261. The Intersection of Crypto and VC, and the Future of Digital Currency (Avichal Garg)

Avichal Garg of Electric Capital

Avichal Garg of Electric Capital joins Nick to discuss The Intersection of Crypto and VC and the Future of Digital Currency. In this episode, we cover:

  • Walk us through your background and path to VC
  • What’s the thesis at Electric Capital?
  • How does the crypto focus change the fund structure of Electric Capital?
  • When you invest capital and receive equity and/or coins in return…  What determines that breakdown?
  • For pure coin investments, how do you think about and manage liquidity and transactions over time?
  • What are some of the big differences between traditional tech investing and crypto investing?
  • How are the founder’s different?
  • What’s are the biggest risk factors that are unique for early-stage cryptocurrencies?

Guest Links:

Interview Transcript:

Nick Moran 0:00
Avichal Garg joins us today from Mountain View California. He is a managing partner at Electric Capital an early-stage venture fund investing in cryptocurrencies, blockchain, FinTech, and marketplaces. Prior to electric capital, he was a founder exiting his business to Facebook in 2012. And he also held roles as partner YC. And top product roles Apple, Facebook, and Google. Avichal, welcome to the show.

Avichal Garg 0:23
Pleasure to be here. Thank you for having me.

Nick Moran 0:24
Yeah. Tell us a bit about your path to tech.

Avichal Garg 0:27
Path to tech? That’s a great question. So I figured out that I could read ahead, a chapter in algebra class, and program, like whatever the next chapter was going to be. And then I was running a little app store. And so I would, you know, do the next the next week’s lessons programmed into a calculator, turn it into a program and then sell it. And so I was making money. When I was younger, I was a bit advanced. So I, this was, I was much younger than everybody else in these classes. And so I wasn’t mobile, but I was making all this money. And so literally, like, every week, I would go in, and they were like two periods of algebra. And they’re 30 kids in each class, I was making like, $60 a week. But I wasn’t mobile, and I couldn’t spend it on anything. So I just like, come home with lots of cash. And I just like stuffing money in a drawer. And then, like, after, you know, several weeks of doing this, I had like, hundreds and hundreds I had like $1,000, I was like, you know, nine or 10 years old. And so my mom found all this money one day and was like, What the hell is going on? Like, why do you have like, 1000s of dollars of bills, like in a jar. And I think she was probably worried I was selling drugs or something. And but it turns out, it was just, you know, I figured out how to program my calculator. And that, for me was I think, I think probably the really the beginning of it, because it was, so this realization that you could like create something, and he created something of value, other people might want it. And they might even pay you for it. And so from like a very, I think, early age, I got the sense I got this, like taste of freedom, basically. And you know, I could do whatever I wanted with my money. And I almost almost was this feeling of like self sufficiency.

Nick Moran 2:03
Do you remember if the kids came to you, and asked you can I get that as well? Or if you were sort of enterprising and said, I should try and sell this to others.

Avichal Garg 2:14
It was a little of both. So what ended up happening was, I had some friends, and, and they saw that I had done this for myself. And they’re like, Hey, can I get that? And then for like, my closest friends, I just kind of gave it to them. And then they’re one of the other kids in class basically said, Hey, can I just pay you for that? Like, he didn’t really know me. And so I think that was like their way of getting it. They didn’t feel comfortable just asking. And they just paid me $1. And then sort of it was as old school organic virality. Then like everybody in high school, that was like taking these classes. It was like, Oh, I should just go get the program from Avichal. So I was running my own little app store. So it was kind of an organic viral thing. Yeah. So you know, I think it’s very clear. So I went to Stanford to study computer science, undergrad and grad school and then went to Google, but it was I think it was very clear to my parents now that apparently, we were just talking about having kids and stuff. Before we started recording. I think it’s one of these things. Now, as a parent, I kind of look at it for my son. And I’m like, yeah, if like, my little nine-year-old son was just like doing that. I think we pretty obvious by the time he’s about nine, like what he should probably go do. So I don’t know, you know, how much of that was innate versus luck versus stumbling into this thing where somebody was just going to pay me $1 for a computer program that I wrote, but so yeah, that was kind of my path, I think to tech, was that kind of pretty early.

Nick Moran 3:24
Okay. And then when did you switch over to the investment side? Was that first with YC?

Avichal Garg 3:31
Yeah, that’s a good question. So what happened, there was, I had a Google I did my first startup, we sold that that was a machine learning plus education company, did my second startup, which we sold to Facebook, and both of those companies kind of, I left the first company before it had been acquired. And so in my first company, my second company effectively exited at the same time, like the transactions closed very close to each other, and kind of like the escrows unlocked right around the same time. So I went from having like, no money, basically, to having like, some money. And I because I’ve been through twice, I had a bunch of friends and friends of friends who were starting to reach out and say, Hey, like, you’ve raised money before, like you’ve sold two companies now, like, Can you help me with this thing can help me with that thing. And so I started dabbling in angel investing kind of around, you know, 2013 2014 ish. And, and that was sort of organic was friends and friends of friends that I worked with over the years. And so I was dabbling with that, and actually, turns out as pretty good at it. And so a lot of those things that were that were early, you know, were things like, notion or boom supersonic was building supersonic airplanes or cruise which built self-driving cars. And these are now all you know, like, unicorns or multi-unicorns, right. And so that kind of got the flywheel going. And frankly, a lot of it, I think, in the earliest days was just luck. It was like people that I knew were very smart. And that, you know, wanted some advice and I was able to participate alongside some very experienced high-quality investors, but that got the flywheel going. And as you know, any investor will tell you so much of it is just like when you have some success, people think you know what you’re doing. And so then they start reaching out to you, but through by that, by that sort of exposure, you get access to stuff that you wouldn’t otherwise because you know, you’ve seen some other companies be successful. And so the YC thing happened as part-time partner, they’re starting in 2017. So it was right after I left Facebook. And so I’ve been dabbling in a bunch of angel investing, I’ve actually sent some things over to YC, where I’d invested before YC, such as boom, and now you know, booms worth over a billion dollars. And so, hopefully, YC makes a bunch of money, my wife had been through Y Combinator twice. And so they’re very generous. And they said, Hey, if you’re going to take a year off and kind of hang out, you wanna just hang out here and help some of the companies. And so it was a pretty awesome opportunity to hang out there and help companies and just to see how this, you know, it’s really, I think, become an institution in Silicon Valley over the last 15 years, how they operate. And so that was kind of like my first foray, I think officially into a sort of like more institutional investing. And then the way electric capital happened, which, you know, is very different from YC, because we focus on crypto is kind of in that 2017 window when I had taken off, my co-founder from my previous startup, and I, we thought we might do another company, too. We’re kicking around ideas. And we dabbled in crypto in the past back in kind of that, like 2010, 2011 window when we were doing our startup that we sold to Facebook. And then we stuck around as hobbyists and we’d done some mining and stuff along the way. And we had all these friends who had become VCs, and some of them started reaching out to us and saying. Hey, I remember you were telling me about crypto, you know, years ago, is it real this time? Should I buy some Bitcoin should I not? So we were doing these education sessions all across 2017. And by the end of 2017, people had started to realize that crypto was just different. And the VCs, in particular, had started to realize that they were not really set up to do crypto, you know, in part, the network’s look really different, like the founders are looked very different. In part, the structure of the investments is very different. Like you know, VCs, generally are trying to take 15 or 20% of a company and in a crypto network, if you take 20% of the network, that’s actually a liability. So the way the rounds are constructed is different. But even from an operational perspective, you know, if you’re a traditional VC, and you invest in a token network, like, one day, $5 million shows up on a USB stick, like, what do you do with that? Right? Like, where do you put that you should put that in a desk drawer? So like the idea of doing custody and doing that securely. It’s just a skill you have to build software for. So a couple of investors came to us, like well known VCs came to us at the end of 2017, and said, Hey, I know you guys are doing this with your personal money. Can we just could we give you our money, and you guys do exactly what you’re doing? But just do it with our money, too. And like, why don’t you set up a little fund. And so that’s how electric happened. So in 2018, we essentially formalized a lot of the angel activity and crypto investing that we were doing. And the first people that gave us money were these VCs that wanted exposure, but their funds weren’t set up for it. And then since then it’s sort of, you know, become something much bigger. And now we know we’re primarily institutional investors, like, you know, US University endowments and healthcare systems and things like that.

Nick Moran 8:09
Got it? And what is the fund size?

Avichal Garg 8:11
So we just announced our second Fund, which is a $110 million fund, our first fund was a $35 million fund. And so you know, we always joke, it’s, you know, we have something like 145 plus or minus 50%. Because on any given day, yeah, it’s like, the crypto moves so quickly, like, you know, this week, I don’t know when this gets released, but this week, Bitcoin went effectively from 10 K to 14 K. Right.

Nick Moran 8:36
It’s nice to look at my Coinbase account.

Avichal Garg 8:38
Exactly. So you know, on any given week, we’re kind of like 150 million plus or minus 50%.

Nick Moran 8:44
So you talked about some of those structural differences. From a fund standpoint, how is the fund structure different? What’s the horizon? What’s the portfolio construction?

Avichal Garg 8:57
It’s a good question. We, you know, they’re kind of three approaches to this, we take the most vanilla approach, which is we’re structured like a venture firm. So it’s, it’s tenure, you know, capital is locked with the LPs, you know, there’s like a fee step down. There are extensions on the back. And we don’t take carry until we’ve actually returned capital and started generating returns in terms of USD. And so it looks a lot like a venture fund. Some of the things behind the scenes that are different are things like, Can you recycle capital? So unlike a traditional venture fund, you may have some restrictions on that. And in a crypto fund, actually, because there’s so much liquidity, you need to sort of like recycle liquidity in a very different way. And so the way that you think about that is different. And so, you know, that’s kind of one end of the spectrum on the far other end of the spectrum is something that looks much more like a hedge fund, where you know, your LPs can come in at any time and redeem and there are rules around that. And we tend to prefer the venture one because we think of this as a venture asset. We think of this as technology as a new platform. And the real value that is going to get created here is not in these really short bursts where prices move 30, 40, 50, or 10 X, even in a very short period of time, the real value is creating a new sort of platform and distributed different way to build software. And really, that’s going to take 10, 20, 30 years to play out. And so we tend to take a very, very long term time horizon. And so we’re okay like not taking carry of every year, the way a hedge fund would, in order to be able to invest on these very long term time horizons,

Nick Moran 10:25
What is your deployment period?

Avichal Garg 10:28
So it’s officially five years. In practice, though, it’s a little different. You know, like a typical VC may have a five-year deployment window. And in practice, they’ll deploy kind of over like two years, and then they’ll keep some reserves. And you know, some funds might have 30, 40, 50%, reserves for follow ons and pro-rata. In our case, we were actually very aggressive. So we started deploying in Q1 of this year. And our belief was that the price of bitcoin at the time, which was hovering around 7K, and then of course, in March, it tanked March 2020, tanked down all the way to about 4k, for a brief moment, that that window of time was actually a very good time to be deployed into the Bitcoin, Ethereum and sort of these listed tokens, these more liquid tokens. And so we were very aggressive on the front end about calling capital and essentially building out our liquid positions. And so you know, by the summer, which was only, you know, a couple of months in, we were, we were effectively 50% deployed in the fund. So we’d already called about half the fund to deploy it. And so our strategy was, even though it says sort of venture deployment cycle, to be very aggressive on the front end about calling capital and deploying it into these liquid positions because we thought it was a very good time to be doing that. And then over the next year, we’re going to be building out more of the sort of equity positions and sort of time waiting in the equity investments that we make across the next 12 to 18 months. So it just looks like the amount of capital being called and deployed looks a little bit different from a venture fund.

Nick Moran 11:55
What is the breakdown? In what is the strategy on you know, investing in liquid coins that are commonly available to everyone versus, you know, those that are tied to an asset or a startup, in some cases, and in trade, their own coins as well?

Avichal Garg 12:12
Yeah, so we end up about the way we think about is roughly a third, a third, a third. So we end up about third things like Bitcoin, or etherium, or some things, you might be able to go into coin base, or you might have to go to some international OTC desk to really get access to but they’re effectively liquid or semi-liquid, that’s about a third of it. A third of it is early-stage projects, token networks, and crypto networks were the first money in and those will turn into tokens. And so in the short term, you might have a some sort of like an equity instrument, but there’s some mechanism by which you actually are going to get tokens out of the other side after.

Avichal Garg 12:49
Yeah, and there’s are sort of evolutions of this that have come about, you know, one of the challenges, for example, as they were originally conceived was that you had access to the token as it was defined. But you had some unscrupulous teams that went out and then washed a different token with the same team. And so there’s a question of like, Well, does the staff entitle you to that other token, are you buying token a, when team wants to compete, so there’s some sort of edge cases there, and you very quickly start to realize that that actually, what you need are a lot of the protections that equity offers you. And so what you end up with is usually some sort of like safe, like one one common structures is not the only way to do it. But one common structure is a safe with a warrant. And so what you’re doing is you’re saying what I have equity in the company, the thing that’s like doing a bunch of work here, and maybe somebody comes along and buys you maybe Coinbase comes along and buys the asset value there. And eventually, there’s going to be, you know, a network that exists here that gets decentralized. And what I’m doing is I’m pre-buying the tokens that will operate that network, the property that allows that network to sort of exist and be distributed, as well pre-buy those with a warrant. And so there’s essentially an option to execute this warrant later. And so you actually separate this. So there’s like, an entity that exists that’s doing much of engineering work, and then there’s some property that you’re buying. And so that’s a very common structure, for example, where you get a lot of the protections of a safe, and then that also allows you to have some protections. Say, for example, if a team decides that actually, they want to launch a second network or a different network that has a different token. So you get some protections that way, as well as an investor.

Nick Moran 14:19
In that case, the warrant would entitle you to buy coins in different networks that same no underlying businesses?

Avichal Garg 14:27
Actually, what you would do is sort of really technically speaking, probably as you would have. You could have protections that essentially say you can’t launch another network unless you know, unless it’s this token or any tokens that are created by the equity by the company like equity holders get pro rata access to warrants to buy those and so you can have structures that essentially create some guardrails there to prevent, bad actors. And you know, like, obviously, at the time that you’re investing you don’t think anybody’s a bad actor but you know, things happen. Or incentives can change. And so you try to sort of say, let’s try to make sure that the investors don’t have, you know, don’t get exploited here, essentially. And while giving the company some freedom, so, you know, there might be very legitimate reasons that you realize, actually, the the thing that you need to do is change up the strategy. And so you want to give the company some flexibility to be able to change approaches if they need to.

Nick Moran 15:21
Got it? Do you have a target equity position to coin position ratio with these assets that you’re entering? Investing in?

Avichal Garg 15:31
Wow, that’s a good question. Um, you know, the way to usually structured is roughly one to one. So it’s effectively pro rata with the equity holders. And then there’s a big overlay here of, because these are decentralized networks, and the company can’t control them. And and the equity holders can’t control the networks, what you actually then do is you effectively, you know, relative to the equity holders, you get your pro rata, but we actually do is set aside 50, 60, 70% of the tokens to give away to the community. And then there are lots of mechanics around which you can have those tokens flow to the community. And so in effect, you end up with, let’s say, just make the math easy, let’s say it’s 50/50. So if you own 10% of the company, you actually will own 5% of the network, because you’re going to get diluted by another 50%, once the network is live, and you have all these other tokens that are created to go out to the community and to incentivize the right behaviors in the community. So that’s a very common pattern as you start to do one to one pro-rata inside the company for equity holders. And then there’s some sort of, you know, 50 to 70% dilution that happens when you launch the network to, to sort of hand it over to the community.

Nick Moran 16:40
Got it. So you’ve had experience investing in tech companies, sort of in the traditional context, and now doing these crypto investments? What are some of the biggest differences between the traditional tech investing and now more crypto investing?

Avichal Garg 16:56
Yeah, I think probably, I mean, this is this actually hits on the biggest one, in my opinion, which is the ownership requirements, actually go out the window, and see a really have to think about your portfolio and investing really differently. Because, you know, as I was saying, if you own 20% of a crypto network, that’s actually a bit of a liability, because if you think about it, you’re gonna have multiple rounds of financing, let’s say, and so you know, in a traditional company, let’s say by the time it goes IPO, the investors may control the majority of it. But in a crypto network, if the investors control a majority of it, that’s a no go. Right. That’s, that’s, uh, that’s dead on arrival. But Tom Lee, if you’re passive, right, because that work is dependent on people transacting and being active. And, yeah, and securing the network. Yeah, exactly, exactly. And so, you know, I think out of the gate, if if the investors own 50% of it, you’re sort of dead in the water, the communities just won’t accept it. Because the whole idea, I mean, if you step back, 100,000 foot view, one of the driving philosophies here is that the value capture that has happened on the internet, into these centralized organizations, is excessive. And the amount of control that we’ve given up as individuals and as citizens, and as users and consumers, to these mega corporations that are worth a trillion dollars, is excessive. And so what you’re trying to do with this new platform, you know, one of the guiding, I think, principles and philosophies here is how do you undo that? And how do you how do you go back to what the internet was supposed to be, which was empowering individuals, which is empowering small businesses, against mega corporations and against mega countries, and authoritarian regimes, and so on. And so you know, you know, in that sort of context, the community just won’t accept like the immune system will come out and will reject networks where it’s owned 70-80%, by the investors, because that’s sort of the whole idea here is we’re pushing back against that and trying to create new value capture mechanisms and new coordination mechanisms, or these networks to exist, where the community owns them. And the bulk of the value capture actually is happens by the users and the consumers and individuals and small businesses and so on. And so you kind of have to shift mindset there, right? So when you’re investing, you can’t say, look, you know, I need to own at least 20%. And then the next investor comes along and says, I need to own 20%. And so, you know, you have to own more like five to 10%. And you often given the financing requirements to get some of these things off the ground, you end up having to collaborate with all of the other crypto investors. So what you find is the crypto VCs are generally much much more collaborative with each other. Because we kind of have to be, right, we, you know, everybody needs to own 5% of it. And if they need to sell, let’s say, 20 ish percent to raise enough capital to get out the door. Well, then, of course, you want to find the three other smartest investors you can possibly find and tag team stuff. And so there’s actually a lot of cooperation that happens ,and deal flow sharing that happens at the seed and series A, and that kind of investment sharing, you know, you just wouldn’t see in traditional venture, right, like because the incentive structures are so different. And so downstream, operationally, the way that you work with investors, the way that you work with angels, the work the way that you sort of invest across different companies, all of that sort of downstream changes, but to me, that’s sort of the nugget that makes all of that downstream effect happen is actually the crux of It is, in a decentralized network. You don’t want to have centralization, both for security reasons, but also from like a philosophical perspective. And then downstream, everything changes, like what you do day to day just has to change.

Nick Moran 20:11
Any concerns about I mean, you mentioned before this long time horizon of, you know, the sense playing out, and that’s part of the reason why you took a more of a venture style structure on your fund. But is there any concern about DPI and exits and getting liquidity on, you know, some of these investments? If, you know, they do become very long cycle?

Avichal Garg 20:31
Yeah, it’s a great thought. I mean, we we talked with our LPs about this a bunch. Short answer is no to your question. And, and the reason is that actually, even though we take a very long term time horizon, we say, you know, what, like, really take something as straightforward as Bitcoin, you know, it really is going to take, in our opinion, 10 years for this to really play out, you know, like, we’re in the very, very early innings, even today of this, where the vast majority of people have not decided whether or not they want to have Bitcoin, there’s maybe three corporations that have Bitcoin on their books. You know, in corporate Treasury, very few endowments have any exposure, direct exposure, almost no pension funds have exposure, no sovereign wealth funds have exposure, central banks don’t have exposure. So when you start thinking about the the piles of liquidity, the trillions of dollars that are sitting out there, you know, you’re nowhere close to the amount of dollars that are going to flow into this space yet. And that likely takes 10 years, you know, like a central bank is not going to move in the next 12 months, and even sovereign wealth funds likely or not to move, you know, for three to four years. And so the the time horizon on which we’re thinking about the these things, reaching maturity is very, very long. Now, that being said, of course, Bitcoin is extremely liquid. And so it could be the case that over the next three to five years, you see 2017 like scenario, right? There’s there’s euphoria, there’s mania, and Bitcoin runs up to some some crazy number. And as a fund manager, we could certainly look at that and say, You know what, like, this is just this has gotten too crazy heights, this is just too much. Let’s let’s just liquidate. Let’s sell 20% of the position, let’s sell 40% of the position. Let’s 100% we think this is crazy. And you know what, if we liquidated right now, we might 10 X the fund just based on this, like, we get 10 X the fund for our investors. Let’s cash it out, let’s give it back to them, we’ll start a new fund and anybody that wants continued exposure to Bitcoin over the next five years, can put back in, but you can actually crystallize all of that stuff and hand it back and then you know, your your DPF, for example. It’s fantastic. So we sort of have to balance this idea of like, a very long term mindset in thinking about the terminal values of these things. And, you know, as you know, so many times that the temptation is you got a 10 X, like, let’s cash it out. But But really, the way venture like the discipline of venture is hold on to your 10X, because they might 100X and hold on to your 100X, it might 1000x, right. And that’s where you get really crazy returns. And that’s how venture works. But as a very specific kind of discipline. And that’s, that’s the type of discipline that we, you know, want to have as a fund. But what’s great actually about this, is that along the way, you might be able to take 10% or 20% out and really, you know, give that DPI back to, to the investors.

Nick Moran 23:08
It’s funny, because I’ve had this conversation probably eight times just over the past week. It’s like, you know, when does the multiple gets so interesting that you you liquidate some of it? We’ve got we’ve got one of those situations, you know, pending right now. And it’s like, wow. Real returns right there.

Avichal Garg 23:27
Yeah, it’s, it’s really, it’s really amazing, right? Because to me, I think people think that the hard part of venture is like finding the things that are going to be great outliers, and so on, and so on. I think that’s really part of it, like getting 1000x, finding the next Facebook credit next, Google is extremely rare. But I tend to think that given how large the Internet has become, and how large these tech sectors have become, there are a lot of businesses, they’re going to be worth a billion dollars, you know, like, like a billion dollar outcome is now kind of like the old 100 million dollar outcome. And the $10 billion outcome is kinda like the old billion dollar outcome, we’re just gonna see a bunch of companies worth between one and 10 billion. Yeah, but but the temptation is, if you’re a seed investor, you invested it in $8 million valuation. And so $800 million, you’re up 100 X, you know, stay with dilution, you’re up, like 60 or 70x. But that thing might actually very well be a $5 billion company, right? And so like, the hard part, to me, actually, is, if you think that the size of the opportunities is larger, and the number of opportunities is significantly greater, how do you hang on and can do that discipline, you know, and the strength to hang on from the 800 million to the 4 billion because that’s really where you start generate, you know, five X to 10 x kind of funds. And it’s hard. It’s, I think, to me, that’s actually harder. When you have that temptation sitting right in front of you and you’re like, hey, look, we could three x the fund, do we get out? And that, to me is actually even harder than finding like really fantastic opportunities. You know, like an 8million seed or something.

Nick Moran 24:49
Yeah, yeah. What a lot of tricky aspects of this business, you know it. I don’t want to belabor this point, but you’ve got this breakdown of liquid assets and those that are less liquid. That stands to reason that not only are you getting diversification benefits, but you would believe that the illiquid assets in your portfolio have the potential to out return the liquid assets. So, you know, I guess one question is, why not just do all liquid, if you think the returns are going to be comparable, why not just do all coin base funds that are, you know, the Ethereum ‘s and in bitcoins and many others. And if you do, like those that are, are illiquid, and more on kind of the startup venture profile that also have coins, why not construct a fund that’s just based on that?

Avichal Garg 25:39
Yeah, so it’s a good question. I think reasonable people can have different answers to this, our approaches been sort of two thoughts. So one is a risk mitigation question, which is, you know, I think there are still open questions about where on the spectrum, these things are, from a regulatory perspective, right. And you have to be really careful and mindful, as an investor, to not accidentally buy tokens that are actually securities and you know, like Kin just yesterday, settled with the SEC around their token offering. And so you know, you have to be really careful about that. But I, you know, I think people forget that we’re dealing with tail probabilities. Here, we’re dealing with tail probabilities. I mean, the fact that we’re even having a conversation about a digital asset in some sort of digital gold with $14,000 a coin, I think, 10 years ago would have been unthinkable, right? Even five years ago, for most people, I think, would have been craziness to to think that something like Bitcoin be worth $14,000 in Bitcoin. And so it’s such a low probability event that this thing even exists. To me, it’s it’s just as likely, you know, 1%, pick a number that the government comes in and says, you know, what, this is illegal now, like, we decided that we’re changing our position. And this is no longer allowed. You know, like, you know, the US government outlawed gold, right, it’s not unthinkable that something happened systemically or, you know, macro in the world, or there’s a war, something happens, right? And so, from a risk mitigation perspective, we think that, you know, there are a lot of interesting opportunities that are not necessarily tied to the success of Bitcoin, or to the success of Etherium. And so when you’re constructing a portfolio, you want to actually have exposure to both. So then to your question, Well, why not have a fun, that’s just all liquid stuff in a fund? That’s all venture stuff? Because the question ends up being in, when you’re investing over, let’s say, three or four years, and you’re deploying capital over, let’s say, three years, the way these cycles work, we really want to do is balance between those two, right? So if you’re in 2017, into 2017, that’s not the right time to be buying Bitcoin and Etherium, that might actually be a great time to be investing into equity based businesses that use crypto infrastructure FinTech businesses that might use this stuff. That’s not the time to be buying liquid assets. Meanwhile, in 2019, great time to be buying liquid assets. That’s actually when you start loading up. And the question is, who should be making that decision? Should it be the LP the person that’s trying to decide between these two funds, so suppose you had a fund that was liquid and illiquid, you’re now going to put that onus on the LP to think about that, or should the LP just say, you know what, there’s a person who thinks about crypto all day, every day, I’ll just give them a lump sum of money and their job over the next three to five years is to allocate, you know, it should be this much liquid this much illiquid and to sort of balance between the two and recycle that capital as necessary. And that’s the approach we’ve taken. So I actually don’t have the LPS thinking about this stuff. That’s not their job. Their job is to find really great managers that they trust and experts in areas. And then we our job is to figure out how to balance between these two sort of things. And you get the nice added benefit of having this really great risk mitigation aspect of you know, should one day the government just say, you know what, this token stuff is totally bananas, We’re shutting it all down, then you still have a part of your portfolio that actually could return a multiple on the portfolio, just without the token stuff.

Nick Moran 28:37
Got it. Yeah, you’d mentioned US policy regarding gold. Yeah, I’m sure you’ve studied, you know, Bretton Woods and all of that. But, you know, what’s your position on central banks and monetary policy? And is the US behind with regards to their position on digital currencies?

Avichal Garg 28:57
Yeah, short answer is we are behind, um, though, you know, in a funny way, as is often the case with when the best versus some other countries, it looks like maybe the private sector is picking up some of the slack, you know, with like, PayPal announcing stuff and square pushing Bitcoin and, you know, buying some Bitcoin for their Treasury and, you know, Coinbase is likely to go public sometime in the next 12 months. So, you know, I think the private sector is picking up a little bit of slack here with things like USDC and USD, you know, some of the USD stable coins that are that are being produced. But yeah, I think the US is behind right now. And I think there’s, there’s a push globally, I mean, not just from China, which I think is sort of the headline, but the IMF is talking about this. France is talking about this, you know, Korea is talking about this, you know, India already has digital identity at the national level. And so they’re not that far off from having a digital currency, like fully digital. And so, you know, I think it’s one of the things that is now starting to come to the surface, but I think central bank digital currencies to control monetary supply, at the very least kind of at the zero level to turn the dial. How much money goes out into into these? These the the banking system and controlling the currency that way i think is inevitable and the US is absolutely behind on that right now, you know, China is already testing their CBDC in the wild. And then there’s sort of a related question, I think people sometimes conflate these, there’s the central bank, digital currency, which allows you to have some, some control over your money supply. But you may not actually change how that reaches, eventually, you know, the retail markets or, you know, the the debt markets. And there’s sort of a related question of, well, actually, should there be electronic payment rails that the banks are all connected through, you know, you look at something like Swift, which was created in the 70s, you look at fedwire. And, and you look at this stuff, and you’re like, Wow, I can’t believe I mean, it’s crazy to me that in the world that we live in, in 2020, right, like, we have rockets that can go in space and come back, we have self driving cars, almost, you know, we have the internet, you and I can have this conversation. It turns out, like if I want to send money to Spain right now, from a bank account, it might take three days to get there. And so what that means is literally what I should do is go to the bank, pull out cash, like put into briefcase, get on a plane and fly to Spain, and like the cash will get there faster, right? That’s kind of crazy. Like where in 2022 atoms move faster than bits, it turns out money is like one of the few places where that’s still true, right? It’s kind of a crazy thing to think about. And so I think like, when you look at it through that lens, a lot of these sort of payment infrastructure, I think just needs to be blown up and redone. And I think that the place where it’s actually likely gonna happen first is in the banking side. And China is really pushing this, because they’re centralized, they can, they’re really efficient about this. And so in addition to their central bank, digital currency, they’re building this digital currency electronic payment system that sits on top of that, and all of the fintechs in China are already plugging into that. And then they’re going to push it through the the Belton road, that they that, you know, the initiative, they have to sort of connect, you know, much of the developing world through Southeast Asia and into Africa and into the Gulf, which, you know, they’re doing for very strategic reasons in terms of access to oil and access to shipping and so on, you know, for their core economy. But the value prop there for their digital currencies is fantastic, right? If you’re trying to settle cross border trade, and you know, denominated currently in US dollars, and it takes potentially a week to two weeks for all that to settle. And you’re talking about oil contracts, you’re talking about, you know, potentially hundreds of billions of dollars and maybe one day, trillions of dollars of trade, to be able to settle that instantly and know exactly how much money you have. And it shows up in your bank account instantly. Like that’s a pretty significant value prop that’s kind of the direction they’re going. So to your question, you know, could the US even offer an alternative today? And the short answer is no, like, there is no actual, you know, US system that you could look at and say that’s anywhere comparable, and offers the kind of value that the Chinese system was going to offer. And so we’re very far behind. I’m optimistic, though, because I think actually, the private sector might be filling this gap a little bit. And so I think there are ways to, to support the private sector in the US that that I think the Fed and Treasury are increasingly open to doing. And so you look at, for example, the the OCC, the Office of the Comptroller of the Currency, which sits inside the inside Treasury. And they recently said, it’s okay for banks to hold private keys for people when it comes to digital currency. And, you know, some people said, Oh, does that mean, that’s great for Bitcoin? Maybe my interpretation was actually what they’re really doing is setting the stage for digital currency, what they’re really doing is saying banks can have digital dollars of some form and hold those dollars for for citizens.And so it might actually end up being the case that essentially what happens is regulators in the US and Treasury and the Fed, everybody says, you know, what we have to get on this digital currency train. And the fastest go to market strategy is to work with the private sector. And so maybe it’s something like Libra, maybe it’s something like Cielo, or maybe it’s even you say, you know, what we really, in addition to the central bank, digital currency, US dollars that sit inside the banking system, maybe actually, the right thing to do is also to support some of the truly more crypto networks, you know, whether it’s Bitcoin or Etherium, or others as a bulwark against the Chinese offering, because these things already live, like if you go to Nigeria, today, you go to Latin America, in Brazil, you could Argentina, you already see Bitcoin and Etherium. You know, there’s a lot of organic adoption there. And so maybe actually, the right strategy for the US, in our opinion, is the right strategy is to push the adoption of these things, and then really encourage the private sector in the innovation that’s going to happen on top of these open networks to happen inside the US. And so, you know, I think the US is way behind, we need to invest in cbdcs, we need to invest in digital currency payment system that links all these banks and sort of, we need to push the ball forward on that, that likely takes some time. So one way to accelerate it is to partner with somebody like Cielo or Libra. And then in parallel, I think we really need to be supporting these open ecosystems, because a lot of the open ecosystems can offer things that that that the Chinese system will never be able to offer and they can offer it today. Right. You know, I think if you started to explain to people things Like, well, you know, if the Chinese government can see every single transaction that’s happening on chain, that means you can get cut out of that system pretty quickly. And see, do you really want, you know, your livelihood or your business to live a livelihood to wrestle whether or not the Chinese government wants you to be able to conduct commerce? And for a lot of people, I think they would say, you know, what, maybe not, you know, it is convenient. But if there’s a reasonable alternative, I’ll take that. And so I think there’s an opportunity actually to push some of the things that that the open crypto networks can offer, in addition to more and more us centric system. So hopefully, the regulators and legislators and bureaucrats, I say that with, you know, sort of career, civil service people, people are really experts at this stuff, you know, are getting up to speed and hopefully they’re able to push sort of in the right direction.

Nick Moran 35:44
You would hope so, right? You’d be a part of the change or the change passes you by and you lose that opportunity.

Avichal Garg 35:50
Yeah, and I think it’s sure playing out on the US, I think it’s a it’s a real national security issue, too, right. I mean, I think people forget that, that the US dollar in the banking system, gives the us tremendous leverage in the world, you know, the ability to do KYC and AML. And, you know, track people down if they’re nefarious and bad actors. And, you know, by and large, you know, I think no, government is perfect, obviously, but generally, you know, I would prefer to have some sort of a democratically elected government system that is sort of trying to try and enforce good behavior. And so, you know, I think from from the US government’s perspective, losing that tool, has it as a tool of national security and is of influence I think, would be a huge loss. So I think there’s actually a very strong incentive for them to start getting on this. Otherwise, I think we end up with kind of like what’s happening right now with 5G, and Huawei? You know, we’ll wake up one day in five years and, and sort of be smacked across the face with the realization that actually the, the tooling, in the sort of financial ecosystem that was a tool for national security has gone from the US. And unlike 5G, you can’t just ban it, right? You can’t just tell other countries to not do a thing. And so I think strategically, we’d be in a much worse position than we have been with, for example, 5G, we can just say, you know what, you can’t sell that hardware in the US. And so I think it actually is like a pretty serious issue that if we don’t get ahead of, I think we’re gonna be in a really strategically bad position in the next five years.

Nick Moran 37:18
Very good. Just to circle back to the startup aspect of this. Could you like, give us the profile of like a crypto startup, as you’re looking at it? You know, what are some of the key characteristics or, you know, structural aspects that you’re evaluating that might be different than what what I do? For instance?

Avichal Garg 37:35
Yeah, I mean, the number one for us as it is, for most early stage investors is, is the team just like are these people that are truly you know, insightful and brilliant. And for us, the litmus test is, and always has been, when you have a meeting with somebody with a founder, and they teach you something counterintuitive, like you walk into the meeting, and and you had some worldview, and I thought the world worked in a certain way. And you have a conversation with this person, and you realize that your worldview is actually totally incorrect. And this person has figured out that the world doesn’t work the way that you thought it worked, it actually works a totally different way. And actually, that the way that they’ve realized the world works is actually how the world works. And when you have one of those conversations, you’re like, Okay, this person is somebody that’s worth backing, because they’ve gone out, and like everybody assumes the world works a certain way. And they’ve actually figured out the world does not work that way. And that disconnect between the way people think the world works, and the way the world actually works, is where you get really, really great high value outcomes, right as businesses or crypto networks, or whatever. And that’s fundamentally what we’re looking for is like founders who have figured out that the world works fundamentally differently than the way everybody thinks it works. And can can back that up with data or, you know, a product or something. Right, they have some some meat on that. So that’s, that’s the number one thing we look at. And then in addition, you know, because we are dealing with a lot of sort of crypto networks, you know, we’re looking at all the standard go to market and you know, their big Tam, and all that kind of stuff. But we’re also looking at the token economics, are the tokens themselves set up to capture some value? If there’s a token involved? Like, do you actually need the token? And I think too often people bolt that on are not thoughtful about that. And that’s often an area where we can often be helpful, too, because you know, that the founder, often is very, very good at figuring out here’s a problem. And here’s a solution. And then some of these other things around like, you know, how do you think about your go to market or anything about hiring? How do you think about building an organization? Or in the case of crypto, how do you think about the crypto network and the token emission curve and how, you know how much goes to different parties? And how do you incentivize the right behaviors? Those are things that investors see a lot of, and so we can sort of help pattern match we can help guide people and give them resources to help think about those things.

Nick Moran 39:41
Do you like deflationary characteristics on the coins? Or does it are you sort of agnostic on that?

Avichal Garg 39:48
Sort of agnostic? We think it depends a lot on the use case. And so you know, it depends Are you building a payment system? Are you building you know, some sort of a you know, like And ownership economy where you know, you want a little bit of inflation, is it? You know, do you have? How do you secure the network? You know, is it? Is it proof of stake proof of work? And who are the actors in the system? Is there? Is there some sort of a burn mechanic? Like, is there actually, you’re eliminating supply somehow? And like, what does that mean? So, it a lot of it depends on the use case. And then sort of matching the token economics to the to the particular use case of you’re talking about

Nick Moran 40:25
Avical, what do you know, you need to get better at?

Avichal Garg 40:28
So many things. I wish I were much, much better on the fly with these kinds of conversations, actually. I’m good at a set of things in terms of like, if you if you scope it to, to crypto are a couple of things that I know really well as an investor, but I actually really respect the the what you do on the other side of it, which is like having a conversation with somebody and pulling, pulling the best out of that person. I think it’s a really, it’s a pretty remarkable skill. And it’s something I wish I were much, much better at.

Nick Moran 40:59
I appreciate you saying that. And finally, what’s the best way for listeners to connect with you?

Avichal Garg 41:04
On Twitter. I’m just at @avichal on Twitter, pretty easy to find.

Nick Moran 41:09
All right. Well, this is real pleasure. I look forward to to revisiting it in a couple years and seeing what some of the patterns are around crypto, then.

Avichal Garg 41:17
Awesome! We can take a supersonic car to the airport, we can hop on a boom jet. We can go to Tokyo and like spend some digital currency. Like five to 10 years away from that.

Nick Moran 41:27
Maybe we will do it all in the metaverse though. All right Avichal. This is a pleasure. Thanks so much