00:00:04
Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. Cryptocurrency's suffered a huge amount of reputational damage in 2022 with the collapse of the FTX Exchange, but the technology that underpins crypto remains solid, so what does 2023 look like? Is this the year that the companies using blockchain and the related technologies really step up? Zeb Rice is one of the founding partners of King River Capital, a venture capital firm with expertise in this space. Zeb, welcome back to Fear and Greed. Now, you've made the point that the FTX collapse wasn't a failing of crypto technology. In fact, it was a human failure. Just explain that.
00:00:43
Zebediah Rice: Sure. Yeah, you got to remember that FTX was not really a crypto company in a technological sense. It was a, what's known as a shadow bank or a centralized exchange. And what it did was it allowed average people in institutions to trade crypto in a way that felt familiar to them, looked like a bank. And unfortunately, when you have an institution run by humans, they're subject to stupidity or corruption or financial mismanagement of whatever kind. And that's really what happened in the case of FTX. When you look at the blockchain itself and what are called decentralized exchanges, you see that they perform flawlessly. There were not criminal activities that happened. They're up and running today. There wasn't money lost. And so that really is the key difference is that you have these decentralized exchange that operate with the software, and don't require humans to make decisions in the management of your money. The software is custodying the money, and then you had FTX, which was custodying money for people in this kind of shadow banking world, and ended up either being very corrupt or very stupid.
00:01:57
Sean Aylmer: Okay, so FTX kind of acted as an intermediary and, which brought the human element into it. Do you think people understand that, perhaps unfortunately for cryptos, they seem to be, in people's perception at least, there's a linkage between the two?
00:02:14
Zebediah Rice: Yeah. There definitely is. Even with some very smart people. I mean, I was listening to, I think it was Kara Swisher and Scott Galloway or two of the brilliant people in tech and media, and they seemed to mix that up, and it was very frustrating because they seemed to think, " Oh, crypto was a cool fad, but now it's obviously dead." And it really reminds me of people saying in 2001, " Gosh, that email and internet thing was an interesting fad, but obviously it's dead. We'll keep, I'm just happy using my fax machine and my library card or whatever." I mean, it's so patently, obviously wrong if you're actually using the technology every day, but most people haven't taken the time to, or had the opportunity to use the technology, so they're conflating the two.
00:02:59
Sean Aylmer: Okay. So what's the next step? How does the sector rebuild credibility after FTX experts like you understand that the underlying technology, the blockchain, worked seamlessly and incredibly well, but how do you bridge that gap between perceptions and the reality? And I suppose if you look at some of the value of some of the cryptos in the last few weeks, it suggests that that is happening already.
00:03:26
Zebediah Rice: Yeah, look. It's all about building great businesses, as it always is. After the . com crash, it wasn't until people saw big businesses solving big problems, generating enormous profits, that the world really came around. And that's going to happen again, and that may take a while. You think about Google, Amazon, Netflix, Uber, all these giants. It took quite a few years before people awakened. I mean, I remember with Amazon, I had people in the late 2000s, maybe even, I can't remember when they turned a profit. 2007 or something like that, or 2010, but there was always these naysayers at banks and hedge funds and so on saying, " Amazon is a biggest Ponzi scheme of all time. It's never generated a profit." And yet we all now know Amazon is, if not the most valuable company in the world, certainly right up there. And so it just takes time for profits to prove people wrong, and that's just around building big businesses, great businesses.
00:04:26
Sean Aylmer: Stay with me, Zeb. We'll be back in a minute.
My guest this morning is co- founder of King River Capital, Zeb Rice. King River Capital is an organization you're always looking to invest in, in the future, including startups and beyond. I just want to have a quick talk about Web3, 'cause I know it's something that you are particularly first in. Let's start with some definitions. What is Web3?
00:04:52
Zebediah Rice: Well, in order to understand Web3, let me just briefly remind people what Web1 and Web2 are. So Web1 was read. The internet happened in the 90s, and people went, " Wow, we can read a newspaper online." Netflix was much later, but, " We can watch content online. People can have newsletters or whatever and put them out." And so, we call them blogs now, right? And so Web1 was all about read, and I think Chris Dixon may have coined this concept. Web two was about write. So people went, " Well, it's not just about reading stuff on the internet. Users can generate their own content." UGC is what it's called. So we're all familiar with the Facebooks and the TicToks and the YouTubes and the Instagrams and so on and so forth, and that was this big revolution that caused this next wave of innovation, and that was called Web2. So read, write, and what the innovation in Web3 was, and what Web3 really unlocks for us, and this hasn't yet been fully realized is value.
So read, write, and now we have value. What does value mean? So before Web3, in order for people to exchange value or money on the blockchain, sorry. The internet rather, you needed someone to enforce the rules, right? You needed a centralized company that you could trust with your credit card details, because you didn't want to give all the details to some stranger on the internet that was selling you a book or whatever, and so you needed a company in the middle that would be kind of a custodian for that information, and you wanted to do it in jurisdictions where those companies were regulated and the players were regulated so that there was the threat of prosecution and penalties and imprisonments so that everything would be upheld.
Well, what blockchain does was it allows people who don't know each other and don't trust each other to exchange value, money or other things of value like digital goods or digital representations of any good in the world, be it physical or virtual, to exchange that in a what's called permissionless and trustless way. And it uses the microeconomic mechanism design, or game theory of the blockchain to ensure that these things don't get corrupted. And that was really the first innovation of (inaudible) with Bitcoin and what's been replicated with Ethereum and all these other blockchains. And that's really the promise that people suddenly realize that they can exchange value. So Web3 is value. Exchange of value in a permissionless, trustless, decentralized way.
00:07:29
Sean Aylmer: Okay. I think I'm with you. I can't say for 100%, but I'm trying to follow the line here. So where do we get to? What does it eventually allow society to do? Because Web1 and 2 have certainly changed to our lives. Where does 3 get to?
00:07:45
Zebediah Rice: Well, let me give you a couple examples, right? This is just easiest to understand what I'm talking about. So we invested in a company called Paystand, and in the US over 50% of B2B transactions are with paper checks. If you think about how (inaudible) , sorry. Businesses pay each other, it's often also with credit cards. You might buy a service on the web as a business for podcasting with a credit card. Now there's a fee charged with a credit card. There's a fee charged with transacting a check, and there's time involved. So with credit cards, it's anywhere from 1 to 3% fees that the credit card company, that's why Visa is such a valuable company. And with checks, just because it's so inefficient, it can take a week or 10 days and cost you again, 1 to 2 or 3% as a fee. So what Paystand does is they go to these businesses, and without getting into the detail, they effectively take over the accounts receivable or the payables, and they use the blockchain, the Ethereum blockchain to send the money in instantaneously and permissionlessly for maybe, I don't know what it is. 30 basis points or, a fraction.
And so what you're talking about with, when I go into this gobblygook and theory around decentralized trustless blockchains, you're talking about something that's not just better, cheaper, faster, and easier. It's not even often twice as cheaper, faster, easier. We're talking 10, 100, 1, 000 times better, faster, cheaper, and easier in some cases. And so it's email versus fax machines, where it's like oxygen. People, when they've experienced email, they use fax machines and they're suffocating. They're so frustrated. And so people that have used the blockchain to send money go nuts when they have to use a bank or a check. It's a pretty funny thing to see once you've kind of been through that. So that's one example I can give others, but that I think that illustrates it well.
00:09:39
Sean Aylmer: The societal consequences of that presumably will be quite massive because, I mean, Visa and MasterCard for example, they're kind of well known as gatekeepers in many industries. So they kind of say, " Yes, you can use a Visa or MasterCard to pay for certain goods and services and that." But all that kind of disappears too, and right, or wrongly, Visa and MasterCard actually are arbiters of good taste and things like that. But that all disappears too. I suppose it does make it frictionless, but that's not without some concerns as well.
00:10:11
Zebediah Rice: Well, look. This is a classic Clayton Christensen's innovators dilemma, where you've got these banks and financial institutions around the world that reap enormous profits from this inefficiency, and so there's been no incentive for them to change and you need a technology that's, again, not just twice as good, but 10 or 100 times as better, to come along to disrupt them. And you get companies, I mean, look at Microsoft. They've been extraordinary in how they've pivoted again and again into the next technology wave and profited from it, and bought their way into it. And so there will be banks and financial institutions that do that, and there will be, I think many more that become part of the history books.
00:10:47
Sean Aylmer: Okay. So how does King River Capital look at it investing? This is kind of going back to a very basic question, having spoken to you Zeb Bryce now for 10 or so minutes, and you kind of, we've done this before, when we've spoken, you kind of put my mind in places that I've never even thought about, literally. How do you go about assessing something that you want to invest people's money into?
00:11:07
Zebediah Rice: Well, on the crypto side, it's really difficult. I mean, it's such a wild west out there. You kind of have to understand that there are just higher risks, but much higher potential returns. And so, normally we invest in software and AI companies in our kind of core funds. We have a crypto fund as well, but we understand in the crypto fund and our investors, we've been very clear with them that it is higher risk, but we expect from ourselves a higher return. So how do you go about it? I mean, it's all the normal things we do. We look at the opportunity, the pain point, the teams, the technology, the competitive advantage and so on and so forth, but it's just with a higher degree of skepticism and a higher expectation of return, frankly. So that that's, I don't know. I could go on for a long time answering that question. That's the short answer.
00:11:54
Sean Aylmer: Yeah, no, no, no, no, no, no, no, no. I get that. I mean, let's finish up immutable. I know you're an investor in Immutable, the NFT platform. That must have been a pretty good investment.
00:12:05
Zebediah Rice: Yeah, well, so far so good. Their business is booming. What's interesting about that company is, it's just a very well run company. It's a classic example. We met crypto founders back when we were looking at Immutable, and they were total cowboys and cavalier and didn't care about regulation and just, we avoided those, fortunately. But the founders of Immutable were serious people. They are serial entrepreneurs. They've built businesses before, they'd made mistakes, and they had a prudence about them even though they were incredibly ambitious. And so that to me is, I think part of the reason they're doing so well, is they've just got such great people there. But look, the business, as I said, is booming. I think last quarter they signed more new game partners than the entire history of the company in four years or whatever it's been, combined. They flipped Polygon as the leading, I think they're now in the top three after right up there with Ethereum and Solana, in terms of NFT volumes, you can go to cryptoslam. io and check out where they are in the leaderboard, and we think they'll flip Solana. It's just going from strength to strength.
00:13:16
Sean Aylmer: Zeb, thank you for talking to Fear and Greed.
00:13:18
Zebediah Rice: You're welcome.
00:13:19
Sean Aylmer: That was Zeb Rice, co- founder of King River Capital. This is the Fear and Greed Daily Interview. Remember, this is general information only, and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, Australia's most popular business podcast. I'm Sean Aylmer. Enjoy your day.
Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. Cryptocurrency's suffered a huge amount of reputational damage in 2022 with the collapse of the FTX Exchange, but the technology that underpins crypto remains solid, so what does 2023 look like? Is this the year that the companies using blockchain and the related technologies really step up? Zeb Rice is one of the founding partners of King River Capital, a venture capital firm with expertise in this space. Zeb, welcome back to Fear and Greed. Now, you've made the point that the FTX collapse wasn't a failing of crypto technology. In fact, it was a human failure. Just explain that.
00:00:43
Zebediah Rice: Sure. Yeah, you got to remember that FTX was not really a crypto company in a technological sense. It was a, what's known as a shadow bank or a centralized exchange. And what it did was it allowed average people in institutions to trade crypto in a way that felt familiar to them, looked like a bank. And unfortunately, when you have an institution run by humans, they're subject to stupidity or corruption or financial mismanagement of whatever kind. And that's really what happened in the case of FTX. When you look at the blockchain itself and what are called decentralized exchanges, you see that they perform flawlessly. There were not criminal activities that happened. They're up and running today. There wasn't money lost. And so that really is the key difference is that you have these decentralized exchange that operate with the software, and don't require humans to make decisions in the management of your money. The software is custodying the money, and then you had FTX, which was custodying money for people in this kind of shadow banking world, and ended up either being very corrupt or very stupid.
00:01:57
Sean Aylmer: Okay, so FTX kind of acted as an intermediary and, which brought the human element into it. Do you think people understand that, perhaps unfortunately for cryptos, they seem to be, in people's perception at least, there's a linkage between the two?
00:02:14
Zebediah Rice: Yeah. There definitely is. Even with some very smart people. I mean, I was listening to, I think it was Kara Swisher and Scott Galloway or two of the brilliant people in tech and media, and they seemed to mix that up, and it was very frustrating because they seemed to think, " Oh, crypto was a cool fad, but now it's obviously dead." And it really reminds me of people saying in 2001, " Gosh, that email and internet thing was an interesting fad, but obviously it's dead. We'll keep, I'm just happy using my fax machine and my library card or whatever." I mean, it's so patently, obviously wrong if you're actually using the technology every day, but most people haven't taken the time to, or had the opportunity to use the technology, so they're conflating the two.
00:02:59
Sean Aylmer: Okay. So what's the next step? How does the sector rebuild credibility after FTX experts like you understand that the underlying technology, the blockchain, worked seamlessly and incredibly well, but how do you bridge that gap between perceptions and the reality? And I suppose if you look at some of the value of some of the cryptos in the last few weeks, it suggests that that is happening already.
00:03:26
Zebediah Rice: Yeah, look. It's all about building great businesses, as it always is. After the . com crash, it wasn't until people saw big businesses solving big problems, generating enormous profits, that the world really came around. And that's going to happen again, and that may take a while. You think about Google, Amazon, Netflix, Uber, all these giants. It took quite a few years before people awakened. I mean, I remember with Amazon, I had people in the late 2000s, maybe even, I can't remember when they turned a profit. 2007 or something like that, or 2010, but there was always these naysayers at banks and hedge funds and so on saying, " Amazon is a biggest Ponzi scheme of all time. It's never generated a profit." And yet we all now know Amazon is, if not the most valuable company in the world, certainly right up there. And so it just takes time for profits to prove people wrong, and that's just around building big businesses, great businesses.
00:04:26
Sean Aylmer: Stay with me, Zeb. We'll be back in a minute.
My guest this morning is co- founder of King River Capital, Zeb Rice. King River Capital is an organization you're always looking to invest in, in the future, including startups and beyond. I just want to have a quick talk about Web3, 'cause I know it's something that you are particularly first in. Let's start with some definitions. What is Web3?
00:04:52
Zebediah Rice: Well, in order to understand Web3, let me just briefly remind people what Web1 and Web2 are. So Web1 was read. The internet happened in the 90s, and people went, " Wow, we can read a newspaper online." Netflix was much later, but, " We can watch content online. People can have newsletters or whatever and put them out." And so, we call them blogs now, right? And so Web1 was all about read, and I think Chris Dixon may have coined this concept. Web two was about write. So people went, " Well, it's not just about reading stuff on the internet. Users can generate their own content." UGC is what it's called. So we're all familiar with the Facebooks and the TicToks and the YouTubes and the Instagrams and so on and so forth, and that was this big revolution that caused this next wave of innovation, and that was called Web2. So read, write, and what the innovation in Web3 was, and what Web3 really unlocks for us, and this hasn't yet been fully realized is value.
So read, write, and now we have value. What does value mean? So before Web3, in order for people to exchange value or money on the blockchain, sorry. The internet rather, you needed someone to enforce the rules, right? You needed a centralized company that you could trust with your credit card details, because you didn't want to give all the details to some stranger on the internet that was selling you a book or whatever, and so you needed a company in the middle that would be kind of a custodian for that information, and you wanted to do it in jurisdictions where those companies were regulated and the players were regulated so that there was the threat of prosecution and penalties and imprisonments so that everything would be upheld.
Well, what blockchain does was it allows people who don't know each other and don't trust each other to exchange value, money or other things of value like digital goods or digital representations of any good in the world, be it physical or virtual, to exchange that in a what's called permissionless and trustless way. And it uses the microeconomic mechanism design, or game theory of the blockchain to ensure that these things don't get corrupted. And that was really the first innovation of (inaudible) with Bitcoin and what's been replicated with Ethereum and all these other blockchains. And that's really the promise that people suddenly realize that they can exchange value. So Web3 is value. Exchange of value in a permissionless, trustless, decentralized way.
00:07:29
Sean Aylmer: Okay. I think I'm with you. I can't say for 100%, but I'm trying to follow the line here. So where do we get to? What does it eventually allow society to do? Because Web1 and 2 have certainly changed to our lives. Where does 3 get to?
00:07:45
Zebediah Rice: Well, let me give you a couple examples, right? This is just easiest to understand what I'm talking about. So we invested in a company called Paystand, and in the US over 50% of B2B transactions are with paper checks. If you think about how (inaudible) , sorry. Businesses pay each other, it's often also with credit cards. You might buy a service on the web as a business for podcasting with a credit card. Now there's a fee charged with a credit card. There's a fee charged with transacting a check, and there's time involved. So with credit cards, it's anywhere from 1 to 3% fees that the credit card company, that's why Visa is such a valuable company. And with checks, just because it's so inefficient, it can take a week or 10 days and cost you again, 1 to 2 or 3% as a fee. So what Paystand does is they go to these businesses, and without getting into the detail, they effectively take over the accounts receivable or the payables, and they use the blockchain, the Ethereum blockchain to send the money in instantaneously and permissionlessly for maybe, I don't know what it is. 30 basis points or, a fraction.
And so what you're talking about with, when I go into this gobblygook and theory around decentralized trustless blockchains, you're talking about something that's not just better, cheaper, faster, and easier. It's not even often twice as cheaper, faster, easier. We're talking 10, 100, 1, 000 times better, faster, cheaper, and easier in some cases. And so it's email versus fax machines, where it's like oxygen. People, when they've experienced email, they use fax machines and they're suffocating. They're so frustrated. And so people that have used the blockchain to send money go nuts when they have to use a bank or a check. It's a pretty funny thing to see once you've kind of been through that. So that's one example I can give others, but that I think that illustrates it well.
00:09:39
Sean Aylmer: The societal consequences of that presumably will be quite massive because, I mean, Visa and MasterCard for example, they're kind of well known as gatekeepers in many industries. So they kind of say, " Yes, you can use a Visa or MasterCard to pay for certain goods and services and that." But all that kind of disappears too, and right, or wrongly, Visa and MasterCard actually are arbiters of good taste and things like that. But that all disappears too. I suppose it does make it frictionless, but that's not without some concerns as well.
00:10:11
Zebediah Rice: Well, look. This is a classic Clayton Christensen's innovators dilemma, where you've got these banks and financial institutions around the world that reap enormous profits from this inefficiency, and so there's been no incentive for them to change and you need a technology that's, again, not just twice as good, but 10 or 100 times as better, to come along to disrupt them. And you get companies, I mean, look at Microsoft. They've been extraordinary in how they've pivoted again and again into the next technology wave and profited from it, and bought their way into it. And so there will be banks and financial institutions that do that, and there will be, I think many more that become part of the history books.
00:10:47
Sean Aylmer: Okay. So how does King River Capital look at it investing? This is kind of going back to a very basic question, having spoken to you Zeb Bryce now for 10 or so minutes, and you kind of, we've done this before, when we've spoken, you kind of put my mind in places that I've never even thought about, literally. How do you go about assessing something that you want to invest people's money into?
00:11:07
Zebediah Rice: Well, on the crypto side, it's really difficult. I mean, it's such a wild west out there. You kind of have to understand that there are just higher risks, but much higher potential returns. And so, normally we invest in software and AI companies in our kind of core funds. We have a crypto fund as well, but we understand in the crypto fund and our investors, we've been very clear with them that it is higher risk, but we expect from ourselves a higher return. So how do you go about it? I mean, it's all the normal things we do. We look at the opportunity, the pain point, the teams, the technology, the competitive advantage and so on and so forth, but it's just with a higher degree of skepticism and a higher expectation of return, frankly. So that that's, I don't know. I could go on for a long time answering that question. That's the short answer.
00:11:54
Sean Aylmer: Yeah, no, no, no, no, no, no, no, no. I get that. I mean, let's finish up immutable. I know you're an investor in Immutable, the NFT platform. That must have been a pretty good investment.
00:12:05
Zebediah Rice: Yeah, well, so far so good. Their business is booming. What's interesting about that company is, it's just a very well run company. It's a classic example. We met crypto founders back when we were looking at Immutable, and they were total cowboys and cavalier and didn't care about regulation and just, we avoided those, fortunately. But the founders of Immutable were serious people. They are serial entrepreneurs. They've built businesses before, they'd made mistakes, and they had a prudence about them even though they were incredibly ambitious. And so that to me is, I think part of the reason they're doing so well, is they've just got such great people there. But look, the business, as I said, is booming. I think last quarter they signed more new game partners than the entire history of the company in four years or whatever it's been, combined. They flipped Polygon as the leading, I think they're now in the top three after right up there with Ethereum and Solana, in terms of NFT volumes, you can go to cryptoslam. io and check out where they are in the leaderboard, and we think they'll flip Solana. It's just going from strength to strength.
00:13:16
Sean Aylmer: Zeb, thank you for talking to Fear and Greed.
00:13:18
Zebediah Rice: You're welcome.
00:13:19
Sean Aylmer: That was Zeb Rice, co- founder of King River Capital. This is the Fear and Greed Daily Interview. Remember, this is general information only, and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, Australia's most popular business podcast. I'm Sean Aylmer. Enjoy your day.
