NA: How did you enter the crypto/blockchain ecosystem and end up co-founding Blockchain.com Ventures?
**SH: **In late 2012 I read about bitcoin in a newspaper, I think it was in the Economist. My housemate at the time then purchased some BTC and paid his half of our rent in Bitcoin to me, and I paid the landlord in GBP and kept the BTC. That was my first exposure, I hadn’t read the whitepaper and didn’t for a number of years afterwards either. In 2014 I joined Naspers, and they were just starting to look in the blockchain/crypto space and since I was the only one on the team that had owned BTC and knew a little about it, I was asked to look into it. That is when I properly got into it, I read the Bitcoin whitepaper and gradually started going down the rabbit hole.
NA: How did you get to co-founding Blockchain.com Ventures?
SH: I became close with one of the co-founders of Blockchain.com while I was at Naspers, as we explored investing in it a number of times. In 2018, they decided to launch a venture fund with the backing of Lightspeed, and I was asked to join to set it up.
NA: We went through the phase of ICOs and last year we saw IEOs, do you think token-based funding will make a comeback in some form?
SH: Interesting question. Tokens are a necessary tech component for some of blockchain’s business model innovations. In those instances, investors need to have the ability to buy and own tokens as they will be required to participate in the potential upside for certain blockchain businesses. For some blockchain businesses that use traditional business models, equity is simpler, offers more investor protection and just works better than a token.
NA: With your experience investing in technology and businesses outside of the blockchain and crypto space, do you think there is any difference when it comes to investing in blockchain/crypto in regards to the due diligence and things that you need to see before you invest?
SH: I actually don’t think it’s hugely different. A lot of the problems we saw in 2017 were driven by the fact that investors weren’t doing the requisite due diligence, or the diligence was perhaps of a different quality. If you look at the serious blockchain investors today, the funds that have been around for a while that know what they are doing, they are doing nearly all of the same DD that a normal fund would do, obviously commensurate with the cheque size that is being written. In addition, some of the code is often open-source, so tech DD can actually be conducted more easily and there is more time spent on the community because obviously with open-source projects, community is extremely important. There’s also more time spent on the regulatory environment and requirements and the security aspects of crypto projects. These are all enhanced areas of DD that weren’t necessarily a particular focus for generalist venture investing.
Those are probably areas where people are spending more time, but I don’t think you can cut corners on any of the traditional DD that’s done in traditional venture capital.
NA: Will this be a game for specialised crypto funds or can generalist VC funds compete?
SH: I think time will tell on that. You can expect specialist VCs to perhaps understand the technology better, but probably the generalist VCs have more recognised brands, more robust portfolio support capabilities, better networks and access to talent as well. Probably it nets out an even playing field. It is great to have both involved. I do think it’s hard for generalists to understand everything that’s going on in blockchain, there is so much new and specialised technology and so much disruption happening, but of course they bring a lot of value as well.
NA: Is there a core question that you ask when assessing a crypto opportunity today?
**SH: **Not really, it varies case-by-case. Everything that we invest in, I guess it’s not a question but it’s a certain standard that we hold the potential portfolio company to. The standard is that they must have built something. That is, it must be functional and hopefully, some people or businesses are using it. We can then take a look at how/why they are using it and make a better assessment of whether it’s a good venture investment or not. Again, I think that brings us back to a lot of the problems in 2017, no one had built or shipped any products and people were just investing in ideas at really high implied valuations. I think maybe there is still money to be made doing that for some people, but we are very focused on what the project has built, how people are engaging with that technology, is it fundamentally useful and is the valuation they are raising at commensurate with what’s been built. A further key question is if they are being capital efficient as they build, and you can’t answer any of those questions if the business is pre-product.
NA: In your experience investing in this space, have you seen any big red flags when it comes to analysing these investments?
SH: Well maybe the most common red flag typically in this space is for companies that have previously raised a token or equity round, and now plan to raise from a different set of investors into the other entity/vehicle. Value almost certainly won’t accrue equally to the different asset types. That just feels like a misalignment of different stakeholder interests. So something we spend a lot of time thinking about is incentive alignment and value capture. While it is potentially fine to have both, if both exist, we as a fund don’t just want one asset type. Given you can end up in a scenario where the equity is kind of like a zombie and all the value is being accrued in the token, if the token economics are designed well. In other instances, and this is probably more common these days, there’s been a token round and the token is kind of now orphaned, they don’t know what to do with it, its market cap is a couple $100,000, and now they want to raise money into equity that founders control all of, and have pivoted back to a normal business model, this also can potentially create issues, as well as tech and regulatory overhang from the token.
NA: When it comes to analysing investments where you will be investing in a token, what is required within the token economics for you to gain some real comfort?
**SH: **We should be able to understand why they’ve chosen that particular organisational structure. It’s pretty much that simple, how is the equity/token going to capture value? It doesn’t need to be particularly complicated, we just need to understand it and have conviction that it makes sense. Token economic models in particular. For example, there is a finite amount of these tokens, people need the token to do something useful, there will be more people that want to take this certain action in the future, therefore one can expect that the token may appreciate over time given typical supply-demand economics and the value of the platform and the number of users growing over time. That is a relatively standard model, there are other kinds of models to capture value that are more transactional that also make sense, but in reality it is a case-by-case basis.
NA: What are your thoughts on Decentralised Autonomous Organisations (DAOs) and the tokens that help govern them, is that an area that you are interested in?
**SH: **This thread of work is all quite utopian. It is a cool idea, but it is not like there are many proof points that it works perfectly at the moment. Some things are still being figured out, like ultimately who is the decision-maker for day to day decisions, or cheque-signer, if you want to do a BD deal. Or who is ultimately making the tough decisions when it comes to cutting costs, or changing the direction of the company or positioning from a market perspective. These are difficult to do in a decentralised way. Ultimately, it’s an interesting idea and I do think some blockchain businesses and organisations will use that model effectively in the future. You can do certain things that you obviously can’t do if there is some centralised component, and in theory there’s some opex cost savings to be had, but I think the way it is mostly structured today where typically it is centralised to some degree, decentralised in others and that the level of decentralisation increases over time is probably the best short-term positioning. I think going truly decentralised from day one, the business or organisation will struggle to move as quickly as an entity with clearly defined leadership.
NA: When it comes to the investments that you have made, is there one common characteristic you have noticed your CEOs or founders possessing?
Interesting question, I was actually thinking about this the other day. I don’t think there is. I guess, I very much like them all on a human level, so perhaps likeability is the defining characteristic. They seem to me like trustworthy, likeable individuals. In short, perhaps because I like them and the rest of our team likes them, maybe they can fundraise, retain talent, keep their team energetic and motivated given they are all likeable, driven, charismatic, and intelligent people. Awesome humans. That’s probably the one overarching trait, but yeah they are very different age groups, experience levels and have vastly different profiles in general.
NA: With the COVID-19 situation in mind, how do you think that would impact the venture capital space?
SH: I think the main shift has been that VCs are spending a lot more time looking inwards to their own portfolio than previously and less time sourcing new deals. I see that across the board amongst my friends and also for us. Spending a lot more time helping companies with various problems, helping them fundraise, making sure they have a good financial plan for the next 12–18 months. These are all the things one should be doing anyway but I think there has been increased focus on it. The bar for doing new deals has probably gone up temporarily. There is this paradox where VCs want as much time and information as they can get their hands on before doing a deal, while the entrepreneur wants the money, and just wants to get the round closed, so they can refocus back on running the business. So you have these opposing interests – the VC would ideally want to spend longer analyzing opportunities, but that’s not always possible. Typically there is this natural pressure to get a deal done because other VCs may fund the business, or the CEO or leadership team of that business may get deal fatigue because they are spending too much time trying to get your investment. So, you never get as much time as you would have wanted, but events like we are going through now give you more time because fewer people are willing to invest during uncertainty and therefore it becomes a good period to pause and have a good think about what you’re investing in, portfolio allocations and how they are impacted in this market? Do these deals still look like a good investment? I imagine in a month or two, most of the deals we are looking at will still be on the table. By which point, we will have had a lot more time to think about it than we would have done otherwise. So, I think a lot of VCs are thinking this way and that will lead to a natural slow down in the upcoming quarter or two
Deals are still happening, companies in our portfolio are still getting term sheets, rounds are still getting done, I just think the bar becomes higher and time spent helping portfolio companies will increase.
NA:What about the other side when it comes to raising for a fund in this kind of situation? Are LPs still deploying capital or they are a bit more conserved?
SH: This macro has certainly given people a reason to pause. Obviously, the crypto market also dropped quite a lot as well so that frightened some. Equity markets are down, people have less wealth than they thought they had. Commits are still happening but again I’d say similar to VC, people are pausing and giving it a second thought.
NA: Where do you see the most opportunity with blockchain technology from here onwards?
SH: We are interested in how blockchain is going to be used to enable something completely novel or different. So, it’s replacing inefficient middlemen or leapfrogging broken or non-existent infrastructure or shifting the business model for a service that exists today but could be done with a different incentive set and utilises the increased stakeholder alignment that blockchain allows.
We are really focused on those things, not so much on finding a decentralised way to buy a cup of coffee. Often blockchain is not well suited to ‘solve’ tasks that work perfectly fine in today’s world anyway, for example, buying a cup of coffee in the US, or in the UK you can use Apple Pay, or a credit/debit card and the participants in the transactions are perfectly happy. Merchants don’t love it because there’s a relatively high payment fee but there is pretty much ubiquitous card penetration across their customers, so they are happy to accept it. The customers get air miles or cashback, so they’re also happy, and they spend a stable fiat, which is the same basis as the one they get paid their earnings in.
Compare the above to receiving remittance in the top countries for remittances (Mexico, India, Philippines) and typically people wait 4–5 days to get the money, they have to physically go to collect the cash as a large number don’t have bank accounts and there is an ~8% charge. By giving them the ability to remit via some kind of dollar-denominated stable coin, maybe even the ability to earn DeFi interest rates, where they would otherwise be stuck in a fiat currency that devalues against the dollar, has a high inflation rate, can’t be moved out of the country etc, then crypto becomes really interesting in our view, it is enabling something that can’t be done today, but with blockchain the consumers can get access. I think it comes down doing something completely novel and/or removing inefficiencies like in the remittance example.
Then you also have some really cool innovations around business models and value alignment that allow you to do existing business, but with a completely different model. An example of that in our portfolio is something like Theta or Origin, they are not necessarily offering a new service, but they are doing it in a way where you can change the business model completely. With Origin, they don’t need to take value from each transaction. They have a token economic model that aligns incentives, rather than there having a marketplace take rate of 30-50% they can take a minimal, close to 0% take rate because the token appreciates when people use and contribute to the network. In Theta’s case, rather than incurring large costs on capital expenditures and physical data centres, like a content delivery network usually would, they can use a mesh network of existing infrastructure, but incentivise the end-user to be part of the network with the token. It leads to lower costs, higher user engagement and you simply can’t do that without a token because the banking infrastructure is not sufficient to pay users a fraction of a cent in 140 countries every few seconds.
NA: My final question is, what is the latest publicly announced investment you have made and why did you invest?
SH: The latest investment that we’ve made that has been announced is in Amber Group. We made that investment because we view it as a horizontal crypto platform encompassing crypto in Asia, which is a big market. Liquidity is super fragmented, if you want to trade certain tokens you need to do it on certain venues. If you want to trade in size, you need to do it on different venues. Amber gives you one place where you can get all of your crypto products, lending, other managed products, OTC, via one relationship. At its core, it is a technology platform that routes orders across different pools of liquidity. The team is great, they referenced extremely well, we liked them a lot. They were working with us on our exchange, the Blockchain.com exchange, so we had a good working relationship with them already. We acutely understand the nature of the problem, we saw a big need and then looking at the financial profile of the business they had something like a 24-month history of consistently being profitable and increasing revenues over time. So, a combination of a great team, excellent references, strong technology, a big market, and we enjoyed working with them.
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