20VC Why Crypto is Software Eating Money, Why Crypto Firms Will Outcompete Traditional Venture Firms, How To Price Tokens and When To Have Them, DAOs How Are They Structured and What Makes One Successful with Avichal Garg, CoFounder @ Electric Capital

Summary Notes


In this episode of 20 VC, host Harry Stebbings interviews Avichal Garg, co-founder and managing partner at Electric Capital, delving into the intricacies of crypto, DAOs, and Web3. With Electric Capital recently raising $1 billion for their new fund, they've positioned themselves as a significant player in the crypto VC landscape. Avichal shares insights from his entrepreneurial journey, including selling his last company to Facebook and becoming a director of product management, to his transition into angel investing and ultimately co-founding Electric Capital. He discusses the unique challenges and opportunities in crypto investing, the importance of building a venture firm with a strong engineering team, and the potential impact of crypto on traditional capital markets. The conversation also touches on the evolution of DAOs, the future of venture capital in an increasingly digital economy, and the role of storytelling in investment.

Summary Notes

Introduction to Electric Capital and Avichal Garg

  • Electric Capital raised $1 billion for their new fund, becoming one of the largest independent crypto-native VC firms.
  • Avichal Garg is a co-founder and managing partner at Electric Capital.
  • Avichal has invested in crypto projects like Anchorage, Bitwise, Lightning Labs, and OpenSea.
  • He has also invested in unicorns such as Airtable, Cruise, Figma, and Notion.
  • Avichal sold his last company to Facebook and became director of product management for the local product group.
  • The episode discusses crypto, DAOs, and Web3, with insights from Avichal's experiences.

"Electric announced that they had raised $1 billion for their new fund, making them one of the largest independent and crypto native VC firms in the world."

The quote highlights the significant achievement of Electric Capital in raising a substantial fund, emphasizing its position in the crypto venture capital space.

Avichal Garg's Background and Entry into Venture Capital

  • Avichal's background is primarily entrepreneurial, having started and sold two companies.
  • He began angel investing around 2015 with a focus on crypto.
  • Avichal left Facebook in 2016 and started receiving advice requests on crypto from traditional VCs.
  • Traditional VCs found crypto outside their expertise, leading to the creation of Electric Capital in 2018.
  • Electric Capital started with a $16 million fund and quickly scaled to a $1 billion fund.

"By the end of 2017, most of the VC firms said, you know what? That's really not in our wheelhouse. Like, we don't really understand it. We don't know how to do tokens, we don't know how to do custody. This is a different world."

The quote explains the gap in the market that Electric Capital filled, as traditional VCs were not equipped to handle the nuances of crypto investing.

Transition to Institutional Investing

  • Avichal was not nervous about moving to institutional investing due to a naïve approach.
  • He acknowledges that if they had known the challenges ahead, they might not have proceeded.
  • Running a venture business involves understanding fund formation, accounting, legal documents, and taxes.

"I think we weren't nervous. It's sort of like the classic entrepreneur naivete. You kind of don't know what you're getting into, and so you're naive enough to not really understand the journey that you're about to embark on, which is why it kind of works."

The quote reflects the entrepreneurial spirit that led Avichal and his team to venture into institutional investing without being deterred by potential challenges.

Venture Business Operations

  • As an angel investor, the primary focus is on deploying capital and working with founders.
  • Running a venture business includes managing fund formation, accounting, legal documentation, and taxes.
  • Avichal compares it to being a product-centric CEO who must learn various business operations as the company grows.

"I think it's very similar to when a founder starts a business and you're sort of a product-centric CEO, and then the thing starts working and all of a sudden you realize that you get really good at customer support and ops, and you have to be the CFO until you have a CFO, and you have to understand the business levers."

This quote draws parallels between the roles and skills required to run a venture business and those needed to grow a startup successfully.

Crypto Venture Landscape

  • The crypto venture landscape includes a few large funds like Andreessen, Paradigm, and Electric, and many smaller funds.
  • Traditional venture capital is becoming less collaborative, while crypto encourages collaboration due to distributed system dynamics.
  • In crypto, concentrated ownership is a liability, leading to collaborative investment rounds with multiple VCs.

"In a distributed system, in a distributed network, if you own 20% of the network, you're a liability to the resilience of the network."

The quote explains why crypto ventures prefer a distributed ownership model, which inherently promotes collaboration among investors.

Venture-Sized Outcomes with Constrained Ownership

  • Despite lower ownership percentages, crypto ventures can still deliver high returns due to the rapid growth and potential of the industry.
  • The infrastructure needed to participate in crypto investing is complex and exclusive, contributing to significant return profiles.

"The size of opportunities and the growth rate in these things is so phenomenal that the multiples that you're talking about over compressed periods of time are still excellent."

Avichal highlights that the fast-paced growth and expansion of opportunities in crypto can lead to substantial returns even with smaller ownership stakes.

Traditional Structures and Crypto Investments

  • Traditional VC structures have limitations on liquid assets and are not optimized for crypto's token buying and tokenomics.
  • Crypto investments require a different operational model, with a focus on software engineering and active participation in networks and governance.

"So much of it in the early days, until you build out the staff and the infrastructure, is like fund formation, accounting, legal docs, taxes."

The quote emphasizes the operational complexities of running a venture fund, particularly one focused on the evolving and technically demanding field of crypto investing.## Crypto VC vs Traditional VC

  • Crypto VCs are building their businesses differently from the start, akin to how Amazon differed from Walmart.
  • Traditional venture structures are seen as paradoxically different compared to crypto venture structures.
  • The integration of a crypto partner into traditional VC firms is questioned due to structural differences.
  • There is skepticism about traditional firms successfully integrating crypto into their existing models.

"I think the crypto VCs are just building their businesses differently from the start." "Everyone wants a fucking crypto or a web three partner." "I don't see this crypto partner being able to bring all that you do into an existing structure that's not outdated, it's just very different."

The quotes emphasize the fundamental differences in how crypto VCs are establishing their operations compared to traditional VCs, and the challenges traditional VCs face when trying to incorporate crypto expertise into their existing structures.

Transition to Crypto-Focused Funds

  • Traditional venture firms can engage in equity-based opportunities in established businesses, but the most interesting opportunities may lie elsewhere.
  • Sequoia and Andreessen Horowitz have created separate standalone crypto funds, which is seen as the right approach.
  • Building a crypto-focused organization requires different incentives, LP expectations, and organizational structures.
  • The crypto space is growing rapidly and requires a different skill set, leading to an innovator's dilemma for traditional VCs.

"Sequoia now has a separate standalone fund, Andreesse." "I think you have to incentivize people differently. The LPs that are opting into this have to sort of approach it differently."

The quotes highlight the strategic moves by prominent VC firms to create dedicated crypto funds and the necessity for different organizational incentives and LP expectations in the crypto space.

Software Eating Capital Markets

  • The concept of owning digital assets through private keys and wallets is a significant social and technical breakthrough.
  • Smart contracts allow code to own money, which is an entity that exists outside of traditional legal and jurisdictional frameworks.
  • This new paradigm has the potential to disrupt traditional capital markets by enabling programmable access to funds and transparent, efficient transactions.
  • The ICO boom demonstrated the creation of a 24/7 global capital market, and the speaker expects significant disruption in venture capital and across all capital markets.

"Software is eating capital markets." "You could send money to the smart contract, you could spend money to that wallet, and you don't own the money anymore. Now, a piece of code owns the money."

The quotes discuss the transformative impact of software on capital markets, with smart contracts enabling new forms of ownership and control over digital assets, which has profound implications for the future of finance.

Future of Traditional Venture Capital

  • Traditional venture capital may coexist with new breakthroughs, similar to how Microsoft and Google have coexisted despite each other's breakthroughs.
  • Human network effects and differentiated value creation in venture capital will likely protect top performers from being replaced.
  • Firms ranked 15th to 1000th may face disruption as capital becomes a commodity and global competition increases.
  • The speaker suggests that the venture capital industry will experience a natural "barbelling" effect, with power concentrating at the top and a long tail of smaller players.

"I think we just invent a new thing. And I think a lot of these traditional businesses coexist alongside, and then they slowly decay and some of them can evolve." "The people I think should be worried are if you're, like VC firm 15 through 1000, right?"

The quotes reflect the speaker's view that the venture capital industry will evolve, with traditional firms coexisting with new models but also facing potential disruption, especially for those not in the top tier.

Role of Services in Crypto Networks

  • Crypto protocols and businesses require different types of services than traditional startups.
  • Value creation in the crypto space involves participating in distributed governance, running validators, and bringing liquidity to marketplaces.
  • The form and structure of firms in the crypto space will differ significantly from traditional venture firms.
  • The speaker envisions a model where a firm's community, rather than its employees, provides value to its investments.

"You need people sitting in your discord helping you do distributed governance." "So I think there is absolutely a place for people who are value add."

The quotes underscore the unique service needs of crypto networks and the importance of community involvement in governance and other support roles, indicating a shift from traditional venture services.

Financing and Business Model of Crypto Ventures

  • The speaker's firm maintains a traditional business model with lockup periods to tap into institutional capital more easily.
  • Despite the availability of liquidity in crypto, lockup periods are seen as beneficial for long-term returns.
  • Liquidity can be a double-edged sword, with the risk of selling too early and not fully realizing the potential of investments.
  • The speaker acknowledges the psychological challenge of not being able to access funds from successful investments immediately.

"Yeah, we actually look pretty vanilla on that stuff." "The liquidity is a double edged sword."

The quotes reveal that while the speaker's firm operates with a traditional venture business model, they recognize the complexities and potential downsides of liquidity in the crypto market.## Emotional and Psychological Adjustment to Investment Volatility

  • The value of investments, such as cryptocurrencies, can fluctuate dramatically.
  • Investors must become accustomed to significant changes in value.
  • Emotional and psychological resilience is required to handle potential losses.

"lio literally might be worth 80% less one day. And that's okay. You just have to get used to it. And so you just get emotionally and psychologically sort of, sort of dulled to it."

This quote emphasizes the need for investors to be emotionally prepared for the possibility that their investments might decrease significantly in value.

Equity to Tokens Conversion

  • The conversion between equity and tokens depends on the specific company.
  • Not all companies should have a token; it needs to make sense.
  • Investors must structure investments to potentially participate in a token network.
  • The value may eventually be more in the token than the company itself.
  • A company may dissolve, transitioning value from equity to tokens.

"There was an amazing company I met the other day and they were like, you have to do one for one equity to tokens. And I was like, okay, what does that mean? And should I be more excited about one than the other. How would you actually advise me on this and how do you think through that?"

This quote raises the question of how to approach the conversion from equity to tokens and which may hold more value.

Investing in Tokens at Scale

  • Institutional investment in tokens is complex due to the lack of infrastructure.
  • The investment lifecycle from identification to divestment requires custom solutions.
  • Legal, operational, organizational, and software infrastructure needs to be developed.
  • New tax laws and audit processes must be considered due to the novelty of tokens.

"Why is it actually hard doing that token buying at scale? And what makes it so hard?"

This quote questions the challenges of purchasing tokens at an institutional scale, highlighting the complexity of the process.

Token vs. Equity Value Capture

  • A token makes sense when a company can dissolve and the network retains value.
  • Skepticism arises when a company's presence is necessary for a network's function.
  • Tokens should not merely support equity but potentially lead the company's direction.
  • Companies sometimes use tokens for non-dilutive financing or as a customer acquisition tool.

"When does it make sense to have a token versus not have one?"

This quote inquires when it is appropriate for a company to issue a token and when it is not.

The Potential for Decentralized Autonomous Organizations (DAOs)

  • DAOs allow for large-scale economic and governance experiments.
  • The success of DAOs can vary based on their objectives, such as investment, art, or services.
  • DAOs can uncover new talents and create economic opportunities globally.
  • The true success and durability of DAOs will be understood over time.

"What does this successful Dow look like? Impact. But in what way?"

This quote seeks to understand what constitutes a successful DAO and how it impacts its field.

The Speculative Nature of Crypto Markets

  • The crypto market attracts short-term and speculative interest during market upswings.
  • Growth and innovation in the market come with speculative activities that can be off-putting.
  • Long-term value creation is necessary amidst market noise and speculation.

"Does it make your job harder like tourists and venture make my job harder?"

This quote discusses the difficulty in navigating a market with short-term speculative investors, known as "tourists," and how they can create distortions.

Pricing Dynamics in Crypto Investments

  • Pricing in crypto assets is similar to traditional venture capital.
  • The focus is on potential future value rather than present discounted value.
  • Beliefs and underwriting are based on the potential for significant returns.

"What do the pricing dynamics look like on crypto? Assets."

This quote asks about the approach to pricing and valuation within crypto assets, drawing parallels to traditional venture capital methodologies.## Venture Capital Philosophy

  • Venture capital focuses on the potential future value of investments, not their current worth.
  • It's about envisioning what a company could be worth and the necessary beliefs and underwritings to justify that potential value.
  • The journey of a venture investment can fluctuate but should aim to meet the required end value for satisfactory returns.

"Venture is not about what is the thing worth today, right? It's really about what could it be worth? And what do I have to believe for it to be worth that? And can I underwrite that?"

This quote emphasizes the forward-looking nature of venture capital, where the current valuation is less important than the potential future worth and the ability to rationalize that future value.

Market Size Underestimation

  • Intuitions about market sizes are often incorrect, especially when dealing with large numbers and potential growth.
  • Historical evidence from companies like Google suggests that markets can grow exponentially, far beyond initial expectations.
  • Investors should be conservative yet open to the possibility of markets being significantly larger than anticipated.

"I think our intuitions about how big markets will be is wrong."

Avichal Garg reflects on the common misjudgment of market potential, suggesting that people tend to underestimate the scale to which markets can grow.

Exponential vs. Linear Extrapolation

  • In technology and markets, growth has historically been exponential, not linear.
  • Looking back, exponential growth patterns are clear, but looking forward can seem ludicrous when applying the same exponential logic.
  • Investors should consider the possibility of exponential growth despite it feeling counterintuitive.

"Our instinct is to extrapolate linearly rather than extrapolate exponentially, because the conclusions that you reach to seem ludicrous in the moment."

Avichal Garg explains the psychological tendency to predict growth linearly, while historical patterns in technology suggest that exponential extrapolation would have been more accurate.

Investing Strategy in Exponential Markets

  • The past decade suggests that investing broadly in credible opportunities might be a successful strategy.
  • There's a notion that the true scale of successful ventures could be an order of magnitude larger than initially thought.
  • This approach considers both the unique bull market conditions and the post-World War II economic environment.

"You should be investing a lot more money, and you being a GP or an LP or an individual human, you should be investing a lot more in technology as a percentage of your total assets, because your intuitions about how big these markets are going to be are totally off."

Avichal Garg proposes that due to commonly underestimated market sizes, there should be a greater allocation of investments in technology.

Advice for Traditional LPs Allocating to Crypto Managers

  • LPs should thoroughly understand the crypto space before deploying capital.
  • A deliberate strategy of cost averaging over multiple cycles is recommended rather than rushing due to fear of missing out.
  • The key is to deeply understand the nuances of crypto investing before making commitments.

"I think just getting up to speed and getting your head around it and actually understanding it before you start to deploy."

Avichal Garg advises traditional LPs to gain a solid understanding of cryptocurrency before investing, emphasizing the importance of knowledge over haste.

Importance of Stories in Investment

  • Stories play a crucial role in human culture and are undervalued in the fields of math, science, and investment.
  • The Bible and the Bhagavad Gita are highlighted as significant stories that have shaped Eastern and Western cultures, respectively.

"I think, underweight the value of stories. And these are probably the two most important stories in eastern and western culture."

Avichal Garg discusses the importance of storytelling and its impact on culture and investment, suggesting that investors often overlook the power of narrative.

Perception of the Global Economic and Political Climate

  • The period from 1990 to 2020 was initially perceived as a trend towards a stable, open, and free global economy.
  • Recent events have led to a change in mind, suggesting that this period may have been unique and that the future may revert to more restricted and competitive conditions.

"I think I've recently changed my mind on the uniqueness of the period of time that we lived in from roughly 1990 to 2020."

Avichal Garg shares a reflection on the changing global economic and political landscape, indicating a shift from previously held beliefs about the direction of global stability and openness.

Work-Life Balance

  • Avichal Garg does not believe in work-life balance in the traditional sense, as his work aligns with his passions.
  • He suggests that when one's hobby becomes their day job, the distinction between work and life blurs.

"I don't really have work life balance. I don't really believe in it in some sense."

This quote reveals Avichal Garg's personal approach to work-life balance, where his work is a direct extension of his interests and passions.

Venture Firm Operations

  • Building a venture firm involves understanding and managing aspects beyond investment, such as accounting, finance, tax, and legal matters.
  • Lessons have been learned through experience, indicating that preparation in these areas could have been more robust.

"How much of it is really about the accounting and the finance and the tax and the legal and all those other things that go into actually building a venture firm."

Avichal Garg acknowledges the operational complexities of running a venture firm, which extend beyond the act of investing itself.

Mentorship and Influence

  • Mentors play a significant role in guiding and supporting new ventures.
  • Elad Gil is credited with having a pivotal influence on Avichal Garg's venture firm, providing initial funding and valuable introductions.

"We wouldn't exist if it weren't for Elad and him helping us the earliest get off the ground."

Avichal Garg expresses gratitude for the mentorship and support from Elad Gil, highlighting the critical role of mentors in the success of new ventures.

Investment Insecurities and Opportunities

  • There is a concern that current investment opportunities may be fleeting and that the market's growth could be short-lived.
  • This sense of urgency drives rapid scaling but is recognized as potentially unhealthy.

"I worry that the whole thing might not be here in six months or twelve months or 24 months."

Avichal Garg shares his apprehension about the durability of current market opportunities, reflecting on the balance between seizing the moment and long-term sustainability.

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