Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Samuel Harrison is Founding Partner at Blockchain.com Ventures, a Venture Capital Fund anchored by Blockchain.com & Lightspeed Venture Partners. Previously he led Naspers Ventures early-stage tech investments and blockchain efforts, was Apple featured iOS app publisher and Angel investor in 30+ companies.
If you’re raising capital for a blockchain project, please reach him out. Invested in Origin Protocol, Theta.tv, DappRadar, Nodle, Securitize, Zerion, Enjin, Amber, Wintermute, Blockdaemon & more.
I started my career at Morgan Stanley in London, with a finance background. But I found myself spending quite a lot of time in the tech world. I was building apps on iOS during my spare time and Bitcoin was also new dabbling that was discovered by accident.
My housemate at that time was paying me his share of our rent for the house in Bitcoin. And recently I realized that I was spending more interest and more time on that than I wanted to spend on the traditional financial world. Two things combined plus ventures give the obvious outcome, which is technology plus finance plus business. These are all the things that I really enjoyed.
How did I get to Blockchain Ventures? I joined a large investment firm called Naspers in Singapore in 2014 because I had owned some Bitcoin before that. The crypto sector was one that I was responsible for from the beginning. I spent quite a lot of time getting to know the various different participants of that sector, as well as education, healthcare, food delivery. But crypto got in 2014, 2015, 2016, and of course in 2017 really exciting again. I met Peter Smith, the co-founder and CEO of blockchain.com along that way. In 2018 he decided to launch a venture fund, which is Blockchain Ventures and asked me to come and start it fundraise for it and get it set up and running. That is my story of landing into the venture investment industry.
Our fund is focused on blockchain technology and our purpose is to figure out which sectors are going to use blockchain fast enough to make a good financial return for investment. What’s the purpose of all of this? We think about it. Maybe it would be gaming, e-sports, or digital collectibles. They will probably adopt blockchain quick enough for our fund in marketplaces, cross-border finance, and decentralized finance remittances.
They might probably adopt blockchain fast enough and then there are some other sectors, maybe insurance or other bits of finance. Maybe they could adopt blockchain to some extent and probably will exclude some other stuff in education and health care. There are a few slots, traditionally quite slow to adopt digital technology and innovative sectors that probably won’t use the technology quickly enough.
The crux of that is we invest in anything that we think will adopt blockchain in a useful manner to provide some kind of utility and more efficient service through intermediaries within the lifespan of this fund for the next five or six years.
I think it’s going to be impactful, crisp, and cool. I think biotech and specifically gene editing is fascinating, but it is beyond the remit of our fund and my understanding of it as an investor.
We are technology agnostic, but there are some regions that we don’t understand that we won’t do business there. We haven’t done any deals in Japan or China. We don’t understand these regions very well. I have historically done deals globally because Procus Ventures, my old fund was a global investor. I did deals in Eastern Europe, South America, North America, Southeast Asia, and India.
It’s the same for Blockchain.com Ventures. We’ve got portfolio companies in Singapore, Hong Kong, Argentina, Lithuania, UK, and North America, and we have looked at many others in other regions as well. We are global, but there are some regions where we are not able to operate or we don’t want to operate. Obviously, we skip them. Also, we don’t want to be dumb money. I think, if you don’t have the right connections, you haven’t done deals in those regions before you understand how things work, you have risk being dumb money. That’s why we avoid certain regions.
Nothing unusual. One that immediately comes to mind is not a venture fund investment but an angel investment. It is a music studio or set of studios for digital creators in London called The Cube. They don’t like this analogy and it’s not perfect, but it effectively works for creatives. You can book and drop in on a soundproof room in recording studios. There is all of the various equipment that you may need to do podcasting, e-sports live streaming, song recording, and music production. And because of that, it is a community of creators that can collaborate because they see each other next door, in the lobby, or the coffee shop.
It was launched in March just before COVID-19 and it is still doing very well. This project is a bit outside of the areas that I understand but I knew the founder and see the need. They are going well, but it’s a bit fringe compared to what I usually do.
I think one of the most striking pictures I ever got was from Zach. He was the CEO. I think they’ve rebranded to iRowNow and it is public now. They were mentioned in the Tech Crunch article.
He mentions a very personal health condition that caused him to start the startup. He talked like it’s not him, but rather it is you get on the call to his open line: «Hey, how’s it going? Good, yeah? Let me tell you about this problem I’ve got personally. And this is why I started this company.» I thought it was very open, very honest, and not an easy thing probably for most people to discuss. It was a very interesting pitch and that company done very well. That was his series seed pitch back in 2017, I think.
Anything that is post product and that built something we can use. It doesn’t need to be perfect. A MVP is good enough, something to sink our teeth into makes it tangible. We understand where they are heading with the product, what problems they are trying to alleviate. And from there onwards up to about 90 or 100 million. That’s the cap for us.
We don’t want to go too far beyond that. It’s a stretch from a valuation perspective, just because it limits the ownership that we can get with a fund of our size.
We invest anywhere from 250K to a million and we’ve gone slightly bigger than a million on a couple of occasions. I would say 650K is probably our sweet spot at the moment. When the fund was smaller and earlier in its life stage, we went even smaller than that. We run as small as a hundred. We wouldn’t want to do that anymore, but we are flexible. If there is a great deal and we thought it’s a good time to get in it extremely early and the valuation is low, we might stay as smaller than $250,00-1,000,000 with a $650K being a perfect sweet spot.
This is a cliche and these are the things that all investors look for: «Do we like the team?», «Do they seem solid?», «Do they have the right vision?», «Are they trustworthy and backable?».
We can just let them get on with it and go and achieve their vision. That is important. I really want to like the people that we work with, that is important. I think being likable and friendly is an issue and an important part of raising money. It’s also an important part of hiring. An important part of doing business is, that when making the deal we just end up investing in people that we often become friends with, those good humans. I’m not sure how many investors realize that, maybe you don’t talk about it that often, but it’s important for us.
We want to be able to go and get a drink or dinner with anyone in the portfolio. I’m really enjoying that experience. And if we enjoy it, that probably means that their employees, partners, or other investors enjoy it too. There is the team and the human element is very important.
Of course, we check that the market size is adequate and big enough. Sometimes the addressable market is just too small for blockchain today or even for the next five years and there is no sense to invest in it. We want to be able to say, that the market will be mature and large enough, if you succeed, to support very big business. I appreciate that is important.
Also, we want to make sure that blockchain technology is actually needed to do what they want to do and it provides some benefit. It’s not just adding blockchain for the sake of it as a fundraising tool, or as a way to get faster liquidity. It’s really blockchain as a technology is important to their business model and couldn’t be done without it. There is a token economic model or something that’s just doesn’t function without blockchain or without blockchain you’d need to use three or four intermediaries, but with blockchain you can do it in a trustful peer to peer manner and it will make your business much more efficient.
That is relevant and it’s really assessing that blockchain is the right technology and it’s not blockchain in search of a problem. Often you can see that people just want to apply blockchain to various different things and that isn’t a good fit and it’s not the most efficient tool. For most things, it’s quite an inefficient way of doing things, but if you want to move money across the border, the easiest tool. The most obvious example is that you can move a hundred million dollars from the US to China in 10 seconds with Ethereum and pay $0.50. There are so many things that it really makes sense for. Whereas, other things, and I don’t want to name examples, but they are just very clearly not a good fit for blockchain. It doesn’t provide any benefit over using a standard database or kind of computing architecture.
That’s an interesting question. Of course, we try to get as much as we can of the company, where the valuation is fair and commensurate with what has been built. I think if we end up owning 5% that’s a good spot to between what we try and get. Sometimes we get more, often we get less. Valuations are pretty high and we prefer to pay a little bit more, but see more traction and more development substantially.
This is unique to the blockchain sector. There is a lot of companies that have under executed because it’s very difficult to build on blockchain. The technology is nascent, the developer tools are still very new and haven’t been fleshed out the same way it has to build a mobile or built on the web. The developer tooling and development infrastructure are still being built itself. As a result of that, there have been some issues with under executing on blockchain and product shipping. We tried to invest after they’ve built something and they’ve got over that hump: «Okay, we know you can execute on the tech and the engineering side. Let’s have a play around with it». Maybe it’s not perfect. There are sufficiently deal risks and we understand that your team has the ability to ship the product on blockchain.
We are targeting a 40% IRR, but that depends how long the fund takes to finish because obviously the IRL is time-sensitive and the multiple is not. I think if the fund takes as long as we think it will take, that will be 6.5X return. We have another 4-6 years to go. It is as being closed for 13 months and we’ve doubled everything that we’ve invested so far.
I would like to enjoy using it. I think that’s a really important thing. I’ve invested in 50 private startups now. Maybe 55, something like that. Nearly always if there is a consumer angle, something that I use, have used before or want to use, they have something that I or my friends find useful and that’s a really good starting point. It is something fundamental. If I am not the target audience for the product that is fine, but if I could potentially be the target audience it needs to be something I really enjoy using and use it regularly. That is the most important thing. I think a product needs to have the potential to be huge and the bigger it could be, the more people that could touch, and the more often they engage with it, probably the bigger the financial outcome could be.
We are looking for a good balance of technical support and business skills in the blockchain space. Often there are a lot of technical, math, and cryptography skills, but fewer business skills. That had typically been a problem in the earlier days of crypto. 2014-16 was a time where there was real anarchy and there were a lot of «crypto hackers» involved in this space. It was great, but there was a lack of business skills and judgment.
You need to see both skillsets. You can see yourself a very strong, maybe you have an Olympian level person in the team or some PhDs, but people that can get stuffed on land, business development deals, sell the product are a nice balance in a company.
It’s also great when teams know each other and work together for a long time. Maybe they came from the same startup before, maybe they were studied together at the same school or had been friends for a long time. That is always a good sign for me. I like to see when friends do business together and there is a history of the team working together. Typically, it is a good thing.
We’ve invested in some solo founders, but they’ve always got a team. It’s a question. Do they have co-founders or do they have a team? I have invested in some solo founders and I’m okay with it. In general, it is very tough, but it can be done.
Speaking about families, I have not invested in the husband and wife team yet, though I have looked at quite a few of them. I have nothing against it. I think it can work out great. There are some really good examples, maybe Cisco is the brightest one. I’m not sure if they are still married, but I think that there are some other good examples.
We try to take as long as we can without losing the deal. I know that is not really an answer, but it’s striking a balance. We want to do as much diligence as we can without wasting the entrepreneur’s time and without losing the deal. If we can do diligence in the background without using their time, we try to do that. I have done deals where it took me six months to get to a position where I feel ready to invest.
Sometimes it can be faster and take a month, but it’s never really quicker than that. It always takes some time to get to know the team, the product, and the industry. I think it’s like a marriage, it’s a long-term relationship and it doesn’t make sense to rush it.
There are about 200 deals that we consider carefully. There are not many more than that. If we just briefly consider, look at the website, have a quick chat with founders, met them at a conference or so, we don’t count those that we’ve engaged with. We spent time thinking about probably about 200-250 a year and then 10 plus go to our table.
There are other venture funds that have invested in us. They are themselves, of course, the venture funds with the blockchain, and they are a great source of deal flow for us. They would typically share deals with us because they want to know our take on the space and, we, therefore, get all of their better deal flow.
There are other venture funds that have invested in blockchain.com: Mosaic, Like Star, Virgin, and Digital Currency Group. We share deals with them too. They are just a part of the family. That’s probably the best pound for pound source of great deals because they have considered them carefully before they share them with us.
Then, of course, there are employees at blockchain.com that see deals, use products, and love them. If they see something they think is great they will flag it. We have an inbound section on our website to fill in a bunch of information if it fits a certain criterion. Then we’ll consider investment on the back of that. We meet pivotal conferences, get referrals from our friends, other funds, and projects that we’ve already invested in. They inform us that a company tried to sell them a product which they think is good and maybe we could consider it as an investment. Typically, a lot of opportunities come from our network.
Also, we go top-down and decide, let’s say, we would like to invest in a blockchain gaming company. Then we speak to every gaming company we can find the best one or maybe two that are investible within that category because we think the category is going to be big, based on research-driven around a thesis.
That is probably where most of all deals come from. Sometimes it is driven by seeing a company that seems to be doing well. And we think, that securitization of digital assets onto the blockchain in other companies like this could become a big thing. Let’s find companies that enable that or facilitate the secondary trading of digital securities like whatever it may be. It is driven by a thesis and a view of the future because ultimately I think, venture investing is taking a view on what the future might look like and then making bets that align with that future.
The most common red flag is when you are asking CEOs a question and they don’t answer it. Very often they dodged the question. It is not good when you ask a very specific question that has a very specific answer and the CEO avoids answering the question for some reason. Sometimes there is indirect vague communication. I don’t like that too.
That is a big red flag for me when I see the problem and realize it doesn’t work for X, Y, Z reasons. It’s got a bug, it’s a bit clanky, the interface has some issues and that’s fine. But if the team itself doesn’t know about it that is an issue. If you have to tell them: «By the way, your product didn’t work when I tried to do something» and they are surprised. If they know the issue, are aware and fixing it – that’s great. If they’re completely unaware of the issue that is a problem.
The team dynamic is also very important. Sometimes you see the team almost disagree and talk over each other on the core. When you ask them about the vision of the future and you get two different answers from two different people, or you ask them some basic questions about the business and you get different answers. That is a kind of internal fighting. I saw that more often than I would have expected. And that’s a big red flag for me. It means the team is not fully aligned on where they are heading and there might be some internal politics to deal with.
It is an interesting question. yeah. There have been a lot of startups that I missed when I was at my first fund and the decision making was slightly broader across a lot of people. I think we missed a few bits because decisions were made by the committee and it doesn’t always agree that ends up in missing on the polarizing investments.
Some people love and some people hate if your committee is too big, but you ultimately end up passing on opportunities, that are very polarizing ones. I think Blue Book was such a startup for a lot of people. Some people hated that, it spent a lot of money and economics were not great. Other people loved it because they saw how big this thing could get redefining an entire category.
I believe there is definitely a bunch from that perspective that we missed. Speaking about Blockchain.com Ventures, I think we missed a couple that were slightly more speculative in nature, but they were good. This is probably a blockchain specific thing. There was a fast path to liquidity and they had a good community and therefore the token has traded very well. Now we were looking at the fundamentals. Is the protocol or the platform useful? Are people building on top of it? Is it going to do something good for the world? The answer was no, and probably still is no, but a lot of money was generated in the interim. So, we’ve missed some of those deals where we thought we are under index for the potential of short-term price appreciation when the token gets public and gets traded.
On the other side, I really regret one angel investment I did just because a friend told me to do it and I didn’t understand it. I’m always chasing a quick flip and a quick IPO. He told me that company will go public next year and I should get in, and it’s a late-stage investment. It was like two and a half years ago and it is still not public. I think they did a down round. It is a biotech space and I don’t understand it. As I mentioned earlier, this is something that I’m fascinated by, but I know nothing about it. I was trying to chasing a short term quick financial return rather than really understanding the business and where it could head. That was a mistake I do regret.
We’re all very blockchain sector-specific, but the Theorem Devcon and Consensus Conference are probably the best two for me to attend. There is just a lot of both developer and commercial activity on a Consensus in particular. That is interesting. Consensus is in New York every year and Devcon changes city every year.
I think that conferences are a part of the business now. You should pick 2-3 conferences a year that are big, the best and they are the ones you want to go to. Going to a conference every month is probably a waste of time. It does depend on the business. If you are doing a lot of B2B, maybe going to conferences to find clients is a good use of time. But going to conferences to fundraise money is probably difficult. It’s just not the best place to fundraise, but this is a good place to be seen and to be seen as part of the ecosystem.
I think having a presence is important. It doesn’t need to be the CEO, but someone going to the after-conference events in the evening, walking around with a t-shirt on, representing the brand, and being seen to be part of the ecosystem. I think you’ll probably meet some interesting people, get some deals done.
I am trying to attend 2-3 a year. I see some CEOs speak every time at every conference. Once a month is too much. I think It’s a time killing. I don’t think it has a good ROI.
Not that much, but we are affected a bit. Until this month or maybe last month we met every team that we’d ever invested in. Now we’ve had to start doing deals where we’ve not met the team in person. We went through March, April, May, June, and basically, all of July still doing deals with the teams that we’ve met before COVID. We had seen them, knew the team, and spent time with them face to face, but we haven’t done a deal. Then we get the deal done during the pandemic but it’s fine because we spent time with them before. Now we are out of deals that we want to do. We’ve not met the team. I don’t like it as much. It is a challenge. It’s difficult, but that’s the reality of the situation.
It has been great for us and blockchain. I hate to say it because it still oversees a horrible, humanitarian crisis and it’s bad for the world. Personally, I’ve found it very challenging to be so isolated from friends and family, but all that said as terrible as it is for the world it has been an accelerant of the adoption of technology in particular digital payments, digital remittances.
And that’s obviously great for blockchain that people don’t want to touch paper money. They are not leaving the house to go through the Western Union to send the remittance abroad. They are doing it with some of the solutions that we’ve invested in. People are trading more. Therefore, the crypto market volumes and volatility has increased.
That has been great for our trading businesses. They are making as much money as I’ve ever done and it has also been an accelerant of the adoption of the thesis that FIA and the sovereign control that government has over the issue of a new currency is a real issue. And the printing of $6 trillion of new us dollars into the system just after a few months of COVID-19 scary people. Everybody think what does that mean for the dollars or the assets that they hold that are priced in US dollars. It has to mean something because there are more dollars now, but we have the exact number of goods, services, property, and Apple stocks as before. What does this mean? Apple stocks doubled even though that earnings quality has gone down. We start to see asset price inflation. Maybe it’s not CPI inflation, but its asset price inflation caused by the printing of money. That is a great thing for cryptocurrencies that have a non-manipulatable transparent fixed supply schedule, like Bitcoin, that will only be 21 million. You can’t print an extra $6 trillion with the Bitcoin. Therefore, there are more US dollars but there is no more Bitcoin. And that has been what’s happened.
Now all the governments are doing it. It is scary because we see extremely high unemployment, a massive drop in economic output that we saw in the UK, and the US. At the same time stock markets in the US is all-time highs. Does that make sense? And the reason is I think because of the stimulus.
The deep reason might be in economic digital transformation that is a huge opportunity for eCommerce and crypto. People that have never ordered food online before, that have not done e-commerce before are now doing these things. They are ordering groceries online, as well as prepared meals. Those people were not doing them before, wouldn’t have tried, and were in a routine of going to the shops, grocery store and now they are doing these things because they have to, and they are not going to switch back.
You use Amazon or the local equivalent for the first time and you like it because they showed up the next day by your doorstep. You will never be going back to walk around the shopping mall. If you bought a pizza online and it shows up in 30 minutes you’ll never go back to cooling up or whatever the equivalent was before.
It has been the same for remittances. I send some US dollars abroad using cryptocurrency and blockchain. They arrived to my friend in 15-20 seconds and it costs me 2%. Before that I was paying 8% to Western Union and was going to their kiosk, handing them cash, waiting 3-5 days. My friend from abroad had to go to the Western Union office where he collects the cash minus 8% almost a week later or I can reject the transaction. Now I can money transfer online and it happens almost immediately, the recipient has a digital store of money in his mobile wallet and can use them to spend in their region and I cannot reject the transaction.
So, it has definitely been an accelerant of all of the adoption of those things. And it will be a redistribution of wealth accordingly.
Also, communication channels change dramatically. Most people will never go back. They realize they can be almost as if not more efficient on Zoom and Google Hangouts. Business needs to go and travel for one-day trips. I used to do a lot of it flying from Singapore to New York for a day to take one meeting and then flying back. It’s a waste of time, expensive and bad for the planet. Now I can do it online. And now people are comfortable with that when they weren’t comfortable with that before. But it’s fine and I think that’s not going to change back.
I touched it on the red flags. I think it is the same here. There are some areas where you could see very common weaknesses that are clearly not acceptable.
That is that the product is not good enough and no one’s going to buy it, and that is a very common thing that you could see. You’ve been working for two years and there is not much commercial traction. You’ve given the product away for very cheap or free to get a few users, but no one is really willing to pay for it. That is pretty common and sometimes entrepreneurs don’t realize that this is an issue.
Wow! They all are incredibly inspirational and they will, except for Wozniak, had some character issues. I think Bill Gates was not the nicest guy when he was young. He is an incredible person now to be clear, but when he was younger he was pretty ruthless. Steve Jobs was not the best in a number of areas to work for. Musk has got a volatile personality and Zuckerberg also seems like he can be pretty ruthless at some times and maybe that’s what it takes to get to the top.
I have never really heard anything bad about Wozniak. None of them is perfect, but they all have changed the world and contributed positively for the most part. Maybe Zuckerberg and Facebook are slightly less good for society, but Gates, Wozniak, Jobs, and Musk have all changed the world for the better undoubtedly and they are obviously all incredibly inspirational.
I wouldn’t want to stay away from any of them. They all are great and I couldn’t pick a favorite one. When you think about it that at least 80% of them have had some traits that make them probably difficult to work with and be in a relationship with at certain times. And it’s interesting for me to think about it.
That is a crazy question. I think Airbnb is an insane startup that I would never have invested in and I would have been wrong. It has more inventory than all of the big hotel groups combined. Isn’t that crazy? It’s a much more efficient way of using something that we already have that can generate income for the host. And as a guest, you get oftentimes a vastly superior experience. Not always of course. It depends on what you want. Business travel is slightly different. But if you go to Bali or a beach place, and you get a private villa on the beach, that is really nice for half the price of the hotel, which is a tiny room where your neighbors have a screaming kid next door. It’s just a better experience for everyone for certain things. And it’s a capital-light model and it’d be great to see them go public. Finally, I think that’s a very impressive startup. It also had some controversy with some of the racial stuff that’s happening now with discrimination against race and that’s all regrettable. But they’ve been relatively clean compared to some of the other big startups of that era like Uber or WeWorked. Airbnb is captive a good clean profile and it’s built a really impressive business that changes the way that we utilize the property.
There’s another obvious one that is more modern. Uber is a category changer. It changed car ownership forever. It changed the world. I’ve seen polls of young people, whether they want to own a car and get a driving license. If you live in a city, you don’t need a car anymore. And that’s thanks to Uber. It didn’t just replace the taxi industries but many orders too with a large magnitude because it encouraged an entirely new behavior, which is powerful and incredible. Just think that now you can land in any city worldwide and there’s an Uber or equivalent to it. You don’t need to book a car. You just pressing the key in the app to get a taxi. And it goes. But if you order an Uber and it doesn’t show up in five minutes you’re annoyed. You feeling terrible and willing to know where is your car. That changed in 10 years or less and it is crazy. Imagine that somebody told you 10 years before that you could be in any city in the world, press the button inside an app, and a car that will show up in five minutes, pick you up and it will be relatively clean. And then it will take you where you want to go and you’ll pay a fair price. Plus, you can order food and a bunch of other things from it as well. That’s crazy and it’s something that we now take for granted.
From the other perspective, there is a good opportunity for drivers too. But I think that’s the part that they didn’t get perfectly. I mean the drivers should have had equity. Sa well as some of the early hosts on Airbnb should have had equity and they both explored doing this, but they couldn’t do it. And that would have been better for everyone. They would have spent less money scaling. Sure, some of the investors would have made a few billion less, but there would have been a wealth generation event for the people that really made the service happen.
I’m a short-form content person and I like YouTube clips, blogs, podcasts, and read a lot of digital print for my job. I don’t read that many books. I read all day long, there are 20 tabs open in my browser and I read all of them rather than sit down and spending an hour by reading a book. I very rarely do that. I do it if I get a strong recommendation from someone that I need to read a book that is very relevant to me. It will take me a while, but I’ll get through it. I don’t read as much as most people probably do. I think there are a few blogs that you should sign up to: Fred Wilson’s ABC, Benedict’s Evans newsletter, the CB Insights newsletter, maybe the PitchBook newsletter, and the Axial’s Venture newsletter. They all are relevant. Twitter is too industry dependent. I have a lot of crypto recommendations, but there are too many to go through. And then the podcast. Unchained is probably my favorite.