Fireside Chat With Keith Rabois

Up next is Keith Raboy from Koslow Ventures. Keith, we're going to give you the honorary ejector seat. And we have Bambi with us.

Oh, gosh.

That's crazy.

Is it comfortable?

It's amazing.

Nice. We wanted to use props from the venue we do this. I know you were not at BlockCon, which is on Santa Monica. We had an air hanger. And we took the seats from the actual airline. And then we put them on the stage.

Doesn't he need to be strapped in?

I want one in my office.

We should do something. Have you been to the USS Hornet before, Keith? No, this is the first time. Wow, nice.

How many people are going to be sleeping over tonight for the kids conference?

Raise your hands if you have kids here who are going to be attending the crypto conference, which is starting at five. We have a few parents here. There are 50, just to give everybody an idea, there are 50 kids that are attending Keith. We'll be showing them how to download a wallet, giving them free fractional Bitcoin, and then Tone Wise comes on board for a couple of minutes to help them with intelligent investing advice. And that's the mini conference on crypto for the kids.

It might be slightly too young for me to send them a Shark.

Well, thank you for coming on and giving us a shot here at the USS Hornet. Really appreciate it. We wanted to just get started with one of your tweets a couple of days back where folks were discussing about how rapidly the resources that are currently there in startups today are actually getting sucked out and going towards the crypto space. and you had some background information on that. We just wanted to get your thoughts as to what's happening now and how is that different from the interactive TV portion, which I'm not aware of it. I actually have to Google it myself and see what you were talking about. Can you enlighten us as to what's happening between now and then?

Well, I mean, I think it's been true since like 2013. There's been a swarm of talented people interested in crypto. I don't think it's really changed in the last year necessarily. One of the reasons why we decided to get in that become investors in crypto is there was a lot of talented people swarming to a new area. And historically that's been a relatively decent, although not perfect predictor of success. Like when you get a lot of talented people focused on things, there's derivative projects that may not even have been intentional that spin off and become interesting. That said, you know, there's lots of periods in Silicon Valley history where people spend a lot of time, money and talented people went after things that actually didn't work at all. In the 90s, there was massive hundreds of millions of dollars spent on interactive TV that went exactly nowhere. There is a famous company like Go that were working on a pen-based portable device in the 80s that went exactly nowhere. So money and talent doesn't always equal success, but more often than not there's a correlation there. So when you see people focused on something that have talent and have opportunities, you definitely want to pay attention because they may be right.

And do you see that happening right now with resources coming out of Airbnb or resources out of Uber or?

Yes and no. I mean, people are paying attention. So if you go to a party or an event or dinner, people all want to talk about crypto, even if they work at Uber, Airbnb, or Facebook. How many are actually quitting their jobs? That's a very different question. I think there's talented people who are more recent graduates from top universities with technical backgrounds that are doing things interesting in crypto. There's a lot of people from finance, escaping finance, which makes sense, and that's sort of always happened when there's a new technology wave. But I don't know that people are really leaving Google, Airbnb, Facebook at any level of scale. I did invest in two ex-Facebook product manager types and engineers. that are starting to start a company called Bitwise. That's like a vanguard for crypto. So it is happening, but I don't think there's like a deluge.

I have a question about Bitwise. Well, just so everyone knows how you're invested in crypto as well as blockchain. So on one hand, you're diversified with your Bitwise index fund, which is invested in several currencies or a number of currencies. And then you're also an investor in Stellar, which is a blockchain platform. So what's interesting is that you've diversified your holdings in the currencies, but you're betting on one platform, Stellar. So why did you diversify in the currencies? And what does that say about your view of the currencies as well as the platform?

Well, at the end of the day, we invest in startups that are aiming to change the world. And that's a function of the people, more than a function of the idea. So we invest, or I invest, to speak for myself, in companies with impressive, interesting, original thinkers as founders, and who can assemble a team of talented people around them to complement their strengths and weaknesses. And so to me, it's always a question of what's the right team? So you may see things that look pretty eclectic and very divergent because it just happens to be that this team's really good, this team's really good, and they're chasing after different ideas. I'm not actually technically an investor in Stellar, I'm actually on the board. It's a nonprofit. But fundamentally we have a lot of investments in crypto. Bitwise is a more recent one. Anchor, we're a smaller investor in an interesting company. We invested in Chain, I love the investment in Chain, which is doing some pretty interesting things. I actually invested in a very liquid exchange called SFOX that very few people know because it's really designed for institutional people converting crypto to crypto or crypto to fiat. So where we find things that are interesting, we're investing. But it's really a found foundational level is the team, the core set of founders and people around them.

How much of your time is spent between, let's say, pitch decks or companies coming from the crypto side of it versus non crypto in the last few months?

In the last few months, it's probably maybe 20% crypto. Before that, maybe 5 to 10%. Financial services, broadly speaking, is probably 20 to 40% depending on what month or what quarter.

And do you anticipate this to quadruple in the next couple of months or stay flat?

I don't know. That's a good question. It's hard to answer. I think there's some things that are not yet public that will happen in crypto that as they play out may accelerate our interest in crypto. But I really can't tell.

Got it. Do you think regulation has a play into this where if the SEC, CFTC, you know, and all of these Governmental agencies come on and tighten the screws a lot that this might have a detrimental effect to this startup ecosystem and where the companies would actually move out offshore or outside of the US?

Well, there's a lot of there's about seven questions embedded in that question. I think it is absolutely inevitable that government regulation will be applied consistently to crypto companies. Right. there's been a bit of a regulatory arbitrage, particularly in 2017. I think it's already sort of corrected in 2018, which is why last time I looked, 84% of money raised in crypto was outside the US in 2018. So I think the regulatory scrutiny is going to continue to increase, particularly from the Securities and Exchange Commission, maybe a couple other regulators as well. And that will mean more, it will have more implications on how companies are financed. than what's actually built. Like basically there are ways that people raise money in the United States since 1933 and 1934 and for a period of time last year, for whatever sort of reason, people suspended belief about the way the law in the United States works. And that's not gonna continue. I mean you may actually just backstage I was reading Jay Clayton, the chairman of the SEC was speaking this morning at Princeton spoke explicitly on crypto. They just made it pretty clear, like, this is a security. If it's a security, it's gonna be regulated like this. And if you wanna raise money, there's a great way. Lots of people have raised money for great things, including Google, Apple, all raised money through venture capital, or private placements with wealthy individuals. There's plenty of ways to raise money to fund interesting projects. Some of those projects succeed, some of them fail. And if you wanna raise from non-accredited investors. There's ways to do that too. You can file an S-1. And there are techniques for raising money, but the idea that crypto is going to be insulated from the rules and regulations around raising money in the United States is false. And by the way, locating outside the United States doesn't help you if you intend to raise any money from a US-based person. If you want to avoid the US market as a whole, you absolutely have that choice. But if you're going to take money from anybody located in the U.S. at any point, you're going to be subject.

To U.S. securities laws. I think I actually agree with you, and I think that there could be, I mean, that it is an equity to some extent, and there should be an S-1 or some form of an S-1, simplified S-1. But the CFTC has already made a statement about this. Federal judges also said that it's actually a commodity. So you can actually launch an ICO. It starts off as an equity, and it can be a commodity. So there's arguments to that.

There is and there isn't. I think that's right that it can convert. If you ask people for money so you can build something, that is definitely a security. There's no way around that. Once you ask money, if you say, give me money and I'm going to do X, that's almost surely a security, especially if it can appreciate in value. Later it can become a commodity, like once something's built.

Yeah.

And you're no longer using it to raise capital, it could absolutely convert. I think Jay actually said that this morning that you could see a path where something starts security and becomes a commodity. That's very possible. But if you say please give me money because I want to do X, that's like the definition of a security.

Maybe you have to delink it from the company performance.

You could. There are creative things you could do, including filing a simplified S-1. People think that S-1 is a disastrous document which is usually very painful to create. But if you wrote an S-1 for something that is a non-operating company, there's only so much disclosure you can put in there. I think business is just not that complicated. You can't write a 137-page document about a business that doesn't exist.

Yeah, and you should, right? Because it's all about building trust in the company, and that should be articulated, the expectations.

Yeah, I mean, consistency around capital raising may actually increase innovation.

I have a question about regulation from decentralization because that seems to be the theme this morning. Several of the presentations were very aspirational. I wasn't sure if I was at a blockchain conference or sort of an inspirational conference. So we've all been around the internet age and we've talked about decentralization. In fact, the speaker spoke about that. That was the power of the internet, right? And that's where we broke down the one-to-many to peer-to-peer. and yet emerged Google, Facebook, and these were companies that scaled because they had efficiencies. They rewrote the rules of the game because they created efficiencies. So do you see, I mean, I guess there's this decentralization utopia everybody's thinking about, but in 10 to 15 years, are we not going to see a company emerge to actually rewrite some of the rules?

Good question. I think decentralization certainly powers innovation in the sense of it allows more ideas, creativity. So it fosters creativity and allows ideas to kind of compete and you can kind of tap into new ideas. Whereas when you have a centralized funnel, like someone is the filter and can narrow the ideas that are subject to debate or they're built or tested in the world. At some point though, if those ideas work, I suspect you wind up with re-centralization to some extent, because there are still economies of scale and other things, network effects. So I think there's two leaps of faith. One is, I believe in decentralization. I think it's a good idea in terms of encouraging new ideas. And some of those ideas would be better than if you had centralization. But then does it wind up net-net with centralization at the end of the funnel? Maybe, because there are real economic drivers of concentration of power.

Some people might want that.

Yeah, I mean, centralization has one clear benefit, which is hard to replicate in a decentralized fashion, which is simplicity. Like when you edit something down to be really easy to use, it's much harder to do that in a decentralized consensus-based sort of approach. I mean, it's a famous Apple approach of you have a dictator running the company. it tends to produce products that are easier to use than a non-dictated a non-authoritarian company.

Sure.

I just wanted to take you a little bit back where you said use creativity and pushing boundaries. I mean, when you were working at PayPal, PayPal was at the crossroads of financial transactions and banking, and you were there to help them from a legal compliance regulatory standpoint. If he just I just thought of this process as PayPal 2.0, right? Where you're pushing the boundaries, because you're not going to be able to make fundamental paradigm shifts until you break certain rules and move forward. If you were the SEC, you know, a commissioner, what would you move the world? How would you look at the ICO? What guidance would you give? to the companies right now?

Well, I think that there's about three to four choices to raise ICOs. You can raise from sophisticated accredited investors, private placement for Reg D, just like companies have always raised in Silicon Valley. You could try the S-1 process, which a couple companies are experimenting with right now. No one's done it successfully yet, but there are people working on that. Third is you can raise from totally outside the US, which there's a thing called Regulation S, I believe, that allows you to do that. It does have some limitations. You could do a Reg A filing, which basically allows you to raise up to $50 million. So you have choices. There isn't a, what I guess I would critique is, I don't believe there's a shortage of capital for most good projects. There's a shortage of talented people to build and run those projects when they work. There's a, I mean, there's a war for talent among all of our companies, for hiring a VP of marketing or a VP of engineering or a product manager or designer. There is a shortage of supply of amazing people. There is not, at least in the US, a shortage of capital. If anything, there's too much capital chasing too few good ideas. So I don't think you need a lot of innovation around ICO fundraising to finance really interesting projects.

What happens to the 400 or so companies that raised $6 billion in ICOs? What happens to the value of the ICOs now that the SEC is cracking down or it's going to be more expensive for them to raise additional money?

I think that's what starts this cascade, is look, everything works when everybody's making money. The real problem is when people start losing money. So everybody's happy if things are going up, and including regulators, they don't pay as much attention when everything is going up. As soon as normal people, quote unquote, normal people lose money, then all hell breaks loose. The media starts writing all these stories about, oh my god, like this person had these life savings and they were supposed to send their kids to college and now it's all gone, or blah blah blah. You can see some of this on Reddit forums right now if you like. That the stories by journalists tend to produce regulatory attention. Regulatory attention tends to create a spiral, making things more difficult, and then people lose more and more money, and then all of a sudden everybody winds up in jail.

I think Keith is actually articulating what he really thinks is going to happen, because we had a conversation before where he believes that the ICOs are sort of the speculation in ICOs has a parallel with the junk bond market.

Yes, I tweeted this a long time ago, that junk bonds were a very interesting financial instrument. They had a lot of positives for society. and then for a variety of reasons, people defaulted on them and a lot of people lost money and then regulators sort of figured out a scapegoat, in my opinion, and went after Michael Milken and wound up going to jail for a fairly significant amount of time. And that's definitely going to happen with people who raise money through ICOs. When normal people lose money in the United States, regulators will always respond to that because the journalists will always have a great story to write that That's a very sad story. There's a reason why, like at the end of the day, there's a reason why you can debate the merits of it, but there's a fundamental reason why in 1933 and 1934, we decided that we collectively that you cannot raise money for speculative projects from normal Americans. It's a policy decision which can look archaic and maybe it is, and it is a little paternalistic. But on the other hand, when society sees a lot of people losing money that really can't afford to, that's not a pretty sight either. And we're going to see that because by definition, a lot of people have lost money in crypto and ICOs, and more people will, because anytime you have variants of like 30% in a day, there's clearly going to be winners and losers, and a lot of people cannot afford to lose that much money. I mean, most people live paycheck to paycheck. The majority of people in the United States basically live paycheck to paycheck.

You said materialistic. What if he took the alternative route and said, you know, anybody can invest, not just accredited investors, power to the people, right? People go to war at the age of 18, right? Why have that boundary for accredited investors? To me it sounds like, let people invest and we tell them, look, invest maybe five percent, two percent. And if you get burned, and at least you'll now become at a higher elevation platform versus us bubbling you every time and creating these archaic rules which sometimes have, you know, counter measures, counter effects to what you actually intended it.

You could scale it on a kind of net worth or income basis of like, you, you know, anybody can invest up to two percent, five percent, whatever, of some liquidity, you know, some liquid net worth. perfectly reasonable way to approach it. But I don't think, let's put it this way, investing in startups or high-risk projects is not a path to success. Most angel investors, like in the United States, do not make a lot of money. Most of them actually don't make any money. There are some who do, but that's pretty rare. Like investing in early stage startups, like first like crypto, just generally speaking, investing in early stage Silicon Valley startups, is not a smart way to make money. Period. There may be 10 people or 20 people or maybe 40 people that actually can make money doing that. So like trying to get 250 million people to be attracted to something that is inevitably gonna lose them money makes no sense.

And there's also something like lawsuits which kill the buzz, right?

I mean, in that case, you can invest for other reasons. So for example, going to Vegas, the odds are stacked against you, right? By definition, the casino has, you know, even if you play your game perfectly, your odds are not very good and they're below 50% of making money. We allow people to do it as entertainment.

But why not let them make that decision? Why do we have to?

Because when families go bankrupt and they expect the societal net, whether it's healthcare or other things like housing, to take care of them, everybody else has to pay for it.

I agree. Most people want to be empowered and yet they're too lazy to make decisions on their own.

If you want to sign a waiver that says, I will not expect health care or housing from any government agency, nor will I expect subsidies to my kids to go to school, that's perfectly fine. That's a fair trade.

Can we switch to just the killer apps? Because there's so many companies out here that are trying to create this killer app and I know, Keith, the killer app today is trading, you know, speculation. Speculation is and that's fine. There's a there's you know a role for that.

No, I actually think speculations are great. I mean in some ways a great thing. The way I talk about it is almost every adult American speculates on something. So some people go to Vegas, some people bet on football games, some people do day trading. Whatever it is, speculation is almost a universal activity and so there's nothing wrong with quotes with speculation. Like I used to buy baseball cards when I was a little kid and hoped that they would go up in value and actually sold a decent amount to help pay for my law school education. So speculation can be fine, but it isn't necessarily what people, all the people swarming into crypto think that they want to build in a permanent sense.

Right. What's the killer app from that? And before you get into the killer app, Just tell me about how you view blockchain. So let me just give you an example. So from the internet, if you think about the killer apps there, it was all about closing the gap about information. So you had publishers, you had search, you had email, it was all about communicating, getting information. Exactly. Those were the killer apps. And so when you think about blockchain, which is sort of distributed ledgers and immutable and sort of sort of creating trust and closing the trust factor. Do you think about, how do you think about investing through that lens if it's closing the trust gap?

So I think that nobody has really figured out what the application is that the set of distributed ledgers that are available and the flexibility that they now have will empower that wasn't possible before. and people are searching for that. People are building it or investors are searching for it. And in fact, that's one of the reasons why I believe that multiple networks, whether it's Bitcoin, Stellar, arguably Ripple, whatever, may have some merit is, or Ethereum, all have different pros and cons depending upon what application you're trying to build. So for example, as lots of people talk about all the time, Ethereum just isn't very well designed for processing transactions. It's a terrible app for a terrible protocol for building an application that's going to do transactional processing. It happens to be a very good one for fundraising. So if your ultimate goal is to build a new way to do financing, Ethereum is a great choice. So there's this interactive dialogue between what protocols exist and what value propositions you're trying to create for normal people. And depending on which, if you could set one, if you could fix one, point and say, okay, this is the value proposition, then it'd be very obvious what protocol to build. Conversely, if you knew which protocols was somehow mandated to be successful, you could limit the set of value propositions, but they're right now competing with each other, which I think why a lot of smart investors are funding new protocol. You may ask, why are smart investors like Chris Dixon and Jason, like funding a whole bunch more protocols? I think the reason why is there's this complex dynamic of, Open Source Software, which is basically what a protocol is, and value proposition, and someone's trying to figure out where one meets the other one, and no one's really done that yet.

Do you own Bitcoin and ETH right now?

Not in any serious sense. I also don't own public securities though.

I know we are out of time, but I wanted to ask one last question. Are you working at Open Door?

Yeah.

How's that going?

Uber's doing really well. We're, you know, simple concept, difficult to do, but simple in theory. Allows you to sell your house in 30 seconds online and get the money in three days. So instant liquidity for a marketplace. That may not sound that unusual in the Bay Area because right now it's not that hard to sell your house in the Bay Area. But that's not normal in the United States. You know, like normally in the United States takes 80 days to sell your house. So we allow you to have a spot price, instantly move out whenever you want. which allows you to trade up or move for a job. It's live in six going on eight cities and by the end of the year it'll be in 10, 15, 20 cities.

I know you're disintermediating the real estate agents and you're trying to do the transactions faster, better, smoother by removing the middlemen out there. It seems like a perfect startup to do an ICO. Would it be doing an ICO?

I don't think we'll do an ICO. We do need a lot of money though. because we actually, we buy the house from you and we resell it. So obviously the faster we grow and we use a lot of debt, like just like a mortgage, we have mortgages to buy these houses, but some of it's equity. So the faster we grow, the more equity we need. So there's sort of an infinite demand for money now that we get the money back as long as we price it correctly, but it's tied up. The capital is tied up. So we have to raise a fair amount of money, but we we've raised it lots of different ways. We've raised it privately, historically. You could see us raising it publicly or in some new way in the future.

Hypothetically, if you did ICO, what kind of pre-pre discount would you give to our attendees?

The discount part is one of the legal issues.

Can I ask him? I told him I would put in my.

Oh, definitely, definitely.

So I picked up a number of company startup brochures, so I've asked Keith, I said I was going to put him on the spot because I want him to sort of evaluate them on the fly. Oh, God. Okay, cross-border real estate investing, powered by blockchain. What do you think?

Well, there's definitely demand for cross-border real estate investing. I mean, the famous example everybody talks about is obviously a lot of money's moved out of China to invest in the United States, which arguably has popped up some real estate prices here. It's an interesting idea because regulators don't necessarily love, like Australia for example also has a huge real estate arguably bubble propped up by ex-Chinese investors. Regulators don't always like foreign investors. You could debate this on the substance, but you could argue through if you did cross-border through blockchain, it'd be hard to police where the investors are coming from. That said, In theory, you can make real estate subject to KY. It is technically subject to KYC obligations. Know your customer obligations right now. Yeah. But yeah, I don't know. There's a fractional ownership arc version of this.

That one is actually just owning a fractional ownership. It is a fractional ownership.

Yeah.

So that's why it's... How about say.

The name of the company? Peer to peer health insurance.

Peer to peer health insurance. So, peer-to-peer health insurance makes tons of sense. I don't know why necessarily you need like a distributed ledger to do it. It may be valuable, but there's the fundamental part of peer-to-peer health insurance, the really hard part, isn't related to how do you track it.

Crypto backed by gold.

Interesting.

Doesn't say much there.

Yeah, I don't know. I mean, I have to understand, yeah, you can't tell too much from the logo.

One more. Okay. Movie coin. Hollywood 2.0.

What do you do with it?

I don't know. Reinventing the movie. He's gonna invent it.

All right, that's all, gentlemen. Thank you. Thank you, Keith, for being here. We really appreciate it. Thank you, Bambi.

Thank you.