 What are the most common mistakes that startup entrepreneurs make nowadays? Startups can go down a road of not talking to users for a long time and sort of they get the skew against what the market actually wants and what they're building. The most important thing you can do as a startup in the upcoming recession is not die. What's up YouTube? I'm your host Giovanni and today we are talking about investments in crypto startups with Brett Gibson, partner at Initialized Capital. How are you today, Brett? I'm great, great. Happy to be here. Thanks a lot, Giovanni. So for those who don't know, Initialized Capital is an early-stage venture capital firm with over 500 million under management and several unicorns in its portfolio, such as Coinbase and Instacart. How did you arrive at Initialized Capital and what is your role there? Yeah, so I'm a partner in Initialized. I spent most of my career writing software and founding a few software startups and one of the companies I founded was a company called Posterous. It's a blog platform we founded in 2008 and one of my co-founders there was Gary Tant who founded Initialized Capital. So I worked on and off with him throughout the years and I was looking for a job in 2017 and decided to join Initialized. And as a partner, I invest in startups and I help work with the portfolio and advise the companies we invest in. But you have a specific focus on software, right? So you are focused on the software side of the companies. Yeah, yeah, definitely. And probably more specifically the engineering side. So I'll do general kind of startup advice for companies but also advise them specifically in engineering. And then when I'm investing, I having a more technical background and I focus on investments where that's useful and among those is the crypto space. Initialized Capital funds company before they get product market fit, which means before they have a product ready to satisfy the needs of the market. What are the main criteria you look at before investing into a project? Yeah, definitely. I think, I mean, we definitely over index on the founders themselves and funding the types of founders who can navigate what it takes to get to product market fit. So before you actually know what the product is and what market exactly they're going to be serving, the founders are the strongest signal. And oftentimes you'll see kind of early product iterations and their ability to build product helps a lot. And then we're also thinking through what, if the fit works out what the market opportunity looks like and the size of it. You look at the team as one of the most important parts of the company you're investing into. So what kind of characteristic does the team need to have in order to inspire your confidence? Yeah, I mean, I think we, a lot of us come from software backgrounds. So we were definitely attracted to people who are able to build. And so technical founders and founders from who have a history of building and shipping products are very attractive. And then, you know, just it's, you know, I think there's a lot of signal when a founder comes in and they kind of know everything about the business. Like they've done sort of deep research and all the aspects of what the market they're looking at and who, whose pain point they're addressing and why. And, you know, the deeper their thought around that, it kind of shows both they put the time in to figure out what's going on and that, you know, they have the kind of analytic structure and ability to hone the product to a place where it's going to resound in the marketplace. What was the most profitable investment that the initialized capital ever made? So, I mean, you know, we're fairly young fund. I mean, so, you know, we don't have as long a history of some funds. But to date, I mean, I think our early investment in Coinbase has been the biggest return of the fund so far. What's the secret of the success of a company like Coinbase, which became a unicorn? Well, I mean, I don't know, there's a lot going on with Coinbase. I mean, some of it just has to do with their ability to get banking relationships in a time where it was hard for crypto companies to get banks generally. I think that they're focused kind of on user experience. And I think that, you know, I think that we'll see, you know, as they're, you know, they're a centralized solution, but a lot of the first generation of things in the centralized space are these centralized solutions that have deep hooks to the centralized world. So, you know, you go on Coinbase and you can, you know, you buy, you could buy Bitcoin with an centralized experience, but you can move it off whenever you want. So it's still integrated with the entire decentralized Bitcoin network. Mm-hmm. Yeah, that makes sense. So if you had to identify right now a new Coinbase, like a company that you would bet on to become as big as Coinbase, what would that be in the crypto space? I mean, you know, I'm so far a fairly large believer in buys and trails and what they're doing and the size they can reach, especially if the staking networks, you know, take up as much of the international crypto market as we think. So I think there's kind of tremendous scale and the ability to run the infrastructure on networks that are powering money around the world. So I'm curious to know, what percentage of the company's equity do you get in return after finding it? It's, you know, it's been, it's changed over the years. We've had a few different funds of different sizes. You know, in our most recent $225 million fund, that is, again, due to most of the seed deals, we have to target about 15% ownership at, after the seed round, you know, to make the economics of the fund that size work. A couple of years ago, during the ICO boom, crypto startups were raising capital very quickly, taking advantage of the hype surrounding cryptocurrency. As we know, most of those ICO were money grabs or just useless products. Did you notice any improvement in terms of quality in projects in the crypto space since then? Yeah, yeah, absolutely. I mean, it's not to say that there weren't quality projects during the boom, but it, you know, there was just a lot of noise and a lot of other other sort of ICOs related projects being raised. But, you know, since the fraud has come out of the market, you know, we've seen the people who are here to build for the long term and who are deeply sort of engaged in the space continue to build. So there's been a lot of impressive work since, I think, and I think, you know, I think, you know, a lot of, you know, a lot of the, a lot of very strong companies come out of downturns generally, you know, if you think of things that happened right after the dot com crash or right after the mortgage crisis, you know, very strong companies were built because you get, you get kind of steel, you know, founders who are really more mission driven and willing to stick it out. And I think, I think the same is going to be true of what happened after the ICO, the ICO crash and the crypto stuff, the companies that were started, you know, maybe late 2018, 2019. After the ICO boom, we saw other ways for crypto startups to raise funds, such as IEOs and STOs. So would you say that venture capital funding is the best way for crypto startups to raise money nowadays? I think it's a good question. And I think, I think it's actually quite complex. I mean, I think generally, you know, not all startups are not all, you know, newly built software businesses need VC funding, right? Because it's specific to a type of market and a type of high growth company that not all companies should be shooting for. And then, you know, it's compounded by the fact that in crypto, you have this, you have, you know, well, token issuance, which is, which is entirely different from kind of selling equity and what it means. And I think that right now, there's even this regulatory moment, you know, we've seen with this with a ton sale, like what does it even mean if you're selling your tokens early on to venture investors? Is that, is that something that's going to be sustainable or workable? I think there are plenty of companies in the crypto space where venture funding still makes sense. I think that venture firms can be quite helpful. And I think that if you're, you know, you're investing your selling equity in your company, and it, you know, looks kind of independent of what sector it's in, you know, venture can still be quite helpful. But at the same time, I think if you're, you know, you're trying to get a new crypto network off the ground, and, you know, venture investors may not look ideal to regulators, and, you know, new sources of sort of crowd funding and distribution are probably, are probably quite interesting and worth considering. Like, I think, I mean, I think that token projects, like, you know, in new kind of layer ones, it's not, it's not, it's not clear to me, it's an ideal fit for venture firms. And for, from the project standpoint, I think that, because I think that maybe, maybe narrowly defined to the, if you're trying to, if you're trying to sell a utility token, and the goal is to get regulators to eventually accept it as such, you know, selling a bunch to investors upfront, and then, and venture investors, you know, probably is not the ideal. So in that case, what, what is the best way to go? I mean, you know, I don't know, there's different camps. Obviously, there's, you know, the ideal would be something like, something like Bitcoin was still possible, right? If you, if you could do a fair launch. I think we saw an attempt of that with, with Grin, and, and it unfortunately kind of ended up in a lot of investor hands anyways, but at least from a regulatory profile, it looked right. I think that, you know, there's, I think that some of these new interesting dual token models make a lot of sense, where you're kind of, you know, you have one token that that is always a utility and not sold to investors in a secondary token that works in the system as an investment vehicle and can be sort of narrowly scoped or regulatory. What are the most common obstacles that startups face nowadays, and what can your company do in order to help them out? You know, I think that one of the biggest things is, you know, you get people who are very talented at building things, and then just getting anyone to care, right? Getting the world to want your product and, you know, know about it are, are often the hard part, independent of how good a product you can actually build. So I think that, you know, what initialize help tries to help do is, you know, work with companies on, you know, getting, getting from a good product to something that resonates in the marketplace, both, both sort of strategically and how they think around, you know, who their customers are, who they're trying to address, and then, you know, a little more tactically on like how to actually market and sell. And we can help both, you know, with advice around those topics, and then, you know, we have a decent amount of media reach. So we're also able to help promote our companies and get them, you know, get them some attention. What are the most common mistakes that startup entrepreneurs make nowadays? I think that, you know, I think a really common mistake and it kind of relates back to, you know, what one of the hardest things is founders will often think that just building a good product is enough and kind of, you know, maybe think like if they build it, that people will just show up and want to use it. And so they don't think through, you know, they don't always think through exactly how to get their product to market and how to, you know, either make sure they're really addressing a need that people have and people are thinking about or, you know, figure out some sort of loop for how to grow the product and grow the user base. So, and I think that they, what's often hard about that is that it takes iteration and it takes kind of, you know, you'll see founders kind of think that they've hit a dead end and that's almost never the case. You know, there's always more they can do and try to figure out how to get their product to resonate and what to change about it or who else to target. Are you talking about the importance of building a community around your product as well? Yeah, I mean, building, I mean, for certain types of product, building community is absolutely essential. I didn't think, but you know, otherwise, I think just not building something, sometimes people build things that they find or they build some, they build things in a vacuum, right? You know, a startup can go down a road of not talking to users for a long time and sort of they get the skew against what the market actually wants and what they're building. So really, really engaging with people and validating your assumptions around why people need what you're building is very important. As a venture capital firm, you have the responsibility to determine what companies will have access to capital. So in a way, you are partly responsible for the growth of the whole ecosystem. What kind of blockchain products and use cases are you betting on to succeed and bring crypto into the mainstream? Yeah, I think, you know, I think right now, I think we're, you know, there's obviously like an infrastructure roll off phase. And so, you know, we're betting on companies that are building sort of the building blocks for, for running and doing this network scale. And an example, again, it'd be something like Bison Trails who's helping build out node infrastructure. And then, you know, there's related things. I think that a lot of what's going on is still financial. And so both, both, you know, being able to bridge the gap to standard financial things that people understand in certain financial systems. An example there would be something like CoinTracker, which we backed to do sort of tax, tax management and portfolio managed for crypto. And so they, you know, they bridge this gap between the crypto world and the normal financial world that we all have to live with, like with taxes. So that's, I think, a lot of what we're looking at. In the financial world, there's a lot to be done to bring kind of the financial system to the rest of the world. I think what we're seeing and going on in crypto now, and especially in sort of the rise of stable coins and places like Ethereum, is that a lot of the world doesn't have access to the financial parameters that the western, the western world sort of takes for granted. And you know, a stable base currency that they can hold their money in and be able to transact in. And so I think that a lot of the near term vision for crypto is bringing that out into the rest of the world. We are talking about ways in which technology can bridge the gap between the traditional financial system and crypto, right? So creating some kind of products which are basically doing things that the financial system is already doing, but better, faster, more decentralized way. So, for example, it comes to my mind crypto lending, right? There are a lot of platforms that nowadays offer lending services using cryptocurrency. I can mention BlockFi, I can mention Celsius. And then we have decentralized platforms like MakerDAO, which are basically offering same services, but in a fully or almost fully decentralized way. Would you invest in something like BlockFi or something like MakerDAO? I think that both are interesting and I think that both kind of have their space. And in fact, we are investors in a project called, at a company called Atomic Loans that does decentralized Bitcoin collateralized loans. The difference being that they're not, you know, they're not based on, they use Ethereum stable coins, but they're not based entirely on Ethereum. They're based on Bitcoin script. So it's kind of DeFi that's closer to the Bitcoin community. I believe that neither will go entirely and the decentralized versions will grow. I think that there are, you know, still it's kind of, it's back maybe to the file storage example where there are values that people care about in the sort of transparency and the, you know, of the centralized solutions, the transparency and sort of lack of ownership and sometimes even sensibility of the centralized solutions. And you're trading them off for convenience of the centralized solutions. And so over time, you know, I don't think that all the business is going to go one side or the other. I think that there are plenty of people for whom the values of the decentralized versions provide are worth dealing with the user experience downside. And then I think the user experience will get better over time. So that blend will probably move more towards the centralized systems as we move forward. But again, let's say the centralized ones will entirely go away. How is the COVID-19 pandemic changing the way you look at companies? And what are the characteristics a startup should have in order to succeed in the upcoming economic recession? We're more concerned with the recession, I would say that specifically than the pandemic. I think obviously there are some companies or portfolio that are doing better, you know, the things like an e-commerce that are doing better because everyone's at home and there's some that are doing worse. But I think that the main thing that we've been talking to your portfolio about and thinking about is just runway. I think the most important thing you can do as a startup in the upcoming recession is not die. So you can't build any sort of business if you run out of money and you're not able to get more. And we think the funding environment is going to get a little bit more adversarial for entrepreneurs, especially if there's a bigger macro drawdown. And so we're advising companies to have more runway, to think more about keeping lean, spending less. If they can get to profitability, think about it more now instead of spending, instead of burning capital. So our main advice is just lengthen your runway. Awesome. Thanks for being with us, Brett. Thank you. This is great. If you like the interview, hit the subscribe button and subscribe to our channel. See you later.