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.
"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.
"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.
"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.
"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.
"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.
"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.
"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
"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.
"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 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.
"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.
"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.
"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
"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.
"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.
"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.
"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.
"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.
"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.
"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 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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.