A Conversation with Nick Grossman, Partner at Union Square Ventures

The following transcript is taken from episode twenty one of The Scoop, The Block’s first podcast. Listen below and subscribe to The Scoop on Apple, Spotify, Google Play, Stitcher, or wherever you listen to podcasts. Email feedback and revision requests to [email protected]. This transcript has been edited for clarity and length.

Union Square Ventures is one of the most prominent east coast VC firms and is also one of the most notable mainstream investors in the bitcoin market. On this episode of The Scoop USV partner Nick Grossman joined us to discuss the firm's approach to investing in the market -- he was recently promoted to partner to lead blockchain investments after 5 years with the firm. We spoke about Libra association which USV is a member of, we examined USV's portfolio and talked about the future of venture capital and the future of capital formation. I hope you enjoy the episode.

Frank Chaparro Alright ladies and gentlemen thank you so much. I'm very excited for what is an incredibly special episode of The Scoop. I'm joined by my very special co-host Teo Leibowitz and we are here with Union Square Venture partner Nick Grossman. Nick, thank you so much for taking the time. Listeners, you've probably heard of this firm. It's very well known and respected in the cryptocurrency market led by it's very impressive leader Fred Wilson. They have two funds that are making investments in cryptocurrency related projects. The first company you invested in was Coinbase in 2013. So early to the market relative to a number of other players it's not known exactly how much you guys have in the market but it's certainly sizable relative to some of the other things you're investing in. The best place to start Nick, the firm recently made headlines for a comment Fred had about Ethereum. I'm just going to read it for the listeners I'm going to put on my reading voice which is different from my podcast voice and this is what he said: Ethereum as many of you know confounds me. It has shown the way to so many important things, smart contracts, programmable trust free computing, potentially proof of stake and a lot more. But it remains hard to build on, scaling issues abound and many developers are looking elsewhere. It'd be interesting to dive into some of these remarks and have a conversation around Ethereum and whether or not it is a match for bitcoin or other crypto currencies and projects out there and whether or not Fred's view is equivalent to maybe your own.

Nick Grossman Yeah. So first off the best person to talk to you about Fred's view would be Fred. So maybe we can get him on here next and have that conversation. And I know Fred's post the other day kicked off a lot of debate on Twitter and I can't consider myself an expert. It's hard for anybody to consider themselves an expert on any of this because all of it is so new and so everybody is looking for a lens and everybody's looking for a framework. Is Ethereum the AOL of crypto, is bitcoin the IP of the money protocol stack? We're all searching for a way to look at this. I'm not sure exactly which part of Fred's comment is really considered controversial. It has been such an interesting project to watch and be around and the level of creativity that is happening on top of it is ridiculous. I'm in love with the idea of open interoperable protocols where people can take assets and interconnect them with other assets without asking any base permission. So generally the idea of permission-less innovation on top of new protocols is an incredible incredible thing. And you're seeing that on the DeFi space, you're seeing that in NFT's and Ethereum like just opened that all up including ICO's and token's back in 2017. So the part about Ethereum being like this magical sandpit and tool kit is indisputable. So maybe the question is about the scaling and whether that's going to work or not going to work.

Frank Chaparro Which is something that evenVitalik Buterin has come out and admitted publicly saying... I remember this was a year ago or maybe even longer when we were at five hundred billion dollar market cap he said look, listen we're not really there yet. The market in terms of the development of these DAPs and the decentralized protocols being built on top of Ethereum. There's not as many users that would be as meaningful as where we can go or where we can potentially go.

Teo Leibowitz Where Fred and Vitalik probably disagree is that Vitalik sees a path to scale [...] and from Fred's post my interpretation was that Fred doesn't necessarily think that Ethereum can execute on that roadmap and that it could or will probably be usurped by one of these competing small contracts.

Nick Grossman Maybe, you could argue that there's a really really strong network effect in Ethereum in terms of developers and exchanges and assets and projects and that just simply undoing that is not practical or possible. You could also think a lot of it depends on timing and ETH 2.0 and how/when it evolves and honestly I'm not the one to handicap that. A lot of new projects are emerging -- Cosmos and Polkadot and Algorand and thousands of others. It's too early to say exactly what they'll all be good for. Even when Ethereum launched nobody knew really what it was going to be great at and it turns out it was great at creating tokens and creating new kinds of assets. And in particular slow moving assets. It took a while for that to become apparent. It's going to take a while for what other projects are good at to become apparent. For sure there's a world where Ethereum just charges on and it evolves and the improvements that get shipped really make a big difference and it's also possible that as other projects get online certain use cases become super appropriate for those. So in a way that's a non-answer. I know a lot of really smart people who are long Ethereum and believe that it will...

Teo Leibowitz Placeholder being one of them

Nick Grossman Exactly.

Teo Leibowitz [...] published almost a response but it actually came out before Fred's quote pretty much taking the exact opposite view.

Nick Grossman And at the same time there are a lot of projects that have a lot of smart people behind them who are building alternatives. I don't know, I'm not the one to place a binary bet on... My personal... one thing we've learned from watching all these crypto assets is that they don't just go away. It's going to be long and slow and another thing to remember is that we're at the very beginning of all this that I have a hard time making predictions.

Teo Leibowitz We should but I guess as a slightly more direct question -- as an investor you don't necessarily have the privilege of waiting around and seeing how this space develops. So you do have to allocate capital, you do have to place certain bets. So how are you thinking about this space? How are you adapting your investments?

Nick Grossman Yeah for sure. An important thing to realize also about USV is that we're not a crypto only fund. We have traditional venture funds out of which we're investing in education companies and healthcare companies and infrastructure companies and so on. We see the crypto space as an important next piece of all this infrastructure. But unlike some other funds who are out there investing in everything, our strategy is to make a smaller number of bets and investments in what we think are important categories. And I guess to some extent it raises the question of what are the categories that you think are gonna matter? So we backed the Algorand project which just launched which is one of many projects working in the proof of stake space. There's a lot of opportunity to do certain things using that architecture. We were early backers of the Filecoin project which is really coming along. And when that launches, that's a different piece of the stack and a different piece of infrastructure. We just backed a project called Helium which is in the decentralized telecom space. We backed the company Dapper Labs behind CryptoKiddies. We've been trying to map out like store of value, smart contracts, different types of computing infrastructure, gaming, other pieces of adjacent infrastructure like Coinbase like the whole developer tools category. For sure big important project are going to get built in all of those areas. And part of the challenge is understanding the different economics of them and the timing of all of them but I don't see it as a zero sum -- I try not to focus on my time on Ethereum versus something else in just a zero sum head to head kind of way

Frank Chaparro That's a great answer that parlays into what I wanted to talk about next which is looking at USV as a firm in the context of the cryptocurrency community, how it operates maybe differently from others and how the day to day might be different from other firms in the space? But I guess the best place to start would be just what we were talking about before we turned the mics on. When you first started as a VC in this space or started investing in the space you were thinking well what can we do that our LPs can't do or what can we invest in that our LP's might have a difficult time investing in? Describe for the listeners how that transpired and how it has progressed up until this point.

Nick Grossman Yeah sure. We wrote a post sometime within the last year about it, somewhat about part of our strategy investing in crypto and the big takeaway is that investing in this category has caused us to change the way we look at how we operate as an investment fund. USV was founded in 2003, for the first 10 years we operated like a traditional VC doing early stage equity investments in companies and that's how you invested in Internet applications and infrastructure. If you believe that the blockchain crypto space is the next generation of Internet applications and infrastructure as we do we want to invest in that too. And yet the market is entirely different. It's not just companies. It's not just private investments. It's open source projects, it's protocols, it's communities, it's public markets.

Frank Chaparro You're saying that investing in the landscape that's so diverse in terms of the makeup or structure rather of these companies and projects, that's impacted how you invest elsewhere. How so?

Nick Grossman Well it effects the whole structure of how we even do business. The theme we were talking about before was that when we made the Coinbase investment back in 2013 it was clear that we saw crypto currencies as important and not just as curiosities but as assets. And we told our LP's as much regularly but our thinking was well anybody can buy Bitcoin you don't need to have special access like a VC does in private deals to buy bitcoin so they should just go do that on their own. One of the things we've learned over time is that institutions that want exposure to this space do need help doing that. We immediately evolved our strategy... not immediately it took us too long but we evolved our strategy to: we're not just going to own equity we're going to own tokens directly. That seems obvious today but back in 2016 that was pretty non-obvious. At the time we had made a bunch of seed investments in projects like Protocol Labs that at the time it was an equity investment but there wasn't going to be a series a it was going to be tokens and so that step one was OK we're going to have to hold tokens and then step two was well...

Frank Chaparro Which isn't an easy feat to figure out.

Nick Grossman No and again it seems super obvious today but at our LP meeting in 2016 we spent three hours talking about how owning tokens is going to be part of the VC landscape in the coming years. We had to change, we had to think about that. We had to educate our investors on that and then we had to evolve our investing strategy based on that. As you guys have published we've come up with a new and diversified strategy where we're investing in token focused funds, we're investing in companies that are adjacent to this, we're investing in companies that are issuing tokens, we're buying tokens directly on the market. We're doing a variety of things. All things that venture funds didn't do five years ago. Now, separate from that you have a whole generation of crypto focused funds that are doing all these things and more. It's an incredibly interesting time to be an investor because what it means to be an investor is just different and new.

Frank Chaparro How does that translate into the day to day? Are you spending less of your time doing due diligence on potential new projects to invest in, working with those portfolio companies on growing and expanding their business? Are you allocating that time or those resources equally among these different investments?

Nick Grossman It really varies, we are still even with all the changes and new approaches, we are still long term patient capital for projects. We have not immediately flipped over into a day trading operation and that's just not who we are. From a time allocation perspective it's somewhat similar to how it always has been which is a combination of looking for new things and working with our portfolio. It really goes up and down depending on the complexity of the moment as everybody here knows what it means to work with a crypto project is not exactly the same as what it means to work with a company. There are similar issues but it's a more complex public environment. There's governance to be worked out. There's public markets to be navigated. There's untold legal and regulatory issues and so for sure a lot of my time is working with our existing portfolio on all of that stuff and looking at new things.

Teo Leibowitz I love this term patient. A patient fund or patient capital. I feel like there has to be a fund called patient capital, right? It very much speaks to the way that USV does deploy capital, you guys are known for making a small number of bets on a yearly basis. This year USV has made one single investment in the cryptocurrency space which is Helium. Do you expect to make any more investments by the end of this year 2019?

Nick Grossman Yeah and I'll give you...

Frank Chaparro Whats the number?

Nick Grossman How many investments? We make a small number of investments. Period. Out of a given fund which we'll invest over the course of three years, maybe we'll make 20 to 25 investments. So on the order of seven or eight a year. That's a mix across all sectors and we're doing that across two funds. There is no forecasting precisely when the right opportunities come. We're always looking for things but I would say that it's likely that we'd make one or two more investments this year in the space.

Frank Chaparro You've invested in six different funds: BlockTower, Multicoin, Placeholder. Obviously the process for doing due diligence on funds and thinking about investing in a fund is different than a project or a company. How does that process work? And I guess I'm always curious to know what are the things that they can do that you can't do yourselves and why not? Like why not just if it's a more liquid strategy, investing in liquid assets why not open up a desk to do that or something else?

Nick Grossman I would say there's three reasons. Strategy, structure and experience. Just on the structure side we are a venture fund. Without getting too into the weeds venture funds have restrictions over the kinds of assets that they can buy and sell. We're exempted from registering with the SEC as an investment advisor which means that we can only buy and sell a limited number of assets that are not private company stock. To the extent that we wanted to say trade crypto we'd be very limited in how to do that in an active way whereas funds that register like Andreessen just did or funds with a hedge fund model they can trade all day long. That is like right up there like a big constraint on operating and to the extent that where we have exposure to public crypto assets it makes sense to box that in our fund structure that has more flexibility even if it's like a long term balanced type of strategy versus an active trading strategy. As we built a portfolio of funds to make investments and we knew that we wanted to get broader access to this asset class. That was the best way to do it at that time period. We picked a number of different funds that each have different strategies. BlockTower is an active trading strategy. Polychain is slower but still in a hedge fund model. We look to get some diversity, Multicoin has some contrarian points of view compared to some other funds. We like that, we've obviously known the guy's at placeholder for a long time. They're also investing in more of a venture strategy early stage. We wanted to get a balance of perspectives and strategies and then the truth of the matter is, as much exposure and depth as maybe we have in this market, we're still looking at lots of things and the folks who are just chest deep in this all day every day have a level of technical sophistication and thinking that is really really valuable. We've really benefited from having closer relationships with managers in this space who are just super smart and out there every day.

Frank Chaparro It also gives you an interesting perspective on the market in terms of seeing how, and we've seen this over the past two years a blurring of the lines so to speak between these cryptocurrency hedge funds and cryptocurrency venture firms. Many of the hedge funds and the long tail that got wiped out tried to pivot to VC and some were successful, BlockTower's one that makes VC investments, they're one of our investors as an example. How do you see that continuing to play out over next few years in terms of that blurring of the lines? And do you see it impacting, you mentioned Andreessen Horowitz adopting that new model. Do you see that continuing to happen in venture broadly?

Nick Grossman That's a good question and I don't really know all the reasons that Andreessen had for registering and they have ambitions that are broader than just things that they might do in the crypto market. I guess you can ask them why they're doing that. I would say in the crypto space we're definitely seeing a blending of a venture approach and more of a liquid fund approach which just makes sense to me. There are different roles to play to the extent that I'll give you one example, we're seeing a pattern emerge where investors may buy tokens primary from a project and then also buy and sell in the public markets. That's really interesting because you want to be a partner to the project and you also want to be an active participant in the community and that's about being active in the markets, being involved in governance.

Frank Chaparro Not to interrupt can't those interests sometimes be at odds.

Nick Grossman That's possible. It's all new. Everybody is working out the right balance. At the beginning what happened is that many of the funds would keep illiquid investments in a side pocket separated but still inside the same entity, you're seeing more of a venture style fund and more of a liquid style fund. I don't know what the right ultimate structure is but it does make sense to me that an ideal investor can have that patient capital, the long term venture style fund but also the ability to participate in the market. The ultimate/right structure will get figured out over time. It's neither here nor there currently for sure.

Teo Leibowitz Does that give you the necessary diversification that you guys are looking for? As you said a lot of these funds, they were initially structured as hedge funds and have started moving into the venture space. Even something like Helium which I referenced earlier, Multicoin actually led that investment. You co-led it with them so that doesn't necessarily give you that liquid asset exposure that you guys are looking for.

Nick Grossman I'm not sure I totally understand the question. But in that case where...

Teo Leibowitz In the sense that you're double dipping into Helium through your LP.

Nick Grossman I see, we have exposure to it through multiple entities. And that's true in some cases. In the case of Multicoin, we're just one of many investors in Multicoin and it was a great opportunity to work with them closely and hands-on on something, they bring a lot of crypto strategy to the table and we bring a dose of the crypto strategy and a dose of regular platform strategy that has been a good balance on that project. On balance we have the right exposure to that project which is a lot and which is good but it's not necessarily a problem because we did it together with them. I would say more the strategy for us is still we want to have broader access to the market as a whole and doing that through fund investments is great for us because just from an economic exposure and also from a visibility and connectedness we want our LPs to benefit from from all that. Then our strategy basically is to focus on the opportunities where we directly can deliver the most value and engage them so Helium is like a perfect example of that.

Frank Chaparro It might be we've had a few VC's on the podcast over the past few weeks which has been really cool because then we get to see where the thinking is on many different issues. We'll get into regulation and some other topics, maybe Facebook or Libra as well. But before we move on to some other things I'd like to know what the firm's view is on the open finance space or DeFi. There are a lot of different projects, many of which interestingly are really contingent on the growth of the Ethereum ecosystem which we discussed Fred's thinking on that. How do you view DeFi and some of the developments going on there?

Nick Grossman The most straightforward view of DeFi is that this is the proving ground for the building blocks of smart contracts and interoperable crypto assets in a financial space. You've got layering of protocols you've got really interesting projects like Maker that have this governance engine paired with a really useful stable asset. All the different models are getting experimented with. I just think that it's really fascinating as a laboratory and then the real question is does the device base grow to become the Fi space or or not. I don't know the answer. Part of it has to do with the stuff we talked about earlier about scalability and are there real limits to what can be done. Another part of it is about going aside from any technical constraints, going from today's relatively small enthusiast audience to more of a mass market audience. What's the the path that's going to get there? When I look at things like gaming, like CryptoKitties or other stuff like NFTs like the Dapper company has just announced a deal with the NBA to bring in NFTs like really broad consumer, that's amazing because you're going to have interoperable digital assets on a blockchain that are going to touch a lot a lot of people in a new way. It's amazing. But the same concepts are there inside the DeFi space and the question is, what will take today's audience to a bigger one? One thought and this is not fully formed but I was just having a conversation about this over breakfast is that there is a generational shift and there are people younger people in particular who have probably a more significant portion of their net worth in crypto assets and in DeFi. It's an open question of whether the DeFi world like attaches to the regular financial system or just becomes more and more of people's real financial lives. It's probably safe to say that today it's not really the centerpiece of people's financial lives in a mass market way. But you could imagine that happening that way as a generation of people own bitcoin and Ethereum and other digital assets and not stocks and bonds and cash -- if that happens you grow outwards from there.

Teo Leibowitz What's interesting about something like Dapper Labs is that it's fairly obvious as to where value accrues in that system. Which is with Dapper Labs itself as an issuer of these NFT tokens.

Nick Grossman Or with secondary marketplaces and buyers and sellers. One of the interesting things to think about, is there more value captured in primary issuance or in secondary trading? And for assets that are perpetual you could imagine that the secondary market will vastly outperform the primary market in terms of how much value is accumulated

Teo Leibowitz And Supreme is the supreme example here in that the primary issuance market is valued around a billion dollars and the secondary market at two billion dollars. There's actually a lot of activity there and one project that I find particularly interesting as a possible solution there to bridge the two is something like the [...] model where you have this bonding curve and buyers can sell back into the bonding curve and the issuer itself gets to capture that trading value. So Dapper Labs, fairly obvious perhaps not fairly obvious but we'll see. Open finance, where do you think value accrues in that system?

Nick Grossman Probably too early to tell. The lame and obvious answer is that part of it will accrue down to the lower level protocols that secure all of it. In this case today Ethereum, part of it will accrue into important second layer protocols. We don't know yet exactly how much and where. Part of it will accrue to applications on top that participate in some ways whether that's marketplace liquidity fee type of... on the edges -- application on the edges like exchanges and marketplaces or something else. There's going to be a company layer -- there is already a company layer on top and today those companies are relatively thin but they'll probably grow. Another big question back to this question of primary versus secondary is that a lot of projects today, secondary markets are private closed markets. If you look at something like OpenSea for NFTs -- that's a company on top of an open protocol that has it's own marketplace and a lot of the liquidity and exchange protocols are are out there and working but not the center of the action. If you believe that the secondary market is the long term big piece it'll be really interesting to watch those trading protocols and if those can end up being tokenized and really used. I can't claim to be like a full expert on where all of those projects are but it does seem like that's not all the way going yet but that's another really interesting place to look over time.

Teo Leibowitz You used to be invested in Kik which is a social messaging mobile application in 2013.

Nick Grossman Indeed.

Frank Chaparro So even before they decided to launch a token there was an investigation by the SEC that exposed a lot of interesting things, one of which was the fact that there was some, I don't want to misquote their findings but I believe that there was a board member or someone involved in the company who said that this would be a hail mary move to do the ICO in order to prop up or save other aspects of the business, notably the messaging platform. So that's the context for where Kik got involved in being in the crossfire of the SEC

Nick Grossman And I don't want to talk in any specifics about the case because obviously there's ongoing investigation there and the SEC has published it's initial report. Kik has published their response to that. There's a lot of detail there and open arguments about the facts of the case and legal interpretations and so on and so forth. What's interesting about the project is that and what has always excited us about the potential of crypto assets to work inside of social platforms is that they represent the opportunity for a different kind of business model. It's interesting. Advertising is a tough game. It's a problematic business model for obvious reasons. You have to have enormous scale. You're competing against Facebook and Google. What Kik got right was that crypto represented a different way to try and build a business in the social space by putting a digital asset inside of the system. They had a lot of success previously with other virtual goods: stickers and points and stuff like that. The thinking that crypto assets makes sense inside of social platforms for obvious reasons because you can build an economy around them. It has the potential to increase engagement, you can just start to do other things. It makes a ton of sense and that will be proven to be true over time.

Teo Leibowitz Yeah I definitely see why issuing a token would be attractive from the business's perspective. And funnily enough I was having a discussion with my my brother yesterday and we were talking about cryptocurrency and the struggle to actually monetize these open source projects and issuing a token does seem like an obvious solution. From the user's perspective though, using these distinct tokens within distinct applications might not be the friendliest experience. How do you think that is going to play out? If Kik had say replaced KIN with DAI or Ether or a more widely adopted currency a more liquid currency. Do you think that that would engender a better user experience?

Nick Grossman What's interesting is that KIN is vastly more widely adopted today than anything in the open finance space. They've got millions of users.

Teo Leibowitz Do you believe that?

Nick Grossman I know you guys have actually probably run some research on it but like there's millions of users inside of Kik that are interacting and you could argue that it's trivial, like the transactions but there are many of them. We should have a longer session about like, how do consumers think about currencies and how many currencies does it make sense for there to be consumer facing? I already like thinking about purchases in terms of Jet Blue Miles and Amex points and dollars and euros and like to be totally honest there's only so much of that you can keep straight. There's going to be a consolidation on some level particularly for things that are user facing. Another thing to think about is that not all tokens inside of social are going to be transactional. So if you look at the props project which is another one that just did the Reg A that's really a staking token for reputation and it's not transactional but it is yet another signal inside of social that is useful and so it's too early to say exactly what is the right thing where and...

Frank Chaparro What's interesting to me is regardless of whether or not folks are using it, regardless of whether or not the point of the of the token itself is to facilitate something that's integral to the business. The whole point of what we used to call utility tokens is that they have some sort of utility but even if let's say KIN had all those things, people are using, it has utility -- is that fact and could that fact be, it cannot be at odds with it being a security seal, if also the other point of conducting it was to raise money for the business itself can those two things be mutually exclusive? I want to create a utility token that adds value to whatever network I have but at the same time I need a lot of money. If those are the two interests can it then be a security even if you have the utility?

Nick Grossman We could do a whole other episode on interpreting the Howey Test and I'm sure you guys have looked in detail at the SEC guidance that came out. Obviously the ICO boom of 2017 made every token look like a security and made everything look like a fundraise and there was a lot of crap that got raised, the money got raised for then. As I talked to folks about this in Washington and other places, really it comes back to if we're building a network what we're talking about is a new model for building infrastructure networks. What's so beautiful about the crypto asset model is that stakeholders can become owners and that value if you're an early participant in a network whether that's social or infrastructure or some other kind like you can benefit from your effort in making that thing real and that there is this interplay between ownership and utility and the process of getting something off the ground -- I actually think that's beautiful. If all the early users of Facebook had more of an actual quote unquote ownership stake or economic interest or skin in the game or something, that would actually be really good for the world. That's the model that is here and that's great. It's hard to square that and unpack that in the context of securities laws. What's so odd about crypto assets is that the nature of them changes. The Howey test is about, what is an investment contract? An investment contract is a transaction. It's not an asset. For a lot of these tokens it may be that early transactions were of one nature and later transactions maybe of another nature. In the history of stocks and bonds and other securities, we haven't really had that before. This whole idea that that you can have the same asset but multiple different transactions -- all this stuff is new and so I don't want to... a lot of lawyers and a lot of places and a lot of countries and a lot of companies and a lot of government agencies are wrapping their heads around these contexts and we'll get there eventually but we have to come back to the the idea that we're we're sharing the benefit of building new networks and that's a good thing.

Teo Leibowitz Absolutely. So if the courts do rule against Kik, what does that mean for the crypto industry moving forward?

Nick Grossman It has everything to do with the details so hard to say. There's already been one case where a judge contradicted the SECs view on an application of the Howey Test. I'm forgetting the name of the case but it was maybe six months ago. I understand why the SEC takes a rather narrow view or you might call it a broad view of the application of the Howey Test because it just makes sense that they would. Over time, whether it's this case or another case or who knows which case, we're going to get refinement of the application of the Hpwey Test as it relates to tokens. It's somewhat unlikely that that comes from the SEC directly although it's not impossible. Commissioner Peirce wrote a post a couple weeks ago advocating for some sort of a safe harbor. Maybe there's room to operate there. But the interplay between the courts interpreting Howey versus the regulators and others will hopefully be a good thing for crypto because it will bring us more clarity as to where the contours really are. As of right now it does feel like in the U.S. there's a cloud over the industry because of the SECs broad interpretation of Howey. I hope that's not ultimately a big problem for the sector because the sector is really important and I want it to flourish here in the U.S. but it's gonna take a while for that to suss out.

Teo Leibowitz How closely are you and USV more broadly interfacing with regulators?

Nick Grossman Throughout the history of the firm we've taken an active role on policy issues that impact the Internet. So back when SOPA and PIPA were a big thing I remember that those copyright and issues affecting the nature of user generated content platforms -- we engaged on that. When net neutrality felt like an issue that was really important to the success of small startups operating on top of the Internet we engaged on that. To the extent that we think the crypto networks are fundamental to the future of the Internet, we're engaging on that too. We are just a small group of people with limited time and resources but we've always felt like it's important to engage on these issues and we engage on this issue in Washington and elsewhere to the extent that we can.

Frank Chaparro This conversation parlays well into what I want to talk about next which is Regulation A, plus a number of your portfolio companies have gone that route in raising funds. So a number of your portfolio companies have raised funds via Reg A plus or registered rather their [...] with Reg A plus which is what they call a mini IPO. These things have been around for a while. I remember when I was at Nasdaq there were a few that were done. You either raise twenty five million dollars or 50 million dollars for the sale. Those are the two types. When you think about regulation and the reason why Block Sec did this, when I've talked to Muneeb it was described as, how can we do this? How can we cover our ass so to speak? If they do deem this thing a security although we do not believe that it is, it's not route everyone can take. It's not really a solution in my view because it's so expensive for one and you have to raise, you have to hit that that 25 million or 50 million dollar... That's the most you can do. Yeah. That's the most you can do.

Nick Grossman The questions here are, are all token securities and should they be? The answer is no. I personally think that there absolutely has to be a path for tokens certain kinds of tokens that work the right ways to trade freely not as securities. I would hope that Muneeb is right, you can go out the gate in the umbrella of securities and then get out of it over time. One of the big questions with the securities laws if you look at the SEC guidance and the speech that Hinman gave about Ethereum not being a security. The SEC is basically said it's possible for tokens not to be a security once they're fully mature but there's really not a clear path on how to go from day one to there. The question is, is the Reg A plus process part of that path or not? We don't know. There is another question about the constraints that are part of getting a clearance to do Reg A and I know both Blockstack and Props went through extensive design revisions with the SEC and I'm not the best person to talk about all of the trade offs that were proposed and made but there were a lot of tradeoffs that were proposed and made. In the case of Props they use Ethereum sidechain architecture and a lot of the nuances of how that works. We're influenced by the back and forth of regulators. And then lastly on the cost -- for sure expensive. Hiring lawyers to work on crypto stuff is expensive. Period. No matter how you do it. It's expensive. And we've seen projects do it every different way. The Reg A plus stuff is expensive. It's I would hope that it will become less expensive if they maybe can become more of a template for certain kinds of projects and gets particularly expensive this first time around because it's never been done before. No one was sure if it could even get done. So I'm with you. I'm not saying this is the way to go for every project at all. I am encouraged that it seems to have at least gotten through for these two and they're both really interesting projects that are doing different things and I'm hopeful that it will work for them. But I also don't think it's the only way to do it and I don't think it should be the only way to do it.

Teo Leibowitz What's interesting about Reg A plus is that it was invented, invented might be the wrong word but it was presented as one possible path to raising capital in 2015 through the Jobs Act. It hasn't been a particularly popular method for raising capital since then.

Nick Grossman You could argue that Ethereum did way more for capital formation than the Jobs Act.

Teo Leibowitz Sure. Some people call it a failure but there's also this notion in venture capital circles I guess which is that if a project has to raise through Reg A plus and raise through the general public they are not necessarily of a high enough quality to raise through the traditional VC route

Nick Grossman I would push back on that particular interpretation because what one of the goals of selling tokens to the general public is to get tokens into the hands of the general public. For tokens where there is a user base and there is a community you want to be able to get them into the hands of those people. In both cases with Props and with Blockstack the retail part of the A plus was not the whole story and there are institutional investors in both cases and the intention is to get it out into the hands of people. I believe in that for sure but you could also argue, the point you're making is about crowdfunding more generally and if you can't raise from VCs go try and do a crowd sale or crowd fund and maybe that's true in some cases. But I also really do believe that you want to get tokens out into people's hands.

Teo Leibowitz Sure. And just lastly on this Reg A plus topic, do you think there is any tension between this distribution process and requiring participants to pass through KYC? What we're dealing with here is cryptocurrency and part of the value proposition is essentially resistance and permissionless. The fact that participants in these Reg A plus sales have to pass through KYC and have to be registered as it were. Is there some kind of tension there?

Nick Grossman The KYC AML regime around money and movement of money is an interesting challenge for the entire sector because part of what is so interesting about the crypto sector is that anyone can build a wallet or an app and integrate crypto currency and it just works by default and you can move value the same way you can send an email and that as an architecture is not really compatible with like the KYC regime and setting up bank accounts. We're going to see different implementations of that in different projects in different ways. Looking at thresholds makes sense. Financial crimes regulators are always looking at high value transactions across borders. That makes sense but figuring out, that's just a challenge throughout. A lot of the as far as I understand it in some of these projects how the Reg A fits with it, is that it's the transitions into and out of other kinds of crypto or fiat where that wall gets put up and sometimes there's room for transactions to happen outside of that regime. But I completely agree that it's not just about Reg A -- that this is a challenge across the whole sector

Frank Chaparro This speaks to a problem that's not just in crypto but across capital markets which is how do we get money out of just the private market and into the public through a mechanism that's not arduous, expensive and you can have a whole podcast dissecting that.

Nick Grossman And it's around friction. There's so much promise in low friction value transfer like I show up at a web page -- whether it's MetaMask or it's just my browser has some crypto assets in it and then something happens behind the scene where a transaction has happened and it's enabled something I don't even know what it is, it can be invisible like, that's magic. That is part of the magic that this sector is going to bring to consumers over time. You can't have a go get a Schwab account and go through KYC in order to onboard into the whole thing. I don't think that's where we'll end up but it's for sure a big tension everywhere.

Frank Chaparro Well we want to be respectful of your time since we're getting past the hour but since we have you and since USV is a member of the Libra association it'd be worth chatting about that before we let you go. The news around Libra has settled down a bit relative to the June launch and then the congressional and Senate hearings. I was down there in the heat of DC summer. We have seen recently though a number of headlines about them bringing on different policy people to advocate and push this thing that a lot of people are skeptical about, specifically just the the idea of this this giant in the social media space that hasn't necessarily always acted in the most proper way having this power. One of the questions that a lot of the Congress men and women and senators were asking was this question of OK sure there's going to be 100 members of this entity but let's be honest and I forget who the congressperson was or the senator but he effectively said listen we are a committee, there is a head of the committee who has more power than the other members of the committee. How does USV think about the balance of powers in this organization? Is it something that when you guys were sitting down and drafting whether it was the white paper on governance or whatever have you, this question of Facebook having too much influence over the entity. Was that something that you guys discussed?

Nick Grossman Yeah absolutely. And it's worth backing up one step to our earlier conversation around how does crypto become mainstream and the crypto architecture touch more people? That's something that we think is important and that we think will be net positive for users and innovation and creativity and so on and today there's no mainstream browsers with crypto built in, no mainstream phone with crypto built in, very few mainstream apps that have crypto built in. This project has the potential to bring the crypto architecture and exposure to lots and lots and lots of people. And that's really where we came from as a starting point and we completely get the tension and the beef and the questions and the skepticism and who knows. As of today one thing that is pretty important is to separate Facebook as and Calibra as an app on the Libra ecosystem with Facebook as a member of the association. And over time the association has the opportunity to become independent and diverse. Of course it was seeded by not only Facebook but by people that they invited in to be part of it. It's going to grow more and more diverse over time. And I do think that governance around the Libra blockchain, the Libra architecture will evolve and become balanced. I also think that Facebook at the end of the day is still going to become one of the biggest apps on the system. If I am somebody in Washington I I would want to keep trying to keep those things separate and distinguish what are the things to be thinking about and concerned about with the Libra architecture itself, the Libra blockchain versus things that Facebook might do with it and keep those separate because I actually think they're quite different.

Frank Chaparro One way to possibly quantify it would be how much manpower from Facebook is going into this, right? And the concern being you may have again one hundred members but if most of them are asleep at the wheel and not really doing anything with this then, alright it's not really a 100 member association it's Facebook doing its thing. Do you think you could quantify as a percentage maybe what would you expect the development of this thing will be coming from Facebook? Is it 70%? Is it 50%? Which would be a concern.

Nick Grossman Yeah for sure. You have to look at it over time like every project especially in this space you start off with a small closed group and if it works it grows and decentralizes over time. That will hopefully happen here. I don't know if I can put a number on it but clearly they've had the biggest role in getting this off the ground. My point of view on it is if it doesn't become meaningfully independent then people won't trust it and people won't want to use it. And so our...

Teo Leibowitz Yeah but also could you define needing to get independent. Is that Facebook having one one hundredth of power? Or does it mean the Libra Association itself opening its doors to participation from the general public?

Nick Grossman Probably all of the above. It's all just getting started and it has a ton of potential because of its ability to like reach a lot of people -- bringing a lot of people into this. But it's also extraordinarily complicated. It's in the spotlight, you've got regulators...

Teo Leibowitz I know what the investment thesis is. As a Libra Association member you also have the opportunity to invest in these Libra investment tokens and USV and other association members will contribute some funds to the initial Libra reserves and then they will have a pro rata claim to any interest that accrues to the float itself. So in my mind I think that Libra if it does launch, I think that there a lot of questions around that. But if it does launch I think that Libra can be successful and can see wide distribution while maintaining this 100 member structure. My question to you Nick, thinking as an ambassador with your fiduciary duty to your LPs your duty is to return some profit for your LPs. What will the incentives be to open up participation to a wider audience? You will potentially be losing money because you will necessarily have your claim to the interest that accrues to...

Frank Chaparro Those interests are at odds with each other.

Nick Grossman Potentially at odds. And I get the question. The way to think about our investment thesis is what you said about there is going to be an interest in the reserve. That the token holders hold that share. There is also an ecosystem effect that could happen over time. Like we would hope that this would raise up the whole sector and we have broad investments across the whole crypto sector. We really see it as an ecosystem stimulant hopefully as much as a direct financial investment. That's one piece. To clarify, on this very specific question of will the association members ever decide to open up economics in the reserve to a broader pool, it's a great question. There are a million questions about how that association is going to evolve including opening up governance, including opening up economics, including opening up participation. Charting out that path will probably be one of the most complicated things that happens in this project. This is a really not fully baked answer but I would hope that the incentives and the structure is such that by opening up to a broader group you get a smaller piece of a bigger pie. That would be the theory there but it's very very early. You're asking really good questions but we don't quite know yet and it'll be a while before we get there.

Frank Chaparro A good way to close since we have to get you out of here would be to share, you went to college with Mike Dudas.

Nick Grossman I did. He was the president of my junior class or my senior class. I can't remember which. It was just Dudas were the signs that were taped up all over campus that year with the Nike swoosh. It was very clever. So yes we go back.

Teo Leibowitz Forever the same. Do you have any embarrassing stories?

Nick Grossman No we actually didn't know each other very well back then although we have a lot of friends in common. Nothing dirty to share on air here today.

Teo Leibowitz Shame.

Frank Chaparro That's alright. Well on that note Nick thank you so much for taking the time.

Nick Grossman Thank you.

Frank Chaparro Stopping by our new offices and sharing your thoughts. We appreciate it.

Nick Grossman Thanks guys.

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