups to raise funds, such as ieos and stos. So would you say that venture capital funding is the best way for crypto startups to raise money nowadays?

I think it's a good question. I think it's actually quite complex. I mean, I think generally not all startups or not all newly built software businesses need VC funding, right, because it's specific to a type of market and a type of high growth company that not all companies should be shooting for. And then you know, it's compounded by the fact that in crypto you have this, you have, you know, well, token issuance, which is, which is entirely different from kind of selling equity and what it means. And I think that right now there's even this regulatory moment, you know, we're seeing with this, with a ton sale. Like what does it even mean if you're selling your tokens early on to venture investors? Is, is that something that's going to be sustainable or workable? I think there are plenty of companies in the crypto space where venture funding still makes sense. I think that venture firms can be quite helpful. And I think that if you're selling equity in your company and it looks kind of independent of what sector it's in, a venture can still be quite helpful. But at the same time, I think if you're, you know, you're trying to get a new crypto network off the ground and you know, venture investors may not look ideal to regulators and you know, new sources of sort of crowdfunding and distribution are probably, are probably quite interesting and worth considering. Like I think, I mean, I think the token projects like in new kind of layer ones, it's not, it's not, it's not clear to me. It's an ideal fit for venture firms and for. From the project standpoint, I think that, because I think that maybe narrowly defined if you're trying to sell a utility token and the goal is to get regulators to eventually accept it as such, selling a bunch to investors up front and venture investors probably is not the ideal.

So in that case, what is the best way to go?

I mean, you know, I don't know. There's different camps obviously there's, you know, the ideal would be something if something like Bitcoin were still possible, right? If you could do a fair launch. I think we saw it attempted that with Grin and it unfortunately kind of ended up in a lot of investors hands anyways. But at least from a regulatory profile it looked right. I think that, you know, I think that some of these new interesting dual token models make a lot of sense where you're kind of, you have one token that is always a utility and not sold to investors and a secondary token that works in the system as an investment vehicle and can be sort of narrowly scoped. Regulatory.

What are the most common obstacles that startups face nowadays and what can your company do in order to help them out?

You know, I think that one of the biggest things is, you know, you get people who are very talented at building things and then just getting anyone to care. Right. Getting the world to want your product and know about it are often the hard part, independent of how good a product you can actually build. So I think that what Initialize Help tries to help do is work with companies on getting from a good product to something that resonates in the marketplace, both strategically and how they think around who their customers are, who they're trying to address, and then a little more tactically on how to actually market and sell. And we can help both with advice around those topics. And then we have a decent amount of media reach, so we're also able to help promote our companies and get them some attention.

What are the most common mistakes that startup entrepreneurs make nowadays?

I think a really common mistake, and it kind of relates back to one of the hardest things is founders were often think that just building a good product is enough and kind of, you know, maybe think like, if they build it, that people will just show up and want to use it. And so they don't think through, you know, they don't always think through exactly how to get their product to market and how to, you know, either make sure they're really addressing a need that people have and people are thinking about, or, you know, figure out some sort of loop for how to grow the product and grow the user base. So, and I think that they. What's often hard about that is that it takes iteration and it takes kind of, you know, you'll see founders kind of think that they've hit a dead end, and that's almost never the case. You know, there's always more they can do and try to figure out how to get their product to resonate and what to change about it or who else to target.

Are you talking about the importance of building a community around your product as well?

Yeah, I mean, building, I mean, for certain types of product, building community is absolutely essential, I think. But, you know, otherwise, I think just not building something. Sometimes people build things that are. That they find are they built. They build things in a vacuum. Right. You know, a startup can go down a road of not talking to users for a long time and sort of they get the skew against what the market actually wants and what they're building. So really, really engaging with people and validating your assumptions around why people need what you're building is very important.

As a venture capital firm, you have the responsibility to determine what companies will have access to capital. So in a way, you are partly responsible for the growth of the whole ecosystem. What kind of blockchain products and use cases are you betting on to succeed and bring crypto into the mainstream?

Yeah, I think right now I think we're. There's obviously like an infrastructure rollout phase and so we're betting on companies that are building sort of the building blocks for running and doing these networks at scale. And an example again would be someone like Bison Trails who's helping build out node infrastructure. And then there's related things. I think that a lot of what's going on is still financial and so both being able to bridge the gap to standard financial things that people understand in standard financial systems. An example there would be something like Cointracker which we backed to do sort of tax management and portfolio management for crypto. And so they bridge this gap between the crypto world and the normal financial world that we all have to live with taxes. So that's, I think a lot of what we're looking at in the financial world. There's a lot to be done to bring kind of the financial system to the rest of the world. I think what we're seeing going on in crypto now and especially in sort of the rise of stablecoins in places like Ethereum, is that a lot of the world doesn't have access to the financial primitives that the western world sort of takes for granted and a stable base currency that they can hold their money in and be able to transact in. And so I think that a lot of the near term vision for crypto is bringing that out into the rest of the world.

We are talking about ways in which technology can bridge the gap between the traditional financial system and crypto. Right? So creating some kind of products which are basically doing things that the financial system is already doing, but better, faster, more decentralized way. So for example, it comes to my mind, crypto lending, right? There are a lot of platforms that nowadays offer lending services using cryptocurrency. I can mention blockfi, I can mention Celsius, and then we have decentralized platforms like MakerDAO which are basically offering same services but in a fully or almost fully decentralized way. Would you invest in something like BlockFi or something like MakerDao?

I think that both are interesting and I think that both kind of have their space. And in fact we are investors in a project called a company called Atomic Loans that does decentralized bitcoin collateralized loans. The difference being that they're not, you know, they're not based on, they use Ethereum stablecoins, but they're not based entirely on Ethereum. They're based on Bitcoin script. So it's kind of defi. That's closer to the Bitcoin community. I believe that both. That neither will go away entirely and that the decentralized versions will grow. I think that there are still, it's back maybe to the file storage example where there are values that people care about in the sort of transparency and of the centralized solutions, the transparency and sort of lack of ownership and sometimes even sensibility of the centralized solutions and you're trading them off for convenience of the centralized solutions. And so over time, I don't think that all the business is going to go one side or the other. I think that there are plenty of people for whom the values of the decentralized versions provide are worth dealing with the user experience downside and then I think the user experience will get better over time. So that blend will probably move more towards decentralized systems as we, as we move forward. But that's not again, say that centralized ones will entirely go away.

How is the COVID 19 pandemic changing the way you look at companies? And what are the characteristics a startup should have in order to succeed in the upcoming economic recession?

We're more concerned with the recession, I would say, than specifically than the pandemic. I think obviously there are some companies in our portfolio that are doing better. You know, things like in E commerce that are doing better because everyone's at home and there's some that are doing worse. But I think the main thing that we've been talking to your portfolio about and thinking about is just Runway. I think, you know, the most important, you know, the most important thing you can do as a startup in the upcoming recession is not die, right? So, you know, you can't build any sort of business if you run out of money and you're not able to get more. And we think the funding environment is going to get a little bit more adversarial for entrepreneurs, especially if there's a bigger macro drawdown. And so, you know, we're advising companies to have more Runway, to think more about keeping lean, you know, spending less if they can get to profitability. Think about it more now instead of, instead of spending, instead of burning, burning capital. So that's my main advice is just, you know, lengthen your Runway.

Awesome. Thanks for being with us, Brett.

Thank you. This was great.

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Sam.