20VC Why Most The Value In Crypto Will Accrue in Governance, When Institutional Capital Will Enter The Space and How To Think About Liquidity In Crypto with Joel Monegro, Founding Partner @ Placeholder.VC

In this episode of "20 minutes VC," Harry Stebbings interviews Joel Monegro, a founding partner at Placeholder VC, a venture capital firm dedicated to investing in decentralized information networks and crypto assets. Monegro shares his journey from starting the Digital Economy department in the Dominican Republic to developing Union Square Ventures' blockchain portfolio, emphasizing the importance of crypto economics and governance in the success of decentralized networks. He discusses the challenges of traditional VCs entering the crypto space, the volatility of crypto markets, and Placeholder VC's approach to long-term investment in a rapidly evolving landscape. The conversation also touches on the potential influx of institutional capital into crypto and the historical patterns in information technology that suggest a shift in value from proprietary data to open, decentralized systems.

• Harry Stebbings introduces the focus on crypto fund management for the month's interviews.
• Guest Joel Monegro, a founding partner at Placeholder VC, is introduced with his background in crypto assets and blockchain investment.
• Joel's previous work includes developing blockchain investment thesis at Union Square Ventures (USV) and founding the digital economy department in the Dominican Republic.
• Acknowledgment of Andy Weissman and Albert Wenger at USV for introducing Joel to the show.

"Welcome back to the 20 minutes VC with me, Harry Stebbings... I'm thrilled to be joined today by Joel Monegro... Joel is a founding partner at Placeholder VC... and prior to founding Placeholder, Joel spent three years at Union Square Ventures developing the firm's blockchain investment thesis and portfolio."

The quote explains Harry Stebbings' introduction of the episode's focus and guest Joel Monegro's background in the venture capital and blockchain space.

• Joel Monegro's interest in crypto assets began in 2013 after working for the Dominican Republic government.
• His role in the government involved seeking modern payment system solutions, leading to his discovery of cryptocurrencies.
• After leaving the government, Joel worked at USV, deepening his involvement in the crypto space.

"So this goes back to when I found bitcoin in 2013... I started a department called the Digital Economy department... and it was in looking at how different countries in Latin America were operating on obsolete financial and payment systems that I started looking for a more modern technology solution and stumbled into the world of cryptocurrencies."

The quote outlines Joel's path to discovering and working with cryptocurrencies, beginning from his time at the Dominican Republic's Digital Economy department.

• Joel and his partner Chris Berniske shared a belief in investing in crypto assets rather than companies.
• Their complementary backgrounds in public equities and venture capital led to the realization that crypto intersects both fields.
• Joel and Chris founded Placeholder VC in early 2017 to focus on this investment strategy.

"Well, a lot of it actually has a lot to do with my relationship with Chris, my partner Chris Berniski... We met in 2016 and early 2016, and we bonded over our shared belief that the most interesting place to invest in was in the assets themselves and the crypto assets that were being created with blockchains as opposed to companies."

The quote explains the reasoning behind the founding of Placeholder VC, emphasizing the focus on investing in crypto assets over companies.

• Joel's experience at USV provided a platform for exploration, investment, and thesis development in the crypto space.
• Investments in early crypto companies like Blockstack and OpenBazaar were pivotal in Joel's learning.
• A key realization was that investing in the assets (e.g., Bitcoin) could be more lucrative than investing in the companies.

"So many. But the one that sticks out... was through making those investments and working with those companies that I started developing a thesis for the space... And that was a big aha for me."

The quote highlights the influential experiences and realizations Joel had while working at USV, shaping his approach to investing in the crypto space.

• Joel discusses the recurring pattern in the history of information technology: the emergence of open systems and standards.
• These open systems reduce production costs and allow for value creation on top of the technology.
• He uses the example of the transistor replacing vacuum tubes to illustrate the cycle of innovation.

"So what we see over and over through the history of information technology... what we see is that we see an open platform, an open system architecture and an open standard emerge... And so just taking it from the beginning to make it a little bit more practical, what kick-started the computer industry was the invention of the transistor..."

The quote provides an overview of the historical pattern in information technology that Joel identifies, which is relevant to understanding the evolution of the crypto industry.## Commoditization of Electronics and Emergence of Computing

• The commoditization of electronics in 1947 led to the consumer electronics revolution and the creation of computers.
• Open sourcing of electronics allowed companies like IBM to emerge.
• The computer market initially centralized around IBM with custom CPUs and complex systems.
• Introduction of microprocessor architecture decentralized the computer business and commoditized computers.
• The shift from hardware to software led to the rise of the software industry and its eventual consolidation around Microsoft.

"1947, and that allowed for the price of electronics to collapse. And we got the whole consumer electronics revolution that happened, and computers came as part of that."

The quote explains the significance of the year 1947 in reducing electronics costs, sparking the consumer electronics revolution, and leading to the development of computers.

"Then the computer market, the mainframe market, got consolidated around IBM as that market matured."

This quote highlights the initial consolidation of the computer market around IBM as the industry matured.

"And about 25 years later, we get the introduction of another openly available platform architecture, which was now based around the microprocessor."

The introduction of the microprocessor is noted as a pivotal moment that changed the computer industry by allowing for a more decentralized market.

"And so as that market became commoditized, value moved one layer up to the software layer."

This quote explains the shift in value from hardware to software as the market for computers became commoditized.

• The introduction of Linux and the web disrupted Microsoft's proprietary software model.
• Open source operating systems like Linux and free distribution on the web led to an explosion of innovation.
• The shift from proprietary software to open source challenged existing business models.
• The commoditization of software led to a new era of proprietary data held by internet giants.

"And then going into the early 90s, we see the same thing happen again with the introduction of Linux and the introduction of the web."

The quote refers to the disruption of the software industry in the early 90s with the emergence of Linux and the web.

"And what we saw was software become free and open source. And that really challenged Microsoft's business model."

This quote emphasizes the challenge to Microsoft's business model due to the rise of free and open source software.

• The current market is characterized by proprietary data controlled by internet giants like Google and Amazon.
• Crypto introduces an open system architecture, making data free and commoditized.
• The value in crypto is shifting away from data to other layers, potentially disrupting current web incumbents.

"And the world we live in today is one of proprietary data, where the winners of the Internet era, Google, Apple, Facebook, Amazon, Netflix, et cetera, their business, their leverage is based on having proprietary data sets."

The quote describes the current internet landscape, where large companies leverage proprietary data to dominate the market.

"What crypto has done or is doing rather on schedule, if you think about these as 20 to 30 year cycles, is introduce yet another open system architecture."

This quote introduces the concept of crypto as the next phase in the cycle, bringing an open system architecture that could disrupt current market leaders.

• Investing heavily in consolidators can be profitable as they still have growth potential.
• Investing in new technologies and platforms that may eventually replace incumbents is another strategy.
• Ark investment funds and Placeholder are examples of investing in current and future market leaders respectively.

"So the two ways to play a consolidating market is one to invest very heavily into the consolidators."

This quote suggests one strategy for investing in a consolidating market is to focus on the current dominant companies.

"And then the other way is to invest in the technologies and the platforms that are going to eventually usurp them."

The second strategy mentioned is to invest in emerging technologies and platforms that have the potential to overtake current market leaders.

• Institutional capital is entering the crypto space largely through investment funds.
• Interest from financial institutions is growing, but regulatory challenges and nascent infrastructure like custody and insurance are hurdles.
• Institutional grade custody solutions and regulatory clarity are needed for substantial institutional investment in crypto.

"I think institutional capital is coming into the space largely through funds."

The quote indicates that institutional capital is entering the cryptocurrency market primarily via investment funds.

"And so it's going to be some time before they really, truly come into the space with force."

This quote acknowledges the barriers to full institutional investment in crypto, suggesting it will take time for significant capital inflow.

• The entry of traditional tech VCs into crypto is positive, increasing competitiveness and potentially improving outcomes.
• Traditional VCs face challenges in adapting to the unique aspects of crypto companies, such as network building and crypto economic policies.
• Specialization and dedicated focus are required for traditional VCs to effectively support crypto companies.

"Well, I think the more investment goes into the segment, the better."

The quote expresses a positive view on the increased investment activity in the crypto space by traditional venture capitalists.

"Some examples of that include, for one, you're not building a company per se, you're building out a network, and that poses a different set of challenges."

This quote highlights the distinct challenges that traditional VCs may face when investing in crypto, emphasizing the difference between building a company and a network.## Portfolio Construction in Crypto

• Crypto investing is a new space where traditional VC models don't fully apply.
• Placeholder approaches crypto investing with a venture capital mindset.
• Focus is on infrastructure for crypto applications due to the lack of existing building blocks.
• Investments in networks with tradable tokens are built over time to avoid market disruption.
• Placeholder develops an investment thesis and follows it, similar to USV's approach.

"The way we look at it, we are a venture capital firm, and even when we take positions in networks that are out there whose tokens are trading and are launched, we still work as venture capitalists."

This quote highlights Placeholder's approach to crypto investing, which, despite the newness of the space, still adheres to traditional venture capital principles.

"So we take the approach of just developing an investment thesis and following it very much in the same way that USV has built its business."

The relevance of this quote is that it underscores the importance of having a clear investment thesis, even in the fluid and dynamic world of crypto investing.

• Traditional VC investments are usually made in one transaction, while crypto investments can be built up over time.
• Traditional VC exits are often determined by external events, whereas crypto investors must decide when to sell.
• Crypto investing requires a different approach to managing volatility and investment horizons.

"One key difference for us, and it's kind of expected, given the nature of the asset class, is that in traditional VC, you diligence a deal and you make an investment decision and say you want to invest a certain amount, then you kind of invest it in one go and all happens in one transaction."

This quote explains a fundamental difference in investment execution between traditional VC and crypto investing, highlighting the gradual nature of building positions in crypto.

"But at some point we're going to have to figure out when to start disposing of positions and returning capital."

The significance of this quote lies in the challenge crypto investors face in determining the optimal time to exit their investments, a decision that is not as straightforward as in traditional VC.

• Placeholder chose a ten-year fund structure to weather market volatility in crypto.
• The long-term fund structure is designed to prevent forced exits during market downturns.
• LPs value the venture fund structure despite the public nature of crypto assets.

"The reason is that when you have a highly volatile market, especially an early new market like crypto that's barely ten years old, there will be a lot of volatility."

This quote emphasizes the rationale behind Placeholder's ten-year fund structure, which is to mitigate the risks associated with the inherent volatility of the crypto market.

"So there's real value to this structure, especially if they're looking to make a really long term bet."

The relevance of this quote is that it addresses the paradox of implementing a traditional venture structure in the fast-paced world of crypto, highlighting the value of stability for long-term investors.

• In the crypto space, features can be easily copied, so competitive advantage must come from elsewhere.
• Placeholder focuses on crypto economics and governance as key areas for investment.
• Properly constructed crypto economics and governance models are seen as crucial for network success.

"Features can be copied, and you can't win this market solely on the basis of features."

This quote points out the transient nature of competitive advantages based on features in the crypto market, suggesting that success requires a focus on more fundamental aspects.

"It comes down to crypto economics and governance, which is the two areas that we focus our practice on at placeholder."

The significance of this quote is that it identifies crypto economics and governance as the primary factors Placeholder considers when assessing the potential success of a crypto network.## Economic Models and Inflation in Decentralized Networks

• Decentralized services face challenges with economic models, such as Bitcoin's supply schedule and application-focused networks like Steam.
• Steam experienced a bubble due to an excessively high inflation rate.
• Understanding and constructing well-designed incentives models is crucial for the coordination of decentralized networks.

"For example, the debates around whether bitcoin's supply schedule will scale or not over the long term still remains to be seen."

This quote highlights the ongoing debates and uncertainty regarding Bitcoin's ability to scale effectively in the future based on its supply schedule.

"When they started out, they had an economic model that created a bit of a bubble, and then that crashed pretty quickly because they had an inflation rate that was way too high."

This quote refers to the economic model of Steam, a decentralized social media network, which led to a bubble and crash due to a very high inflation rate, emphasizing the importance of a sustainable economic model.

• Governance in decentralized networks is akin to the ability to change the rules of a game.
• It is assumed that the rules will need to change over time, necessitating governance mechanisms that enable community decision-making.
• Governance mechanisms are critical for the adaptability and longevity of a network.

"And if you think of crypto economics within a network as kind of the rules to a game, the governance mechanisms within a network represent the power to change the rules of the game."

This quote explains that governance mechanisms are the tools that allow for the modification of the foundational economic rules within a crypto network.

"And the reason that's important is you have to start with the assumption that whatever you set as the rules of the game, at some point is going to have to change."

The quote underscores the importance of flexible governance structures in decentralized networks, acknowledging that initial rules will inevitably require adjustments.

• Joel Monegro believes governance is where most value will accumulate in crypto, as it is critical for maintaining a cohesive community.
• Features and functionality can be replicated, but a strong community and governance structure are unique.

"I believe that governance is where most of the value is going to accrue in crypto at the end of the day, precisely because of what Kyle pointed out, features, functionality, can be copied, and the thing that you can't copy is a community."

Joel Monegro expresses his belief that the unique value in crypto arises from governance and the community it supports, rather than from features that can be easily duplicated.

• ICO (Initial Coin Offering) fever has diminished over time, with increased regulatory interest seen as positive for the crypto space.
• The decrease in ICOs is attributed to healthier market conditions and regulatory scrutiny.

"Yes, I agree, though I think we've seen ICOs or ICO fever really diminish as the year has gone by."

Joel Monegro agrees with the concern over ICOs but notes that the trend has been waning, suggesting an improvement in the crypto market's health.

• The urge to constantly check market performance is strong due to the 24/7 nature of crypto markets.
• Traditional venture capital operates on a longer feedback loop, whereas crypto investments offer real-time market valuations.
• Balancing the focus on long-term investment thesis versus short-term market fluctuations is challenging.

"Here the portfolio is marked to market every minute. And in crypto specifically, markets never shut down. It's twenty four seven."

This quote describes the constant fluctuation of crypto markets and the challenge of resisting the urge to monitor performance incessantly.

• Placeholder's investment in Decred was based on its unique combination of Bitcoin-like qualities with governance features.
• Investment decisions in crypto can require proactive engagement and relationship building with the community, unlike traditional VC where entrepreneurs seek out investors.

"We didn't say yes because they didn't ask for the investment."

Joel Monegro highlights the proactive nature of Placeholder's investment in Decred, where the investment was not solicited but rather resulted from their initiative and growing involvement with the network's community.

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This quote introduces Terminal's service offering, which facilitates the building of remote technical teams for companies.

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The quote describes High Five's conferencing platform, emphasizing its role in simplifying and enhancing business collaboration.

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FreshBooks is presented as a user-friendly accounting solution for small businesses, recommended by the speaker for its simplicity and efficiency.