20VC Why Market Matters So Much More Than Founding Team Why Crypto Investing is Less Collaborative Than Ever Why Bitcoin is Not a Hedge Against Inflation Why Solana Will Beat Ethereum The Network Effects You Need To Understand with Kyle Samani, C

In this episode of 20 VC, host Harry Stebbings interviews Kyle Samani, co-founder and managing partner at Multicoin Capital, a leading crypto venture fund. Kyle shares his journey from founding Pristine, a health IT startup, to entering the crypto space and establishing Multicoin Capital. He discusses the firm's focus on market analysis, rigorous debate, and information consumption, emphasizing the importance of specificity in plans and conviction in investment sizing. Kyle also touches on the challenges of token issuance, the collaborative yet competitive nature of crypto investing, and the role of tokens in bootstrapping network effects while potentially reducing their power. The conversation also covers regulatory clarity, the significance of developer-focused customers for blockchain, and the potential of data DAOs like Delphia to revolutionize equity trading. Throughout, Kyle advocates for a laissez-faire approach to capital formation in crypto and a focus on long-term investment horizons.

• Multicoin Capital is a leading crypto native fund with investments in Solana, FTX, Fractal, and Helium.
• Kyle Somani, before entering venture and crypto, founded Pristine, a health IT startup that raised over $5 million and was acquired by Upskill.

"Just last week, this guest announced the closing of their new $430,000,000 venture fund."

This quote indicates the recent success of Multicoin Capital in raising a significant venture fund, highlighting the company's growth and influence in the crypto space.

"Before moving into the world of venture and crypto, he founded Pristine, a health IT startup that raised more than $5 million in venture funding and was acquired by Upskill."

Kyle Somani's background in entrepreneurship and experience with a successful startup provides context for his expertise in venture capital and crypto investments.

• Notion is praised for its ability to replace multiple tools and organize company information effectively.
• AngelList is a critical platform for managing investments and offers a new product, AngelList Stack, for founders.
• Squarespace is commended for its mobile optimization, email campaigns, and SEO tools.

"More than 70% of companies who start using notion stop using two plus other tools."

This quote emphasizes the efficiency and utility of Notion as a tool that can consolidate multiple functions, potentially saving money for its users.

"I'm also super excited about their new product, AngelList Stack, which is purpose built for founders."

AngelList Stack is highlighted as a valuable resource for founders, simplifying the process of starting a company by integrating incorporation, banking, and fundraising.

"Squarespace is the all in one platform to build a beautiful online presence and run your business."

Squarespace is recognized for its comprehensive services that support businesses in establishing and managing their online presence.

• Kyle's last startup, Pristine, faced challenges when Google killed Google Glass, leading to its acquisition for minimal profit.
• Disenchanted with healthcare, Kyle discovered Ethereum in 2016, recognizing its potential in permissionless finance.
• He and Tushar Jain founded Multicoin in May 2017, launching their liquid fund in October 2017 and their first venture fund in July 2018.

"I discovered Ethereum in March or so of 2016, started fiddling around with it, and it struck me fairly quickly that this is what permissionless finance is."

Kyle's early engagement with Ethereum sparked his interest in the broader possibilities of crypto assets and smart contracts, leading to the founding of Multicoin Capital.

"In May of 17, we agreed to launch multicoin. We had no idea how to launch a fund."

The quote reflects the entrepreneurial spirit and learning curve faced by the founders of Multicoin Capital as they entered the venture capital space.

• Multicoin realized they could not excel at market trading, fundamental research, and venture simultaneously.
• They chose to focus on thesis formation with an indefinite holding period.
• The painful lesson learned was understanding their "strike zone" and focusing on their strengths.

"We cannot be the best at everything. We tried to for our first 36 months, 24 to 36 months, trade the market and do fundamental research and do venture."

This quote captures the realization that led Multicoin to narrow its focus and specialize in its areas of strength rather than spreading itself too thin.

• High performance involves creating the right culture for the team and ensuring individual cognitive performance.
• Cognitive performance is linked to health behaviors like sleep, diet, exercise, and mental training.

"Making sure your sleep is there, your diet, your exercise, supplements, meds, whatever you're going to do, being very eyes wide open, that your brain is a muscle and that you are training your brain."

Kyle Somani emphasizes the importance of treating cognitive ability as a skill that requires maintenance and improvement, which is crucial for high performance in investing.

• Tokens can bootstrap network effects by incentivizing behavior among the public for a shared objective.
• The helium network is cited as an example where tokens incentivize the deployment of a wireless network.
• Tokens are assets that can be priced and may or may not have a discounted cash flow (DCF) model for valuation.
• Multicoin focuses on assets that could produce a DCF in the future.

"Tokens are assets. Assets can be priced, they can be valued."

Kyle explains that tokens are a form of asset with economic value that can be priced and potentially valued using financial models.

"Tokens only make sense if you need to incentivize behavior in a permissionless fashion among the public at large."

This quote clarifies that the utility of tokens is tied to their ability to motivate collective action towards a common goal.

• Tokens and equity should not both accrue value, as this can create conflicts.
• Multicoin primarily invests in tokens, believing they will hold value over equity.
• Tokens make sense for companies that need to incentivize public, permissionless behavior.

"In almost all cases, there should not be value accrual to tokens and equity."

Kyle Somani points out the potential conflict between tokens and equity in value accrual, suggesting that they should not both increase in value simultaneously.

"The primary asset that we believe will have value is tokens. We do not believe the equity will be worth anything."

Multicoin's investment strategy is centered on tokens, with the expectation that they will be the main assets to appreciate in value, rather than the associated equity.## Cost Reduction in Network Building

• The model discussed removes significant costs from building a network, including labor, land, and backhaul costs.
• The remaining cost is primarily the cost of the hardware, which is commoditized.
• A wireless network requires a critical mass of hotspots to be valuable.

"You physically remove 99% of the cost from the system. So labor cost goes to zero, land cost goes to zero, backhaul cost goes to zero."

This quote emphasizes the substantial cost savings inherent in the model being discussed, highlighting that major expense categories are reduced to zero.

• Tokens can incentivize early adopters by offering financial upside for taking on more risk.
• A fixed amount of tokens is distributed per unit of time, rewarding early contributors with more tokens.
• This model is seen as a breakthrough in capital formation, leveraging token incentives to bootstrap a network.

"The beauty of tokens here is if you can tie the usage of the network to organic demand for the token... you actually want to incentivize those people to have more financial upside for taking on more financial risk."

This quote explains how tokens can be used to align the incentives of network participants with the success of the network, particularly rewarding early adopters who take on greater risk.

• Easier network bootstrapping could theoretically reduce the power of network effects.
• However, the commitment to hardware and token-based incentive structures may still create significant lock-in.

"By making it easier to bootstrap any given network, then for a network that has theoretical network effects, it is also theoretically easier for the next guy to use the same mechanism to bootstrap a competitive network."

The speaker suggests that while tokens make it easier to start a network, they could also enable competitors to emerge more easily, potentially reducing the strength of network effects.

• Tokens are viewed as a tool for wealth distribution, contrasting with traditional equity ownership in startups being limited to VCs and employees.
• The current norms of equity ownership by only a select few are seen as a regulatory issue that will be viewed differently in the future.

"Without question, tokens help distribute wealth."

This quote asserts the speaker's belief that tokens are an effective means of distributing wealth more broadly than traditional equity in startups.

• Token issuance introduces operational complexity and risks such as insider trading.
• Engaging a community of token holders can be challenging for small startups.

"Issuing a token, it creates a lot of operational complexity. Internally. It creates obviously the risk of employees trading on insider information..."

The speaker acknowledges the complexities and risks that come with issuing a token, including the need for mechanisms to prevent insider trading.

• Liquidity in token markets allows for faster feedback loops regarding investment performance.
• The speaker's firm makes investments with the intention to hold indefinitely, so liquidity does not affect their investment psychology.

"The big benefit it brings is faster time cycle of are we good at our jobs or not?"

This quote highlights how liquidity in the token market can provide quicker indicators of investment success or failure.

• The firm has a rigorous investment memo and debate process to identify flaws and assumptions.
• Active disagreement and a non-friendly debate process are used to uncover the truth.

"The process of actually recognizing the truth fundamentally requires active disagreement..."

The speaker describes the firm's belief that truth in investment decisions is best reached through a process of active disagreement and critical analysis.

• The hiring process involves writing an essay and engaging in discussions with the investment team.
• The firm values the ability to withstand rigorous debate and contribute to finding the truth.

"Step one of our hiring process is write an essay better than what's on our blog."

This quote outlines the initial step in the hiring process, emphasizing the importance of analytical and writing skills.

• Crypto investing is seen as more collaborative than traditional venture capital.
• To achieve venture returns in a collaborative ecosystem, the outcomes must be significantly larger.

"Well, I mean, mathematically, the only way for that to be true is the outcomes have to be twice large on average, right?"

The speaker is addressing the need for larger outcomes in crypto investing to make the collaborative model work financially, given the reduced ownership stakes compared to traditional venture capital.## Decentralized Ownership and Valuation

• Decentralized ownership's justification for valuation increases is uncertain.
• There is no clear answer to how much decentralized ownership can justify an increase in valuation.
• Collaboration in the space has decreased as fund sizes have grown, leading to more competitive behavior.

Which, I don't know, is decentralized ownership of stuff justify valuation, increase by two x zero x one x eight x. I don't know.

This quote discusses the ambiguity around whether and how much decentralized ownership can justify an increase in a company's valuation. The speaker expresses uncertainty about the correlation between decentralized ownership and significant valuation increases.

• Multicoin Capital does not follow formal rules for portfolio construction.
• There are no set diversification lines or capital concentration limits.
• Multicoin does not practice reserve allocation for their investments.
• The firm is flexible with investment sizes, ranging from $1 million to $300 million, and is stage agnostic.

We have basically no formal rules of any form of portfolio construction nature. We don't do any notion of reserves in multicoin.

This quote explains that Multicoin Capital does not adhere to traditional portfolio construction methods such as reserves and has no formal rules in this regard. They prefer a more flexible and opportunistic approach to investing.

• Multicoin Capital prioritizes market analysis over product or founders.
• The fit between the founder and the market is crucial.
• The belief is that market evolution can be predicted with more precision than most VCs believe.
• High concentration investments are made based on conviction in market analysis.

Do multicoin prioritizes all 93% of our discussion time is on market.

This quote highlights Multicoin Capital's investment strategy, which focuses heavily on market analysis rather than the product or the founders, with the latter only being important in terms of their fit with the market.

• Market prediction is challenging, but some markets allow for more precise analysis.
• Rigorous discussions on returns to scale and the fundamental nature of the product and market are crucial.
• Understanding the core wedge for a product's market breakout is a key focus area.
• The firm debates assumptions in the product and market to establish conviction.

You can reason about at market evolution with a lot more precision than I'd say probably most other vcs believe.

This quote underscores the speaker's confidence in their ability to analyze and predict market evolution more accurately than their competitors, which forms the basis for their investment decisions.

• Network effects are categorized as sublinear (logarithmic), linear, or superlinear.
• Understanding the type of network effect is critical to investment decisions.
• The shape of the network effect curve is debated to determine investment conviction and sizing.

Usually the sublinear one is logarithmic, almost always, and being very clear about that, being very clear about once the new insight is understood in the world, what are the ways in which there are ways to respond, both by new startups and by incumbents.

This quote explains that most network effects follow a sublinear, logarithmic pattern and emphasizes the importance of understanding how these effects influence the market and investment opportunities.

• Multicoin Capital generally avoids investing in SaaS businesses due to the lack of meaningful network effects.
• The firm's investment strategy is influenced by the potential for network effects within a business model.

We basically don't do SaaS businesses for this reason.

The quote indicates Multicoin Capital's rationale for not investing in SaaS businesses, which is attributed to the absence of significant network effects that align with their investment strategy.

• Information consumption is seen as inefficient but effective for gaining insights and making investment decisions.
• A large part of information comes from Twitter and subscribing to numerous email newsletters.
• Despite the volume of information, there is a commitment to dedicating time to reading and staying informed.

I actually believe that information consumption is extremely inefficient but extremely effective.

This quote reflects the speaker's belief in the importance of consuming a vast amount of information to maintain a competitive edge in investment judgment, despite the inefficiency of the process.

• The speaker disagrees with the notion that token distribution innovations are the sole cause of crypto bull markets.
• Leverage has not significantly increased between market cycles according to the speaker.
• Novel breakthroughs in capital formation are seen as the primary drivers of the last two bull markets.

What's created the bull markets? I think actually the last two bull markets has been novel breakthroughs in capital formation.

The quote counters the idea that token distribution innovations are the only factor in creating bull markets, instead attributing them to new methods of capital formation.

• There is uncertainty about whether institutional LPs will retreat from crypto due to market volatility.
• The speaker's firm is not currently concerned about raising a new fund.

Maybe, I don't know. We raised right before things turned south, so I guess we got lucky.

This quote expresses uncertainty about the future behavior of institutional LPs in the face of crypto market volatility but conveys a lack of immediate concern for the speaker's firm.

• The speaker believes an investment team larger than ten people can be detrimental to the investment process.
• Discussion time and deal scouting may suffer as a result of a too-large team.

I am of the view that if investment team is larger than ten, you are now net value destructive to the overall investment team process and culture.

This quote suggests that there is an optimal size for an investment team, beyond which the quality of the investment process and culture may decline.## Investment Committee (IC) Time Constraints

• There is a practical limit to the amount of time a team can spend reviewing investment decisions.
• Time must be balanced between analyzing deals and gathering information to make informed decisions.
• Excessive IC meetings can consume a significant portion of the workday.

"Of deals per week, well, IC would just now become 6 hours of the day. There's just like some upper bound limit to the amount of time you can spend as a team reviewing decisions versus time spent collecting the information to make them."

The quote highlights the challenge of managing time effectively within an investment committee, emphasizing that too much time spent on decision review can limit the time available for other critical tasks.

• Venture capitalists often feel intense pressure to bring deals to the table.
• This pressure can influence the quantity and quality of deals presented.

"And that's what many firms are, 6 hours of ics. Do you think people feel the same pressure then to bring deals to the table? Obviously we both know many vcs, they feel intense pressure to bring deals."

The quote reflects the common experience among venture capitalists of feeling compelled to present deals, which can result in lengthy investment committee meetings.

• Temporal diversification refers to spreading investments over time to manage risk.
• Speed of deployment is not a priority in every investment strategy.
• Some investors prioritize love for the deal over the speed of investment.

"We don't care about speed of deployment. Our view is we do it if we love it."

This quote conveys the speaker's investment philosophy, which values passion for a deal over the rapid deployment of capital.

• Regular decision reviews can help identify missed risks or incorrect sizing of investments.
• Reflecting on past decisions is crucial for improving future investment strategies.
• Venture capitalists may not focus enough on the appropriate sizing of investments.

"We do a quarterly decision review looking back on decisions from the prior year, both in our hedge fund and in our venture funds."

The quote explains the process of reviewing past investment decisions to learn and improve future practices.

• Assessing the actualization of network effects is key to understanding if an investment was sized correctly.
• Confidence in predicting network effects is crucial for making better investment decisions.

"Have the nature of the network effects been what we thought they would be? If they were what we thought they would be, and it's working, then we should have sized up."

This quote emphasizes the importance of accurately anticipating network effects when determining the size of an investment.

• In hindsight, some investment failures are attributable to factors that could have been anticipated, while others are due to unforeseeable events.
• The ratio of knowable to unknowable factors affecting investment outcomes is roughly even.

"Probably half were in the knowable camp and half were in the unknowable camp."

The speaker reflects on the nature of investment outcomes and acknowledges that some failures stem from predictable risks, while others are unexpected.

• Crypto investments can offer faster liquidity compared to traditional venture investments.
• The ability to exit an investment at a multiple within a short time frame is more feasible in crypto.
• This liquidity can lead to lower loss rates in the crypto space.

"There's a lot of things like tokens launch. They traded a price. That's two x four x eight x. It's been 18 months since you made the investment you convicted."

The quote describes the rapid liquidity events that can occur in the crypto market, allowing for quicker exits at significant multiples.

• Selling large positions can negatively signal to the market.
• Engaging with founders and responsibly timing the sale of assets are important considerations.

"We will t wop over six months. We're not going to get out in two weeks. That's irresponsible."

The quote highlights a careful approach to selling assets over an extended period to avoid negative market signals and maintain responsibility.

• The speaker values content that provides new insights or changes their perspective.
• Specific content can significantly influence investment strategies or thoughts on an industry.

"Eugene way. Not status as a service, but the path dependency of social graphs."

The quote identifies a particular piece of content that had a profound impact on the speaker, showcasing the value of insightful information.

• Bitcoin is not considered an effective hedge against inflation by the speaker.
• The speaker believes in the superiority of productive assets over non-productive ones as inflation hedges.

"Bitcoin is nonsense."

The blunt quote expresses the speaker's opinion that Bitcoin does not serve as a practical hedge against inflation.

• The speaker favors Solana over Ethereum due to Ethereum's lack of a scaling plan.
• Predictability and confidence in a blockchain's scaling plan are deemed crucial for its success.

"Ethereum does not have a scaling plan. Seven years later, it still does not have one today."

The quote criticizes Ethereum for its perceived inability to provide a clear and reliable scaling plan, which is seen as detrimental to its success compared to competitors like Solana.

• Detailed and specific plans are preferred as they provide clarity and inspire confidence, especially among developers.
• The specificity of a blockchain's plan is important for its adoption and success.

"Specificity. I like specificity in plans."

The quote underscores the value the speaker places on detailed planning, which is believed to be essential for the credibility and effectiveness of a project.

• The speaker acknowledges the challenge of maintaining personal habits, such as regular exercise, despite advocating for them.

"Kyle, make sure you work out every day."

This quote reveals a piece of personal advice that the speaker finds difficult to follow consistently, highlighting the common struggle between knowing what's beneficial and acting on it.

• Being open to new ideas is essential, even if they might seem unconvincing at first.
• Recognizing the potential in emerging trends can be beneficial for investment strategies.

"There are a lot of things that I think will be stupid in three years, but I think will be interesting in the next twelve months."

The speaker reflects on the importance of keeping an open mind about new developments that may seem fleeting but could have short-term significance.

• The speaker desires a regulatory environment for crypto that is close to laissez-faire.
• Current regulations do not meet the speaker's ideal, and significant changes, such as legislative action, are needed.

"I would like clarity around a set of regulatory requirements around capital formation that are pretty close to laissez faire."

The quote conveys the speaker's wish for a more defined and permissive regulatory framework for the crypto industry.

• Delphia is a data dow that aims to monetize user data in a novel way.
• The investment in Delphia is driven by the potential to use aggregated consumer data to make more accurate forecasts and achieve exceptional returns.

"Delphia is a data dow, which is really cool."

The quote expresses enthusiasm for Delphia's innovative approach to data monetization and its implications for trading and forecasting.

• The host appreciates the guest's patience with the questions asked during the interview.
• The guest did not find the questions basic and enjoyed discussing token network effects and bootstrapping networks.

"I don't think they were basic at all. I thought these were great token network effects, bootstrapping networks."

The quote indicates the guest's positive reception of the interview and the topics covered, suggesting that the conversation was insightful and engaging.