The big banks and financial services incumbents are scrambling after deals in startups focused on blockchain tech, which may be a sign that the technology is too hyped, according to Fred Wilson of Union Square Ventures.
“‘Oh shit, I need some blockchain,'” Wilson said, speaking at the CB Insights Future of Fintech Conference yesterday. He was poking fun at finance companies’ eagerness to leap into deals to blockchain startups. “‘Where do I get some blockchain?'”
Though his comments were tongue-in-cheek, it was clear that he was skeptical of banks and finance corporates’ rush to embrace blockchain.
“When the dumb money shows up, it’s time to get the fuck out,” said Wilson, who has been a vocal proponent of Bitcoin and public blockchain tech. Big banks and other financial services companies, however, have tended to embrace the technology to build their own private blockchains they can control, in part due to security and regulatory concerns.
Wilson was clear on where he believes blockchain and bitcoin is headed. He’s concerned about China’s dominance on Bitcoin mining, transactions, and development activity, and whether that’s healthy. He also noted that building on Ethereum, a rival open blockchain network to Bitcoin, is a much better experience for developers, comparing it to programming in a modern programming language instead of primitive COBOL or assembly language.
On the other hand, Wilson said he’s not interested in the private blockchain protocols favored by the financial institutions who steer clear of public, open blockchains like Bitcoin or Ethereum.
The fireside chat was moderated by Nathaniel Popper of The New York Times, who in his own reporting also recently noted many large corporations experimenting with blockchain tech have tended to do so with private blockchains.
Wilson repeated USV’s conviction that the future lies with open networks, not closed ones.
The biggest laughs came when Wilson riffed on corporate investors, why they invest in private companies, and why any startup would take their money.
“I hate corporate investment,” he said. “Corporate investment is dumb. Corporates should buy companies. What does investing do, make you look smart to your boss?”
Then he asked rhetorically why entrepreneurs take CVCs money. “They’re doing business with the devil.”
He went on to note that these were his personal views on CVCs and not those of his firm or his portfolio companies.
And despite his tough views on the world of bitcoin and blockchain investing, Wilson was more optimistic than many are on bitcoin’s future, though he acknowledged that it had earned a “black eye” due to fraud scandals like Mt. Gox and governance issues.
Wilson noted that bitcoin is still relevant after all these problems and that’s some evidence of its resilience.
“One would think after all the self inflicted wounds, the world would have moved on,” Wilson said.
Anand Sanwal, CEO, CB Insights: So I’m going to walk through very quickly some overview on what we’ve been seeing in Bitcoin and blockchain. And then we will turned it over to Nathaniel and Fred, which I’m very excited about. So could we get the monitor working? So this should be pretty quick. I will really blow through this, because I’m very excited for this panel. You guys got the routine.
So this is Marc Andreessen talking about what he thought would be his sort of belief in Bitcoin. So it being this big thing in 2014. And VC investors have piled in, right? And I mentioned earlier that cumulative funding into Bitcoin and blockchain startups has eclipsed to a billion dollars. And so you see that rise, here.
The opposite view of Marc’s was made by Jamie Dimon, who basically said that no real non-controlled currency in the world will ever be put up for by governments. So this is the other view. And so Bitcoin’s had it’s travails, right? It had the Silk Road kind of episode. You had Mt. Gox. And I showed this earlier. This is the media attention to Bitcoin. It sort of is still pretty gave, but definitely has come down.
But the narrative is definitely what we’ve seen, even in the data, has shifted to blockchain. So people are more interested in the technical innovation underlying Bitcoin. And we see that also in the attention. So blockchain has become increasingly popular over time. And the applications are limitless. It’s not just within financial services — e-commerce, patents, music — a whole bunch of different areas. So blockchain, as a protocol, has a lot of applications.
And so we see, now, the shift, in terms of where Series A money is going. And so it’s going more-so to blockchain startups, than it is to what we describe as Bitcoin. So the money has shifted. Three out of the five largest investments in this world are focused on blockchain enablement. So it’s, again, when you look at sentiment of investors, it has shifted a bit from Bitcoin to blockchain.
This is one of reasons I think financial services players, in particular, are so excited about blockchain. Is that, because of the amazing amounts of money that they spend on technology, and then the opportunity. So if I go back to, this — payments, a $1.7 trillion kind of opportunity for them. And depending on estimates. Obviously, they vary. But you see Goldman, here, has an estimate of it being a $6 billion a year savings. And Santander has $20 billion — so massive opportunities. And when you see that kind of stuff, the suits have shown up. So financial services firms have gotten very aggressive, especially in blockchain.
When you look at the largest deals, they’ve been almost…all the largest deals have had a corporate involvement. And so it’s been pretty diverse. It’s been payment companies, insurance, New York Stock Exchange, etc.. So it’s not any particular sub-vertical within financial services, but across the board. And so see these are the different partnerships that are being struck. And even JPMorgan, who’s had that bearish tone on Bitcoin has become a little softer, in their tone on what’s happening. And so you see partnerships and things on the blockchain side.
And then, here, you see the diversity of players that I mentioned earlier. So everybody from USAA, [inaudible 01:46:15], Goldman Sachs, etc..
So not just the diversity of players, but also the intensity of investment from incumbents into Bitcoin and blockchain companies. And this is corporate strategics. Again, just looking at the web of investments into that space.
So kind of open questions. And Nathaniel and Fred will dig into a lot other question, others sort of more interesting questions, hopefully, as well. But, which of these applications of blockchain is going to get the most traction, right? People are talking about it in insurance, and payments, in lending. Which of those is going to come out of the gate and get the traction the earliest?
Regulation, obviously, clarity around regulation creates confidence in this type of protocol. So what’s that going to look like? How are regulators going to keep up with it? And then the general sort of trust issues around a new kind of technology and innovation like this.
So let me introduce you, then, the people that you want to really see. Nathaniel Popper, a reporter covering business and tech at New York Times. He’s actually written a lot about Bitcoin and blockchain. He’s the author of “Digital Gold and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money.”
Fred Wilson, venture capitalists since 1987. Founder of Union Square Ventures and managing partner, there. Exits kind of a who’s-who — Zynga, Twitter, Etsy, awaiting Twilio’s IPO. Bitcoin and blockchain investments include Mediachain and OpenBazaar. On a personal note, as an entrepreneur. Fred’s blog, if you don’t read it — AVC — is fantastic. Internally, on the team at CB Insights there’s a bit of a joke that I have a man crush on Fred. So very influential just as an entrepreneur, so it’s been really helpful. So I’m really, really excited to have them. So let me welcome Fred and Nathaniel to the stage.
Nathaniel Popper, Business & Technology Reporter, The New York Times: All right. Ready for this? Great. Well, good to be here with you, Fred.
Fred Wilson, Managing Partner, Union Square Ventures: The last time we did this was New York Public Library with Gavin and…
Nathaniel: And, Ross Sorkin. Who was grilling us.
Fred: And you had just written your book.
Nathaniel: I had. That was on the night that my book was released. And that was a fun conversation.
Fred: How long ago was that? Like a year and half ago?
Nathaniel: One year. Actually my paperback’s coming out. And, yeah, that was a good…talking about Gavin, who was is still, I guess, the Chief Scientist. His title has changed over time. But I remember him, he was wearing a shirt with a geek name tag on it, to differentiate himself from us, or such.
Fred: Well, if anybody wants to know the history of a Bitcoin and blockchain…what’s the book called?
Nathaniel: It’s that good. It’s that good. Really, it stays with you.
Fred: The book is good. I just don’t remember the title.
Nathaniel: “Digital Gold.” I forgive you.
Fred: “Digital Gold.” Well, I think it’s a good book.
Nathaniel: No, you are one of the few people who’s talked to me, who’s made it clear…it’s been clear to me that you actually did read it. And I do appreciate that. And it is quite a story. It is quite a story. And Fred, I think, has been an important player in that story. And so that’s why this conversation is a good one to be having.
And I remember I was talking to you backstage, Fred. When I first spoke with you, for the book, you had told me…I think this was in maybe 2013 or ’14. You told me that when you learned about Bitcoin, you had at that time — 2011-12 — been in a sort of lull, in your investing. And I don’t know if you’d go so far as to call it a funk. But you weren’t sure what was next. And I’m curious to hear how you came out of that? If you’re feeling like you have emerged from that, at this point? If you’re still feeling sort of excited and energized?
Fred: Absolutely. I’m sadly not motivated just by making money as an investor. I need to be fired up about the things that I invest in. And there’s really only been three or four moments in my career, where I’ve had this ah-ha moment. Where, literally, there’s an epiphany, and God came down and handed me the tablet. And there was a burning bush, right? I could just tell you what they were.
When the commercial internet first emerged in ’94 and ’95, and I got the Mosaic browser and went on the web. I was like, “Oh my God.” I quit my job. I started a new venture capital firm. I was like, “I’m all in on this. Everything that I was doing up until now was shit. And I’m just going to do this.” And that worked out pretty well.
And then, when social media crashed on the horizon. And Facebook, and LinkedIn, and even MySpace happened, I had another one of those epiphanies. And just thought that all of a sudden things were going to be different on the internet.
And social media kind of played out in 2009-2010. In 2011, I just like it was getting less and less interesting to invest, there. Although things were coming along — the on-demand economy, and Uber, and Airbnb. But, honestly, it didn’t really like motivate me yet. Because it wasn’t like some fundamental new thing that you could build lots of interesting stuff on top of it. It wasn’t like this new platform. It was just new companies, and it just didn’t interest me. And I was in a real funk. I didn’t do any investments for 18-months.
And then, I made the investment in Coinbase. During that time, I was talking to a lot of Bitcoin entrepreneurs. And I kind of thought this was the next thing for me. But it wasn’t really until we made our investment at Coinbase in early 2013, that I felt like the next thing for me had arrived.
Nathaniel: I think I remember you telling me, some conversations you had in 2012. What was the first thing about this? What was the first concept of about this? Because there are so many different things that get people into this, from the Silk Road, on down. And I’m just curious, for you, what was the thing that struck you as different, first?
Fred: Well, I always felt like money and value wasn’t well integrated into the core internet infrastructure, as it was built out in the late ’80s and early ’90s. And that it was missing…we got a lot of right with http and the web. But money got kludged onto it. It was like credit cards and PayPal. It was all like a hack.
And all of a sudden, to me, it was like, “This is the way you do value on the internet. This is an internet-like architectures. It’s distributed. No one owns it. It’s open source. It’s a protocol. It’s decentralized.” And so I don’t know. Like I said, I’ve had a few epiphanies in my career, and that was one of them. I was just like, “This is it. We found it.”
Nathaniel: Yeah. You hear a lot of those early folks. I mean, Andreessen, and even Tim Berners-Lee, who came out with this new initiative. Complaining about how money on the internet just never really got to where it needed to be. And I think there are a lot of effort, right now, to fix that.
Just before we dive into Bitcoin blockchain stuff. I just want to touch on everything else in FinTech. Obviously, a lot of different categories being talked about, here — insurance, payments, lending, so much. Are there, beyond Bitcoin blockchain stuff, are you yourself…are any of those particularly exciting to you? Or, you’re spending a lot of time on?
Fred: So Union Square Ventures, the firm that I’m a partner in, probably is doing about a third of our investing in what we would all call FinTech. And we probably have been for the past five or six years. We’re investing in insurance related opportunities, we’re investing in lending related opportunities, we’re investing in payments related opportunities. We’re investing in marketplace models for equity, and real estate, asset management opportunities. This has been a consistent theme and, frankly, maybe the largest single sector that we’ve been investing in for the past five or six years.
So we believe in. We think it’s one of the most…the financial services industry is getting impacted maybe more than almost any other industry, right now. By the internet, and mobile, and other related technologies. And so we’re big investors in this category.
I, personally, like…as I said a little bit before. I like kind of moon shot, kind of breakthrough, kind of big, speculative, ambitious ideas. And so I tend to be drawn to things that are either, spectacular failures or spectacular successes. And I have partners who maybe aren’t exactly the same mindset. And so I’m not doing a lot of what I would consider to be rational, sane, intelligent, smart investing, in this sector. I’m doing the crazy shit.
Nathaniel: That’s definitely the funner job to have. So you don’t see those sorts of moon shots, that sort of opportunity, outside of Bitcoin blockchain stuff within FinTech? Or, do you?
Fred: I mean certainly there are moon shot opportunities outside of Bitcoin and blockchain. We were early investors in Lending Club, which is still, I think, the leading marketplace lending business out there. They’re going through some troubles right now. But that was a 30 or 40x on our investment, for us…maybe more. So that’s a moon shot. That’s a homerun, for us. So, yeah, I absolutely think you can get those kinds of opportunities in, what I would consider to be more or less conventional type investing.
The thing about Bitcoin and blockchain that makes it so interesting to me but also, I think, so challenging, as an investor. Is that you have a multiplicity of risks when you make an investment. You have the risk that the technology itself will get adopted. You have the risk of the individual crypto currencies, and how they’re going to get adopted. And then, you have the businesses that are being built on top of them. And so all three of those things have to come together to really make the investment work. And that’s why, I think, it’s fraught with a lot of risk.
Nathaniel: Yeah. So right now, I think the two big story lines are. One hand, the price going on a tear again. Your back up near $600 for the first time since Mt. Gox collapsed. And on the other hand, hearing the latest reports about Bitcoin being dead. One of the biggest developers left Bitcoin and declared the whole project over.
I want to get to both of those. But let’s start with the first. With, what appears to be going right? You hear a lot of talk that the price going up is a result of, again, interest in China. Which is what drove things back in 2013, when Bitcoin skyrocketed to $1200. What are you hearing out of China? And is that a good thing four for Bitcoin, that development that’s happening there?
Fred: I’m not hearing a lot coming out of China. Partially, because I’m not super connected over there. But it is an area of concern for me, that so much of the trading activity, so much of the transaction activity, and so much of the mining activity is actually happening in China. Which is, in effect, firewalled off from the global public internet. And so that’s not, in some ways, a good thing.
However, I think if the Chinese figure out how to build interesting businesses on top of Bitcoin. And they may get there before the rest of the world, because of so much hyper activity going on there. Then, I think, that it is a good thing. So I don’t know. I would prefer to have the transaction activity and the mining activity more evenly distributed around the world, that would feel better to me.
Nathaniel: Yeah. It certainly always struck me that Bitcoin is described as a decentralized system. Right now, it sort of works on this voting system. Right now you have, essentially, two companies in China that control voting for Bitcoin. Two companies that have more than 50% of the hashing power on the Bitcoin network. And I mean this movement between being a decentralized system on one hand. But, in some senses, being a very centralized system in that sense. Is that something you watch much? Does that pose a threat to…
Fred: Yeah. It is something that I watch. And it is a threat. What I have advocated, and I haven’t seen anybody do it… It may be happening, I’m just not unaware of it. I think that the largest banks and financial services companies around the world ought to dedicate a piece of their transaction processing infrastructure…and they all have a lot of transaction processing infrastructure. To mining Bitcoin.
If the 50 leading banks around the world all put a million or $2 million bucks of infrastructure into Bitcoin mining. They could collectively probably grab 20%, 30%, 40% market share, which would be a really, really healthy thing. And because this is potentially the financial plumbing of the next millennium, they ought to be doing it.
But I think, right now, a lot of what’s going on with the big financial services companies is a lot of experimentation. And not a lot of, really, going…I don’t think they’re getting engaged in a commercial way, yet.
Nathaniel: Well, I certainly, talking of bankers…generally, the line is, “We’re not interested in Bitcoin. We’re interested in blockchain.” From your read of them, is that on? Do you think any of them are interested in trying to use the Bitcoin blockchain? Or, does it seem legitimate for them to say that they are working on things that really, ultimately will have nothing to do with Bitcoin per se?
Fred: To me that’s like, “We don’t want to use the internet. We think CompuServe is good.” It’s naive. It’s wishful thinking.
Nathaniel: So you think, to the degree that the blockchain matters, it will be the Bitcoin blockchain?
Nathaniel: No. It’ll be a public…it’ll be a globally distributed decentralized public blockchain. I just don’t think you can get the benefits of blockchain technology by trying to put it in a box and make it private.
If the CompuServe analogy is a bad one, and it might be. It’s like running an intranet. You can run an intranet. But if Chase put all of their online banking software on their intranet, none other customers could use it. And their customers aren’t going to dial into Chase’s private banking network to do online banking. They’re going to want to access it in a browser. Through any ISP that they want to use. That is the lesson of the internet. Unless everybody’s on the same network, communicating via the same protocol, it’s not going to work. And that’s what the power of these public blockchains are.
Now, I do think it’s possible that Bitcoin is so tarnished because of all that has happened, that you document so well in your book. I mean it’s really nuts. You could’ve written a novel. The fact is, it’s true.
Nathaniel: It’s all real. True story.
Fred: But, you read it, and you’re like, “No way. No way. Can’t be.” So Bitcoin is, in some ways, kind of laughable. And, also, there’s been a lot of fraud and other bad behavior. And it just may be tarnished in the way that bittorrent has been tarnished, and Napster was tarnished. There’s just these things, these technologies that have come out, that have really been profoundly disruptive. But, unfortunately, got adopted by people doing sketchy things. And so the technology got a black eye, and people didn’t want to go near it. I think it’s possible that that will be the case with Bitcoin. I don’t actually think that it’s probable, but I think it’s possible.
And so that’s why I’m interested in Ethereum and some of these other things that are out there. Ethereum is the most interesting of them, to me. Which could be alternative public blockchains that come along and are second generation, or third generation. Which leverage all that good stuff, and don’t have some of the baggage that Bitcoin has. So I don’t actually think that’s the highest probability of what’s going to happen. But I think it is potentially possible.
Nathaniel: Yeah. The latest saga is this divide between the developers. Or this fight over how to scale Bitcoin and make it bigger, so that more people can use it. And I wonder…Bitcoin is, at this point, stuck with a relatively small number of transactions going through it. And, again, this kind of raises these questions about this being a decentralized system.
And, yet, a small group of developers seems to have essentially control over of the core software that runs it. Again, is it still a decentralized system, when you have these sort of phenomenon arising? They’re not the intended phenomenon but, again, you have this sort of small group of miners who have the voting power, and the small group of developers. At what point do you lose the important things that that Bitcoin was supposed to introduce into the world?
Fred: Yeah. I mean it would be better if there were multiple teams working on the core software, and competing to get their new features accepted into the core software. And that there was, in effect, a competitive environment among the core developers. And that still may happen. But it hasn’t.
If you want to list the big risk factors out there for Bitcoin. I think mining concentration is one of them. I think developer concentration is another. I think the black eye that Bitcoin has as a brand, and as a word, is another of them. And so these are all the bare cases.
The bull case is that a lot of this has been true for most of the history of Bitcoin. And yet it’s been incredibly resilient. Transaction activity continues to grow on the network. Prices come down and go back up. So you would think, given all the self-inflicted wounds, that the Bitcoin community have caused, That the world would’ve moved beyond Bitcoin by now. But it hasn’t happened.
I also think it’s interesting, going back to China before we leave that topic. I’m often think that technologies get adopted by people, and places that don’t have an alternative, they don’t have a better alternative. And here, in the U.S., we actually have a pretty good financial system. And money flows pretty freely, here. And people the U.S. can buy things all over the world, and there are no capital controls.
And so some of the things that are most valuable about Bitcoin are nice to have, but not a need to have here, in the U.S.. It’s not surprising that a place like China, where they control the currency, where there are capital controls, and where citizens really don’t have the ability to move their money in and out of the country the way they want to. And even know what the government’s going to do with the value of the currency. They could devalue it whenever they want. It’s not surprising that a country like that might be the place that Bitcoin really thrives, versus a place like the United States.
Nathaniel: Yeah. I mean it’s always struck me that the most certain important feeling working in Bitcoin is not happening in the United States, and was not something that Americans would ever really have any need for. It was a year or two ago, Argentina, when I traveled there. That was almost the only place I traveled in the course of reporting out my book, where I saw ordinary people using Bitcoin in their everyday lives. You hear some of that out of Venezuela, now, which is in even more desperate circumstances.
I mean China’s interesting because, I think, a lot of what’s happening, there, is not people using it for commerce. It’s largely still speculative.
Fred: Or, store value.
Nathaniel: Yeah. Yeah. Have you made any of those kind of developing world bets? I mean it seems like most of your bets in this space have been on more European/American focused companies.
Fred: Yeah. That’s because that’s where we’re comfortable investing. We don’t have a lot of experience investing in China. or Asia, Southeast Asia, Latin America, Africa. Some of the parts of the world that might be earlier adopters of this technology. So we haven’t done that.
Nathaniel: And then, on Ethereum, one of your first investments in this space — Coinbase. One of the founders, Fred Ehrsam, recently wrote an interesting post. His company rose up with Bitcoin. And, yet, he seemed to be kind of worrying about its demise, and talking about Ethereum as the next great hope. Are seeing enough new, there, to make that valuable? And are you planning any bets there?
Fred: We have been talking to companies that are up building applications on top of Ethereum. And we’ve also been talking to our companies, our blockchain and Bitcoin companies about supporting Ethereum, the way that Bitcoin did. So we’re interested in it for couple of reasons.
And one of the things that we’ve observed, we also invest in a lot of developer tools — APIs. We’re investors in Stripe, we’re investors and Twilio. Developer platforms like MongoDB.
The problems with Ethereum are that it hasn’t really been battle tested the way that Bitcoin has been. The security model is, in some sense, unproven. They also are claiming that they’re going to move away from proof-of-work, i.e., mining. To proof of stake. And they want to do that by the end of this year.
In some ways, that’s super exciting because mining, itself, is in some ways kind of…it’s an expensive and energy consuming way to control and govern the network. Plus, you’ve got all these issues around concentration, and things like that. So if they can pull that off and make proof-of-stake work, which I think is quite a computer science feat. Then that would be quite something, I think.
Nathaniel: I think it appeared for a while, that maybe the Silk Road of Ethereum, the first real application of it, would be this thing called the decentralized autonomous organization, which raised $150 million of the ether. But, immediately, computer scientists came in and said, “This has all of these vulnerabilities that could leave the money frozen.” And, now, there’s this kind of moratorium on the project, and the money is just sitting there. I guess, what do you make of this? A decentralized autonomous organization, just to say it, is like, “What?”
Fred: Right. Well, I wrote a blogpost about this, which are called, “Experiments and Scandal.” And the point I was trying to make is that there’s a lot of these grand experiments going on, now. Not just in the blockchain, by the way. But in the blockchain there are a number of them. Bitcoin is a grand experiment. Ethereum is a grand experiment. The Dow is a grand experiment.
And a number of these experiments are going to be spectacular failures, as was Mt. Gox. I don’t know if Mt. Gox was really a failure. I’m still not clear whether that was incompetence or fraud. Are you?
Nathaniel: I think it was probably a grand combination of both of those. Yeah. I mean I think the money was disappearing slowly. And incompetence turns into fraud pretty easy. The line blurs.
Fred: That’s what happens. Is that people…yeah. I mean apparently that’s what happened with Madoff. He did originally intend to be a Ponzi schemer. But he just kind of fell into it.
Nathaniel: You get in a little hole…
Fred: And then you dig it deeper, and deeper, and deeper. Exactly.
So, anyway. I didn’t mean to digress into that. I just think that some of these grand experiments are going to be spectacular failures. And when you’ve got $150 million, or $175 million of people’s money, that can turn into scandal pretty quickly. And the regulators will pounce. And there’s going to be hell to pay for that.
So I do think that people get so excited about these experiments. And there is this crowd of people that hang around the Bitcoin community. And they’re almost utopian in their belief. “There’s this new way to govern companies. This distribute autonomous organization. What a beautiful idea. Let’s go make it happen.” And then, next thing you know, they’ve got $150 million of people’s money to go make it happen. And then the technology doesn’t quite work right, right?
I’m not saying it will be a failure. That’s not what I’m saying. I’m just saying that it’s possible that all of these things will end badly. And that a lot of people have egg on their face.
I mean I went through that, personally, in the early days of the internet. And watched a number of friends of mine get into trouble. Literally, get into trouble for doing things that were I guess, in hindsight, a little stupid, but not criminal in any way. But when people start losing a lot of money…
Nathaniel: The knives come out.
Nathaniel: Yeah. All right. Let’s move to the fact that Anand began this presentation by pointing to how the investments have shifted from the Bitcoin blockchain to, essentially, non-Bitcoin blockchain, or blockchain concept more broadly. And I think it’s fascinating that you have really stuck with it the Bitcoin blockchain. I mean even your most recent investment, I think, is Mediachain, right? Which is using the Bitcoin blockchain, if I’m not mistaken.
Fred: Yeah. Although, it could be ported onto Ethereum. Or, they could, if they wanted to build their own blockchain and issue their own currency.
I think the thing that I would love to try to crystallized a little bit is that, we, at Union Square Ventures and, me, Fred Wilson, are believers in public blockchains and open protocol. Not private blockchain and closed protocols.
So we think that’s where the big wins are going to be. And that’s where, if this technology really takes off, that’s where people are going to really be able to extract value. Consumers are going to be able to extract value. And companies are going to be able to extract value.
So Mediachain is a public blockchain. OB1, which is a protocol to build marketplaces on top of the blockchain. And, currently, on top of the Bitcoin blockchain, is an open public network, right? So that’s what we think is the most disruptive and powerful thing going on, here. And that’s what we want to invest in.
Nathaniel: I just think it’s fascinating. Because, I think, you look at that list of the biggest investments in this space. When I talk to bankers they basically say, “We will not work with permissionless blockchains.” Which is I think, in some sense, another way of talking about public blockchains. Digital asset holdings, R3, these big efforts that are bringing banks together. They’re almost exclusively working on blockchains where you have to basically be allowed in, in some way. Which is to some degree, by definition, not a public blockchain. What happens to all that, in your view? I mean is there space there too, as you were saying earlier, to build companies, even if they’re not moon shots? Or do you think they’ll all eventually come back around to public blockchains?
Because, I think, there’s been enough work done by banks, that they’re out there doing really sort of projects. They’re building software. And it is, at this point, mostly private blockchains. What happens to all of that?
Fred: Well, if they’re using it to build internal tools, I think that’ll work just. fine. If they’re using it to build networks that allow these banks to settle with each other, or do interbank transactions with each other, that could work just fine. But if they want to build something that is going to allow them to move their business — their consumer businesses, and their merchant businesses, and their scale businesses — from the current technology platforms they’re on, onto a blockchain-based platform. I don’t see how that happens with a private permissioned network. It just doesn’t strike me that that’s going to work.
I may be wrong about this, right? I’ve been wrong about a lot of things. I’m often wrong. Never in doubt. Which I think is actually a good motto for investors because…well, at least my kind of investing. Because I can afford to be wrong a lot.
What’s important in my business is to be right about something every once in a while, that everybody else thinks I’m wrong about. And to be spectacularly right about it. And if I only do that three or four times in my career, I’m going to have an amazing career. It’s one of the very few businesses I think, that one could take that posture and be successful. I think entrepreneurs can do that too, right? Because every entrepreneur out there probably has, I don’t know, five or six companies in them, if they keep plugging at it over the course of a 30 or 40 year career. And I think that’s the most fun way to play the game.
Nathaniel: And if you have one or two successes in there, that’s probably going to be enough. And you get three or four, that’s good. You can sail off into the sunset.
Okay. I think it’s interesting because when you talk about that banks may be able to do the kind of clearing, and settlement, and interbank stuff with private blockchain…I mean I think that’s a lot of what the goal is, now. And that’s viewed as a big enough business opportunity in itself. I guess it sounds like a business opportunity you’re not particularly interested?
Fred: Yeah, we haven’t invested in that. I don’t think we will invest in that. I also think that a lot of these financial services companies, they’re just like, “Oh shit, we gotta get some of this blockchain. How do I get some this blockchain? I need some. I need some blockchain.” And so they’re like…
Nathaniel: …jonesing. Yeah.
Fred: Exactly. I mean those numbers are astounding, right? Literally, all the money that went into this sector from 2010 through 2014 went in from angels.
Nathaniel: Bankers wouldn’t mention this.
Fred: Right. And then, now, it’s all the financial services companies are all in, now, all of a sudden, right? Honestly, it’s time to get the fuck out for a while, right? When that happens, because that’s like the dumb money showed up, right? That’s like, “Oh fuck, the dumb money showed up. Time to get out of here.”
Nathaniel: So I don’t know what this room…the folks in this room, where they would fit in that, but…
Fred: Look, corporations aren’t people, right? Corporations are entities. They behave in this odd way. When have corporation’s ever been great at making investments? They’re not.
Nathaniel: Maybe IBM, Xerox?
Fred: No, they’re good at investing in their business. But they’re not good at making investments. Look, I hate corporate investing. I’ve gone on record saying that. I think it’s dumb.
I think corporation should buy companies. Investing in companies makes no sense, right? Don’t waste your money being a minority investor is something you don’t control. You’re a corporation. Buy it. If you want the asset, buy it. If you don’t want the asset…I mean making a minority investment, what does that do? Make you look smart to your boss?
Nathaniel: I guess if I was going to channel some of the folks who I’ve seen here, today. I would think that, particularly in this space, a venture arm gets you some access. Gets you in the room so you can hear what they’re working, to see if that’s relevant. Although, there’s probably cheaper ways to do that.
Fred: So if you’re the entrepreneur, do you want them in the room?
Nathaniel: Apparently, many do.
Fred: Well, because they either can’t get money from anybody else. Or the corporations have paid a higher price than I would pay, right? So they do business with the devil. They’re doing business with the devil.
Nathaniel: You heard it, here. Well, look, I think in the blockchain space this is interesting. I think there’s another explanation there. Another more particular one, which is blockchains are about groups of people…or the way people are thinking about blockchains, now. Groups of people doing projects together, keeping data together. And when you’re doing a project like that, there’s value in having people bought-in from the beginning. So that they want to use whatever system you’re developing, right?
So R3, they have 45 banks onboard. So if they develop something, and those banks want to see it be successful, they’ll use it. It’s like a stock exchange.
Fred: Yeah. Or, it’d be like Swift, or the ACH system, or some of these inner bank protocols. Yeah, I can see how that could happen. That may well be where all that stuff is going.
But, honestly, the more interesting place for me in the future of all of that is how it gets out into the consumer’s hands. When you use a piece of technology like an M-Pesa or a Venmo, and you’ve just got money on your phone, right? And I can send money to anybody else. And, I got it.
I don’t need to go to my bank and have them send a Swift transaction for me, or an ACH transaction. I just Venmo you the money. That’s what’s cool about Bitcoin. I can just send you some Bitcoin. I don’t know. I just think that’s really where…that’s where the revolution is happening. It’s out there on the edge of the network. Not in some little mini private network that banks put together.
Nathaniel: So we’re nearly running out of time. But I did want to ask you. Some of your recent investments — OB1, OpenBazaar, Mediachain — they’re not really financial companies.
Nathaniel: They’re other forms, they’re other efforts to store data, and store information. Is that, do you think, more of the near-term opportunity?
Fred: I don’t know. We’re just trying…look, this is like a brave new world, right? We’re just trying to spread our bets across as many different application types as we can find for this technology. Because, honestly, we don’t know where the killer app’s going to come.
And we want to be there when it comes. So anything that looks like a potentially big application of a public blockchain that could be transformative for an important industry. Like the media industry, or the e-commerce industry, or financial services obviously, seems to be a good place to make investments.
I’m being a little careful because we have three or four other investments like those that are unannounced right now. I don’t know why it is that entrepreneurs don’t like to announce their investments. Like, somehow by being in stealth mode no one’s going to…I mean I get it at some level. But we have a bunch of unannounced investments.
Nathaniel: You want to do it, here?
Fred: I can’t.
Nathaniel: I had to give you the opportunity. Well, I guess, do you see…is it just as likely that the blockchain becomes important in non-financial ways, as a means of a data storage and whatnot? Or do you think it has to also be important in a financial way to…
Fred: I think you’ve got to have the finance piece, right? Look, the finance piece is…it’s kind of where the rubber meets the road, right? Let’s see if I can make it tangible.
If Mediachain works, right? And Mediachain’s an attempt to take something like a right’s database for media, or copyrights database, or something like that, and put it on the public blockchain. People are going to want to get compensated for their rights, for anybody who wants to use the rights. And so it all ties back to a payment system that’s going to underlie all of that. So I think that’s where the rubber meets the road.
I want to say one thing about the corporate investing thing, though.
Nathaniel: He’s not done with you, yet.
Fred: No. No. Many of the companies that USV has invested in, many of the companies that I’m on the board of have taken money from corporations. And many of the entrepreneurs that I work with believe that taking money from corporations is good, and chose to do it over my advice not to do it.
So I don’t want people to think…and my partners at USV don’t agree with me, on this. What I’m saying is, this is Fred Wilson’s opinion. It is not the opinion of USV, nor the opinions of any of the companies I’m on the board, or of any entrepreneurs that I work with, or anybody else.
Nathaniel: You need a picture of a girl dancing in the background, while the disclaimer’s going out.
Fred: I need a lawyer to write a disclaimer.
Nathaniel: Okay. All right. One other thing you might need a disclaimer on. So OpenBazaar, I just want to ask you about this because I think it’s one of the most fascinating investments you and Andreessen Horowitz have made.
It’s basically a decentralized market. Which the most famous of which, to date, was of course the Silk Road, which wasn’t completely decentralized. Why do people need a decentralized market to do legal transactions?
Fred: Well, because there’s a zero take rate in these markets, right? If you really want a transaction…if you really want a marketplace where there’s no central clearinghouse taking, whether it’s eBay, or Etsy, or anybody else taking a take rate, you need a decentralized market. So it’s not just because you want to sell stuff you shouldn’t be selling. It’s because you want to sell stuff and not have to pay the man.
Nathaniel: But people may sell stuff you shouldn’t sell on the way?
Fred: Yeah. And I think that there will be multiple clients that people can use to transact on OpenBazaar. OB1 may have a client. And these clients could decide to be white, or gray, or black. And I think the market will play itself out that way.
Nathaniel: So racially inclusive.
Nathaniel: Good. I think…I don’t know if we have time for some questions. I was told they might be coming from the back from some disembodied…is that right?
Fred: Did we use up all of our time?
Nathaniel: Did we use up all of our time?
Man: No. We have some time for some questions. So the first question is: The regulatory landscape around Bitcoin and blockchain is still unclear. Do you think that’s hurting startups in this space, and holding back widespread adoption? And is there a way that it can be excessively regulated?
Fred: Well, I think there’s definitely a way that it can be excessively regulated. I actually don’t think it’s really holding back startups in this space. Because most of what the startups are doing is that they…most of them are very well advised by lawyers. And the lawyers basically say, “Look, this is where we think the regs are going to come down. And if you do things this way, even though the regulations aren’t completely finalized, you’ll probably be okay.”
So a good example of that is, if you’re moving money using Bitcoin, you’re going to need to do KYC, you’re going to need to do AML, you’re going to need to follow FINRA rules, and IRS rules, and all those kinds of things. Even if the regulations aren’t completely spelled out for you, you kind of know that you’ve got to do that. And if you do that, even though you might not be completely blessed by the regulators. The regulators are going to probably be okay with what you’re doing.
So most of the companies are well advised. They’re doing things the right way. And they’ll ultimately get blessed by the regulators. If you’re not doing things the right way and you’re trying to be in that business, you’re going to get shut down.
Man: You recently wrote a post that’s focused on geographies. What are the struggles, and is it possible to build a FinTech company outside of major markets? And do you see opportunities there that entrepreneurs in places like New York might overlook?
Fred: I think the most interesting places are the developing world where, as we were talking about, there are real needs. Venezuela would be an interesting place to try to do something with Bitcoin right now, because the place is just a complete and total mess. So yeah, I think that entrepreneurs who can work in those markets and can build services there, I think have the potential to build maybe some of the most interesting applications.
Man: SigFig, one of your company’s recently raised money from a host of strategic investors. What are your thoughts on how the robo advisor space might look like in the next five years?
Fred: When I gave my little disclaimer to you, I was thinking about SigFig. Because, Mike Sha, who’s the CEO of that company, he sent me an email. He said, “We’re about to announce this big strategic investment. Please don’t piss all over it.” Which I didn’t until now, I guess.
Nathaniel: Glad we could bring you to that place.
Fred: So I don’t know a ton about this space. My partner, John, works on the SigFig investment. I do think that this whole robo advisor technology to basically make it possible for the average investor to get access to the kinds of technologies and asset allocation approaches that the most sophisticated investors use is very good. And I think it’ll allow many average investors to strengthen their portfolios, get better diversification, and get better returns.
And the approach SigFig is taking, is to work with all the big banks and brokerages, and be a white label provider to them. And so it’s not surprising that a lot of these big corporations wanted to, in addition to being their partner, also wanted to have a stake in the company come.
It’s really common in financial services. You see the big banks and brokerage firms coming together in consortiums and making a technology or a company the standard in the market. I’m not saying that that’s what’s happening with SigFig. But you see a lot of these kinds of financing where lots of big banks and other financial services companies come together around a company.
Man: Last question from this side. You have a significant amount of deal activity in Europe. Just wondering if you could talk a little bit about the Europeans FinTech landscape, and how that might look a little different from the landscape of U.S.?
Fred: By the way, internationally, I feel little bit different about corporate investing. Well, the arm the reason is, there are some markets it’s really hard to go into.
If you want to go into Japan, or you want to go into China, or you want to go into highly regulated countries. As a startup, you’re going to have a really hard time doing that on your own. It’s not just in financial services. When Yahoo went to Japan, famously they partnered with SoftBank. And, now, Yahoo Japan has been hugely successful because of that. They may not have been able to make that happen on their own.
So I do think that one place I actually really do think that startups should potentially partner with big companies is when they’re trying to go into markets where they don’t have the relationships and contacts to be successful on their own. And Asia, for sure, is an example of that. And probably other parts the world as well.
So I think for a technology like blockchain that’s a global technology, you’re going to want to be a global company. And so having the right partners, internationally, is actually a pretty sound strategy.
Man: Great. That’s it from this side.
Nathaniel: Is there another side?
Fred: I feel like these conversations are coming from…
Nathaniel: Anand, how are we doing, here? That’s a wrap. That’s it, folks.
Fred: All right. Great. Thank you.
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