 I'm paying for it. You're paying for it, dude. I'm paying for it. He's paying for it. David's paying for it. Everybody's paying for that bailout. Jerome Powell has never been in these streets. He's never been on the street. I don't even think he's ever been in his 7-Eleven, dude. There's some regional bank that's going to step up and take SVV's place. VV blow up. So let's go and play the game over there. Welcome everybody to another episode of Upside Mindset. We're sitting down with very successful individuals. Today, we are sitting down with our friend, venture capitalist Jason Kim from Legendary Ventures. Thank you for being here with us. And then next to him, we have special guest Mark Lee from Sin Futures, which is a crypto derivatives exchange. And so now we have traditional and new school banking and finance all together on one podcast. Thank you guys for being here. It's great to be here, guys. Happy to be here. Yeah, thank you for joining us. It always brings me back to my business school days. You know, I ended up not pursuing that path in my life, but it always brings me back to it because the talks are incredibly knowledgeable and edifying for people. So whether you're deep in the business world yourself or you're kind of on the outside, I think you're going to learn something today. And like you said, you've got traditional new school and a blend of both. Jason, let's just get into it. What do you think about Silicon Valley Bank and the whole situation? Because you kind of have a unique take on it, right? That I mean, people have covered it, but still a lot of people out there ultimately do not fully understand what happened. Yeah, I think Silicon Valley, that whole situation is very, very unfortunate because first of all, as an institution, it's meant so much for founders and VCs, like over the last 16, 20 years. However, I do think that there is a distinction between banking and investment banking. And I think if you get past all the generalities of what you're seeing in the public, from a banking perspective, I don't necessarily compare Silicon Valley Bank with the Citibank or JP Morgan or Goldman Sachs. They're two different types of businesses with different strategies and goals. I think SVB was a very innovative investment bank that was not only vested in providing traditional banking functions and services, but it was also very, very focused on supporting the ecosystem from a financing perspective. This is founders, this is also VCs. And so I think the situation is more complex than what people see in the public view. What's the easiest way for you to describe the difference? I mean, as a bank, with a big bank, I know that there's different divisions. I could get a loan at a regular bank too, but it's not an investment bank, but obviously SVB, they were almost blending two different styles together that are normally very separate, right? Yeah, if you look at the traditional banking infrastructure from like an architecture standpoint, like how they're structured and how they operate, a lot of these things, whether it's just making deposits which stays on the more traditional commercial or merchant banking side versus investment banking, which handles more loans and more creative levels of financing versus brokerage where you're handling public securities or potentially alternative financing. I think the more traditional, quote unquote, banking institutions all have some level of separation like you said, Andrew. I think the smaller mid-level banks traditionally kind of blend some of those things because they're sort of unto themselves, right? So they need to grow the business. And I think in Silicon Valley, SVB's case, excuse me, is there was no clear distinction to some degree with handling customer deposits and banking with business development, right? So they're gonna leverage both to try to build that business, which is not wrong, but at that stage, you need more rules and more discipline to separate those two functions. For example, if you're a customer depositing money into a bank, right? There's a certain amount of de-risking and regulatory compliance that you need to handle those funds, right? So if my mom put money into a bank account, she's gonna expect that money to be there and you just can't play around with it. If for some reason you're taking some of that and you're starting to invest that, that's a whole different level of expectation and disclosure and de-risking that type of blending, right? You know, per se. So who would you say, and Mark, you can also weigh in on this, like who are the biggest losers out of this all? Like was it just people like me who had just citizens that maybe weren't banking with SVB? Is it small business people who are banking with SVB? Is it the big startups or the big companies? Like who really lost out? I think it's really the startups and the small businesses, right? Because it doesn't impact your average retail client, because FDIC still covers up to 250 grand. Most depositors fall under that on the retail side. Startups though, we're really relying on SVB and other regional banks like First Republic, Signature Bank for more flexible terms in the way that they lend in the way that they deal with these founders, right? Because SVB for example, has long been probably the biggest proponent of the startup industry and so I think this is a big blow to not only startups but the VC community. That was the top bank if you're a startup founder to go to. Oh, it was. Whether you're keeping your actual cash value that your company has there or securing loans, right? It was SVB. It was, it was. But how did like the, we were kind of talking earlier, like maybe the taxpayers, like did I lose out on any of it in a way? Yeah, I think what Mark's talking about is one dimension of it and disagree, you know, agree, feel free to agree to disagree. I think there's multiple levels of wins and losses here, right? So there's the pure economic sense of who lost it, you know, who won and lost, right? I think to answer your question, my perspective is the biggest loser financially speaking is probably the taxpayers, right? The taxpayers, they gotta bail everybody out in that kind of engineering scheme to some degree. But I think it's different from 2008, right? We're not necessarily using taxpayer money to bail out the banks, which is why a lot of the regulators are saying, don't call this a bailout. Well, no, we are. We're injecting liquidity, but not at the expense of the taxpayers, meaning the banks will ultimately have to pay this back. Well, I could be wrong, but I kind of disagree with that for one reason. The bailout of SBV was primarily coming from, while they're going through a transitionary phase of insolvency, right? And maybe potentially reacquisition is coming from FDIC. FDIC is funded by taxpayer dollars. So at the end of the day, everybody in, you know, on this interview is paying for that bailout. I'm paying for it. You're paying for it, dude. I'm paying for it. He's paying for it. David's paying for it. Everybody's paying for that bailout. Right, right, right. The net net. You know what I'm saying? Right, of course, of course. But I think I agree with Mark with what he's saying, which is there's also causally related damages from this, which is beyond the pure economics of it, is who else is really paying for this? And I agree with him. I think the startup community and the small businesses are the ones that are the most affected because at the end of the day, they need some sort of creative financing to really build their business, right? You know, America is the greatest startup in this world. You need help to get something off the ground, you know? And if you're not getting that help because you have innovative companies, albeit a little bit more riskier than a traditional bank, like SVB, providing that type of like support, who do you go for, right? So that's what Mark is saying, right? Like if you're a startup and you're a small business and you really need help getting off the ground, you go to a bigger bank and they're probably gonna say, hey, you know what? Give me three years of your run rate. Give me three years of your tax and credit histories. And a lot of immigrant, especially immigrant founders don't have that. Right, right. They're gonna ask for a lot of paperwork to do. Right, exactly. And then they're gonna go back. So there's a huge gap in the market right now because, you know, what SVB First Republic in their defense did really in signature, those types of banks did was they filled a niche in the banking system for startups and founders that a traditional big bank couldn't fill. I think that's, I don't wanna put words in your mind. So I guess where will all the founders go now that their startup bank, that all the startups were banking on, had a big mishap, where will all the startups go? Because like we were saying, the majority of startups were at SVB, right? Or a disproportionate amount. Where will they go now? Because maybe some of the faith in these startup banks or smaller banks that are obviously operating completely different than your JP Morgan, the city banks, Goldman Sachs, the trust in them has been shaken. Where will they go? Because they still need these creative financing options, right, to grow their business and just be different. I think just from a treasury perspective, they'll start to move into the bigger pangs. I know a lot of founders myself that are moving to the JP Morgan's and the cities of the world, some of them are going to the FinTech solutions. Like you have Mercury, you have Brex. They've really raised a limit on the FDIC limits to like 2 million, 3 million respectively. And the way they're able to do this is they use FinTech to spread out your deposit across multiple banks. So you get exposure to, you know, you're really spreading out your risk. So you give it to them and they spread it out? Exactly. So you don't have to spread it out yourself and manage. As a founder, it makes your job much easier. But just on a side note, you're also paying for that when you could do that yourself. So if you're a real hustler founder, Mark, you know, agree or disagree with me, you don't really need those middleware companies to do that. There's nothing that prevents me and Mark from taking $2 million for example, beyond 250, you know, FDIC, and just setting up seven or eight bank accounts and spreading that risk over seven or eight bank accounts. Why do you need to pay all these other companies to do that? It's a nightmare to manage. You're running eight different accounts at a time. You're paying for the convenience. Exactly. I mean, just to bring it to layman's terms, I heard that MBA MVP, Yanis Antitokumpo has 40 bank accounts at all, 250K each. That makes sense. Yeah, but that's not a solution either because at the end of the day, to Mark's point, it just becomes an overhead. I mean, there are products with major banking institutions that will cover you beyond, you know, FDIC. So for example, if you are, you know, if you have a million dollars, right, and you put that money and you're not covered under FDIC and you don't want to play this weird insurance game of creating up, creating 40 accounts just to make sure that you're protected, you could certainly go into an investment banking account, put some of that money into Treasury or some other really, you know, strong government. Yeah, that's actually what a lot of people are starting to do, right? They're putting some of their Treasury into short data US Treasury. Right. Okay. That's completely government backed. So the only way you could lose that money because it's by definition, it's government backed because of the government collapses. So it's probably the safest thing ever. So Yanis, if you're watching, you don't need 40. You can just do what they just said. Just have two accounts. Listen to the Asian guys, yeah. We were talking about an analogy earlier and to wrap up this segment because there's a great segue into our Web3 and traditional finance segment. But I guess like we all are familiar with LiquidDeath, this drink brand that's, it's value very high. And it's just- There's a lot of memes about it right now because the valuations are so high and people are like literally, this is just flavored sparkling water, but like cooler, right? Right. So it's a real product but maybe it's valued a little bit higher than maybe it should be. But I guess what is the, is there a comparison between LiquidDeath and SVB or like, is there like some type of parallel type thing? Well, I guess just in the sense that it's hyped in the sense that like all the founders were going to SVB, right, they had a really trendy name. It totally logically, it just makes sense if you're a founder. Oh yeah, I'm trying to be millennial. That sounds like a millennial run bank. Yeah. Look, I think, I think it's interesting that you guys are trying to, you know, compare a ready to drink business with a bank. So I'm a little stunned here, but I think if you were to find some commonality in that type of analogy, I think it's that both fit a really distinct need in the market, right? So SVB to Mark's point was really about servicing a demographic or an audience that just didn't have access to the benefits of traditional banks, right? Now, what? They didn't like the terms, they didn't like the paperwork that they had to provide, right, or they couldn't. It's also that they were just a little bit more lenient and flexible, like I said, from the beginning of this podcast, right? Like, you know, traditional banks aren't as aggressive in terms of lending and really fostering, you know, startup scenarios, right? You walk into a big bank. Maybe they view it with a suspect eye more than a bank. Yeah, yeah, I mean, you walk into a big bank and, you know, they're gonna like you and they're gonna love you, but, you know, without a 10-year history with them, they're gonna basically, it's just like any other loan, they're gonna KYC you, I don't know if what people know what KYC is, but they're gonna due diligence to you. They definitely wanna know what your credit history looks like. They wanna know three years of tax returns. They wanna know what your, you know, annual sales of a business is gonna be. So it was kind of a niche bank, sort of? Or, or, or a very, it was just a bank that just believed in founders more than, right? Like, we'll spot you a little bit more because like, I like you, because I like startups. And listen, they're not altruistic, right? They did this to build a business and in the last few years, they've grown deposits and multiples by catering specifically to startups and disease, right? So on that, so the underlying tension in this conversation is, and I'll get back to the liquid-death comparison, is are smaller regional banks, right? Are they predatory lenders or are they founders, right? Because on the one hand, you could say, wait a minute, to Mark's point, they serve a niche because they help people that, you know, that's the positive side of the story, right? In terms of the marketing, you know, they're like Nissan. Like Nissan will give you a loan on a car more than Toyota will. Or a Mercedes. Right, right. Right, exactly. So the question is this, you know, on the one, you know, there's two perspectives, right? To everything, you know, if you look at SUVs and these regional banks from a financing perspective, you know, are they good for mainstream banking? Probably not. Are they good for startups and founders who have more risk and they're willing to absorb that risk? Great, they fit a niche, right? On the other hand of it, you could look at these types of banks as predatory lenders to some degree, right? Because what they're doing is they're forgoing some of the requirements, right? In terms of the regulatory, the safety, the checks, because what they want to do is they want the customer growth. And as they get them in, they start lending to them on more riskier terms, right? So at the end of the day, that's their business model and that business model didn't work. When you see the macro-micro-economy just kind of fall, right? And so, you know, you can almost say that SVB is also a startup unto themselves. I know they've been around for 16-plus years. So you could say that a startup was lending to other startups. Pretty much. And I guess that is different. There's a lot of layers of risk there. Right, right. But I would say more than their business focus, their failure was really just in the treasury management, right? It's not necessarily, they didn't fail just because they were lending to startups that weren't getting loans that the bigger places, it's just what they did with those deposits. Right. But what else, I would agree with Mark, but I also add on to that that if you were a more stable, traditional bank, they wouldn't have taken those risks. That's true. I guess for all the founders out there are people who are would-be founders or people, you know how people tend to follow founders and everybody in B-School, whether they end up one or not, they dream of being a founder. What should you do? Big bank or small bank? SVB or big bank? Both. Do both. Both, both. So have a little bit in the smaller bank, have a little bit in the big bank. It's like diversifying your life, right? Or your investment portfolio, right? So if you wanna do basic banking operations, right? Go to one of the bigger banks because they're probably not gonna risk that money, right? Regardless of where the economic position is, right? I think even if they, the worst case, right? Even if they do, if Bank of America, JP Morgan, they do risk your money, what people are betting on and the reason people are moving money into those banks is, worst case scenario, they're too big to fail, right? So you're always protected. Is that at least the thinking that most people have? They're locked in with sort of the old world. The old world's gonna protect people who are a part of it, right? But that's not completely true too because in 08, the traditional banks all fell. Yeah, but those are investment banks, right? Well, I mean, Citibank, I mean, fell too, to some degree, right? But it didn't completely collapse. It wasn't like a leaning. Did you guys personally know anybody who was freaking out over the SVB thing? Like their money was locked up. Oh, sure. They can't make payroll. They're like calling every successful friend they got. Like any, I guess I don't know any stories you guys can tell. Oh, I had a founder texting me. He's a friend of mine. So I knew that he took money from Silicon Valley Bank. He took a big loan from them and he kept most of his money there. And he was telling me he doesn't know how to, he was gonna make payroll, like you mentioned. He wasn't know what tomorrow was gonna look like. He was getting on the phone with all of his VC's trying to line up bridge loans. And it was, you know, it was- He was freaking out. He was freaking out. I mean, it only lasted a couple of days because I would say our government moved relatively quick on this, but yeah, it must have been a hard 48, 72 hours room. Crazy. Yeah, we had a lot of founders and I also knew people in the ecosystem that were affected by it. I mean, it's two parts, right? One is, you know, even if the government was gonna backstop that or the taxpayers to some degree, there's a psychological aspect of it, right? Which is where do I put my money and how do I make sure that that's somewhat stable, right? And so I think a lot of our, the people that I know, whether it's founders or VC's, we're looking for alternative options and there weren't that many other than the big banks, right? I mean, you might have some, you know, regional movement, right, like within that segment, like going from an SVB to a PacWest or a PacWest to somebody else, but I think a lot of people were just looking to move to a bigger bank. The bigger issue once they've moved it was what do I do next, right? How do I avoid this situation? And so there's a lot of, like to your point, David, there's, you know, there's different strategies on de-risking that type of situation. One is you can go and open up a hundred different bank accounts. I don't know if there's that many banks to be able to fit under FDIC, but I think this again goes back to Mark's point, which is you don't have to be at that level to protect your cash position. You can certainly have a traditional bank account. You can also set up investment accounts, right? And within that investment account, move money back and forth, which is what treasury management is. And as you put money into those holding accounts, right, which is these investment accounts, you could put that into safer investments like T-bills or, you know, secured nodes, things that completely guarantee your principal and you can move in and out of them. However, the key piece of that strategy is to make sure that you're putting your money into financial products that don't have, especially in this type of culture, long-term risk or a long-term lockup. So in SVB's case, obviously, they put a lot of their kind of strategies into 10-year bonds and things of that nature, where the penalties were so high that if, you know, with any shift in macroeconomics, so for example, if the economy's not doing well and you're seeing interest rates just skyrocket, you know, you know, with the interest that they're earning on these bonds doesn't cover the points that they're losing on the securitized assets. So basically the SVB guys super did not predict this macro dip in the economy and its wild inflation. Right, and they were so locked into these types of products, they couldn't get out without a penalty that was so high, they couldn't absorb that penalty, right? So if you have $90 billion in a bond, right, and the penalty fee on that could be up to 50%, how are you gonna handle that loss? Right, you just gotta eat the inflation, right? Well, you just gotta cross your fingers and hope things get better, right? I think David, to your point, no one expected interest rates to spike this high, right? There was no expectation of that from the Fed. What really happened is when they blocked in that 10-year bond for like 1.38 or whatever that number was, it sounds ridiculous today in an interest rate environment that's at 5%, but at the time, treasuries that were at what, 0.25? So it was, you know, maybe not the smartest move, but it wasn't a terrible move. Right, not to go sideways, but I also think that the government has complicity in all of this, right? Because it's because- You gotta do more? Well, no, no, no, I feel bad for SVV because they did all the right things. If you actually look at their investments, they weren't that risky, putting money into a very safe bond over 10 years that's where the underlying assets are really T-bills and corporate bonds- You're saying for the Fed to let the inflation get that crazy. Well, no, no, no, that's not what I'm saying. What I'm saying is that I think the Fed chair should be fired immediately because the guy doesn't know what the fuck he's doing. At the end of the day, the normalized rate, right? So you can't compare, you can't keep raising interest rates with a goal of hitting a 2% inflation mark when you're living in the fucking stone ages, right? That threshold was what my parents lived through, right? In today's modern context, where you've seen an increase in labor, increase in wages, like we have a different lifestyle today than we did 30 years ago. So the Fed's perspective is, I need to keep raising interest rates until I get to 2%, which is when he was a fucking dinosaur, right? Today's environment that I would argue that the normalized inflation rate should be 5.5%. If that's the case, we're already there based on our way of life, right? Like the average income 20 years ago or even in the 90s or 80s and 90s was probably about 45, $50,000. The average medium wage now in today's context is close to six figures unless you're living in San Francisco where you're considered poor if you're not making $275,000 a year. So in my opinion, the Fed should stop raising rates. They're fucking it up for everybody because we've already hit stable state. That's my argument. So if the Fed stopped raising rates, SVV might have not collapsed because in their effort to help startup founders by bringing in accounts, by making the right treasury deposits, investments, and then also giving out the right loans, in that cocktail, they wouldn't have had any financial issues, is that what it's saying? Right, right, right. You're saying their behavior really wasn't that irrational. Right, look, I'm pretty progressive as it gets and I don't, but on fiscal policy and economic policy or monetary policy, I don't really tend to agree with the Democrats, like Warren, but I agree with her. That asshole should be fired immediately, right? If I was the president of the United States, the first thing I would do by executive order was to get rid of Jerome Powell because he's a single root cause of all of this, right, at the end of the day. And I'm convinced of it because they continue to convene to raise interest rates based on a time not too far in the distant past, right? When eggs were like 99 cents, the reality today is that a dozen eggs are gonna cost 399. So I guess if Jerome Powell is almost like this conductor in the orchestra of all these metrics, like interest rate, you don't like the way he's conducting. Like you think he's basically a bad orchestra conductor of the things he's in charge of. I think personally, I don't know, I've never met him. I personally, he's probably a brilliant individual when it comes to economic theory, right? But in practice, when I look at the Fed team, right? He was making these types of policies. I wonder if any of them actually have created a business and started a business, a brand of business. They don't know what it's like in the... They don't know what it's like in the trenches, they're just generals. I wanna know if they were a bougie group of people who basically went to, you know what I mean, who came from bougie families, who got a nice ride, who went to college, good colleges, you know what I mean? Learned a lot of fucking theory and then never started a business, never went bankrupt and then they got a cushy job making six figures, you know what I mean? Dictating to the world. All these macro things, right? Right, exactly, macro, micro policies when they've never worked at a gas station and they don't know what it's like to feed their family. They don't know what it's like to be a regular person. Yeah, they're not a regular Joe Schmo. Did the people who worked for the Fed, did their paychecks change once the economy went down? No. Jerome Powell has never been in these streets. He's never been on the streets. I don't even think he's ever been like in a 7-Eleven, dude. Jerome? You guys should interview Jerome Powell and ask him if he's ever been at 7-Eleven. I'll ask him, hey, what's the first row of snacks at a 7-Eleven, huh? Yeah, he doesn't know that. I know that, because my mom owns a gas station. I know exactly what the first row is, but you know what I mean? I don't think he knows. Jason, for Fed chair, I'm campaigning. Jay Kim. So these banking issues are unreal. The root cause of these banking issues is that the government is not implementing the correct monetary policy that maintains that detente of growth over loss. You know what I mean? Like, you know, inflation is fine the way it is. That's the new realities of today's environment. You know, in terms of GDP growth, America has always grown at single digits, no matter what, every year, right? So if you look at those two components and you're sitting in a meeting, right? Like it shouldn't require an SVB collapse to start slowing down interest rate hikes. Does that make sense? Like it has nothing to do with SVB, right? If the feds keep raising interest rates, it's gonna put, I mean, America is a credit environment. You guys know that, right? Yeah, this is how the- This is America. America has very little savings. We are a credit environment. There's not that many countries where you can have 10 credit cards. Right, America is like the greatest Ponzi scheme in the world, right? You said it was the greatest startup. It is, it's both, at the end of the day. Because at the end of the day, we're a credit finance environment. We have very little savings and what this economy runs on is constant growth and innovation. There's just that trust that the money's gonna come back. Right, exactly. We let it go, it's gonna come back. Then it's gonna go to somebody else. We're a highly matrixed economic environment, right? And for a group of people to be taking such a linear perspective of such a highly dynamic environment is really messing up the system. So there's gonna be more SVBs to come. All right, Jason, I think we're gonna wrap up this segment here because I think we could go on and on about banking but we gotta keep it moving because we have Mark here and you here at the same time because you guys are bros, you guys know each other, but we're all bros here. But you guys kind of represent maybe different sides of finance. You know, you're more traditional. You're from the VC world. Mark is in Web 3 and crypto. And I kind of wanna know, I wanna segue into this whole segment by asking like, how did SVB falling and collapsing? How did that have any effect on the crypto world? Did it help? Did it hurt? Did it make people think differently about crypto and made them lose faith in it or feel like crypto needed to be more regulated? Or gain faith in Web 3 and crypto. Yeah, so I think we could look at it in two ways. First, it's become extremely difficult for the crypto industry to access banking products, right? So not just, you know, Silicon Valley Bank especially Signature Bank and some of these smaller regional banks cater to non-traditional clients which included crypto companies, right? There's this bigger push in the country right now especially from regulators to cut off crypto's access to banking. And it's already taking effect, right? If you look at what some of the regulators have said about the buyers of SVB and Signature, one of the things they need to do if they're gonna buy the bank is they have to give up their crypto clients, right? So I think there's this broader push by regulators to crack down on crypto. They're leveraging what's happening with the banking crisis to accelerate some of this. On the flip side of this, it's really this banking crisis has really disroaded trust in traditional finance, right? So people are starting to think, okay, so let me learn a little more about crypto and DeFi. What is it really about? Is it just about speculation or is it about improving accessibility, making products more approachable and making sure that people have complete access over their finances, right? The idea that the government could step in and just shut a bank down overnight is, you know, it's not one that's welcomed by everyone, right? So the whole idea, DeFi, is you take complete control over your own finances, you trust the code, not the people. Mm. Don't trust Jerome, trust the code. That's right. Yeah, but just for the audience to understand and Mark, you can correct me if I'm wrong, but with DeFi, there's still security issues around the blockchain and DeFi, right? Of course. I mean, you can still manipulate on-chain transactions. Maybe not manipulate, but there's always a chance of a vulnerability, just like Google can always get hacked, right? Your bank accounts can get hacked. The likeliness of that happening, low, right? But that's because there are measures in place. Because probability, not certainty. Yeah, so DeFi as well, like our project, all of our products get audited, smart contract audits, by at least two or three reputable auditors. And this doesn't necessarily guarantee that. I just want to say that that's what Binance says. And they're under DOJ. Well, Binance is different. They're centralized, right? So they have centralized servers, centralized leadership. I think for a lot of people out there, possibly me, I'm wondering, and this is a big question, how is Coinbase different than Binance real quick? Is Coinbase safer? I mean- Those are two different businesses, right? Well, they're two different businesses, but they're similar in the sense that they're both centralized exchanges, which means everything's controlled by a single entity, right? For the most part. There's like a parent company that oversees all the different projects. I mean, personally speaking, I would think Coinbase is a bit safer because they operate under US regulation. Under SEC regulation too. Under SEC regulation. And as far as I've seen, they've always done right by, they try to do right by regulators, by lawmakers, by their customers. Binance, you know, has a- But there's a, but there's a, I agree with you, but there's also a fundamental difference. I didn't correct me if I'm wrong. Coinbase, my understanding is that they're an asset manager, right? That's the way they've positioned themselves in the market. They're not in exchange. Binance is a pure exchange. No, they're very similar. They offer similar products. I mean, Coinbase does have an asset management arm, but their core product is their exchange. It's the trading platform. Yeah, I mean, the way it's, but right, I agree with you, they have a multiplexity of services and products. But I think that if you look at their core focus, Coinbase historically and it culturally has always came out as an asset manager, and then they've kind of evolved into an exchange. Yeah. Whereas Binance, I believe is my opinion, started out as a pure exchange, and now they're evolving into other services like asset management. So they're both the same, I agree with you, but I think they just came from different perspectives. And I think that speaks to its culture. Is that makes sense? Yeah. And it also, you know, I put, I personally living in this country put value on a company that puts its roots here. Yeah, definitely. Binance, for example, is somewhere in, you know, I think a lot of their operations in Dubai, which there's nothing wrong with that, but I think- You got to try CZ, right? Yeah, yeah, exactly. Yeah, and so the other thing, I think what Mark is speaking about is, and I don't want to move off the financing topic, is that when you're making an investment, that's not just a finance piece of it, but it's the legal piece of it, right? So as investors, if you're investing in a company, you have to be aware of the fact that, you know, the best case is that you make money and things go well. The worst case is that if you run a miss, or there's something that's going on, I think, you know, to Mark's point, making sure that you're in the right jurisdiction helps, right? Right, yeah. Because there's more infrastructure in the United States, and the law, and the rule of law here has been advanced enough to a point where there's some consumer protections that are reasonable. Right. It's not just about- Not the Bahamas, right? Yeah. It's not just about like, oh, how good is this deal for me as far as my shares, and ratios, or leverage, or whatever, but I literally have to think about like, okay, if something bad happens, do I have, essentially, somebody I can talk to is the government gonna help me out? Is there a customer service? Yeah, so I'll give you an example. Like, this is a really classical example, right? This is one particular point and example of the situation is, like, for instance, we invest in a lot of companies, right? Early stage founders. And it's pretty well known that founders, eventually, like, they kind of want to, you know, build the business, they want to raise money, build the business, tell great stories, right? But at the end of the day, there's also risks associated with that. And a lot of founders, they're afraid of talking about the risks because they think that if you don't tell them the truth and tell them the risks, you're not gonna invest in them and that's not true. You know, I'd much rather find a founder who says, you know what, this is what I'm doing, you believe in me or not, but by the way, I could lose all of your money, too. But a lot of the younger founders are afraid of talking about the risks because they think that if you talk about something, it's like dating, right? You show up on a date and you're like, here's all the great things about me. Oh, and by the way, here's all the terrible things about me. No, you gotta talk about, but everybody wants to live in the friend zone. Nobody wants to talk about the bad things, right? No, no one wants to talk about the red flags. Exactly. Everybody just wants to say, look how I would do this nice dinner, blah, blah, blah, and then it's like, but what's, but you got some damage. Yeah, but it's like dating. If I met somebody who said, you know what, here's all these great things about me, but here's also some of the things that you might not like. I might just, I appreciate the honesty and I might accept that and move on and that it'll be a good relationship. So what happens in the startup world is that a lot of these founders will talk about the great things, but they won't talk about some of their challenges, right? Not necessarily risks, because they're ashamed to talk about it and they think they're not gonna get support from it when that's not true. It's not, you know, and what ends up happening is, even if you invest in them, I didn't want to interrupt, what happens is over time, as they go through the peaks and valleys of their business, right? Because there's no business that just goes up like a hockey stick. If all of us in this interview created a business, we're gonna have good times, bad times. That's the point of creating a business, right? And taking it to some level state. So, you know, in the good times, everybody's gonna be talking great in the bad times, you know, what happens? And I think in the bad times, investors traditionally try to go out to the founders and just want some basic information of how they're doing. A lot of the founders today won't even give you that information because, again, it's that psychology. I can't be seen as a weak person. So I've got this pride and ego. So you know what, I can't tell anybody about the bad things because they might not invest in me. Oh, by the way, and even if you've invested in me, I can't even tell you that I'm struggling in my business because you might hate me and you might not want to keep giving me money or support me. And so they start not, so it's a self-fulfilling prophecy by not being honest and transparent. What ends up happening is they end up failing and the worst founders will then basically come out and say, hey, by the way, you know what, I'm not gonna give you any information. The investors then feel like, oh my God, you know, I've lost all my money, what do I do? If you're living in a foreign country, to Barg's point, legally, you're not gonna be able, there's no recourse. You can't go to someone for help. In this country, what founders don't realize, and if you're a founder, you should listen to this, what I'm saying, is that it doesn't really matter if you're an investor and you don't have rights to get information about the status of a company. In this country, the rule of law, especially if you're incorporated out of Delaware and just regulatory-wise, is that an investor has every right to get every piece of information about a company. And if you're not willing to give it to them, they could take legal action to get it, right? So specifically, like for example, if you were a company registered or you're incorporated out of Delaware, the Delaware Chancellery Courts allow every investor, regardless of what the founder thinks, to go and file a DE220 motion and get all the information out of that company. So if a founder ever tells you, I can't give you that information, that's just prerogative. But at least in this country, the investors are protected. They have a recourse. They can go to that and pull that trigger and say, I don't only care at the end of the day. That's why America's dope for business, right? Right, exactly. And that I can't get you that information is actually realistically, in real terms, I don't want to give you that information. Exactly. And you can legally pry it out of me, but I don't want to. And to Mark's point, in this country, you have those options. Whereas if you're in Dubai or BVI or the Caymans or some foreign entity, you might have zero recourse at that point. I was just speaking personally speaking, right? From an investor's point of view, I mean, VC's job is to take risk, right? And part of that risk is jurisdictional risk. So you're investing in companies, not only in the US, but in all other jurisdictions, knowing that you take that risk for a higher upside. Right, right, right. So it's not like don't invest in companies based in foreign countries, but you're taking on a certain amount of risk that you might want to really think about. If you're an accredited investor, to Mark's point, you also understand that risk-reward equation. You know that there's gonna be, if you're going that extreme for a big return, you should be aware of that fact that you might not have recourse if you're going into those companies. Yeah, and I agree with that. Okay, let's talk about, I guess that's also a good segue into the different types of funding, because we're talking about investing in businesses, the risks here and there, but I guess what are the different types of funding that startups can get from different investors? Because not all investors are you. They're not all VC guys who went to, did this, got X and X degrees and worked in this and this, right? A lot of it is like, even just friends and family in different types of people, right? Go fund me, maybe. Kick starter. So like on the traditional side, less, you know, more Web3 crypto tokenomics and those kind of things. You know, from my perspective, if I was a founder, you know, there's kind of a trajectory with this, right? There's a path. So if I was starting a company, the first thing you do is try to get friends and family, right? It's like all of us trying to create a company. Like literally people, like if I'm starting a company, I'd call you guys because I know you. Yeah, Bezos dad gave him 300K to start this one, right? Like I call Mark, I call you guys, I call my mom, I call my partner Kai, whoever, right? You know what I mean? And I'd be like, hey bro, I have this great idea. You know, do you believe in it? Let's, you know, invest in me, let's pull it together and let's just try to build something. Is there a pressure if you're that friend or family and you have the means to invest that like, if you don't invest in my company, then I think that you don't believe in me as a person. Yeah, for me, if I make a friends and family investment into a friend, I kind of treat it like giving money to a family member. I've already written it off when I give it to them. Because I want to set the expectation low. I don't want to impact my personal relationship with that person. So if I'm giving them that person, I know I'm giving it to them without any expectation that they'll be able to give it back. You are willing, absolutely willing to lose all this money and still be friends with that person. So if I say I'm starting a liquid death competitor called Liquid Life and you give me 100K, you're basically like, I'm betting I'm never gonna see. You really want to hit me up on Liquid Life, right? Cause I missed that investment, right? You really want to, you're really trying to nerve me on this. It's just a trendy topic right now. Yeah, so like if you started a business and you asked me to believe in it and give it to you, I would do it and I would support it. But I would emotionally prepare myself that it's never gonna come back because you're my friend. And I don't want my relationship affected with you. And a lot of relationships because people do not do what you just said, they are impacted in the real world. And you see that. Friends and family is the lowest level. It's the first level and it's like, it's akin to like giving money to your child, right? Like when you loan your money to a family member, like you don't want to get into issues with that. So you're giving it to them freely out of love. Does that make sense? Right. It's not that different than buying your kid a Lamborghini so he can have really cool experiences in high school, right? Yeah, you don't expect him to make money on a Lamborghini. You don't expect him to like go and get like a CEO job the next day and pay you back, right? So I think you said that that was the first level. Friends and family, call it people you know, personally know, people who may be familiar with your character as a person, but they have no expectation with how the business goes. What's the next level after that? You've exhausted, I've called all you guys up. I've called my friends. I got some funding, but not everybody believes in it. That's fine. I think the next level. Well, actually before we get to the next level, what are some alternatives to friends and family, right? Because not everyone has access, right? It really depends on your upbringing, your environment. Right, your networks. Yeah, exactly. So you're saying that if you're at a friends and family level and all your friends and family are whole. What are some things that like aspiring entrepreneurs can do to get that initial upstart capital? Yeah, you didn't go to maybe one of these Ivy League schools. You don't have necessarily the most expansive network. Where should they start? Mark, you're saying if you just don't have friends and family, right? Exactly. That's what I just said, friends and family are poor. Yeah. You know what I mean? Yeah, the poor or you don't have any. Okay, so. I don't know why everybody's looking at me. Are there alternatives? I don't know. Well, then you come to Jason and give up half your company. No, no, no. I think if you're in that situation, you then it's pure hustle, right? Like at that level. Super bootstrapped. Yeah, super bootstrapped and you've got a hustle to go and build that network. And that might take time, right? Like, you know, you've got to meet people and you've got to build relationships. Look, your economic position has no bearing on how hard you hustle, right? You could be the poorest person in this country but you could be working 24 hours a day meeting people, going to events, right? Networking and refining that and finding like-minded people. It would be hard for me to believe that someone in this country could not find a social base of people that really care about them and you don't need hundreds of them. Like you can't find four or five people who believe in you. That's gonna help you out, right? That's what America is all about. So I think at that stage, it's pure hustle. Yeah, I agree with you. I do think that people often just look around like who's the five, 10 closest people that they got born into around them and they might not have that available and just the people they were organically just born with, they're off like watching sports games or whatever. Like this isn't like we live in a country where people want to help, right? So if you have no help at that level, you know, my argument is that you can go find it. You know what I mean? Just be real, be a human being. Go tell people that you need help. Tell them about your ideas. You know, out of a thousand tries, you're probably gonna get a few that- Or even just tell your story in a great way and go to the GoFundMe's or the- Right. Some startups have literally started off that, right? Yeah. Especially years ago, Kickstarter, right? So many consumer products started right on Kickstarter. So I think beyond that level, the next level would be to answer a question, Drew, is probably kind of angel investing, which means- And what is that? Well, angel is like not so as personal. It's the same, to me, it's the same thing as friends and family, but it's just more of the extended friends and family network, right? Yeah. Where you have your friends and family who know other people, who are credit investors who can now, you know, kind of rally around you and give you more money. Why do they call it angel investor? Angel investor sounds cool, is it? Because they come down and they're like, I'm going to save you. No, no, no. I think they- I don't know, Mark, I think- For me, I think they call it angel investors because they're not institutional and at the end of the day, they're just private investors who are willing to write small checks, right? So to me, it's just a private investor, but it's just, they're not going to be writing- I think there's something to what Andrew just alluded to, which is like the term angel is because they're the ones really helping you get that startup off the ground. Yeah, yeah, I agree with that. They're the first true investors that come in, beyond friends and family. And these angels, I mean, unlike friends and family, they're not writing off that money. They want to see a return. So if I'm writing a check as an angel, it's not like I'm like, oh, I think you're a great person, go earn, right? There's a higher level of expectation. I want some money back. The truth is they're not angels, because they do expect something back. Well, I guess they're the angels in the sense that they really do want to help, but they're not like, they don't want to help as much as family. Does that make sense? Sure, sure. And they're going to be smaller checks. And then the next level after that is probably, you know, syndicates or potentially early stage VC, right? And those are more organized groups of investors, right? So this is what's called a pool and income fund, right? So the money is now individual. It's not individual. It's basically pooled in some sense. And those, and that's where the check sizes get a little bit bigger. And then eventually you get to institutionals. And then, you know, from institutionals, you move from VC and to growth and from growth into private equity and from private equity potentially into the public markets, right? At a very, very high level. Yeah, I always hear about... That's the hierarchy of... Exactly. I always hear that brands, like cool brands like Supreme and stuff, once they get bought by private equity companies, then they become like less cool. I don't know. I love Supreme. I never thought, I mean, I think there's a difference between like... But it becomes, I guess, like now you're reaching the institutions. And then once like institutions want to invest in your product, it's like... Yeah, you have a huge... But I would also agree, most consumers don't know that, right? Like they don't know Supreme was bought by a corporate strategic. Are you also saying this because you have a huge Supreme skate deck collection? I love Supreme skateboards, yeah. When you told me that, I was like, Jay, I would have never expected it. Why wouldn't you expect that? Well, you don't have a Supreme shirt on, right? Yeah, I think... That doesn't make sense. You don't appear to me as a person who likes to jump on skateboards. I don't really skate because as an Asian, I think I would get hurt. So what I... I just like the art, you know what I mean? I just love their art. So I collect them as like a collectible. Yeah, no, it's a very organic street culture. Yeah, I could never take part in some of those sports. I want to talk about Mark because Mark, you are part of a crypto derivatives exchange. What is derivatives for people and how does that play into funding maybe crypto projects? Yeah, derivatives are just financial instruments for trading. So to give an example, futures, some people are familiar with options contracts. So what we enable as a platform is trading crypto futures. So basically you're taking leveraged long and short bets on all types of crypto assets. Okay, how's it... I mean, we just got to ask for the layman's out there. How is it different from FTX? Yeah, so we're decentralized, meaning everything's run on chain, everything's completely transparent and we're non-custodial. What that means is we don't take a hold of users' assets. Part of the problem with FTX is they took users' assets and then they went and did something else with their related hedge fund, right? For us, all of that is stored in a smart contract and it never goes to our possession. So you can't move the money, even if you want to invest it like sin futures would never? Exactly, yeah. What were you guys all thinking? I mean, I know that we've all moved on to Silicon Valley bank talk, right? But previously, just a few months ago, everybody was talking about FTX. When you were obviously as somebody in that space, were you just like, whoa? Yeah, it was hard because FTX became this household name for crypto. They became pretty much the face of the crypto industry here in the States, right? And so for them to collapse in the way they have, it was like a big disgrace for the crypto industry. And we knew that, I think for DeFi projects, we always knew that it was a net positive because it actually shows the weaknesses of centralized systems. There are some congressmen who are pro-crypto in the industry and they've even quoted, they've been quoted saying this was a centralized failure, not a failure of crypto, which is true. With DeFi, you kind of have some of the checks and balances in place, like you have the on-chain transparency. This could have never happened because people can monitor exactly what's happening to funds, right? The other thing is it's non-custodial, so no one takes access. So the idea that someone's assets are taken out of an exchange could not happen in DeFi. So I think this really cemented the benefits and the use cases for DeFi. Okay. Right, because you guys can't go do whatever he was doing with all the funds. Yeah. Go and gamble. Wait, I'm trying to get this straight just for the people out there listening. So with almost FTX failing and understanding why it fell, it could have even solidified people's more faith into DeFi. Yeah. And so, but you know, that's not, there's some positive, some negative, right? The positive is the people who understand DeFi, they actually truly understand the benefits now. And we saw this when FTX collapsed, our exchange volume started hitting all-time highs, right? So these were people moving from centralized exchange to decentralized venues like ours. The bigger challenge though is, you know, if you look at the average person, the average politician, the average policymaker. Anormy person in America. Yeah, anormy person, all of crypto is the same, right? So they don't distinguish between FTX and a DeFi product. Centralized versus DeFi, yeah. They don't even know the difference between Bitcoin and any other shitcoin, right? It's all, to them it's like, it's all one big scam, who cares? So I think the fall of FTX has really hurt the credibility of the industry, especially for the anormy audiences. I want to ask, I don't want to, you know, just out of my, you know, stupidity, I wanted to ask Mark this because he's such an expert in this area. So you keep saying it's a non-custodial account. It has to sit somewhere. So I realized what a smart contract is, but I'm wondering if you've got a lot of open cash, right? So on the exchange, you have buyers and sellers. They're depositing it into a non-custodial account. But there's gotta be someone who still has fiduciary responsibility over millions of dollars on that non-custodial account. Who is that person? It's all on chain and all on contract. It's all done through contracts, and then the assets you store it in a decentralized wallet, which is your, it's in your possession, right? So who's yours? The user, the end user. Okay, so the author, so the business per se was kind of the super user, right? Has no legal access to the money that's being put in reserve to handle the trades back and forth. Is that correct? I'm just trying to understand. Okay, great. I didn't realize that. I learned something new. Thank you, Mark. Also, a lot of DeFi exchanges, you're not necessarily trading against the counterpart. Trading against an algorithm, or what we call an automated market made. Okay. There isn't always another side of the trade. Right, there's the buy sell side, where it's just taking up against some position against the house, which is the algorithm, correct? Yeah, that's great to me as a model. I just was always curious, and I appreciate that you answered the question, was even if it was put into a non-custodial account, someone must have access to it. I think what you're telling me is that the company itself doesn't have access to it. We don't have access to it. Right, but the users have their access to that, their particular portion of it. Yes, that makes sense. Mark, forgive me. I'm just trying to make a very layman's analogy. It's like an Airbnb or like an Uber where Uber doesn't own the cars. So then you're never gonna run out of cars, like the cars, they can never take the cars away. Is there some analogy? Yeah. Wait, wait, wait, wait, wait, wait, wait, wait. I might have a good analogy. It's like all of us creating a bank account, we're not putting money into it, but it's one account, but at the end of the day, there's no way one person is a signer for all the accounts. Everybody owns their bit and piece of that account, correct? So all four of us put in a thousand, if we have a bank account with a thousand bucks and all four of us put in $250, none of us has the ability to actually take out a thousand dollars. We only have the ability to manage $250 of that $1,000, but it's one account. Am I wrong? Yeah, I mean, yeah, it's a reasonable analogy. It's okay to say I'm wrong, you know what I mean? No, no, it's because I'm looking for another analogy, but it's actually quite hard to find a compromise. That's what I'm saying. That's why I was thinking about it that way. It's really, so it's basically like a pooled investment account, but there's no central authority that has the ability to execute on behalf of the collective, right? So it's written into the smart contract. Right, so it's like having one bank. Yeah, it's like having one bank account. It's a pooled bank account, but literally, there's like 1,000 signers on it. And unless you get all 1,000 signers, you can't effectively, there's no authority to commit that bank account to something. You can only commit your piece of it. Sorry, am I getting too like intellectual masturbating on this thing? I guess do ultimately, we are discussing obviously centralized exchanges versus decentralized D5 versus regular exchanges. Do you think that after this whole FTX thing that just the industry needs more regulation? And if it does need more regulation, who should do it? Because it can't be guys who all grew up with Jerome Powell. And then bro, it definitely can't be him. Because they cannot understand this new world, right? They're from, they don't even know what Spotify is, right? They're still playing records and CDs and maybe. Jerome Powell's on the venals, man. Yeah, he's. He's on the vinyl. Because if it needs more regulation to create more consumer trust, who's going to create the regulation, right? Who should be put in charge of regulating? Yeah, I think crypto regulation falls into two camps. One is the SEC. SEC overlooks anything securities related. And then the CFTC that overlooks any of the futures markets, right? So for us as an exchange, if we operated in the US, which we don't, we would fall under CFTC jurisdiction, right? But right now, as far as I'm aware, there's a little bit of a battle between the CFTC and the SEC because both sides want to plant a flag into who regulate, who gets to regulate crypto. Right, who's jurisdiction? Exactly. It's almost like all those crime dramas, the FBI is always fighting with the police to see who gets the case, right? The big challenge right now for the crypto industry in general is a lack of regulatory clarity. And the reason for that is the laws that are in place and the, yeah, the laws that are in place right now weren't designed for digital assets, right? So what the SEC is trying to do is kind of force pieces of that law to apply to crypto, doesn't always translate one to one. And so I think most of the industry is still kind of sitting on the sidelines waiting for regulatory clarity so that we can abide by regulation that we can operate with and comply to their guidelines. They haven't made that readily available yet. And it's a little disappointing because the SEC has really been regulating by enforcement, which means without putting together the proper frameworks, they're only going directly after crypto companies and bringing down judgment and enforcements as a way to set precedent on future regulation. Oh, interesting. Yeah. So it's all kind of murky right now. They're still figuring it out. It is very murky. Yeah. Do you think... I think what Mark is saying is that they're learning on the go. Yeah. I mean, I'd argue that we need more open dialogue between the crypto industry and regulators. Right. Before setting those judgments and enforcements. Yeah, exactly. Right? First is learning on the go. Should there be an age limit on the regulators? I mean, I mean, you know, other countries, they have to just extend the age limit in France just to let Macron still be the president, right? Because they were capped at 62. I think our cap in America is obviously endless. It looks like we're gonna... It should be... Yeah, if there's no cap on the presidency, why would you put an age limit on regulators? I think there is some argument for an age limit, right? Because at some point, the disconnect between... What, 30? No, the disconnect becomes... What would you think the age limit is? I don't know. I go on crypto? It's gotta be at least 62, like France, right? Yeah, if you name the crypto Web 3 czar, right? As a cabinet level position in the U.S. government, what do you think the age limit would be? I think you gotta go with 64, you know why? Because it's a 64-bit and N64. It's a very digital number. That's cool. That's a good idea, actually. Yeah. It's like the old-school Nintendo style. Although it's not necessarily about age, right? Like, you can be older and still progressive about innovation and... But if you have to put it... He said 64 Nintendo. What do you think it should be? Well, the crypto industry would love it if it was 69. Yeah, that's pretty funny. Yeah, that's true. Yeah, yeah. Oh, yeah, yeah. Or 42. 42 or 69. 42 is a little... Those would be the regulatory ages for crypto. Even the porn industry would love 69. Yeah. I guess... But Japanese porn would really suffer, though, if the actors were captives. That's true, man. Because they like the old guys in the J.A.V. Anyway, guys, we're just... It starts for the man in those women, too, anyways. I guess to wrap it up, like... I guess do you have any guys closing thoughts on... I guess we covered a lot of banking and finance, but between FTX falling and SVB falling all within like the past like seven, six months seems kind of crazy. A lot of stuff is falling, but I guess is there a hope? Is there anything that the regular person can learn from it? Yeah, are the larger macro fears oversold? Is it just a slight dip in consumer trust and then we're going to bounce out of it? Or you know how like everybody was writing all these pieces to go viral and I'm sure they had ulterior agendas, but this person saying, oh, we're all going down and other people were like, dude, it's by far still the most stable system. Yeah, it might have fallen from where it was, but what are you going to do? Put it in this currency or that... You know what I mean? Go somewhere else. Like, America's still the most stable at the end of the day. But before we go into the future, right, and kind of like what I would love to get some information, like just get insight from Mark about is like tokenomics because we were talking about traditional versus non-traditional financing. So in the VC world, a lot of the financing is based on equity, right? We buy something, you know, we take a percentage of the company and we're very vested in it. It's equity, right? We own something of something. There's also derivatives of that where you could do debt, you know, alternative financing, whatever it might be. What's interesting about the non-traditional world is they have a similar setup, but it's in their own kind of way. And I want to see if Mark could talk a little bit about, you know what I mean? Yeah. How financing works. Yeah, because it sounds more new school, right? Yeah, I think being in the crypto space, you do have definitely more avenues to fundraising. You know, just as Jason mentioned, a lot of crypto projects start similarly to web two companies with friends and family, right? Friends and family. But where we have a little more flexibility is we also have access to something called grants, foundation grants, right? So there are a lot of these like later one projects. And for those of you who aren't familiar, a later one project in crypto just means you could think of it as an operating system like a Microsoft, the Linux, a macOS. It's a layer where people build their apps on. So these later ones are incentivized to bring builders into their ecosystem. So they start handing out grants. They say, hey, Jason, you're creating a decentralized dating app, right? We'll give you a $50,000 grant. This is something that's not traditionally available in web two or just traditional startups. Definitely. Yeah. But beyond that, once you get to the VC level, like Jason mentioned, we don't always raise in equity, right? I think in the earlier days of crypto is mostly dominated by token raises, which means you go to a VC and you typically raise through what you call a SAFT, right? This is similar to a safe in web two investing. It's a simple agreement for future equity. A SAFT is a simple agreement for future tokens. That just means the tokens don't exist right now. So let's say I'm starting up a project. I don't have the tokens yet. I go to you as an investor and I say, hey, I'll sell you some future tokens at a valuation of X. That was the typical method of fundraising from institutional maybe years ago. It's starting to change a little bit now just as the industry matures. Now, I think what's becoming a little more popular is we call the traditional safe route but with something called a side note or a side letter, which really are token warrants, right? It just means if you buy 10% of the equity in the company, you will be able to convert some of that or all of that into tokens if we have tokens in the future. Is it not just basically a safe now? Deceptually. Is it because people just not trusting the tokens like they used to? Well, it's also because business models are changing and some of these startups are growing up. The industry is becoming a bit more mature and because traditional VCs are coming into the space, right? So crypto native VCs are happy to take tokens. There are some major web two VCs that have token only funds, but the majority of VC is still traditional VC where they're buying equity, right? These guys are coming into the space. I'm talking about like the sequoias of the world, right? They're coming into the space and they're talking to crypto startups and they're saying, okay, this token thing sounds interesting but we want a piece of the actual pie, which is the equity, right? That's what they know. That's what they've invested in for hundreds and hundreds of years, right? So the benefit of these safes with token warrants is now they have some flexibility. We own part of the equity, but if you guys ever launch your token, we have a right to exercise some kind of conversion into the token. So from an investor's perspective, there's nothing to lose. Right, they're getting both. They're getting the more stable traditional thing they've been aware of for hundreds of years and they're getting the new school. So what Mark is talking about is a permutation on traditional safe notes from the VC environment. So in the VC environment, a safe is basically you're investing on an essentially a loan product. You're saying, hey, look, I'm gonna put this much money in for this percentage of the company with this kind of interest. And if over a two year period, you have the option as the founder to pay me the interest on the money that I've invested, right? And if you don't pay me that interest, then you're gonna convert me into equity at a certain valuation. Yeah, that was like the traditional convertible. That's a traditional convertible note safe. What I think Mark is saying is that the alternative kind of non-traditional world of crypto and web three is going into that same direction now, whereas opposed to you were investing for some sort of token economics, they're now letting you invest, have the optionality of taking equity or converting you with some sort of benefit, right? With kind of tokens. Does that make sense? And the reason is the trajectory of a crypto startup is very different from web two in the sense that the value captor sometimes in investing in these projects comes in the form of tokens, right? And the reason is a lot of the projects that are being built today, their goal is to become a decentralized autonomous organization or a DAO, which means the token holders capture all of the value. They make the decisions. They oversee governance. So really as an investor, you want to make sure you have exposure to both sides, right? If there is an option. Yeah, I don't want to actually bring up another issue, but an open question I think to this audience and to the folks in this room is, since we're talking about safe notes, right? Is I don't really fully never really understood what the value of a safe note is. And I'm talking to you Mark about this because I've never seen a safe note not convert. Well, so no, I completely agree with you, right? So like, what's the point of doing a safe when you know that the founders are never going to give you the interest back on the loan? They're always going to convert it to equity because they don't have the money to give you back the interest in the principle. What I usually think of safe is a little differently from convertible notes, right? I think convertible notes, you're right. They convertibles are the same thing as safe. The only thing is with a safe is that you're guaranteed you have certain privileges on the convertible note. Yeah. So to me, my point is who cares if it's a convertible note or a safe. If I give, if I give, let's say, drew a hundred grand on a safe or a convertible, it doesn't really matter because at the end of the day, he's always going to convert me to equity because he's not going to have enough money to give me back my money plus an interest. So my argument is just at a metaphysical level, what's the point of having a safe or a, what do you call it? A saft. Saft, when it never, when it's always going to convert. Why don't we, why don't you just do a straight equity deal? Well, because then you have to price it around. With a safe, you don't necessarily have to price it around, right? You don't think that's an issue that you don't have to price the right amount? Well, no, because in the beginning, there's not enough traction for people to agree on a certain valuation. Right. So would you do a safe note for something that's not priced? Because a founder can come back and later say, oh, by the way, when I first talked to you, the value of my company was 10 million, and now I decided it's going to be 1 billion. Yeah, but that's why they're, so let's say a safe that says, you know, the cap is 10 million. Yeah. And you get a or 20% discount, right? Sure. Isn't that how a typical safe is structured? It does. But my point is, it's all going to, okay, I agree with you, but it's going to all convert anyway. So what's the point of the whole thing? Why don't you just do a standard, you know, stock purchase agreement for equity at 10 million dollars? Well, you know, part of it is, I think people just want to kick the can down the road, right? They don't want to make that definitive. I think the answer is that for founders, whether it's a saft or a safe, it's an easier process legally, without having to get more lawyers involved to get very complex on executing that investment, right? That's also a safe sort of popularized by YC. Right. So, yeah. Part of it is how much influence they must have, right? Right, exactly. In the industry itself. But they popularized that for different reasons, right? And so, I don't know if it's necessarily the right approach. I think for them, the safe was very advantageous to them, because at the end of the day, they're an incubator, right? They come in and say, okay, we may or may not give you money, but I'm going to take some equity for providing strategic value add. So of course, as YC, you're going to do a note, because at the end of the day, you might not be investing that much in these companies. So they're not going to care about those terms. But if you were, you know, a non-incubating, accelerating investor where you're just putting cash on cash into a company because you really believe in them, I think the safe doesn't apply. It's basically an equity agreement. You know, that's my argument, right? So like if I was an incubator and I was coming to the Fung Brothers and saying, oh, by the way, I want 20% of your business and I'll give you some money, I think a safe applies, because there's benefits for that incubator. But if I was coming to the Bros and I said, hey, by the way, I just believe in what you're doing and I'm going to give you, you know, I'm going to give you money, then why wouldn't I just want an equity? Yeah, definitely. I mean, hey, like we said, we got a VC, we got a founder, different perspectives. I'm not going to lie, everything about the whole safe and the Saft is way over my head. But I know that we were arguing about something smart. I guess, long story short, now that everything's happening this way, are we just looking at a blip or are we looking at something that's way more concerning? And then I guess we'll both get your VC perspective and the founder perspective. All these things happening, nobody could predict them. You know, you're talking about Jerome, doesn't know what he's doing. He's too old, he's on vinyl. I guess, is it just a blip? We're going to bounce out of it? We got some stuff to figure out. Or who's got to figure it out? The American economy will always come back. So this is just a trend, right? So if you look- You mean people are freaking out for- For no reason, yeah. Overly freaking out. Yeah, it's overly freak out. If you wait, this is like any other bubble. If you look at the last 20 years, there's always been ups and downs in our economy, right? And America always bounces back, right? Whether it's the tech bubble in the early 2000s, what was the financial crisis in 08, it always comes back. You're saying we're not Greece? Yeah, dude. Yeah, it's going to come back. Like if you give it two or three years, the market forces will stabilize. Is it just sensationalized because of the social media cycle and the way the new cycle is even quicker, obviously than it has been in prior generations? There is a big component of that, right? Where you're fueling the panic because you have so much technology available, where you want to make money off the views of getting everybody freaked out, right? Exactly, right? So there's that component from a technology perspective that's impacting consumer behavior and investment behavior. But overall, we work on cycles, right? Eventually, the feds are going to stop raising interest rates. Eventually, people normalizing it back to basics. Like the way we behave as Americans is schizophrenic. We want the excitement. So every three years, we're going to run up on FOMO and then every three years, the party's over and it's going to be a hangover and we're all going to be suffering. And then three years later, we come back. This is the American story, right? Yeah, yeah, yeah. Which is big, one big party, it's a rolling party and Jerome Powell should not be part of that party. Does that make sense? Right. Because he doesn't get it, you know what I mean? He doesn't realize whether he's there or not, that party, that party, we're in a hangover. The hangover is going to end and then there's going to be another drinking session after that. He doesn't understand this at the end of the day. Right. I mean, I think to your point, as crazy as this all sounds to like people who listen to media, I remember, I think some older parents were actually getting trampled and possibly even killed over at Tickle Me Elmos and Beanie Babies at one point, which are really stupid investments. I mean, not to say that other people didn't, you know, lose on some stuff recently, but. Right. Talking about Beanie Babies at Tickle Me Elmos. Yeah, we work in cycles. Everything is going to be fine over a period of time. Yeah, I think in the media, in the short term, it's looking a little bearish, right? And I don't want to spread any like fud or fear or anything like that, but. You know, the interest rate hikes, what it's going to mean to founders and small business owners is, you know, their cost of capital is going to go higher, right? And it's going to be more expensive for them to borrow money. But even on the venture side, so LPs invest in venture capitalists, right? But what happens when interest rates hike this high is the appetite for risk assets drops a lot, right? So instead of putting their money in venture capital, they may look at more, you know, why put, why do all the risky investments when you could put, get 5% risk free from treasuries, right? So naturally you may have this cascading effect where ultimately you get less funding for startups in the short term, just because of the current risk, the interest environment we're in right now. I would also, I would only disagree with Mark when I in one area, you don't do venture investments to get 5%. No, I, yeah. Regardless, right? You're in venture investments, you're looking for some multiple or you want to risk at all and make a lot or you want to lose it all, right? That's venture investing. So, but I do agree with you about, you know, about your statements about the macro economy. But do you generally feel like also that it's going to come back and everything will stabilize? Oh, of course, it will come, yeah. I believe everything's going to. It's just a matter of time, right? It could be two years, three years. And as a VC, are there some good deals right now in the sense that, you know, how when there's a, yeah, there's fear, right? And people are like, oh man, I was just booming two years ago and I was feeling like all the VCs were knocking on my door. I was like the hot chick on hinge. I was a rose and now I'm, you know, maybe I'm. The missing story in all of this and the sad part about all of it is going back to Mark's earlier comment about startups and small businesses. There is a subset of good actors and good businesses that are being disproportionately impacted by this, right? Some good guys are getting screwed by the bad actors. Right, yeah, exactly. I mean, there are great companies even today that are struggling, but they're making, but they're getting by, they're growing in terms of revenue, they're getting to profitability, and now they're just being lumped in with the rest of this and then they're just not getting those opportunities. And those are the ones that are really going to drive the next generation of growth in this country. There are good actors that are being tight-casted and stereotyped as bad with the bad apples. That's like saying Asians don't like, you know, in-and-out burgers, man, that's not true. Right. That all we do is eat ramen and noodles. Asians love a good unit. Is this sort of like how there are some good guys who maybe own an island in a private jet and they're like, dude, everybody thinks I'm a bad guy now, man. Yeah, exactly. I'm not, we're not all. There's a good segment of great founders, great companies like Mark, you know what I mean? You know, that don't get opportunities. And now everybody's looking at them skeptical, right? Yeah, exactly. They're like, oh, what's this all about? Well, maybe in our next video we can talk about how we suss out who is an actual good actor and an actual bad founder. Yeah, that'd be very interesting. Negative stereotypes of good founders. But yeah, I mean, I think there's so much content and obviously like, man, we sat here, we could probably sit here for another two hours. But you know, I think at some point, YouTube says, you know, you guys should cut it at an hour and a half. So here we go. Too long guys, too long. Yeah, no, Jason, Mark, we're going to have you guys back. Of course, guys, upside mindset with Jason Kim right here on the Fung Bros. channel, where we talk about so many things, successful people, smart people, people who are making a lot of money and making their parents proud. So thank you so much for all the knowledge you guys dropped. Please let us know if you made it this far. Hit that like button and thank you so much for watching upside mindset on the Fung Bros. Until next time, everybody, we're out. Peace.