Why the VC Model Breaks Onchain | Hoolie Tejwani - Coinage Media, Zack Guzman - Coinbase

Okay, so we are heading towards the end of the day and we've got two more sessions left. First, we have a session with our friends from Coinbase and Coin Age Media on why the VC model breaks on chain. So, please join me in welcoming Julie from Coinbase and Zach from Coin Age Media for a fireside chat. Thank you guys. Thank you very much.

Appreciate you guys joining us uh as we talk about VCs on chain and what uh what to do well, what not to do, I think. And Julie, I'm excited to be up here with you and maybe we'll just let you kick things off, introduce yourself and what you're working on at Coinbase Ventures.

Sure. Thanks. Uh hey all, my name's Julie. Uh I'm I look after Coinbase Ventures. We've been investing in the crypto space since 2018.

We've made close to 600 investments so far. So we've seen a lot of things, multiple multiple cycles up and down. We invest very broadly uh across all ecosystems, primarily early stage uh projects, broad mandate, anything that touches a blockchain and is moving the crypto economy forward, we're we're looking to invest in.

It's also your first ETH Denver. it is. I can't remember what number it is for me, but I think I I wanted to start with kind of the things that you're most excited about when it comes to crypto VCs versus traditional VCs because you come from a traditional VC background. Want to get into that and maybe what you think is the biggest difference between the two worlds as you look at investments.

Yeah, it's a really really exciting time for onchain capital formation. So like the EI5 of what traditional VC is, VCs are humans. They're not like gods. They go and convince limited partners who are endowments, pension funds, family offices to give them money into a fund. They then go and invest that over 3, four years.

And hopefully, if things work out in like a 10-year time frame, they return capital to those uh those limited partners who then are able to, you know, pay off their pensions and and do things like that. That whole model is predicated on this JC curve concept of you're going to invest, put put money into the ground, most things aren't going to work, dollars are going out the door, and then there's a power law where a couple things probably start working and then over time hopefully you're able to return all that capital. So the time frame is is really elongated with C. Then tokens came along and that kind of changes the whole dynamic because you were originally thinking, hey, I'm going to invest in something and it's like seven years to liquidity and now it's, hey, I'm investing in something and there could be liquidity on day one before anything's even built. Um, but the main takeaways on traditional VC, it's very gated.

It's an access game. Uh, the old model was if you're a founder, you go up and down Sand Hill Road and it's kind of like a sushi conveyor belt and hopefully like someone picks you off. you have to kind of know the right people. Um, and it's based on a lot of information asymmetry because equity companies compound compound privately. There's not a lot of information going out to the market or or users about how those companies are doing.

Yeah.

And with tokens, you can look at like the original ETH ICO as like an example. Everything kind of gets flipped on its head. And so we we can go more into that, but it's um it's a very interesting time between regulatory clarity, what's the state-of-the-art of how you can design tokconomic models to to really reimagine capital formation in a much more

like grassroots egalitarian way.

Well, yeah, I think the Ethereum example is probably one of the earliest ones. Uh we I guess I didn't give my background and introduce what I do at Coinage as a community on media outlet, but to your point on capital formation, we sell NFTs. People become co-owners. Very same model that Ethereum and Sporkdow also have. We share the same legal team.

So people back in 2022 minted NFTs and co-own the outlet and the price of that has risen over time as the brand has grown. And I think you know there is still that element whether it was what NFTs tried to do after the ICO boom and now uh Zora is one of the uh Coinbase Ventures investments that we were talking about before we came up here. There's just all kinds of different experiments to really warp the the read white own is is you know Chris Dixon also famous for that kind of narrative. I mean, when you introduce the token and the idea of a VC uh looking at what the token means versus a user perhaps, what do you what have you seen kind of projects get right and wrong when you're looking at it kind of both as quasi equity from the VC lens, but also like a reward token for users?

Yeah, that's a great question. So, like first and foremost, whether you're talking VC dollars or like crowdfunding dollars, there's no substitute for just having a product that people want in the world. like full like full stop. So the kind of reverse into like what you're solving for and what you're trying to build. If I look at like some example projects like Hyperlquid or Aerod Drrome which we've we've invested in, there were no private VC rounds.

And what those projects did right is they were super super thoughtful about the detailed mechanics of their token design, all the different incentives of the different players on their network, how the teams would be aligned with those incentives. Um so that they were able to kind of invert and not do the VC thing and have a concentration of their token base in with private investors but use that use those tokens as incentives to actually drive adoption on their networks. And you have to be really thoughtful of how of all the different incentives and how like those flywheels are going to work so the things can like actually endure for like you know generationally because the failure mode is you launch a token a bunch of short-term mercenary speculators snipe it and buy it do a quick flip and it goes like this versus like harnessing these onchain mechanics to be like a much more like enduring enduring flywheel.

Yeah. And like VC is not bad. It's not like a like it's not a binary thing. If you're just starting out like having venture, the dollars are there, but there's also a signaling factor of it's probably easier to hire your second, third engineer if you've got like some credentiing. Venture capitalists will provide like access, resources, advice, connective tissue.

The other piece that projects get right or don't get right. It's VCs don't just provide dollars. They also provide governance and control and like a check and balance. So they take they're taking on a fiduciary responsibility from their LPs. They're often going to take a board seat and have the ability to like provide oversight around how funds and things are used.

So that needs to get applied in the token only world as well in in the right way.

Yeah. I I mean, as a founder myself, uh investing or or raising back in 22 was a very interesting time to be around. Uh may have been easier to raise back then than it is now, but we were able to do a little over $3 million in a safe round. And the idea of kind of how the, you know, the the safes versus tokens, SAFS, token allocations, and kind of what you've seen evolve in in capital formation. I mean, uh, one of the interesting things to think about, uh, in regards to that is the Clarity Act that's coming up.

And obviously, Coinbase, uh, one of the big regulatory behemoths in the space talking in DC, I was just chatting with Hester Pur, uh, head of the crypto task force like 5 minutes ago about what that can change when it comes to, you know, in 22. The other thing was if you actually promised any upside to users, you were probably going to get sued. And so as the Clarity Act comes about, how does that maybe change, you know, cart blanch giving people upside? What are those things that could change the idea of of the VC game if that were to happen?

Yeah, it you're spot on. We've been in this weird gray zone with regulatory and candidly like there are aspects of how tokens can be designed that can have security-like features but there's a whole taxonomy of how you can design tokens that are just they're a net new thing and they don't fit into like the 1930s laws. So I think clarity is going to be a huge unlock because we'll have clear rules of the road. When do you have to register? How how do you not have to register?

I would argue that the whole like memecoin craze was this like unintended consequence of exactly what you're pointing out. To do token onchain capital formation, right, you have to link economic value from the network or the project back to the token holders in some way. So projects like like Hyperlid or doicile offshore, they do revenue buyback straight from the um straight from the trading platform to token holders. Um once we have clarity like US-based founders will be able they'll have a clean framework about how to how to approach that. Um but ultimately if the token is just floating and has no intrinsic tie to the actual product or the network it's just this ephemeral thing versus you know the full potential of what it could be.

Yeah. Yeah, I mean I think one of the other big things that is interesting to me as a journalist, as a reporter watching this and coming from CNBC and Yahoo Finance, the idea of what crypto I think represented from capital formation, issuing ownership on chain, cutting out a lot of intermediaries. Like you want to think about what Bitcoin was able to do, it was giving value back to a community that used the tool or the product and also eliminated the need for intermediaries. And I feel like what's really weird to watch now is like uh licensed issuers and everything else that's happening. And I don't know what Clarity Act maybe does to that dynamic, but obviously at Coinbase where a lot of these things can trade, how does that like work when the Coinbase Ventures team is looking at things?

Is it kind of like, hey, we want to support everything that lifts crypto up or is there an element of also trying to like make sure it boosts Coinbase, too? Like where where do you guys fit in that? Yeah, I I think the reason I I love my job is our mandates fundamentally we just are fundamentally like positive summinded. So we go out and invest we'll invest in things that you could argue are competitive or disruptive to Coinbase. We'll invest across all the different ecosystems.

There's definitely a ton of value that comes back to Coinbase from the founder network portfolios that portfolio companies that we wind up working with like Morpho is a good example like a borrow protocol that we ended up integrating into Coinbase. Um, but we're taking like the long like the long view. And I think you'd even see from some of our positions in DC, like we've taken very principled positions that you would that you could argue are like actually in the not in the short-term interest of our business, but um are in the long-term interests of what we're trying to build here, which is increasing economic freedom in the world through open permissionless finance. Um to your point around like intermediaries, I don't think you'll ever get away from a world where there's some level of like gating and access into quality quality projects. Like there's just the vast majority of things are going to are going to fail, right?

Like it's startups and there is always going to be this like flight for quality and the most like high quality like founders and projects will be kind of gated in some way. Part of the reason we did our acquisition for Echko, which is now uh now part of the Coinbase platform, is really trying to thread that needle. So like Echko is a crowdfunding uh platform. The really elegant part about their model is if you are an investor, you can post in like in your Echo group to syndicate out the investment, but you have to be investing on the exact same terms that you are sharing with everybody else. So it's not like me as Julie, I get in at a penny and then the rabble can get in at a dollar.

So there's like solutions like that where we can like expand access. We can get more people involved in in investing.

Yeah,

there's a lot of work to do on accredited investor rules. I think those are like nonsensical.

Agreed.

Um but you still need these kind of

um scouts or like uh just kind of like quality signal sources and there's no better way to like see that than if they're putting their own money behind something.

Yeah. Now, I I would agree on the call out around the accredited investor rule and the idea of gating access to upside in deals just based on how much money you own seems somewhat definitely anti-crypto. Uh, arguably anti-American, you could say. Um, but it's also why we landed on the tokenized co-op model because that is something that has worked. I'm sure as I know it's why Ethereum Denver landed on the co-op model as well.

Um, but I do know we're running out of time so I do want to fit two more quick ones in. one being uh the the sketchiest maybe the things that you've seen you passed on to Coinbased Ventures because when you're dealing with tokens I wonder if it warps kind of like if someone's only there for the upside and we see how quickly money moves between projects just to token farm or whatever it may be does that like give you guys as the VC is trying to figure out what's real maybe bad signal like does it start to warp everything when you're investing

our our line is always like we're looking for missionaries not mercenaries and when traditional VC hit crypto a bunch of norms formalized. For example, um investors and teams are going to be in a lockup period and we're going to have vesting schedules. Are we going to be treated the same way? The flip of that is like if you've launched a token that create that can telegraph to the market, there's like a supply overhang, etc. But there's you can tell very quickly as you unpack conversation with founders around how they're thinking about designs, incentives, timeline if this is like short-term cash grab or like, yeah, I'm actually trying to build something that's going to be there 10 years from now and I'm I'm going to ride with it.

Um, so I think we've gotten pretty good at the uh like this is like the scammy side signal and try to focus on on like the real enduring principal builders. Yeah. Lastly, I I like leaving on a on a positive optimistic note. You and I were talking before this about the idea of consumer crypto not being dead uh and and why we still believe in the idea of positive flywheel effects that can happen in consumer crypto. I guess maybe uh to leave the audience in our last minute here, just one of those things that you're most optimistic about as we've evolved, as abstraction has happened to to make onboarding way easier in crypto.

What's Julie most amped about when it comes to crypto and VCs in the future? I'll give you three things.

Okay. Okay.

Three for the price of one.

Um,

stable coin, stablecoin related infrastructure. Um, like we're watching it. The metrics are crazy. Stable coins are penetrating all of traditional finance. A significant amount of like world GDP is going to be moving through stable coins.

For like crypto OGs, it doesn't feel as like, you know, rebellious, but like Trafi is eating is getting eaten by stable coins, and that's like net net good for the world. to um just agentic future. Like every conversation I've had here today, like the rate of change with Cloudbot, all the different agent tools that are coming coming like it just makes so much sense to me that that agent economy is a huge part of it's going to be powered by crypto and crypto rails. Yeah.

Um and so we may not get a billion human traders, but like I think we're get a trillion agents like online like first. Um, and then on the third side on consumer crypto, I I think like that's a big big bucket. What's clear and what's had product market fit is use cases and mechanics that harness what crypto is like 10x better than like the web 2 alternative. And that's like

247 globally liquid markets. There is some like financialization or specul specul speculation involved. I don't think like consumer crypto is going to be as skumorphic as like onchain Tik Tok. is going to look look like very different. But all the investment that's happened up until now has been like we're the infrastructure is finally ready.

Like if I came here four years ago, we'd be saying like the L1's falling over, it's not working. Yeah. Or the wallets are too like I have to do the seed phrase and like I can't get a consumer. Like now we're seeing consumer apps. We're like two clicks in and you're in.

And so we just got to give it time. See more experiments and there will be like look at poly market that has fully crossed the chasm, right? There'll be more and more uh consumer crypto winners like that.

Yeah, and a lot of this just comes down to education, too. You mentioned Aerome, you mentioned Hyperlquid. Two projects that were nominated in our uh crypto project of the year series at Coinage as well. So, I'd encourage everyone to go check those out as well. Cool.

Can't thank you enough, man. Appreciate the time. Likewise.

Very good. Thanks, guys. Appreciate it.