The Inquisitive VC: Sterling Witzke — Winklevoss Capital
Sterling Witzke is a partner at Winklevoss Capital with a passion for startups and helping entrepreneurs change the world. At Winklevoss Capital, she leads all private investments for the family office of Cameron and Tyler Winklevoss, providing funding and strategic support to a large portfolio of investments spanning multiple verticals. Prior to Winklevoss Capital, Sterling was on the founding team and served as Chief Business Development Officer of Turo (formerly RelayRides), the nation’s first peer-to-peer car-sharing service.
NA: I have seen that you’ve been in the venture capital space for about 6 years now, can you talk about how things have changed in that time for the venture space as a whole?
SW: Over the last several years, one of the things we have seen is companies raising larger rounds earlier and earlier, and what that means is we have seen a proliferation of seed-stage funds, and now even pre-seed stage funds. I joined Winklevoss Capital six and a half years ago and probably about five years ago we made an investment in a pre-seed fund in New York. It was one of the few around and since then we have seen a lot of these much smaller very early-stage investment funds pop-up. On the other side of the spectrum, we have also seen the massive capital raises driven largely to compete with investors like Softbank, and other firms raising multi-billion dollar funds.
NA: Interesting that there has been an increase in funds on both sides of the spectrum. What about the change you have noticed in the crypto space in the past six and a half years?
SW: (Laughs). Six years in the crypto space is basically decades in regular tech. It’s kind of a hard question to answer just because there have been so many ups and downs. But in general, we are starting to see a maturation of the space, and one of the biggest things we have seen is that Founders we have worked with in non-crypto investments, after an exit or acquisition, their next project has been to start a crypto-related company. So, it has become more “acceptable”, if you will, to leave big tech companies or leave other promising startups and focus on the blockchain space, because it is becoming increasingly mainstream.
NA: That is a great observation and there are not many people that have been involved in the space that long. Where do you see the most opportunity with blockchain technology from here onwards?
SW: There is so much opportunity, but the space that I am particularly interested in is around identity applications. Being in the US, identity is really something that each one of us takes for granted. We are given a birth certificate when we are born, a drivers licence when we are older, basically, the government says yes we can verify that you exist, we can confirm who you are, etc. But there are two billion-plus people that don’t have any official form of ID. There are obviously many problems with this, but the biggest problem is that these people can’t get a bank account. We have two billion people unbanked, which cuts them off from vital services like credit or money transfer. It basically excludes them from the financial system as a whole. I think that one of the most interesting applications of blockchain is that it has the potential to solve these problems.
We could theoretically use blockchain to prove a person’s identity based on things other than a stamp of approval from a central government. Things like biometrics or social footprints, or even the GPS on your phone can show that if you are in a building that is not your home, eight hours a day, you likely have a job. Even if that job is coming with cash and not a verifiable payslip or W-2 as we are used to in the US. That is a space that I think is a relatively low hanging fruit, massive market and can move the needle for literally billions of people in the world.
NA: Yeah there’s no doubt that identity is a massive opportunity for blockchain. Winklevoss Capital is quite closely associated with bitcoin and blockchain because of how active Tyler and Cameron are in the space, could you elaborate on the thesis of the firm and your approach to portfolio construction?
SW: We are just looking for the best and brightest founders. We are early stage focussed in both our traditional venture investments as well as crypto. There is no set percentage that needs to be crypto versus SaaS, e-commerce, IoT etc. It is really all about making the best investments up and coming at the time.
NA: Sure, and does the fund have a global mandate or just the states?
SW: With our more traditional venture capital investments those tend to be very US-focused because that is the market that we understand the most. When you are dealing with an e-commerce company, for example, you really want to be able to understand the consumer of, let’s say, a CPG good that is being sold in a Wholefoods. For crypto, it’s so global that we really can’t have a US-only mandate. We have seen a lot of interesting projects coming out of Berlin as well as the US, and other global locations as well. So for crypto, it tends to be more global.
NA: That makes sense, crypto companies are essentially global from day one. How do you think COVID-19 is going to affect crypto?
SW: Great question, I think it will largely affect crypto in the same way that it is affecting other investments. There has been a large flight to cash across all asset classes, although we are starting to see that come back in the bitcoin bounce, using bitcoin as more of a store of value. The foreseeable future is certainly a bit uncertain, and I would be remiss if I did not say that things are going to be different going forward. I think investors are certainly being much more careful and potentially more thorough in general with investments. I will say, though, that there is definitely still capital out there and available for interesting projects. We are still actively investing, but in the space as a whole, I would certainly expect to see valuations change and become more aligned with our new reality.
NA: Very insightful. In a few of my other conversations with VCs, they have said that they are also actively investing but there is a lot more focus on the current portfolio and the bar for to make new investments has gotten higher. Is that the case with Winklevoss Capital as well?
SW: I would say that is true. We have got around 85 active portfolio companies, so you can imagine a lot of my attention now is focused on circling the wagon around those, making sure that they are all doing their contingency planning, helping with fundraising if they need to raise right now, helping with cost-cutting, things like that. Basically making sure that each of these companies has a runway of minimum 12 but more preferably 18 months, given the uncertainty of the global macro environment right now. With that said, the innovation in this space doesn’t stop just because of Coronavirus, so there are still interesting companies raising and we would be remiss if we were to just stop looking at them.
NA: Fair enough, keeping an eye on your 85 portfolio companies must keep you quite busy. Since you have made so many investments, have you noticed a certain characteristic or trait that is common between your founders/CEOs?
SW: The number one thing that I always look for, and I hope that I can coin this phrase, is a founder who is crazy yet coachable. What I mean by that is a founder “crazy” enough to think that he or she can change the world (and hopefully will), yet coachable enough to really know what he or she does not know. I think that one of the most dangerous things you can get is a founder who is unwilling to ask for help and really thinks that he or she knows all the right answers because there is not a single human being on earth that does. The whole reason that you surround yourself with good investors is that so you can lean on them for things that you might not have expertise in. So crazy yet coachable is what I look for.
NA: Well I have not heard anyone else say crazy yet coachable. Do you find that there is a difference in DD when you are looking crypto and blockchain compared to other businesses?
SW: Within the blockchain sphere we think about investing very much in a similar way to the rest of our tech investments. So we are investing early and have a similarly long horizon, something like seven to ten years, similar to a traditional VC investment. The projects we are looking at are largely very early in their development cycle and tend to look very similar to traditional seed-stage companies and because of that, we evaluate them in much of the same way as we would any other VC deal. Who is the team? What is the market size? Does the tech work? What is the go-to-market strategy? Many of the dimensions are largely the same. I would say the main difference is that if we are looking at a company with a token component, the token economics need to be rock solid. Additionally, regulatory due diligence is probably a deeper component more often in crypto deals than in traditional venture deals.
Obviously, that depends on the vertical that you are talking about in venture. If we were looking at something like marijuana tech for example, obviously regulation would be a huge portion, but as a whole, I would say that regulatory questions become more important in crypto than in a lot of other verticals.
With the token investments, we always dig into the questions: Why does this company need to be building on a blockchain? Are there real advantages to doing this? Could they do it in a different way? And then the most important question taking it a step further is, is the added value creation from using a blockchain enough to justify us giving up traditional rights that we would have as equity holders. A lot of that revolves around how solid the token economics are.
NA: Great to get a clear understanding of how you view token and equity investments. My final question is, what is the latest publicly announced investment you have made and why did you invest?
SW: The latest investment that we have made in the crypto space is called TaxBit. TaxBit is tax software that simplifies calculating your tax obligation from trading crypto. One of the reasons we invested is that it is such a massive pain point. Anyone who has tried to calculate their own tax obligations on crypto trades from more than one exchange knows what a huge headache this is and what a high pain point it is for the space in general. They have really taken a very convoluted process and made it very simple with consumer products as well as an enterprise product for exchanges, and also now software for CPAs to use.
Within the blockchain and crypto space, I am particularly drawn to “picks and shovels” investments. What I mean by that is infrastructure and services in the crypto space that are protocol agnostic, and that is one of the reasons I love TaxBit. For TaxBit, it doesn’t matter which crypto token wins the widest adoption, at the end of the day you have to pay your taxes. Also, the founder is incredibly authentic to the brand, which is another thing going back to your earlier question, that what we look for. Why is this the right founder to build this company? The founder of TaxBit spent six years at Qualtrics and was ultimately the Controller that brought them to an eight billion dollar acquisition by SAP. So really a phenomenal founding team and I really can’t say enough good things about the company.
NA: Fantastic, it been great understanding how you guys invest at Winklevoss Capital and I really appreciate your time.
SW: Great talking to you as well, thanks for reaching out.
