Conversation

1) I've only been in crypto for 3 years, and out of college for 6, so feel free to ignore this "built up wisdom". But I think it's hard to think well about the role VCs play. I know I've fucked it up before! So here are my war stories and takeaways.

4:35 AM · Aug 6, 2020Twitter Web App

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2) I'll start with two very different horror stories. I'm not going to name names, but you know who you are. The first story is the longer one. There was a VC; call them G. We were in talks with G for a while about investing into Alameda. In many ways the talks were good!

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3) They expressed excitement about Alameda, and desire to help it grow. They understood the business. Alameda has never taken an external investor, but this seemed like a good opportunity. So the talks went on for a few months, and finally got to terms.

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4) We showed an offer for a valuation, which they acknowledged. A week later they came back with 1/3 of that offer. We said no. They did not react well to us saying no, and we were surprised. Like, of course we said no! They only bid 1/3 of our offer.

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5) But they insisted that a deal would get done. We were sort of like, idk, if you think a deal will get done then will you meet your terms? (No, they wouldn't.) So we thought the deal was dead, and they didn't for some reason.

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6) They tried to argue that the terms were fair. We tried to argue that the terms were lower than the seed round FTT implied valuation of FTX alone, which they had tacked on to the deal. So, like, why would we do it? That line of reasoning did not seem to move them.

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7) But again, this was _weird_. We weren't arguing that they should take our valuation--just that if they didn't we'd say no. They were trying to argue that they wouldn't and that also we'd say yes. Which is kind of our decision? But anyway they maintained it would happen.

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8) So they flew us out to meet with them and some others in the industry. They spent half the time shitting on us (telling us how we wouldn't survive without them), and the other half promising fantastical treasures. All the exchange relationships! A great network!

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9) The trip was.... weird. A typical part was the dinner. They made a big deal of it--best Peking Duck in the city! When dinner time arrived, it became clear they weren't going to the dinner--they had just booked us a table. Also we were paying. Also 2/3 of us were veggie.

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10) Also, according to the other 1/3, the Peking Duck was pretty average. Hyping up the restaurant was a really weird flex! And so much seemed like that--a thin veneer of first-class living surrounding a business proposition that didn't really make sense.

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11) Eventually we said no to them. They said no to us saying no, and we weren't really sure how one responds to that, so we just stopped responding. A few months later they came back, ready to buy their seed allocation of FTT after it was 10x higher. We said no.

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12) My other story is much shorter. I had a call with a big-name VC. It was the final call before investing and the only one with me, and they spent 80% of it asking if we had a bank account with funds set aside for a signing bonus to be used in succession planning.

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13) Also they let on halfway through that they couldn't remember if FTX had derivatives or was spot, but whatever, let's get back to that bank account. So, there are two very different types of Bad VC Experiences.

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14) Anyway, how do you think about VCs? Well, why do they exist anyway? Let's start there. I've been on both sides of this now a few times, and have started to get a sense of it. As far as I can tell there are basically 6 reasons VCs exist.

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15) One reason--the stupidest--is that they can invest others' money and take a cut without any risk. That's a Bad VC. The Second, and maybe most common, is that they can buy low and sell high. Ideally, Very Low and then Very High, separated by Very Little Time.

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16) This is the easiest money a VC can make. It also provides basically no value to the project. Or rather it provides negative value. They're not floating capital for a while, they're not promoting it--they're just making money the project could have made instead.

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17) You don't want the Second VC either, really. You're just paying them money for no reason. And in fact maybe you even kind of know that, at some level. But it's what you do, you know? You do the VC thing where you sell cheap to them.

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18) Then there's the Third VC. The Third VC isn't trying to make money at all on this! The Third VC wants attention, and networks, and gossip. The Third VC might be strategic (if we invest here we'll meet their friends and maybe _that_ will give us great investments!).

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19) They might also just wish they had more eyes on them, so they want to do something, anything, to be Important. So far this doesn't look like a great advertisement for VCs. So far they either look like leaches, or really incompetent leaches.

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20) So let's move on to the Good VCs. The cleanest is the Fourth VC--the one who solves funding gaps. Often people will have a great company but that company won't make money for 2 years--instead it'll spend money. So it needs money to survive until it makes money.

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21) So a VC steps in, buys equity at 1/3 the eventual price, and makes a lot; and the company gives up 10% of their equity but increases their odds of survival from 20% to 60%--so somehow _both_ make 3x out of the investment. The only word of caution here--do you really need it?

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22) And now we get to the Fifth VC. The Fifth VC is kind of like the Fourth VC, but instead of providing bridge funding, they fight like hell for you. They tell all their friends about your project, and all their portfolio companies, and give you connections and networks.

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23) Sketchy versions of the Fifth VC are basicaly MLM. But Virtuous versions take projects they believe in, and teams they believe in. And when they go to their friends and companies and networks and promote the company, they're just telling their truth.

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24) "Use this", they say, "it will be great". And they stake their reputation on you, because they _do_ think you'll be great. The Fifth VC is nearly indistinguishable from 1-4, sometimes. Everyone _says_ they're #5. But there are things you can do to tell.

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25) For instance, give them a super long lockup--do they _really_ believe in you long term? Or grill them, and make them sell you on yourself. Or watch what they say publicly, and see what they push. Do they push random crap? Or do you agree with what they promote?

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26) The Fifth VC might seem lame. All VCs promise their network, but the Fourth also gives lots of money! If the Fifth VC really believes in you, though, they’ll give the _most_ money, because they think it’ll be worth it. And networks are great _if_ they’re really utilized.

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27) People have limited bandwidth, and don’t care about random crap they hear. But if someone you trust says that this is the one project to watch--you listen. We’ve gotten surprising amounts of value from team #5. It pops up where you least expect it.

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28) “Oh yeah, we onboarded because XX said you guys were cool.” “I spent 12 hours reading your ideas because YY vouched for them, and now I’m convinced.” A Fifth VC can get you a foot in the door. It’s up to you to maximize that.

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29) And to be clear, there’s a _huge_ difference between someone who says nice things about you, and someone who really goes to bat. Finally there’s the Sixth VC, a variant on the Fifth. They’re similar except instead of giving their influence they give their advice.

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30) The Sixth VC is great for newer entrepreneurs. There are a lot of fuckups everyone makes (I certainly did!). Pointing those out is huge. And so is noticing when you’re about to make a large error in strategic direction and telling you.

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31) On the other hand, the Third VC does this too, because Important Smart people have advice! Telling apart a Sixth VC from a Third VC can be hard, but it’s really important.

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