Hashed Interview: David Lee, Managing Partner at Refactor Capital, “The Importance of Market Timing”
David Lee is managing partner at Refactor Capital and a former partner at SV Angel, famed investor of Coinbase, Stripe, Airbnb, Slack, and Dropbox. Check out Hashed’s in-depth interview with David on why this the best time for a blockchain investor.
So we haven’t caught up in a while. A lot has happened in the market, right? We’re going to go through some questions soon, but the urgent matter is, what’s your assessment of the market? What do you think?
I don’t necessarily think of it in terms of market. I think of it in terms of environment, and I would imagine some people have gone through some pain in terms of investing a lot of their portfolio into crypto, and it’s obviously down in the last year. I can say from an investor’s perspective that this is this is the best time. Historically, if you look at the best time to invest is when sentiment has turned negative. And I was just talking to a few people here about whether or not we’re at the proverbial bottom. I have no idea, but I know that a lot of the exuberance has disappeared, maybe not entirely and that’s usually the best time as an investor if you believe in the long-term trend, which I do. So the environment to me, while bleak, I think is a great time for everyone to do a gut check and decide whether you’re in this for the long haul and just to stay focused and ignore the noise and ignore the market price.
I can say from an investor’s perspective that this is this is the best time. Historically, if you look at the best time to invest is when sentiment has turned negative.
I was going to ask about how you got into crypto, but I realize that most of the audience probably don’t know your background as well as I do. So if you could just do a little time machine and talk about your early roots, your stepping stone into venture capital, your role in the first big wave of helping build out the biggest companies in Silicon Valley and now crypto?
So I’m a relatively late bloomer. Let’s suggest that I’ve bloomed. I thought I wanted to be a professor growing up. I went to graduate school for engineering, realized that that wasn’t my true passion — just wasn’t what I wanted to do. I eventually went to law school because I really wanted to work in the business world and at the time — this was back in the 1990s — a lot of people I admired in the business world had law degrees. So I went to law school, eventually was a lawyer, and to make a long story short I ended up at Google, pre-IPO, as a corporate attorney when I was 35 years old. That’s what I mean when I say I’m a relatively late bloomer. That was my first entry point into working in the corporate world as opposed to a law firm or that sort of thing. Google was this rocket ship and over time I transitioned into business development and then I met one of the early investors in Google — Ron Conway and he’s an angel investor and over time I worked with a startup, worked for that startup, StumbleUpon and we were acquired by eBay and after that I started at Baseline Ventures, which was then partnered with Ron and then eventually helped started the current iteration of SV Angel at around 2009.
Can we talk about SV Angel a little bit more?
SV Angel is a firm. It was started by Ron Conway back in the first tech boom of the 1990s. And it was an angel fund that made smaller investments into many companies. So many funds invest into maybe 10 or 20 companies — relatively concentrated. And we would invest in maybe a hundred, because if you believe in the trend then, you would invest in just three to four companies in each trend with the idea that one of them will be the big winner. It’s relevant because during that run, from 2009 to 2015, I was able to invest in companies like Airbnb, Stripe, Dropbox, Snap, Pinterest, Twitter, and 400 other companies [as well as] Slack And Coinbase in 2012. It’s relevant because — and I’m not being falsely modest when I say this but — timing is everything in investing. And I happened to start investing seriously, or with a lot of intensity, around the time when the iPhone launched, and when the US went through the greatest ramp of technology adoption in history. I’m not sure we’re going to replicate that in the near term. where you went from 10 to 15% of the country having a phone or being connected, to 85% of the US, i.e fully penetrated, in a matter of 2.5–3 years. So that’s why all the startups that were started during that time, they were the fastest growing X. Fasted growing car service, fastest growing delivery service, fastest growing photo sharing app… And timing is everything because the market is moving, and they call it the tailwind, when it is in your favor, you don’t have to be great. And so conversely, if the market is moving against you, and we can talk about that in a bit, then it’s a little trickier. It was a great run, but by 2015–6, everybody had their first screen apps. And also, around 2012–13, I saw more and more founders working on fundamental human problems, one of them being Bitcoin, that’s when I first got introduced to Bitcoin through a good friend Balaji Srinivasan you were at Counsyl and I was an investor at Counsyl and that’s how I met Balaji and he introduced me to Bitcoin in 2012 and that’s when I invested in Coinbase and got really into it, and that was my entry point into crypto.
I was able to invest in companies like Airbnb, Stripe, Dropbox, Snap, Pinterest, Twitter, and 400 other companies [as well as] Slack And Coinbase in 2012.
For reference, Balaji used to be one of the partners at Andreessen Horowitz, a CEO at Earn.com and there was a recent buyout and now he’s CTO at Coinbase. Before we go deeper into crypto, I think one thing is that venture capital is a very mature industry in the Bay Area, whereas in Korea, China it’s relatively young, like 10–15 years in. What are some of the key differentiators that you think you’ve noticed besides market timing? Maybe particular to founders, particular to how they operate a business, that you think made the difference between success versus failure?
In terms of the companies or in terms of the venture capital ecosystem?
Let’s try the companies because I think a large part of our audience is founders.
It’s so hard to say…I mean it’s easier to talk about why companies don’t succeed. There’s more data that correlate that. I think it’s really hard to say why these companies are successful. I think if you compare and contrast founders in the US versus Korea, certainly the infrastructure is more robust in the West, in Silicon Valley in terms of the investors, in terms of the people who can help you, either informally or formally. Even somebody like a good lawyer. You know that’s something that’s strikingly [different]. You see in other communities, a lot of attorneys that really don’t understand the startup community while in Silicon Valley, they’re a dime a dozen. So the ecosystem there and the infrastructure is certainly a huge advantage. And I think just the human network effect, of companies being created all the way back to Intel and Fairchild Semiconductor.. you just had literal generations of not just entrepreneurs but employees who have gone on to start companies or who have gone on to become investors. And that’s really hard to replicate.
That’s the Silicon Valley narrative that I always tell. I’m generally hopeful that the next evolution, the next big wave of innovation could maybe happen outside of Silicon Valley. Do you have thoughts around that?
One of the pieces I would be a little be cautious if I weren’t Silicon Valley, is trying to replicate the Silicon Valley model of financing. If you look back in history, Silicon Valley really started when William Shockley invented the transistor. He moved to Mountain View because his mom was sick, and he won a Nobel prize. And the transistor was really the white paper of software. People talk about the Internet or Marc Andreessen..no it’s the transistor. Without the transistor, you don’t have Intel. Without Intel, you don’t have Microsoft. Without Microsoft, you don’t have the ecosystem around it. [So] without the transistor you don’t have the internet. And I have this picture in a previous presentation, where I believe it’s Fairchild Semiconductor and it’s Robert Noyce and Gordon Moore of Moore’s Law — they went on to start intel — Andy Grove, Eugene Kleiner who started Kleiner Perkins and Arthur Rock. And so you had this ecosystem. Shockley was the first person who arrived in Silicon Valley and there was a financing ecosystem called venture capital that was created to support that ecosystem. I think the next wave is much more global and distributed in nature. So having something that concentrated in one area and the ecosystem doesn’t make sense. So to your point, if you look at crypto, it’s not Shockley who landed in one part of California and created Silicon Valley. It’s Satoshi, who we don’t know who he, she, it, or they are, Vitalik, who all for intents and purposes lives in a suitcase. He’s very nomadic; so the funding mechanism, the funding structure, the funding environment to support the new generation’s entrepreneurs, I think, will be very different. It’s not clear that a localized version of venture capital is the best vehicle to finance these distributed teams.
Vitalik, who all for intents and purposes lives in a suitcase. He’s very nomadic; so the funding mechanism, the funding structure, the funding environment to support the new generation’s entrepreneurs, I think, will be very different. It’s not clear that a localized version of venture capital is the best vehicle to finance these distributed teams.
So there’s some terminology that’s been popping around. We’ve been thinking a lot more about what it means to be a venture capitalist, but really a network participant, because in a lot of cases we’re in an open source environment — we’re investing in networks, we’re building our communities for these projects, and some people call it general mining, if you know Kyle at MultiCoin that’s how they go about it… in recent months, however, the general sentiment around utility tokens are nearing zero. Do you still think this token ecosystem, this blockchain ecosystem is disruptive to venture capital?
I don’t know if it’s ever been disruptive to venture capital. I think what it did at least in the US is…it accelerated a vision for a founder where the amount of choices that the founder had to finance his or her project expanded. So it wasn’t just debt and equity; it was tokens. And so for me, I don’t think they’re mutually exclusive. I don’t think the real breakthrough funding model has emerged. I think it’ll be a hybrid of traditional financing — debt and equity — with token economics. I do think, though, if you’re an investor, whether it’s 1950, 2000, 1999 or today, your job is to meet the founder where they are, right? And to help them along the way. So if the product that you’re selling is debt and equity, and tomorrow’s founder is thinking about token economics, then you’re living in the world you want to live in, not the world you [actually] live in. The investor’s job is to constantly adjust and evolve and meet the founder where they are and to help them to achieve their goals. That was what venture capital was about in the 1960s, and I think the really astute investor today will know where to meet the founder and to help them achieve what they’re trying to achieve.
Makes a lot of sense. Moving into crypto, then, what’s your vantage point? How do you view this landscape today as an investor?
As an investor, I was just mentioning this to the group, I’m actually…excited is probably an inappropriate term, but this is the time as an investor where the job gets easier along one dimension. Part of evaluating any new project, whether it’s a new protocol or a new company, is that you have to look at the people backing it. You have to understand their motivations and not just their current motivation, but their potential and their potential to lead, their potential to thrive through adversity, their potential to build, to evolve as a leader, and I think that is correlated to their belief in what they’re doing. And in this type of environment, you can weed out the pretenders pretty quickly. And that’s pretty important — you asked me earlier about the patterns of success. One of the areas, the elements that you’ll find…a lot of this is hindsight bias because a lot of people have these elements and still don’t go on to success…is that single-minded focus to achieve something. So Billie Jean King — she’s a famous tennis player in the US…
There was a movie.
Yeah. She’s an icon not just for her athletic accomplishments but for what she did off the court. She said that the only way to change the world is to be single-minded in nature and don’t ever think that’s a bad thing. And what she was saying was that if you truly believe in what you’re doing, and it is really difficult to do, you need to be single-minded and focus to the point of sacrificing a lot. In this type of environment, it’s very clarifying because you can spot the people who probably have higher potential to do that. Because if you’re in crypto now with the same level of enthusiasm and the same level of passion, you are a true believer. And those are the people that are hardest to find as an investor. It doesn’t mean it’s sufficient for success — but it’s definitely necessary
If you’re in crypto now with the same level of enthusiasm and the same level of passion, you are a true believer. And those are the people that are hardest to find as an investor. It doesn’t mean it’s sufficient for success — but it’s definitely necessary
Just in the interest of time, I think the category to move on to now is Korea. You live in LA — I think I’ve seen you in Korea more than LA. Anything you want to share to the Hashed community about what is so interesting [about Korea] for you to take an 11–12 hr flight out here?
Part of the reason I do that is that I believe that to really participate in crypto, and the community, you have to get on a plane. You have to understand what’s happening in the rest of the world and not just the US. And as a Korean-American, there’s an affinity there. Also, Korea is known globally as being early adopters as a country. And the running joke is that we export consumption. We export having fun. That was literally an initiative back in the 90s. Part of that is games and adopting new technologies, and that’s part of the reason why I’m much more optimistic about some projects here than in the US. And I think what’s happening here — one way of thinking about it is you look at what’s happening here, and that’ll give you a pretty good idea of what’s going to happen in the rest of the world, and in the US in five years. So what I would say to the founders is or the people out in the community is that now is the time, to be honest with yourself. It is not a bad thing to look at yourself in the mirror and say, “You know what? I like this stuff, but I’m not ready to dedicate the next 10–15 years of my life to it.” And that’s okay. But for those people who feel like “This is all I think about when I wake up in the morning. This is what I want to work on. I want to work with people in this community. This is absolutely the best time [for them] because as my friend said, the tsunami washes the garbage away, and what you’ll find are people who are true believers. There’s a documentary on HBO called The Defiant Ones and it’s about the early days of gangster rap: Dr. Dre, Eazy E, N.W.A…and that’s how I think about it. This type of environment fosters defiant ones. And those are the ones you want to back.
I think what’s happening here — one way of thinking about it is you look at what’s happening here, and that’ll give you a pretty good idea of what’s going to happen in the rest of the world, and in the US in five years.
