Michael Jones from Science, Inc.

Welcome to the Puck, Venture Capital and Beyond. A show that explores the evolving landscape of the Venture Capital world. We'll have candid conversations with today's VCs and entrepreneurs who are shaping those changes. I'm Jim Beer, managing partner of Bier and Troff and president of CMG Advisors. This podcast brings change makers to the table to discover the inner workings behind decision making strategies and ultimately how they got to where they are today.

We're custodians of other people's capital until we take our jobs really seriously and we have a global network of LPs that really trust us. Today we are sitting down with Mike Jones, CEO at at Science, a startup studio and venture capital firm. Mike is one of the most active investors in the field today with exits of over $2,000,000,000 including the sale of Trailblazer Dollar Shave Club to Unilever. Our conversation focuses on the newly launched science blockchain and what the future holds for all of us as digital citizens. Welcome, first of all, Mike Jones.

We're thrilled to have you here today for the DePoc Venture Capital and Beyond. And with your background, you really fit well into what we're trying to accomplish because you really were doing the brick and mortar interesting things back in the day. And now you see where the Puck is going, and it seems like you're transitioning into that new world that we're all trying to understand. So if you could kinda just share with us a little bit about your background and again, welcome and thanks for taking the time today. Thanks for having me.

Yeah. So I started my career as an entrepreneur in college. And my sophomore year of college, I began a magazine that became kind of like a nationally distributed magazine. After that, I started a kind of a small consulting firm at the very beginning of the web. So I was one of the kind of original agencies that was building websites and software for a handful of brands.

That company eventually grew up and I sold it to a partner at a pretty young age. And then I started a second company, a company called Userplane, that I founded with a handful of cofounders and that also after around five years was purchased by AOL. And after that purchase, this point I'd spent, you know, maybe six or seven years in LA building companies, working in technology. And at that point, the LA ecosystem was super thin, so there wasn't a ton of activity. There wasn't a ton of investors.

There were a handful of angels that were supporting deals, but I found that there weren't great mentors for CEOs or entrepreneurs to connect to to try to figure out how they would go on this path. I began doing that. So I became a strategic advisor to a handful businesses and then started also being an active angel. After my time with AOL, I joined a private equity firm where I ran one of their companies and sat on a board of a handful of companies. And I really enjoyed going from the small privately held company to companies of larger scale with much more scrutiny, with much more financial discipline that kind of private equity represented in me.

So I really enjoyed that education. After we sold those businesses, I was recruited in to become the CEO of Myspace. John Miller, who had acquired one of my first companies today well, was at that point the chief digital officer for Rupert Murdoch, and And he put together a new operational team to kind of take on Facebook. And it was right at the point of Facebook eclipsing MySpace and traffic and they decided to change management to see whether there was a new strategy. I ran that around five years and ended up selling it off in three different large transactions to get it out of News Corp's portfolio because it was basically impossible at that point to fight Facebook.

And then after that, I portfolio because it was basically impossible at that point to fight Facebook. And then after that, I started science with a handful of operators and partners and we came together to build science, which is my current firm. So tell me, how does science differ from the traditional VC model in LA? Well, I think it differs from the traditional VC model kind of anywhere in that. My perspective was that capital wasn't the answer to most entrepreneurs problems.

You know, what I found was that I'd come across in my career, like, numerous great entrepreneurs that had these big visions of businesses to build, but they didn't have a lot of experience of how to actually build these companies. And they may or may not stumble in the capital, and they may or may not have great supporting board members. But when it came to the kind of day to day strategic operations, there were always things that they need to learn. The second thing is I found that early stage entrepreneurs have a horrible, I guess, lack of information as it relates to raising capital and selling businesses. And there is this complete fracture between what VCs know and what entrepreneurs think they know.

And suddenly, I felt like, gosh. If I was sitting in a room with these entrepreneurs and we were helping them actually build their businesses and we were helping them negotiate their rounds and working with them as more of a strategic operator, strategic partner. And then, my gosh, if there was ever an opportunity to sell that business, I bet we could generate a lot more value for those entrepreneurs. I also felt that, you know, the number of angel companies that I had seen go out of business because of poor operational strategic decisions could actually be reduced. So my thought was if we put a lot of smart people together in a building and we hosted these CEOs and hosted the early stage companies, we worked with them hand in hand much more like operators than investors that our hit ratio of companies that would survive should be much greater than traditional venture.

And that was the beginning of science. And then how did that lead to becoming an investor in Dollar Shave Club? Well, so Dollar Shave Club was one of the first portfolio companies that joined our family. So, you know, when we opened our doors, which was originally at a kind of a shared co working space, we'd originally raised $10,000,000 and we're still negotiating our lease, but we had a bunch of shared space. We moved in maybe six or seven companies.

Dollar Shave Club was one of those businesses. Dog vacay was one, MeUndies, and a handful of others. And just to the thesis that I mentioned, we started working with them hand in hand. And that meant strategy, operations, technology, design, hiring, and then fundraising, and then eventually m and a. And we found that these companies actually did exceedingly well.

And so we ended up raising more capital, moving to a bigger facility, and building a larger portfolio. But Dollar Shave Shave was a fantastic entrepreneur that came to talk to us about both investment and working with us as a strategic partner. We carved a deal with him and went on that four year journey of getting his company up to a point where it eventually got acquired. So let's move to the blockchain and the new direction that you're going in. And I assume this is complimentary as opposed to taking the place of science.

So tell us a little bit about science blockchain. Sure. So in the spirit of science, you know, science is a early stage incubator that has a follow on venture fund and we work hand hand with these companies to build up best of breed practices. We found the same need in blockchain. Right?

So blockchain in the entire crypto space is a super complicated space. It's complicated technically. It's a new way to approach businesses. Certainly, the financing aspects of these companies are very complicated. It requires a nuance set of services and partners to make sure that you do this right.

And there's a bad consequence if you do it wrong, both from a technical and from a legal perspective. So, you know, in that same spirit, we said, well, we'd like to do something meaningful in the blockchain space. We had looked at incubating companies in crypto four years ago. We'd invested in the CoinDesk and a mining operation. We built a lightweight coin based competitor.

And we had pulled back four or five years ago because the legal landscape was too complicated at the time. We ended up just sitting on some bit coin and doing some light trading, but we kinda shut down our operational companies. And at the beginning of 2017, we decided we wanted to do a new dedicated vehicle for blockchain. And so we initially had to come up with a pool capital, so we decided to do a reg d private offering as a fund that would eventually have a connection to a token. And so CYENS was the kind of second company to do an SEC exempt Reg d offering as a token sale.

We completed that sometime late two thousand seventeen, and that pool of capital funds the incubator that works hand in hand with companies building what we would consider meaningful technologies on the blockchain. So being a student of the blockchain, I think I understand the beginning of it. And also reading about all the ICOs that are being done offshore, that are being done, in my opinion, in a reckless manner, meaning that there's gonna be a reckoning. Part of what is unique about what you're doing is, as you said, you did it as a reg d offering. What kinda led to that going into this space but doing it as the SCC friendly approach?

You know, we're custodians of other people's capital and so we take our jobs really seriously and we have a global network of LPs that really trust us. And certainly, we're not gonna do things that risk our reputation or the capital, the people that we work with. We felt that as a fund, because we are really truthfully a fund and an incubator, it was a security. What we're doing is a security. And it was necessary to do it the absolute right way even if people have been doing what we're doing the wrong way.

So we chose to do it that way, and we chose to take what we would consider the most conservative approach to doing these things and doing everything as compliant as we possibly can. One thing I would note though is that there's certain aspects of not only the legal component of it, even like the tax component, which we still find super confusing. And we do a lot of work to try to determine the right way to approach these reporting issues and these tax issues to be completely compliant. And I think that we're trying to lead that charge, but it's still unclear what the right approach is. And to your point, there's a lot of offshore offerings.

And this is the first time in my career where I find that entrepreneurs and technologists have to spend a lot of and technologists have to spend a lot of time having the strategy of their companies dictated by legal policy. And a lot of them are starting to ask me questions like, why am I building this company here in The US? And as a, obviously, a citizen and someone who builds a lot of technology companies in US and likes The US to have that advantage, I don't really like to hear that because then I started thinking like, gosh. Is this gonna eventually lead to us creating more technology companies overseas and that maybe reduces some of the core value that we're driving to The US around innovation. So walk us through a little bit of the process you went through to actually launch your ICO.

So our process was vastly different than most of the ICOs you see. First off is doing a Reg d offering itself is expensive and complicated. Doing one where you have to deal with the Reg s as well, which allows us for international accredited investors also purchase is complicated. And then knowing that we have to have transfer restrictions off of our tokens post issuance, it's complicated. What it really meant was, like, with six months, it was well into the hundreds of thousands of dollars in cost.

It continues to be costly, inexpensive to run that vehicle, being it in a compliant fashion. And, we were highly restricted off the investors we could talk with because we wanted accredited investors only. And restricted off the investors we could talk with because we wanted accredited investors only, and the investors had to be comfortable with the lockups and the lack of traditional changes that we transfer our tokens. So I don't think our ICO is a good representative methodology of the past ICOs. It might be a good representative of the ICOs that could be happening more in the future, which is what does it mean to do an accredited reg d offering.

Now on the flip side, the ICOs that we see sometimes participate in and get pitched all the time are obviously doing very different processes. And we've seen ones that are completely oblivious to the potential laws they may be breaking, and they're just wildly selling their tokens to kind of anyone who contacts them. You know, we've seen ICOs that obviously just tweet out a Twitter address. And if you send tokens to that address, you just get bounced back their tokens, and that's the entire ICO process. And then we've seen ones that are extremely thoughtful.

I'd say today, we like private placement offerings that eventually may or may not have a token component. We like high structures around those. We like very thoughtful mechanisms on the way that people are designing those offerings. We want a lot of legal work to be done on those offerings. And I think that well, one thing to notice, if you're an entrepreneur and you're trying to raise between 5 and $25,000,000 for some piece of technology you're gonna build, Right now, an ICO or whatever you call it, a private token offering, whatever the language around, is by far the most complicated and difficult way to possibly raise capital.

I would argue that if you're a great entrepreneur with a good set of technology, you should just focus on venture capital. That is why that sector exists. Maybe it's limiting to you. Maybe they have biases against you and you've chosen not to go through that path, but you're taking the absolute most risky position to go into this ICO, especially if you're in The US, which means that you better have a really good reason of why this should exist as a token and why you want to eventually get there. I'd also say that there's a lot of law firms that I don't think understand the space at all and they give a lot of really bad advice.

And I'm not sure the entrepreneurs understand that they may have some personal liability over very bad advice. And so by going with a cheap law firm, which may or may not totally understand these offerings, they could potentially be putting themselves in harm's way in the future. And so we try to distance ourselves from those offerings. And I try to warn those entrepreneurs like, look, this may feel like fast and easy capital right now, but there's a lot of strings that come along with it and you have to be really cautious about it. So why did science blockchain decide to do an ICO with all these bumps in the road out there, so to speak?

So we thought about it deeply. Certainly, if we wanted to go raise 12 to $15,000,000 for an incubator, we can do it in a lot of different ways. Our belief was this. We believe that tokens represent a completely new way for equity to flow and value to flow between individuals. And that's super compelling.

I think that the infrastructure blockchain will be used in a lot of different industries. With or without tokens, it's a really incredible thing happening. We felt that if we were going to be developing companies in the blockchain space, we conservative way possible, which very few people, if any people, had really done before, which is why we chose the methodology we did. But we felt like that was the actual true way to to do it. And to be totally honest, in the cost of it and the economic benefit to us that did it, we probably would have been better economically to do a standard private offering or a standard private fund.

But I don't think that's what we wanted to learn. You know? I didn't wanna go out and just say or my team wasn't like, oh, let's just go out and figure out how to wrestle together $12,000,000 to build some companies in the blockchain. The thought was we're witnessing a new rise and a new type of technology. And one of the benefits is this tokenization.

And this tokenization can have a lot of impact and positive impact to equities and value. And so if we're gonna do it, let's learn. Let's do it the way that's being done. And so I think we came out of that process much wiser than when we started. And I think it makes us great partners for people that are trying to build things because we can really talk them through our approach on this.

But certainly, we chose a very difficult path in order to do it, which would have been much easier through just a standard capital raise. So let's get into what the actual science token is about. Can you take a minute and tell us about how the token works and what's unique about it? Yeah. 100%.

So, you know, we did this, as I mentioned, this reg d. We used the reg d exemption to do a private offering to accredited investors. Those accredited investors received the science token. The way that the tokens are distributed has restrictions. So US holders are not able to receive that token for a year.

Some different international countries would receive it prior to a year. It's not listed on any exchanges because right now there's no registered ATSs. In theory, it could be listed on exchange, but it would have to be pursuant to other restrictions around transfers. Like, for instance, we don't wanna breach our 99 investor rule, which would mean that we have to restrict the way that our tokens can be bought or sold. With all that said, the way they work is actually fairly fascinating.

So with the way we designed it, which is again, like, really true to Ethereum and some neat principles that Ethereum allows, which is that if we make an investment or we take a position, and we incubate a company. And let's say that we receive tokens in return for those services that we provide or that investment that we make or however we design our, you know, our relationship. What we do is we take roughly 70% of the proceeds that we receive relative to that action, and we actually distribute them on a pro rata basis to all the science token holders, which will be done through what we call public snapshot. So what we do is we announce that we're taking a public snapshot of science token holders. And our smart contract executes a snapshot at that time that we publicly disclose of what wallet addresses have which science tokens at what level.

Then we take that wallet snapshot and then we execute a second smart contract function where we distribute the token proceeds that we'd have from one of these activities on a pro rata basis down to all the science token holders, which is almost this kind of dream venture fund. Right? So one of the problems of venture funds is that as an LP, you might make an investment in venture fund. The venture fund may make 30 or 40 investments, but you as the individual LP typically don't take possession of any any of those investments. You rely on the management team to make those decisions or the the investment team, and they may or may not go off and sell those things.

But because tokens often have liquidity, we felt it was the right answer to basically distribute the proceeds of any of our activities down to our individual science token holders. Which means that a science token holder, you know, you basically get here an announcement of like, hey, we're taking a snapshot. There's a, you know, there's a proceed distribution coming to you. You then, in theory, would log into whatever wallets holding the science tokens and you would then see a new type of token that was sitting inside that wallet that would thus be your pro rata allocation of that snapshot. You had mentioned before that there's some interesting tax issues floating around there.

And my mind just starts to spin as you're talking about this. I mean, again, is it an offshore person? Is it a person in The US? Is it just up to state taxes? Yep.

Federal taxes? Is it capital gains? Is it ordinary income? That's right. Is there a double taxation?

Is the company paying the tax? Yeah. So how have you started to wrestle through those issues? So we spent a lot of time upfront on the tax structure and came to a conclusion which I'm probably not qualified to walk everyone through as far as us feeling comfortable that we had the tax issue solved. And I think it's all spelled out on our offering memorandum.

Luckily, I have two great partners with me. One's an attorney and the other one's our COO, CFO. And then we have, we have a lot of people that worked with us on the offering. But you're exactly right because at the end of the day, we're distributing these sub tokens down to our token holders, and we need to make sure that we're compliant and we issue any kind of appropriate reporting. We've actually also designed a system which we haven't publicly released yet, which allows us to send official documents into people's Ethereum wallets.

So one of the things that we also thought through was, gosh, if we wanna release a document, and that document might be a specific type of statement, and we wanna make sure that that document ends up in the wallets of anyone that's holding precautionary measure, how would we do it? And so we built a system that will eventually turn on live for kind of anyone to use, where if you wanna distribute something official down to all the wallets, you can actually use the system. And then you can encrypt the document or store the document how you need or put on read receipts on the documents so you can assure that your token holders actually receive something official. Because obviously, as everyone knows in the blockchain world, you know, we're all sending these tokens to these anonymized wallet addresses and it creates a really big issue if you wanna send something official to the holders of those tokens. So we also designed that system to further allow us to kind of inform people if there were issues that we had to notify them around.

What's also interesting about what you're doing is having been to several conferences and hearing the regulators talk about this and being really in the dark dark and not knowing how to be educated about this. It's almost as if you're positioning yourself where you can really be a source of information as this develops for the regulatory climate because there's a whole generation, whether or not it's the SCC when they were writing the 33 act or the 34 act or writing reg d rules, that they don't know. They're like deer in headlights. They're looking at this. They do not wanna clamp down on the next generation of entrepreneurial energy.

Yeah. On the other hand, they wanna try to understand it, and they're gonna need people to explain it to them so that they do have an ability to appropriate regulate it but not over regulate it. And I think that they don't wanna to your point, they don't wanna scare innovation outside The US. And they also don't wanna destroy value of Americans that might be holding crypto in whatever form they decide to hold it in. So it needs to be a cautious dance.

I mean, the good part is that they've been slow and methodical over their releases, so we're good with that, versus other countries that have made kind of big bold statements that have been somewhat terrifying to their citizens. I think that they are committed to figuring out a solution through it. I think they have alerted a bunch of companies, obviously, like we've read about in the news on trying to learn more about what they've done or how their offerings have worked. And, yeah, as hopefully what is considered a premium firm, we wanna do it the right way. And so I'd like to be the place that companies with meaningful technology and big vision and great entrepreneurs can come to and we can help them navigate this complicated space.

It sounds like you've been building a fascinating framework. But when we talk about marketplaces, I know that in the virtual good space, working on the blockchain has created a lot of opportunity when dealing with cross border transactions. But the goods have digital form and can practically move instantaneously. I wonder, have you seen or is anybody talking about how to actually do that with real goods? So I've seen, yeah.

We were talking with and working with a company looking at doing it for physical goods in a marketplace setting, using escrow functions, and creating a global sellable pool of data that would eventually that would transact real goods. So we're thinking a lot about that. That. It's a completely natural position for the blockchain. The other sector that's talked to us a lot about this is film and music.

That either they're selling rights or they're selling, you know, they're selling media across border globally. Some of them do wanna enable secondary transactions of their goods, don't. You know, obviously, Apple plays the biggest role in that space right now, but there's a lot of people with digital IP that are super interested in the way to enable global commerce of that IP. So you just triggered something in my mind with music Mhmm. And with film.

Mhmm. Pirating is this huge issue. Right? That's right. You launch a movie in Hollywood and the next thing you know, it's out there in China.

It's on your iPhone. You can get it for free. Yeah. From a digital perspective and from a Hollywood perspective and music, does the blockchain start to solve some of that issue? So there's a piece of it that it does solve.

It's funny. When I was running Myspace and I went out to China, I remember my office in China showing me this website that you could go to and you could download all the m p threes. And I was sitting with the entrepreneur that ran this website and I said, this is crazy. Why can I go to your site and download, like, for instance, the entire Beatles catalog in the m p three form? He's like, why have a license to do that?

And I'm like, how do you possibly have a license to allow he goes, well, listen. The piracy was so bad that the music labels gave me full right to allow individuals to download songs, assuming I rev And my jaw dropped. Right? I'm like, wait. You're telling me I as a US citizen can fly to China, download every song ever created through your website, fly back to The US, and continue to use those m p threes?

Threes? And he's like, well, I don't worry about what happens to the IP after you fly home. But you are not breaching any laws. This is a completely legal website and we have all the rights for the music labels. So it just shows that the problem of piracy was so big that they were willing to take pennies on the dollar for banner ad revenue.

And this is of course like ten years ago or something. So then you ask yourself in the blockchain. Right? So one area of music that I've been super fascinated with is as a kid, I could always sell my CDs. But as an adult now, if I own a bunch of m p threes or Apple forces me to buy this movie because the rental window hasn't expired, why can't I sell it?

Right? Well, you can't. Because Apple right now doesn't facilitate you through a DRM mechanism to resell your goods. But we used to be able to do that. Right?

You used to be able to resell your DVDs and CDs and it was your IP and you could transfer to a friend or give a different whatever. So it's a big hole. Right? Well, in The US, in a world where we're all very comfortable spending 1995 to watch that movie at home three weeks before you can spend $3.99 as a rental, I don't think the music companies or Apple's gonna change their policy because we're all not really showing resistance. But in other countries where there is vast levels of piracy, if you did enable a blockchain DRM solution that allowed people to buy and sell and trade music or film, you might actually find that you could allow the labels and the film companies to participate on the secondary transactions because the IP in the DRM was being controlled through blockchain.

Well, that would mean that if I was in China and I bought a movie for whatever I'm gonna buy it for, and then I eventually sell it to you, then that studio can participate on the secondary transaction, which they've never been able to do in the past. So it's even better than what was happening when we had physical CDs and DVDs. So I think in areas to your point where there's large amounts of piracy, if somebody were to create a market place that allows the secondary sales of media and you actually had the labels, you know, and the studios kind of participate in that market place, they could actually see a revenue uptick versus what they're currently losing through piracy. So currently, if I wanna watch a movie, I can go on Amazon, I can go to Netflix. If they have it in their library, I can rent it or otherwise see it.

There's these libraries out there and a lot of times they're in deep storage and no one even knows these films exist. How might an entrepreneur take advantage of that and create a platform for the rest of us to be able to actually go watch these movies? So, yeah. There's an interesting idea there. So you first have to start with the concept that right now, the media that we all consume is super restricted because we basically have a single curatorial platform which let's just use Apple for example.

So either Apple has the films up on the home page and in the category selector or they don't. Now let's say that you're a studio. You're MGM and you have archives of everything. MGM's Bond. Right?

They have every Bond film known to man. Right? And you think to yourself, gosh, it'd be so great if somebody came forth and wanted to remarket our Bond collection. So right now what you're gonna do is you're gonna phone up Apple and be like, we really wanna remaster and relaunch Bond. And they're gonna be like, you know, we're really busy and we only have like six spots on the home page and guess what?

You're not gonna get one. Right? But in theory, if you had a global DRM system, which basically would mean that there was a smart contract, there was a viewer, and there was a token. When I went to the viewer to watch a Bond film, it would check with the smart contract that I was the holder of the token that represented my ownership of the bond film, and then the viewer would allow me to play that bond film. And then if I transfer that token to you, you would then have the token around the bond film.

So if you had that basic system of a DRM capable viewer talking to a smart contract that facilitated the transfers and facilitated DRM do a token that represented ownership, and you did allow your back catalog to go into that space, then you could have thousands of websites, and thousands of editors, and thousands of marketers, and thousands of fans that could then be talking about your media, helping sell your media, facilitating the sell of media. You could even commission them off of the sale of that media. You could create secondary marketplaces over that media. You would allow the audience to then kind of rise up and bring awareness to this back catalog, which for for you right now is just gathering dust in a giant warehouse. So Mike jumping into what science blockchain is doing and this notion of incubating and helping people that are trying to get to know this space.

Mhmm. Can you help us understand what types of applications you're currently seeing with the blockchain and how you see it evolving? Sure. Let's just split the companies we're looking at and seeing in kind of two buckets. There's areas that people wanna use the token as a global method to raise capital.

And let's just call that a pure security. And what we're seeing there are sectors and industries that have been left behind by venture capital that have large capital needs, sometimes attached to fantastic projects that have positive global impact, but they currently don't have an investor base. Right? So we see a handful of those. And one that keeps coming up in a strange way is cleantech, where they need a lot of upfront capital.

They're doing very positive things for the planet. We're seeing very experienced operators come to us with these big projects, but it's not right for VCs. And they typically have some private money committed, but they're looking for alternative sources of capital. So we see a lot of very interesting offerings that are truthfully security tokens and security offerings that we're kind of evaluating. On the pure technology side, we obviously see a lot.

And as everyone would expect, we see a lot of projects that have literally no business building on the blockchain and they have no actual purpose for needing a token. The main reason to do it is to obfuscate their need for venture capital and reduce or remove any kind of equity dilution and they're using this as an alternative fundraising vehicle. Those are not super interesting. The interesting projects or one one sector of interesting project that we like to think about are areas where we as digital citizens have a portfolio of data that is attached to us that is currently contained or owned by a singular company. So this could be highly relevant today in the Facebook data breach.

It could be the way you think about LinkedIn, your LinkedIn data. It could be the way you think about medical records. It could be the way you think about your credit scores being held by Experian. And you might start asking yourself, well, gosh, I would like a global public utility data pool that's autonomous, self supporting, that I have control over, where my data is, how it sits, who has access to it, and how I revoke access to it. My data is, how it sits, who has access to it, and how I revoke access to it.

I don't want it controlled by any singular corporation, and I would like to know that I have kind of individual ability to add to it, to potentially remove things to it or to protest things on it, and then to grant access to certain people. That's a really interesting category. Right? When you start thinking about the need that we have as digital citizens for autonomous data repositories. And suddenly the blockchain becomes a really interesting solution for that because you have a system that can be self supporting.

You have a system that can't be controlled by any single corporation. You have a system that can pay its own bills through tokenization. It can incentivize people for participation. And suddenly you also think, what would the world look like if we had anonymized medical records in a blockchain and you could have researchers globally query information that suddenly right now is completely locked up? What would it look like to have my credit not being held through Experian or my Facebook data not completely controlled by Facebook?

So this concept of kind of autonomous data systems becomes really fascinating. We're seeing a lot of them. Some people call them marketplaces. I kind of think about them more like public utilities. And we're seeing a lot of people pitch us these concept of public utilities.

So that's one sector of business that we see that we like a lot. Yeah. And with all the news lately with Facebook, for instance, and making the information available, I also was with a young entrepreneur recently who was saying that they were thinking about going into a different direction, but their, quote, their identity was so out there in Facebook that there was no way to go back and unring the bell, so to speak. So we are living through this revolution and how it's evolving. So as you said, bringing it down, giving people an ability to control their data makes a lot of sense.

In terms of how entrepreneurs are gonna monetize that, can you help explain where you see an opportunity for somebody that wants to start one of these companies and actually how do they again, we understand it from the perspective of equity. Right? You own equity. You sell the company. Yeah.

How do you value these tokens? How do you monetize it? How do you come up with projections and actually bring it down into a scalable business? Right. So it's definitely a different mindset.

So if our thought is we wanna design a global credit scoring system or a global medical record system and our intention is to never allow it to be sold, then one thing you have to consider is that equity is trapped value. Like, suddenly you're not wanting to really own a piece of that company because in essence as an investor, you would never potentially see liquidity if the vision of that company is held. Right? So suddenly tokens, which in a certain case represents obviously access in and out of a system, but it can also represent almost like a portion of future proceeds. And so if you thought to yourself, well, I'd like to design a global medical record system.

It's gonna have an ultimate taxonomy of health and I'm gonna let countries, you know, deposit or individuals deposit information to this repository and have a granting system back to hospitals and medical providers you may work with? You might design a system so that a local doctor's office might have to pay in tokens in order to have access to that system. And then the nodes that would be running that system would then receive a portion of those proceeds or portion of those token payments to incentivize them to continue running that infrastructure for all of us. Right? As an individual, I may choose to also grant my anonymized data to researchers for free because I want them to do research on something that maybe I'm concerned about.

Maybe I won't do that. As a user, I may also have the ability to revoke access back from a hospital or doctor's office. But, you know, similar to systems we've seen in the past where companies pay for bulk level API access, which is kind of a known business model, typically, if we were creating a giant information repository, the standard business model would be identify your current kind of core corporate users and then have a scaled billing mechanism for them, which in this case would be done through token purchases. Do you see other applications of Blockchain as replacing some of the VC backed Internet companies today for commerce? Do you see a role for it in that area at all?

I do see a role in certain areas like marketplaces is one that's obviously super logical. You know, you pay a large fee when you list and sell goods between individuals, whether that's off of the amount you might pay to Visa or, you know, your payment methodology, but you're also paying a large platform fee. And a lot of people are asking themselves, why can't I list something for sale and have an individual purchase that, and why do I have to pay a large portion of that platform fee to the company that's just facilitating the purchase between two people. So there's a big view around marketplaces. Right?

That makes sense. Now that's not as simple as just a consumer commerce, but certainly marketplaces represent a lot of volume and a lot of revenue. Certainly, like, a big global marketplace solution could potentially take a bite out of commerce. Right? That's one area that could be interesting.

Well, and when you speak about that change, when you look at the world of retail right now Mhmm. And you've got Amazon at the top taking over the world so to speak. Right. And then you have these retailers whether or not it's the Toys R Us that are just decimated by this. Yeah.

Do you see a way for some of these suppliers and retailers who are being decimated by Amazon to create a more level playing field and to create an alternative to Amazon? I think it's more likely you could see a marketplace solution that could create an alternative to eBay versus an alternative to Amazon. That'd be my general sense. I think with Amazon, I as a large Amazon, probably all are large Amazon consumers at this point, like, I pay money to Amazon for convenience and for me that convenience is really in time. I use a product that we invested in called Ernie to make sure that they always give me the right price because Ernie request price refunds on my behalf based on my Chase card if Amazon doesn't give me the right price.

So suddenly, if I know that I'm always getting the right price through Amazon and it's super convenient because the time to delivery is super low, that's a very hard thing to compete against. On the flip side, you know, if I was buying goods from other individuals through marketplace and I wanted to find it for the absolute best price and connect to that individual in some logical way that didn't go through an intermediary like eBay or Craigslist or something, blockchain's a much more logical solution. Do you see in terms of the talent of entrepreneurs in Los Angeles, as you were talking about this, this ecosystem is growing and you've got more people choosing Southern California as a place to build their businesses. Do you see a lot of interest in the blockchain with these new entrepreneurs and a lot of energy going into creative approaches to where the world's gonna go? Well, I think that in markets where venture capital isn't plentiful, suddenly blockchain looks like a very innovative way to develop your company and drive value.

Right? And I'm sure that blockchain is super prevalent in San Francisco as well. But knowing that there's so many options for capital in San Francisco and there's fewer options for capital in LA or these alternative markets, I think that Blockchain becomes a pretty interesting thing. And I'd say that of the pitches I get, we see pitches that are coming out of cities globally that I would never consider having strong levels of technical innovation because we would just never have seen their companies. And suddenly, I'm finding that they're actually successfully raising large portions of capital in order to develop their businesses.

And I look at these companies thinking, like, well, it would have been hard for any US based VC to justify this individual investment, but suddenly this seed stage, series a stage company has a $20,000,000 ICO completed, and they have capital now within their kind of local region. They're gonna develop this technology company. That probably wouldn't have happened in the past. So I think the disruption of VC is probably more prevalent in areas outside of large VC concentration like San Francisco. Inside San Francisco, this is probably equally exciting, but maybe not overtaking venture capital interest.

It's interesting. You mentioned that you think there's a somewhat unique role that LA or Southern California is playing because there is less VC capital in LA. And so as a result of it, people are seeing this as an alternative. Yeah. Does it concern you at all that some of the people that have gone out this and haven't done it in the thoughtful way you have in terms of dealing with the SEC that there will be some regulatory backlash as a result of that?

Yeah. I mean, I'm I think we we broadly assume there'll be regulatory backlash off of people that have either committed fraud or illegally traded in securities or haven't built the products that they said that they were gonna build. That makes me super nervous. I assume that though coming out of this, they'll hopefully be clarity on how we do these types of private offerings. There'll be clarity on how tokens will be treated in the future.

There'll be a more clean path for how entrepreneurs could build their businesses if it makes sense for them to be logically distributing tokens. And then we'll end up with really healthy companies. But certainly the first burst which really happened last year, there's gonna be a bunch of junk that probably needs to get cleaned out. So when you're incubating or investing in these companies, are you buying traditional equity in these companies or are you taking tokens? I mean, it it just depends on the company.

You know, in most cases, we're obviously looking to be equity holders. Right? If we think that value is gonna switch to something that's interesting in tokens, we'll, of course, look at tokens. You know, our concern is obviously, we don't wanna be purchasing things that we think eventually will be repossessed by the SCC or forced to shut down because of a improper offering. So we're very cautious about it.

And there's certainly investors in the space that will make way more capital than we will because they'll have less restriction over what they do or don't decide to touch. You know, the other thing to note is because we're using capital driven through our ICO, we have to distribute the proceeds of these investments we make down to our ICO token holders, which means that we have to be highly sensitive because they're also gonna be receiving these products as well. So we're gonna take a much more conservative role than other people will. But I still think, you know, we're gonna end up with great returns and there'll be great companies that'll come out of it. So this is a little off the wall.

But in the same way we're seeing these new subscription models for going to view a movie Yeah. Where you're spending your x dollars and then you get to go to unlimited movies and so forth. Mhmm. Do you see any role of tokens in the ability to use tokens, for instance, for a retail experience of some kind? Whether or not it's for food or whether or not it's for entertainment?

We see a lot of pitches that are a hybrid of payment equity loyalty. Where it's like, well, you know, you own a piece of the coffee shop, but you can use your ownership and tokens to pay for the lattes at the coffee shop and you can get rewarded in tokens. Every time you buy a latte in cash, you get additional tokens as a loyalty system. There's two problems. The first is a lot of consumers say, oh, that'd be so hard for me to track all that stuff.

But then I started inventorying the number of loyalty value that I have. And I have tons of loyalty points. Right? My coffee shop has loyalty points. My airlines have loyalty points.

My credit cards have loyalty points. I've got loyalty points all over the place. I've got game credits and games. Like, I already have a giant portfolio of digital tokens. I just can't sell them and I can't transfer them.

Right? And half the time I forget them because there's not a single wallet that shows me my American Airlines, my United Airlines, my Chase points, my Amex points, my whatevers. Right? So I would argue right now that we're already there. The second problem is that, obviously, in The US, this concept of equity bleeding into payments, bleeding into loyalty is a real messy place.

Because we've never thought before, well, gosh, I'll buy $25,000 worth of Apple stock. And then when I go to the Apple store, I'll spend my Apple stock on buying Apple products. And then if I promote Apple as a number one influencer, I'm gonna get paid in Apple stock. Right? So it's a beautiful vision, but it feels like we're very far from having the regulation in place that would allow us to do that.

But I love the idea. Well, in in terms of old technology or old industries being displaced, for instance, we're doing a podcast right now. But twenty years ago, we did newsletters and so forth. If you look at things like co ops Mhmm. Where people would actually join a co op and be able to go in and then buy food at a discount Mhmm.

This is kind of a more evolved co op, it seems like. That's right. It's definitely this conversion. I mean, REI has done this model for a long time. There's been food co ops that have been highly effective where both co owners plus purchasers end up with a better incentive to basically use the platform.

It also drives loyalty. Right? And that's the other thing that people have been trying to use through loyalty points, but maybe not as effectively is you wanna create a community of people that are highly incentivized to the success of your company. You want them as customers, but you'd also kind of like them as owners. But you're exactly right.

Like, the co op methodology, the loyalty point methodology is colliding here. Well, and you also look at things like Amway, where you get points and the more people you bring into the network, the value goes up. And again, if you look at Jim Sinegal and the brilliance behind Costco's club membership or Prime with Amazon Yeah. Or you look at what the ski industry is doing right now where they started with a membership or a season pass for one ski resort. Then they consolidated and you're forced to buy a ski pass that now gets you into 18 ski resorts.

Yeah. So that's where the world is going in ways that we can conceptualize in terms of having American Airlines points or credit card points and otherwise. But the tokens, it seems to me, is just a whole another revolution of that. That's right. Well, and if we think that computing was built on the idea of copy and paste, like everything was copy and paste.

The backups, clones, emails, like everything's copy and paste. Everybody got duplicates of everything everywhere. So it really took the concept of something that couldn't be copied. Right? Suddenly, we have something that can't be copied.

It's a irrevocable, ubiquitous transfer mechanism between two parties or two digital wallets. Suddenly with that framework, you can build things that you couldn't build in the past. And so I think you will find worlds where people do wanna transfer those airline points. So they do wanna transfer their membership levels. And they do wanna token that represents the digital ownership over these things that can't be copied, but it can be transferred.

And suddenly, if you think through that there's a lot of neat things that we couldn't build in the past that we can build now. I hear what you're saying but at the end of the day sometimes it just takes jumping into the deep end to see where innovation will take you. Yeah. I agree. Trading, touching tokens, holding tokens, reading those white papers, understanding the way that the economies work inside them, seeing the exchanges, seeing the transfers, meeting the entrepreneurs.

It was the only way. Generally, my whole life I've learned by doing. This is just one more experience of learning by fully emerging ourself in it. And I do agree that there's really amazing things that will come out of it that could change the way that we do own things or do pay for things or do transfer the ownership of things. I think it'll end up somewhere in the middle.

Like, it's certainly not gonna be completely unregulated, unlimited token offerings, no valuation, no clear ownership rights or votes. There'll be something between today's current equity structures and maybe tomorrow's token value structures. What I'm curious about is how fast that happens. Join us next time when we talk to Matt Koslov, managing director at Techstars, one of the largest accelerators in the global tech ecosystem. Matt shares what drives them to create a synergy of investors and entrepreneurs across a vast spectrum of markets to bring disruption and innovation to businesses around the world.