{ "episodeId": "SLP335", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "don_stuart": { "name": "Don Stuart", "role": "guest", "tag": "DON" } }, "segments": [ { "speaker": "stephan", "time": "00:09", "start": 8.69, "text": "Hi and welcome back to Stephan Livera podcast, a show about Bitcoin and Austrian economics. Today for episode three hundred and thirty five, this is the first episode of this new year twenty twenty two, and I hope you all had a great break. Today we're talking with Don Stuart, and we're talking about venture capital and Bitcoin. Now, there's a lot of different thoughts in In the space, I thought an episode talking about how venture capital works, how is that sausage made, as well as applying that to the world of Bitcoin and the quote-unquote crypto world and the differences between these worlds. This show is brought to you by Swan Bitcoin, the easy way to accumulate Bitcoin while also learning about Bitcoin. So if you have friends and family who are new and need an onboarding pathway, Swan Bitcoin is a great place for them to learn. You can get The copy of Inventing Bitcoin by Jan Pritzkir for free at swanbitcoin dot com slash free book. Also, there is a DCA or Bitcoin Savings Plan calculator on the swan dot com front page, so you can see, for example, if you had invested a hundred dollars a week for five years, how much would you have put in and how much would you now have. Swan also has Swan Private, which is a high-touch service for high-net-worth individuals and entity accounts. So go to swan dot com and sign up. This show is also brought to you by Brains. They are a Bitcoin mining company through and through, and they're working on some of the most unique and cutting-edge projects in the mining industry. They offer Brains OS Plus. This is firmware that you can install on your ASIC machine with a special auto-tuning feature allowing you to get more Bang for your buck. 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If you're in the US, you can have that ordered and delivered to your home and set up mining at home, use some of the guides and guidance they have on their website, or you can have that machine sent to a facility where you pay hosting, you select the mining pool. And you receive Sats. So this is an easy way to get started if you don't have access to competitive power rates at your home on residential rates, you can access this without having advanced technical knowledge. So you can check out the website at compassmining.io, they've got all sorts of material, they've got podcasts and guides also, so make sure you check them out. And now onto the show with Don. Don. Welcome to the show. Hey, Stefan, how you doing, man? Good to see you again. Doing well. I really enjoyed your recent article. And I wanted to chat about what's going on in the world of venture capital, and so I think this might be an interesting one for people who might have heard a bit about that world, but maybe they've not been as exposed to it. And I think you have an interesting perspective. So for anyone who doesn't know you, can you tell us a little bit about yourself?" }, { "speaker": "don_stuart", "time": "03:41", "start": 221.4, "text": "For sure, yeah. so Don Stuart, I'm born and raised in Kansas City, right in the middle, smack dab middle of America. grew up here, went to college here, been here kinda my whole life. my introduction to Bitcoin came in 2016, a friend of mine at a software company we worked at introduced me to Bitcoin, and like most people, I, you know, initially wrote it off. he luckily at least convinced me to buy a little bit at the time, and kinda forgot about it until the bull market came around in 2 So, promptly, went down the, the altcoin rabbit hole and bought all kinds of altcoins and had no idea what I was doing, in the bear market twenty eighteen, found out real quick that, you know, everything else went down ninety nine percent plus, Bitcoin was the only one that stayed around, and I figured, man, I gotta figure out what makes this different. So that was kind of my rabbit hole journey. Actually started learning at that point about what Bitcoin is, why it's important, and have just been sucked down the rabbit hole ever since. prior to getting Consulting company, technology company that I built and ran for the last decade, earlier this year, finally ended up exiting that business, sold it, and just have been focusing in the Bitcoin world full time. So, for, for me, that means I co-host a meetup here in Kansas City, our Kansas City Bitcoin meetup, and have been doing some venture investing in Bitcoin startups. And in addition to that, I, am a co-host of a, of a new podcast called Orange Pill Addicts. So, that's a little bit about my background." }, { "speaker": "stephan", "time": "05:07", "start": 307.34, "text": "Awesome. And Brady from the Swan team, he's down there in the Kansas City scene as well. So let's talk a little bit about venture capital. So just for people who maybe they've heard the term, but they've never really had it explained clearly what exactly it is. So what is venture" }, { "speaker": "don_stuart", "time": "05:25", "start": 325.03, "text": "capital? So venture capital is a, it's a form of private equity, and it's just a way for early stage companies and startups to get funding to expand their business. So a lot of the times the-- these brand new companies don't have access to capital markets or- Ways to get loans from banks necessarily, so they'll lean on angel investors or venture capitalists to fund their project, and that can take various forms. Usually, it's in the, the form of equity financing. So the venture capitalists will get a small portion, typically of the company's equity. sometimes there's debt arrangements involved, but it's really just a way for early stage startups and smaller companies to get financing." }, { "speaker": "stephan", "time": "06:03", "start": 363.46, "text": "And so how does the model work? Let's say you are a venture capitalist, what is the model?" }, { "speaker": "don_stuart", "time": "06:11", "start": 370.7, "text": "So the model is, you want to identify kind of high growth, fast, growing companies that are still small and still kind of getting off the ground. that's where you wanna focus your investments typically. So, I mean, I guess the, the story most people know is like, you know, some of the Silicon Val-Valley companies, such as Tesla, Facebook, things like that, who have, you know, they're kind of, are gaining some traction on the early stages, they're getting some users, they're getting some, some traction, some people Capitalists want to step in and kind of get a piece of those companies, so to speak, before they kind of blow up. So venture capitalists, identify promising companies that are kind of high growth and looking like they have a promising future and then make their bets based on where they think those companies could be." }, { "speaker": "stephan", "time": "06:55", "start": 415.01, "text": "And it's interesting you use the term bets as well, because I think that's also an interesting aspect because perhaps you could explain for people why there is such a high failure rate and the way venture capitalists think about that when they are doing their investments." }, { "speaker": "don_stuart", "time": "07:11", "start": 430.52, "text": "For sure, yeah. So, I mean, on average, probably ninety percent plus of early stage companies fail. So, for venture capitalists, they want to be sure to spread their bets around. they know that, you know, most of their investments are gonna be worth zero at some point. I mean, most of these companies are gonna go out of business, run out of funding, not make it to the other side of their stated goal, et cetera. So really, they want to spread their investments out. They make a lot of typically small investments, especially the earlier stage of the company" }, { "speaker": "don_stuart", "time": "07:40", "start": 459.98, "text": "To kind of limit that risk. So kind of the saying is, you know, if you can have one winner out of ten, you're doing well, and that typically will pay for all of the, all of your losers as well, because typically when a small company does make it big, they make it really big, and it, it makes up for all those other failures." }, { "speaker": "stephan", "time": "07:55", "start": 475.05, "text": "Yeah. And as you mentioned, the winners in this case, what does success look like? What, what does that mean that this one company out of the ten, let's say, really knocked it out of the park" }, { "speaker": "don_stuart", "time": "08:10", "start": 489.84, "text": "industry, but a lot of the times it's for software companies, technology companies, it's number of users, number of monthly active users, daily active users, et cetera, and then once they kind of stop their burn rate as far as burning capital and they're kind of making it to a, a more mature stage company, then they typically start, you know, having sustainable revenues, profits, et cetera, that will eventually lead to, you know, maybe being listed on a stock exchange somewhere or being bought out by another company, et cetera. So success At the long term is what they call a liquidity event, so that could be, you know, the company buying their stock back from investors, that could be them being acquired by another company, it could be them going public on a stock, stock exchange through a SPAC or a IPO or a different listing, but success kinda depends on the stage of the company, but, at maturation, it's, it's obviously having a profitable, profitable revenue model and returning that equity back to investors, hopefully at a multiple of what they paid." }, { "speaker": "stephan", "time": "09:09", "start": 549.08, "text": "I see. And Also, could you explain what it means that there are multiple rounds of investment and what are the different stages?" }, { "speaker": "don_stuart", "time": "09:17", "start": 557.24, "text": "Yeah, for sure. So everything from pre-seed is usually the earliest round. So a pre-seed round is typically for a company that's very, very new. They may only have, you know, a few users, on their network at the time. They might only have a few people using their app, things like that. And it's just a way for companies to kind of bootstrap themselves a little bit further to develop their product. Or service more. Typically, a lot of the times those, those super early rounds, like the, the seed and the pre-seed, are done through something called a SAFE, which is a simple agreement for future equity. So investors in, in those types of super early rounds basically just, agree to fund the, the founder or the company a certain amount in, in exchange for a piece of equity in the future. So, that piece of equity usually would come at what's called a priced round, which could be a seed round or a series- Series A, a Series B, and that's when they, the, where the company will actually have terms of a specific round that they raise capital for in exchange for a certain amount of equity. So they might say, \"We think our business is worth ten million dollars, we're willing to sell five percent of our equity, \"and, the, the folks who invested in those pre-seed rounds on those safes will then convert to that, that new pricing round, if that makes sense." }, { "speaker": "stephan", "time": "10:33", "start": 632.88, "text": "Right. And there's typically a vesting schedule, and this applies in the case of founders Early employees, and so on. So if you could explain just a little bit around how vesting works in the venture capital world?" }, { "speaker": "don_stuart", "time": "10:48", "start": 648.03, "text": "Yeah, yeah. So a lot of the times, early stage companies, especially will-- part of the compensation package they offer to their employees are shares in the company, so equity in the company. And you mentioned the, the vesting schedule, so that comes into play where, employees won't be able to sell those shares for a predetermined amount of time, and that can apply to early investors as well as founders. So, if you know, if employee number two at a company gets a chunk of equity, they might say, \"You'll be able to sell your equity on some kind of, scale starting at like year three, for example. You can sell a certain amount in year three, four, five, six, et cetera, and, although, you know, it can have different terms as long as for investors, for employees, and it's just a way to basically-- they don't want everybody dumping their, their shares at the same time, so it's kind of a way to," }, { "speaker": "don_stuart", "time": "11:40", "start": 699.98, "text": "Of" }, { "speaker": "stephan", "time": "11:40", "start": 700.1, "text": "course, and I think we'll, we'll come back to this question around vesting later when it comes to crypto. So one other question around VCs and venture capitalists, where do they get their money from? Where are these funds being sourced from?" }, { "speaker": "don_stuart", "time": "11:53", "start": 713.07, "text": "Yeah, so a couple different ways. The, the most common way is a pooled investment vehicle. So they will use, Like a hedge fund structure basically to gather money from a bunch of limited partners, and then the people that actually facilitate the fund are what's called the, the general partners. So the general partners are actually in charge of sourcing the deals, allocating the capital, things like that, but they'll collect money from a bunch of limited partners who, are betting on that manager's expertise, track record to find, good investments for them. So it's, it's typically wrapped up through, through a fund structure, but they're also our individual inve- Investors as well, so, especially in the angel investing world, there's a lot of just individual investors who provide their own capital straight to companies and kind of forego the whole fund structure as well. So a few different forms. I see." }, { "speaker": "stephan", "time": "12:44", "start": 763.82, "text": "And as you mentioned, the limited partners are putting some level of trust into the, into the general partners in terms of where they are directing funds and potentially also their ability to source good deals, or, or I guess that's also known as deal flow. So could you explain Explain a little bit about that too." }, { "speaker": "don_stuart", "time": "13:02", "start": 781.71, "text": "Yeah, so deal flow is really the most important part of a venture capitalist job. That, and, you know, obviously, they wanna make sure that the terms they're investing on when they do find a deal makes sense to them, but deal flow is really where the networking comes in. So a good venture capitalist will have a strong network of founders, a strong network of other investors in whatever industry their expertise is in, and they'll spend a lot of their time just making connections with founders, with early stage companies. They wanna know, you know, who In the process, what companies might be raising capital soon, for those companies that will be raising soon, where are they at in the life cycle of their company? Are they gonna be doing a pre-seed round, a seed round, maybe they're a later stage company doing like a Series B or Series C, or even getting ready to go public? But, the venture capital, that's, that's where their expertise comes in. They wanna know all the founders in their field of knowledge, they want to know who's raising money when, and they wanna have those connections so that A company is getting ready to raise a round, you know, they're one of the first ones to know about it, they potentially are the first call from the founder letting them know that they're getting ready to raise, and they can jump in those rounds, and that's particularly important in today's world where there's just abundant liquidity all over financial systems. so right now, a lot of these founders don't necessarily need money, they just-- the thing they really need is, is connections, and having those connections and support from a venture capitalist can help them in more ways than one, They can help build their business, they can help connect them with other capital allocators, and they can even potentially help in development of, of certain things throughout the company's lifetime as well. So, yeah, the venture capitalists really their expertise is finding the, finding the deals, sourcing the deals, making sure they know who's doing what in the space and, and then allocating capital to the, to the most promising, companies in the space. I see." }, { "speaker": "stephan", "time": "14:54", "start": 893.76, "text": "And in terms of venture capitalists, what is the typical remuneration model or structure? structure for them, how do they make their own money?" }, { "speaker": "don_stuart", "time": "15:03", "start": 903.25, "text": "Yeah, so typically in the, in the fund structure, they will get management fees as part of the fund. So typically it's a two percent management fee on capital invested in the fund. So if the fund has ten million dollars, let's see, doing math on air, that'd be like around two hundred thousand per year on the management fee. So they keep two percent of the capital in the fund per year for a management fee, and then any kind of performance fee they get is typically a twenty percent, it can go all the way on the fund, but that just means if the fund is making money, they take twenty percent of the profits of that fund. So for the venture funds, they typically have a longer life cycle, money is typically locked up for approximately seven to ten years in a venture fund, and, so during that time, the, the majority of the revenue for the managers comes from that two percent management fee, and if they have any liquidity events within that time, they'll take a, they'll take their cut of any profits there as well." }, { "speaker": "stephan", "time": "15:56", "start": 956.31, "text": "Excellent. And so we were touching on earlier how there's Abundant liquidity out there in the world, and so maybe you could touch on a little bit about that and why we're seeing that and what impact that is having into the world of venture capital investment." }, { "speaker": "don_stuart", "time": "16:13", "start": 972.82, "text": "For sure. It's, yeah, it's, it's totally crazy. So, I mean, everybody knows the printing press has been in overdrive since COVID. I mean, there's been approximately forty percent of all US dollars in existence have been printed in the last couple years, so, I mean, their financial markets are just awash with money. You see equities at all time highs Real estate, you know, all time highs, Bitcoin, all time highs pretty much. It's, it's just there's money floating around everywhere. So, in order to try to keep pace with the rate of monetary expansion, capital allocators are charged with trying to find investments that meet or exceed that, you know, rate of monetary expansion. So, I mean, right now, the last couple of years, they're looking at approximately a forty percent hurdle rate in order to just, you know, keep up with the level of money printing. So, that being said Investors have to look out further and further to the right on the risk curve, looking for riskier and riskier invest-investments in order to generate those higher returns. So, I mean, you're seeing everything from, you know, meme stocks going crazy, Tesla, AMC, all the short squeeze nonsense that went on last year with some of those, some of those stocks, you're seeing crazy cryptocurrencies going nuts with Doge and Shiba Inu and all that junk, and that's just a, a partially a function of all the liquidity in the system, and that definitely plays people are noticing that they can't buy as much with their money as they used to, and they're trying to figure out things they can invest in that let them keep up with their lifestyle and keep up with that, like I said, that pace of monetary expansion." }, { "speaker": "stephan", "time": "17:43", "start": 1062.78, "text": "Right. And as you mentioned, this risk curve, we can think of it like there are different types of investments that people could do, and maybe today it's becoming a little warped, but historically they might have thought of it like, okay, there's bonds, there's stocks, and so on, and then you're going further and Private equity and venture capital being one of them. So I guess that you would say that's a fair characterization of that concept around the risk curve. Or did you have anything to add there about risk curve?" }, { "speaker": "don_stuart", "time": "18:11", "start": 1090.94, "text": "Yeah, no, I think that's accurate. And, the other problem too is, you know, bonds now are so impaired just because the rate of inflation is so high that, that was used to be a large allocation for most, most people that would have, you know, the old sixty forty portfolio where it's sixty percent equities, forty percent bonds, and now those bonds," }, { "speaker": "don_stuart", "time": "18:30", "start": 1110.33, "text": "And salt doesn't allocate to bonds anymore with, you know, the stated rate of inflation in the United States being seven percent, but we all know that the rate of inflation is actually a lot higher than that. So any kind of bond, even a junk bond these days, you're not keeping up with the rate of monetary expansion by any means. So yeah, people are being driven to equities, they're being driven to real-- over, you know, overpriced real estate and all kinds of other crazy stuff. But yeah, venture, venture capital is definitely further out there on the risk curve Plus, of these companies are gonna fail." }, { "speaker": "stephan", "time": "19:02", "start": 1142.15, "text": "And so let's bring it now to the Bitcoin and crypto worlds. And so you wrote this piece recently around venture capital in this world. Could you give us some of your high level thoughts, what's going on out there in the quote-unquote crypto VC world?" }, { "speaker": "don_stuart", "time": "19:18", "start": 1158.32, "text": "Yeah. So as a Bitcoiner, I'm sitting here looking at, you know, Twitter and all the news sites that we all follow, and every day you just see, so-and-so, shitcoin raised x amount of money, so-and-so. company related to that space raised, you know, another billion dollars, and it just seemed like this was happening every day. So, I kept thinking to myself, \"Why are all these people allocating to crypto tokens and crypto ecosystem companies and not to all the great Bitcoin companies out there? \" So, starting to look into it, I found out that there's usually, I mean, less than, probably less than two to four percent of the total venture capital money in the crypto ecosystem is actually being directed to Bitcoin companies. So, it's just a sad, sad state of affairs. I think Number one, I think it's just easier for venture capitalists to make multiples on their money when they can get in early for a new token round. So a lot of these tokens that are launched are initially sold at steep discounts to venture capitalists and other insiders in the industry. So it's really easy for them to buy these cheap coins and then turn on their marketing and hype machines, pump the price of those tokens, and then exit, you know, on retail basically. So they're exiting on retail when they bought this token Token, basically in a premine where it was worth, you know, a hundredth of, of what it was after it was listed on an exchange. So it's easy for them to get those multiples for their investors, and honestly, it's just a, it's just a symptom of, of, you know, high time preference, fiat thinking. They just roll these investments from one thing to the next. So that's one part of it. I think the other, there's a couple other more reasons for the discrepancy in my opinion. One is there's kind of a misguided comparison for these crypto companies" }, { "speaker": "don_stuart", "time": "21:00", "start": 1260.37, "text": "And think about it, it's like, well, all of these crypto tokens basically purport themselves to be decentralized for the most part, the vast majority of them do anyway. And so the comparison to them as a, to a tech company just breaks down right there. I mean, tech companies obviously aren't decentralized. I think it's just an easy way for these crypto VCs to sell the idea to their investors, honestly. And also, I mean, normal technology companies can't just print money out of thin air in the form of tokens, so that's- Kind of another breakdown of that whole, comparison, but yeah, so those, those are the main two. There's another fallacy that crypto, people like to think that their addressable market is larger than Bitcoin's. So, in their mind, a lot of the times, Bitcoin is only, quote, unquote, money, which in my mind is the most important thing there is, but to them, in their mind, they just say, \"Well, if Bitcoin's only money, then every other use case in the world is ready to be disrupted by And, and so they think there's just a larger, you know, perceived market there for them to play in. But, I mean, like I said, everybody needs money. I don't know anybody that actually needs a, a JPEG. So," }, { "speaker": "stephan", "time": "22:12", "start": 1332.08, "text": "well, when it comes to the question of perceived market, could it be that some of them are, are thinking of it maybe incorrectly? They're saying, \"Oh, Bitcoin is, quote unquote, digital gold,\" and the gold market is, you know, only a few, a couple trillion, where the market for stocks or global wealth is A hundred trillion. Could it be that that's part of their argument?" }, { "speaker": "don_stuart", "time": "22:35", "start": 1354.65, "text": "I think that's part of it. I think also they, honestly, it's hard for them in their line of business, so their incentive structure, right, is to amass the most amount of capital under management they can to generate, like we talked about, those, those fees, right? So, they can't really just tell people, \"Just go buy Bitcoin on your own, store it, you know, in cold storage, and forget about it for ten years.\" If they did that, they wouldn't Aren't easy for people to do on their own, so, they'll say, you know, we're gonna find the next Amazon, we're gonna find the next Apple, things like that. So I think it's, it's partially they just-- most of them don't understand Bitcoin in the first place, and it's also partially against their incentive structure to kind of, you know, just tell people to go buy Bitcoin." }, { "speaker": "stephan", "time": "23:19", "start": 1398.78, "text": "And coming to that question we were discussing earlier around vesting and liquidity events, as we were saying, how does that apply into the crypto token world when? Let's say some of the early investors, the friends and family round, are getting allocated altcoin tokens as opposed to just merely having equity in a" }, { "speaker": "don_stuart", "time": "23:40", "start": 1419.95, "text": "company. Yeah. So a lot of the times it's, it's, they get straight tokens, or sometimes they'll get a portion of tokens and equity in a company if there is a company behind the token, which generally there is. So, like I said, a lot of the times they'll get these at steep discounts from what retail can buy them at later on, and the vesting schedule is typically a lot shorter for altcoin projects than it would be normal technology company for equity round like we were talking about earlier, like early stage employees generally have to hold their stock for at least a few years, but with these tokens, it's maybe a few months. I mean, it's, it's totally different. So VCs can get in early, they can get in at a vastly cheaper price than anyone else can, and they typically don't have to wait very long in order to be able to have that position be liquid, so there's incentive to get in early, there's incentive for them to create hype and buzz around the token, and Incentive for them to liquidate it once there's a liquid market trading on an exchange for that token, and they kind of just cycle those through. So I mean, they'll do one, maybe a year later, they'll jump to the next one, make that one run up and dump it on retail and just do it over and over again. So, yeah, the-- there's definitely a problem in my, in my opinion with the, the quick time that these early stage token events can become liquid. I feel like they should have to be held at least for like three or four years living in an un-regulated world for the most part in this industry, and I think that's also something these, these VCs that play around in the crypto space are taking advantage of. It's kind of a gray space right now as far as regulatory, and I think hopefully that will be changing, in my opinion, in the next couple years, but I guess we'll have to wait and see. Yeah. And the analog in the" }, { "speaker": "stephan", "time": "25:21", "start": 1520.64, "text": "non-quote unquote crypto world or Bitcoin world is you get shares in a company and the liquidity event is actually getting listed on a stock exchange. Exchange. That's the liquidity event, but in this case, there's an incentive for crypto, VCs and people involved because they're getting that earlier liquidity event, and in, in this case, it's getting their altcoin listed on one of the casino exchanges, basically." }, { "speaker": "don_stuart", "time": "25:48", "start": 1547.94, "text": "Yep, exactly, yeah. And a lot of the times, the companies behind the tokens will actually pay for those listings too. so they'll go to Binance and they'll say, \"Hey, you know, we'll, we'll write you a check for a million dollars or a million dollars in crypto or So, I mean, there's all kinds of, behind the scenes deals that come with these things, and it's, it's just a-- it's just honestly all around a shady business practice. you have the exchanges incentivized to list as many tokens as they can, because they want their users gambling on as many tokens as they can. You have the company behind the token wanting to be listed, because then it's easier to drive the price up, which makes the tokens they hold worth more, and of course, the VCs are along for that ride too, so they're using their To, to get things listed and to get that price of that token up as fast as they can, so yeah, it's an all-around kind of a, a flywheel effect, not in a good way." }, { "speaker": "stephan", "time": "26:41", "start": 1601.27, "text": "And when it comes to, like we were saying earlier around deal flow, connections matter. And so in the quote-unquote crypto world, connections might mean things like being able to get a coin listed, connections might mean being able to have somebody write a favorable press or have a favorable interview done for your coin or really, it's a company behind that coin. So the, these are different ways that the crypto world, quote-unquote crypto, is dis- distinct from the Bitcoin world. So maybe you wanna tell us a little bit about the distinctions then when it comes to a Bitcoin venture capitalist." }, { "speaker": "don_stuart", "time": "27:20", "start": 1640.4, "text": "For sure, yeah. in my experience, we're still pretty early as far as having Bitcoin only venture capital funds. you have, you know, the Stillmarks of the world, the Folger Ventures of the world, who have been around for at least several years now. but just recently, just this past year, we're starting to see more and more dedicated Bitcoin capital being raised, through funds. So you have You have the likes of Trammell Ventures Partners standing up a fund here recently, you have ten thirty one, you have several, syndicates on AngelsList, Bitcoin Ventures, which I know Stephan, you're a part of, a few others there as well that are dedicated to funding Bitcoin only companies. So it's just really great to see, we're a few years behind the, the crypto bros, but I feel like we're, we're making up ground fast, which is great. But yeah, the, the difference is as far as the investors behind this capital is" }, { "speaker": "don_stuart", "time": "28:11", "start": 1691.21, "text": "Compared to the crypto VCs, in my experience, the, the capital allocators for Bitcoin-only companies are doing it for a few different reasons, and they're not in a big hurry to get that liquidity event we were talking about. A lot of the times, it's, it's mission-aligned capital, so we want Bitcoin to succeed, and we want to do everything we can to fund the companies that are helping Bitcoin get to where it is now, to the other side of hyperbitcoinization, and we all know that's a process, and we know that in order for that to happen And happen as fast as it can. all these companies that are supporting onboarding, supporting, self custody, cold storage, all the social layers being built on top of Bitcoin, Lightning, et cetera, all that's gonna take time. And most Bitcoiners realize that, that's why we're in Bitcoin in the first place. And so they're, they have much more, patience really, and a lot longer time that they're willing to let that capital just, you know, ride and be supportive of these companies." }, { "speaker": "stephan", "time": "29:08", "start": 1747.87, "text": "Back to the show in a moment. 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Now, you can create one for free on the website, and they will countersign for you for a fee. Alternatively, if you need guidance, they have a concierge onboarding program where you can pay an upfront. Fees, have hardware wallets shipped to you, have video calls to teach you how to use your hardware wallets and deposits in Bitcoin in your vault. So if you go to the website and you use the code Livera, you'll get a discount on your Klonecho onboarding program. That website is Unchained dot com. Back to the show with Don. When it comes to the differences in valuations, what are we seeing in terms of, say, Bitcoin only companies as opposed to crypto companies?" }, { "speaker": "don_stuart", "time": "31:42", "start": 1902.26, "text": "Yeah, it's a, it's a huge, huge difference, and it's really sickening, honestly. So, I mean, you have- The example number one, which is the, the first basically big IPO on the crypto side, which is Coinbase. I mean, they're valued at over fifty billion dollars today, then of course you have the Binance's of the world, the FTX's of the world. They're both, Binance is, is rumored to be worth several hundred billion dollars, FTX raised money earlier this year at a twenty-five billion dollars valuation, you have Crypto.com, Consensus, Celsius, all those types of companies that are worth- Several billion dollars plus. And then, you know, on the, on the Bitcoin company side, I mean, really you have things like Unchained Capital, River Dot Com, Strike, Swan, Casa, Blockstream, all those types of companies. And really, I mean, really the, the one that's valued the highest out of that list I just went over is Blockstream. They're, they're about a three billion dollar valuation. they've been around the longest, they do kind of the most things for the, in the, in the Bitcoin space, everything from mining to to the liquid side chain, to the hardware wallets, to the, satellite, all that kind of stuff. But I mean, really the, the unchain capitals of the world, the rivers, they're worth so much less than the comparable crypto companies. I mean, you're talking maybe ten to twenty million dollars in that range as opposed to two to three billion on the crypto side. So it's, it's a very big difference for sure." }, { "speaker": "stephan", "time": "33:09", "start": 1988.52, "text": "And what kind of difference in reach do you think that translates into? Does that mean a lot less marketing, a lot less customers? Customers, what, what kind of" }, { "speaker": "don_stuart", "time": "33:19", "start": 1998.94, "text": "differences are we seeing there? Yeah, definitely. So on the Bitcoin side, since until recently there hasn't been much capital available for investment, a lot of the, the Bitcoin company founders are kind of left to build their product or service first, develop a product market fit, and then go out and try to raise a little bit of money. So they're typically more bootstrapped as opposed to the crypto side where, you know, kind of anything with an idea is generally having at least a few million bucks, if not more, thrown at it from all the- The venture capital money floating around in the crypto space, so they're not really incentivized to build any kind of product or service first. typically it just starts with an idea, then they go out and raise money, and then they try to execute on that idea, whereas on the Bitcoin side it's the other way around, they develop the product and service first Prove product market fit and then go to the market and try to raise some money to get to the next stage of that, of that business. And so, I mean, that also plays into marketing dollars, hype, a lot of the times Bitcoin companies, you don't even know they exist until they come out and say, \"Hey, we have this product or service now, check it out.\" whereas on the other side, when the VCs get involved early stage on the, on the crypto company side, they're pumping upcoming so-and-so project or upcoming so-and-so token's gonna it's just a, yeah, it's a stark difference for sure." }, { "speaker": "stephan", "time": "34:38", "start": 2078.16, "text": "Is there also a gap or a difference here, more just in the minds of the everyday person? So like, someone who's not really in the Bitcoin or quote unquote crypto world, they maybe they're analogizing more to equities, and so they think, \"Oh, I, I need to be invested in a fund that is doing all of the coins.\" Do you think that's playing into the mindset here, or is it something else?" }, { "speaker": "don_stuart", "time": "35:00", "start": 2099.87, "text": "I think that's definitely part of it. Yeah, for sure. I think Rabbit hole fully, just they kind of wanna play the s-the crypto space like they do the equity market space. They wanna own a diversified basket of, of cryptos because that's what they've always done in the equity market. what they don't understand obviously is that, you know, Bitcoin is the only decentralized token out there, which really at the end of the day means it's the only one that's resistant to different attack vectors, and it's really the only, the only money that you can own. And spend without any kind of intermediary, where all these other altcoins are controlled by generally a small number of people or a small number of players, and, like we talked about, they turn on the, the marketing and the hype machine to make big promises, but at the end of the day, there's small likelihood of, of most of those being around within the next five to ten years. I mean, you can look at any altcoin that's been up in the top ten over the last seven or eight years, and they're all, you know, they're all gone. They And the, try to do that whole basket of, of cryptos things sounds good because that's what people are used to doing in the equity world, but, obviously in the, in the crypto space, you and I and the rest of the bitcoiners know that that's not gonna end well for those people." }, { "speaker": "stephan", "time": "36:18", "start": 2177.86, "text": "I see. And it seems as well that there are different eras, right? So twenty sixteen, seventeen was the ICOs, and then, you know, in that time since then, it was things like, okay, it's DeFi or it's NFTs or it's" }, { "speaker": "stephan", "time": "36:36", "start": 2196.3, "text": "Six months, let's say, before the market rotates out of one thing and into the next thing, and so at one point it's yield farming or something else. So what's your perspective on some of those shifts we've seen?" }, { "speaker": "don_stuart", "time": "36:50", "start": 2209.57, "text": "Yeah, I think a, a big part of it just has to go back to the incentive model. So, a lot of the founders and the projects that, that build those things, on Ethereum or on Solana or on any of the other, alternate platforms, they're incentivized to always have something new for people to jump to Because they can create a project, they can mint a bunch of these tokens, aka print money out of thin air for themselves. They can run that hype for a while, get a bunch of people excited. There may be some kind of product that people use for a while, so I mean, it's not all, it's not all vaporware necessarily, but, a lot of the times they run that for a few years, hype starts to die down, probably during the next bear market for whatever project they're building, and then once that kind of crashes and burns, they'll go on to the Whether that's NFTs or DeFi, I think we're gonna see that same thing play out over the next few years for those, those, you know, things that have been so hyped over the last few years as well. I see. Yeah. And, I" }, { "speaker": "stephan", "time": "37:49", "start": 2269.0, "text": "think one perspective That's been out there for a while is, oh, everything's a scam and, you know, everything other than Bitcoin's a scam. and perhaps there's like different levels of scam. Maybe we would say some of them are like outright, you know, OneCoin and Bitconnect, where it's just like intentionally like a criminal intent, and then there's others that are maybe less of a scam, but they're kind of more like a grift or they're more like, I'm promising things that are maybe not realistic, or there's not a sustainable model here because it just relies Attracting more and more people, and perhaps eventually you run out of people who you're going to be able to pull into your scheme, and eventually the world shifts out of, or people shift out of this one and into some new hotness." }, { "speaker": "don_stuart", "time": "38:33", "start": 2313.33, "text": "Yep, for sure. And I think, I think DeFi is a perfect example of that, honestly. I mean, you see last summer, where yields on a bunch of these different DeFi protocols were in the thousands of percent APY, and that was just a function of, you know, being-- There was a bunch of people doing the liquidity" }, { "speaker": "don_stuart", "time": "38:52", "start": 2331.68, "text": "New tokens were coming out left and right, and people didn't realize that, you know, the more, the more tokens that are rewarded to them, just means that the tokens they have now are worth less of the overall supply. So I think, when people started, stopped getting s-as excited about some of those protocols, they kind of moved on. Then they jumped over to NFTs, we kind of saw the same thing there, and pretty soon they'll jump to the next thing, whatever that is. But yeah, I think it's, it's, just a function of, The, the high time preference, people wanna get rich quick, and so they see, \"Oh, I can make, you know, two thousand percent API, APY on XYZ DeFi protocol. Let me go over there and make a million dollars real quick, and then I'll be, you know, set for whatever, for the next ten, twenty years of their lives.\" But usually when retail people figure that out, it's, it means it's kind of too late for those returns to keep happening. So that's typically when the, the VCs, you know, when they see all that hype" }, { "speaker": "don_stuart", "time": "39:52", "start": 2391.68, "text": "And the retail is left holding the bag." }, { "speaker": "stephan", "time": "39:53", "start": 2393.47, "text": "Unfortunate. And so as a Bitcoin investor and investing in companies, how do you deal with the question that someone could ask you, they could say, \"Well, Don, why not simply huddle Bitcoin?\"" }, { "speaker": "don_stuart", "time": "40:05", "start": 2405.35, "text": "Yeah, and that's actually, you know, it's a really good question. It's something I ask myself every day when I'm evaluating companies in the, in the Bitcoin space. You have to basically ask yourself that exact question, am I better holding onto Bitcoin for the next ten years or am I better off putting some money into this company that I could And so there's a couple things that, that go into that calculation, at least in my mind. number one is I just wanna help the, the space, you know, advance as much as I can, and part of that, in my opinion, is helping these Bitcoin companies that are doing so much for the space be able to get to their next, round of funding or be able to have a little bit of more money to spend to acquire customers, et cetera. So, part of it's like, that's where the angel investing comes in, you're but of course, you know, capital allocators wanna get a return on their capital too, so it's important to kinda have a good balance of, not so much charity, but angel investing in a way, and then trying to identify opportunities where you really do think that you'll be able to outpace the, the rate of, of Bitcoin, advance. So there's a few different things there that I think people can take into consideration when trying to determine whether they should just hold Bitcoin or whether they should take a portion of, of any available- Capital they have and also invest in some equity of Bitcoin companies in the space. But yeah, I mean, I think it's, it's number one, we just wanna help these, these companies as much as we can. They're important for the ecosystem, which in turn is important for Bitcoin." }, { "speaker": "stephan", "time": "41:34", "start": 2493.51, "text": "And so as I take it from you, there's this idea that the Bitcoin focused venture capitalists tend to be more mission focused and perhaps more ideologically driven. And so that can also play into the decisions that, say, a company founder- Or team might be thinking about when they're looking at who are we going to accept investment from, because it's also arguable to say that depending on who you take your investment from, they can influence the direction of that company." }, { "speaker": "don_stuart", "time": "42:06", "start": 2525.63, "text": "Definitely, yeah, that's a really good point. And I think up until recently, a lot of the Bitcoin companies, for lack of a better option, had to accept capital from some of these VC crypto operators, just because there, honestly, there wasn't any other capital available to them. So you have, Bitcoin companies that, you know, were accepting money from people that didn't necessarily align with their mission and goals, and that can become a problem, especially if one of those allocators amasses a large chunk of a round or a large chunk of a company equity, they can potentially have greater influence on the direction, the future direction of that company. sometimes they may even get a board seat, things like that, that could potentially cause a company to have to move away from its original mission and vision and move more towards what- Controllers of their equity feel like they should be doing, but now that there's Bitcoiners and, and Bitcoin focused funds out there, Bitcoin companies are much more likely to accept capital from those types of players just because they know that we're mission aligned, we have lower time preference, we want them to succeed based on the mission that they originally laid out for the company. Most of the time, Bitcoin capital allocators aren't gonna get in there and try to change the direction of the company, which a lot of the times on the crypto side, that's, that's exactly what happens for, with some" }, { "speaker": "stephan", "time": "43:22", "start": 2601.66, "text": "What kind of startups and ideas would you want to see more funding for, obviously in the Bitcoin space?" }, { "speaker": "don_stuart", "time": "43:29", "start": 2608.85, "text": "Yeah, yeah. So for me, anything, privacy, privacy focused, any kind of company that helps Bitcoiners be more self-sovereign, those are the types of companies that I would really like to see more funding. So, I mean, you kinda have the, the Hottel Hottels of the world, things like that out there, but I think, we'd all be better off if, you know, companies like Start9 Labs," }, { "speaker": "don_stuart", "time": "43:52", "start": 2631.66, "text": "More and more funding to continue building more self-sovereign, privacy-focused tools. And then the other space I'm really excited about right now is, a lot of the development going on on top of the Lightning Network, specifically podcasting two point o apps. I'm really excited about those, being able to do the value-for-value model as far as content creation, I think is gonna be really important, especially as we move further into censorship from, big tech companies, Twitter, Facebook, et cetera. We're already starting to see some of that. So to Centralized alternatives where, podcasters, YouTube, people can speak directly to their audience and provide value to them and then get sat streamed back to them over the Lightning Network is, is super exciting to me. So really, enjoying that space and then now you're starting to see some gaming on top of Lightning, DLC projects, those are all super exciting. Looking forward to, to what comes next with those." }, { "speaker": "stephan", "time": "44:44", "start": 2684.29, "text": "Are there businesses for which it's not suitable to have venture capital investment?" }, { "speaker": "don_stuart", "time": "44:51", "start": 2690.72, "text": "Yeah, good, good question. So I think any kind of probably slow-growing company, would be better suited to avoid venture capital investment and try to access other forms of investment, whether that be a, a bank loan, Traditional, more traditional capital allocations as opposed to venture capital. So companies with smaller profit margins, companies that are slower growing aren't typically going to be a match for venture capital just because the venture capitalists are looking for companies that can, that can hit it big, like we said, you know, typically one success is going to pay for nine of their other failures. So if you're kind of a more mature, slow growth, small profit margin company, you're probably not going to get a lot of interest from venture capitalists, and you probably aren't actually aren't going to want that kind of money anyway, because they'll be kind of pushing you to, to change your business, to grow faster, maybe take on riskier strategies, things like that. And then the other part of it too is if, if your business is in indus-industry that has, smaller multiples as far as acquisitions go, that's probably going to be a hindrance as far as venture capital funding as well. if, if companies in your industry maybe get acquired for like three times revenue or something like that, most venture capitalists are looking for much Maybe even fifty or a hundred times revenue, you're starting to see some, some pretty crazy valuations out there in the, like, the SaaS world, for example. so yeah, I think, I think like I said, smaller, more mature, slow growth, small profit margin companies are probably, better off avoiding the venture capital route." }, { "speaker": "stephan", "time": "46:24", "start": 2784.14, "text": "Some in the Bitcoin space have argued about the plague of, quote unquote, fiat maxis. So for example, here I'm thinking of someone like Steve Barber of Upstream Data, and so he's quite-- I mean, not BCS, but where do you think that kind of concern is coming from, and do you believe that is also being driven by the fiat monetary system?" }, { "speaker": "don_stuart", "time": "46:46", "start": 2805.52, "text": "Yeah, I love Steve, his Twitter account's awesome, but yeah, he, he, he makes it very clear that he's, he believes so much in his business that he wants to hoard, you know, as much equity as he can, which is awesome. I love that kind of enthusiasm and confidence from a founder. but a lot of the times, I think there's, there's certain types of bitcoiners who" }, { "speaker": "don_stuart", "time": "47:06", "start": 2826.35, "text": "Where somebody asks for help in any kind of way, which you could consider, you know, venture capital a form of help because they're providing financing to companies and helping them grow and helping them get to the other side. So, there's, there's certain bitcoiners out there who are against any kind of assistance, you know, it's kind of like, in their mind, if, if you can't do it yourself, then don't bother. but I also think there's a lot of bitcoiners out there who see the benefits of what venture capital can do for bitcoin companies, and The other side of hyperbitcoinization, we need tons of products and services built related to Bitcoin, and one way to do that is, one way to accelerate that mission is to, to have funds and capital dedicated to providing support to those companies. So I think there's, you know, there's, of course, there's so many bitcoiners now that there's a wide, array of opinions and things like that, but I think, the more mainstream Bitcoin gets, I think the more mainstream investment in, in Bitcoin companies will get as well. I see," }, { "speaker": "stephan", "time": "48:05", "start": 2885.23, "text": "yeah. And as As I'm thinking about it now, I'm also thinking about my friend NVK of CoinKite. Now, one of some of his points of view, sort of related, but it might be more like, in certain cases, let's say, in a hardware business, maybe venture capital model isn't as suitable for it, and maybe to your point, as you were saying, that relates to the point about having not as high of a multiple in terms of revenue multiples, or maybe certain businesses are just harder to do, or, or the other argument could also be, maybe some of these businesses Maybe the market for hardware wallets yet is not big enough." }, { "speaker": "don_stuart", "time": "48:40", "start": 2920.03, "text": "Yeah, yeah, those are definitely some good points. I think anything that's, capital intensive as far as physical infrastructure is generally harder for venture capitalists to get excited about, especially, esp-- if, if a company is gonna go spend, you know, ten million dollars on a bunch of hardware or physical assets and then try to make like a ten percent profit margin on that, on those physical assets, that's something that a venture capitalist wouldn't get very excited about. It's really the, like I said, the high growth, big multi Businesses that venture capitalists are more excited to, to put their money in, but I think, like you said, I think especially for Bitcoin related hardware, whether that's hardware wallets, whether that's, node infrastructure, things like that, I think there actually will be a pretty good opportunity for venture capitalists to get more involved in that space as we move forward. the more people that plug into the Bitcoin network, the more people are going to want to be self-sovereign eventually, and the more people that are going to need those types of, of products and be willing to pay As time goes on, we'll, we'll see some of those companies be, you know, really, really big infrastructure type companies. You're kind of starting to see that a little bit here and there, but I think maybe, you know, two, three, four years from now, those companies will be, will be much bigger and there'll probably be much more money trying to get in on, on those types of companies as well." }, { "speaker": "stephan", "time": "49:53", "start": 2993.22, "text": "Some of the discussion has been, now some of this is from the crypto VCs who may argue that Bitcoiners are anti-VC. Are they anti-VC and" }, { "speaker": "don_stuart", "time": "50:07", "start": 3006.51, "text": "In my opinion, not at all. I think there's a little bit of confusion for people who say that, you know, Bitcoin is antiquated or it doesn't update, it doesn't change. Well, I mean, that's by design. We don't want to break anything on the Bitcoin main chain, so, updates, development is slow and steady for a reason on the main chain. However, that doesn't apply to peripheral companies in the space. I mean, if a company has an idea, they wanna go out there, they try their best, they try to execute, they just don product market fit or for whatever reason they fail, that doesn't hurt Bitcoin at all, Bitcoin's still fine. So, I mean, the, the risk of breaking something on Bitcoin is a risk that should be taken seriously and is taken seriously by the, you know, the developers of Bitcoin, by the node operators, et cetera, but, the companies that are being built peripherally to Bitcoin or on top of the different Bitcoin layers, you know, they can do the old, they can do the old, venture capital model of, of move fast and, and break things if" }, { "speaker": "don_stuart", "time": "51:06", "start": 3066.47, "text": "They put in, their investors obviously would be a little upset, but there's no harm done to Bitcoin, so I think there's a little bit of a, a misconception there as, as far as people saying, you know, Bitcoin's old, it's out of date, and you look at the companies, you know, in the entrepreneurs and the founders that are, are building Bitcoin services and products, and that couldn't be further from the truth." }, { "speaker": "stephan", "time": "51:25", "start": 3085.42, "text": "One other question around venture capitalists, now part of the reason they might be that is because it's not just them doing it purely out of their own It could be that that's the system driving that pressure onto them, that because of the fiat world, driving this high time preference behavior, looking for very quick returns, aka very early liquidity events That, that is driving some of the crypto VC behavior, so that it's, it's like they are a product of the overarching fiat system that we're in, and maybe that's part of the explanation for the, the Bitcoiner mindset and the crypto mindset." }, { "speaker": "don_stuart", "time": "52:06", "start": 3126.25, "text": "Yeah, definitely. 100% agree. I think it's, it's a combination of all of the, the capital trying to find a home. It's a combination of Fiat money has basically made individuals so impatient that they can barely, you know, wait, you know, to get out of, of their, of their car and walk up to a, a restaurant before they get their food. They want their food just, you know, somehow magically beamed into their car so they don't have to get out and go up there and get it. So I mean, it's a, it's a product of just, you know, fifty plus years of fiat money making people so impatient, so high time preference, and that bleeds over into returns from capital alloc Paradigm, for example, is one of the big crypto VC funds. I mean, they raised a two and a half billion dollar venture fund earlier this year, and, I mean, it's just crazy the amounts of money that they're, they're throwing around to these different projects. And the reason they're able to attract so much capital is that, you know, they can promise their investors, \"We're gonna get you a high return, and you're not gonna have to wait, you know, the seven to ten years that you would in a typical, technology venture capital fund, for And we're not just gonna do it a few times, we're gonna do it like a hundred times, so you're gonna, you know, could potentially get like a hundred x on your money in a few years if we pick the right, the right tokens, the right projects. And then on the other side of that coin, you have the bitcoiners who are, like we kind of talked about, much more low time preference, they're willing to just invest their capital in companies and founders that they have conviction in for the long term, and we're okay waiting, you know, until, as long as There's, there's a big difference there, and I think you're right, it's, it's a, it's a product of the fiat culture, the high time preference thinking, and it's just, it, it boils its way into every aspect of our lives." }, { "speaker": "stephan", "time": "53:56", "start": 3236.34, "text": "Yeah. And so it, it kind of just brings us back to that point that perhaps Bitcoiners and people who are Bitcoin only or Bitcoin focused are, in some sense, swimming against the stream, and maybe that's a little bit more difficult for them. And I guess that's kind of just like, it's like playing" }, { "speaker": "don_stuart", "time": "54:15", "start": 3254.96, "text": "I think Bitcoiners are used to kind of being outcasts, right? So a lot of us, didn't necessarily fit in in, you know, the old world, and we found Bitcoin, and for whatever it, it, you know, for whatever reason it clicked for us, it clicked with our personalities, and we're used to kind of having to, you know, make our way through lives and not maybe the easiest way. a lot of us are kind of, you know, known as outcasts or rebels or whatever, in the normal world, and then" }, { "speaker": "don_stuart", "time": "54:44", "start": 3284.08, "text": "we You feel the same way, kind of have the same vision and goals in mind, are really going to create some, some massive companies, and I think a lot of the-- a lot, a lot of people are just underestimating the chance that hyperbitcoinization is going to happen. So I just can't wait for the day where you see a Bitcoin company come out and just be worth orders of magnitude more than a lot of these crypto companies are today, and I'm confident that's coming, and I'm so excited to see that day. It's just gonna be, it's just gonna be amazing." }, { "speaker": "stephan", "time": "55:15", "start": 3314.92, "text": "A good spot to wrap up here. So any, anything you want to say just at the end here? And of course, if anyone wants to find you online, what's the best place? Yeah, for" }, { "speaker": "don_stuart", "time": "55:23", "start": 3323.04, "text": "sure. I guess, as a closing remark, all the bitcoiners out there, I'd really encourage you to look into different ways to get involved in funding Bitcoin-only companies. there's, there's different levels to do it. I mean, if you have, a larger amount of capital, look into joining one of the, the Bitcoin-only venture capital funds out Earlier, a lot of those have a, a thousand dollar minimum. Unfortunately, you do have to be an accredited investor to participate in this type of investment. there's nothing, unfortunately, that Bitcoiners can do to change that. It's up to our government, but hopefully that will come one day. But if you do meet that requirement, you can get involved for as little as a thousand dollars. You can pick which investments you want to participate in. You have all the control on where you allocate your money. I would just really encourage any Bitcoiner that can to look into being able to A good way to provide support to the companies that make Bitcoin so, so fun for us to use every day. as far as where to find me, you can find me on Twitter at casey underscore hodl. And then you can find, my business that I just set up earlier this year to formalize my own venture capital investing is Sat Standard Capital. And other than that, Twitter, I hang out there all day on Bitcoin Twitter like everybody else, so looking forward to connecting with people there. Fantastic, thank you, Don. Appreciate it, Stephane." }, { "speaker": "stephan", "time": "56:41", "start": 3400.91, "text": "Thanks. I hope you About the world of venture capital and venture capital applied to Bitcoin. The website is stephanlivera dot com. Thanks for listening, and I'll see you in the citadels." } ] }