Variant x Token Terminal: Interview with Jesse Walden

We sat down with Jesse Walden, founder of Variant Fund. Jesse previously founded Mediachain Labs, a protocol for (social) media metadata, which was acquired by Spotify in 2017. He later joined a16z crypto as a partner in 2018, and has been one of the leading figures behind a16z Crypto Startup School, an educational program for builders in the space.

This interview was transcribed from an audio recording.

Your career is a combination of music, startups, and crypto — how have these experiences shaped you as an investor?

There’s a few straight lines through my career that may not be obvious. One is that I think there’s actually a lot that is similar between the work I was doing in the music industry as an artist manager prior to getting into the tech world. Before starting Mediachain Labs, I had started an artist management firm called Cool Managers where we helped independent artists such as Solange Knowles and Blood Orange.

What’s interesting is that there’s kind of a similarity in the work of being an artist manager and then working in VC. Both jobs require you to be constantly scouting out new talent, new ideas and creativity that you can get excited about and put work into to help realize those ideas. As an artist manager, the talent that you’re working with are musicians. And now, as a venture capital investor, the talent that I’m working with are entrepreneurs, developers and technologists.

For me this is a straight line — I’ve always been personally a technologist and someone who’s excited about culture, music and ideas. And so, I found the transition from working in music to working in tech, both as an entrepreneur and then later as an investor, as a very natural one. The other thing that I’d say is that in all of my careers, I think the guiding principle has been trying to help creative people capture more of the value that they create.

With the artist management firm, the goal was to help artists remain independent and reach their fans directly by using new technology platforms, which also helped them monetize their audiences without having to depend on the major label system.

Similarly, with Variant, the thesis is all about trying to help everyday Internet users capture more of the value from products and services that they contribute to every day. I think that’s the big unlock that crypto networks have exposed — the foundation for a new generation of Internet platforms that are getting started today.

Some of your writings have evolved into landmark pieces in the crypto space — how do you choose a topic to write about?

I’m in a very privileged position in that I get to meet entrepreneurs every day who have great ideas about how to build products. The benefit of talking to tons of technologists building stuff helps you see patterns emerge. You can then contrast these patterns against one another and build frameworks as to how these markets work.

When I start to see a pattern that’s emergent, and potentially something that is poorly or not widely understood, that’s where I see an opportunity to to collect my thoughts and share them to hopefully benefit other entrepreneurs that are trying to navigate the idea maze of running an early stage startup.

The progressive decentralization playbook is definitely an example of that. It was largely informed by my experience as an entrepreneur and the things that I was learning from other entrepreneurs who were executing through the idea maze.

Being close to the next wave of entrepreneurs that came on the back of the ICO boom, I started to see patterns emerge that I thought were better fact and design patterns. That’s what prompted writing that post.

It’s definitely not some stroke of genius, lightning in a bottle type thing. It’s more just about having the benefit of learning from the best entrepreneurs.

What has surprised you the most in the development of the crypto industry?

I would say one thing I’ve been surprised with are the progressive decentralization posts, and how often the concept is referenced. It’s a playbook that I think many projects are now following. That’s a net positive, because the reason I wrote that post was to provide a better framework for bringing a crypto project to market.

The surprise has been the degree to which that playbook has been executed and the speed of execution. So now, there are many projects that are going through the three steps of the progressive decentralization playbook literally in a matter of days. I would say that’s been very surprising and also interesting to watch, especially since it diverges from the intent of the post quite a bit, for better or worse.

You were responsible for the a16z Crypto Startup School initiative. As an organizer, what can you tell us from the experience and what were the key learnings from the course?

Many of the people who applied to crypto startup school, and ultimately ended up attending, were people who are new to crypto. I would describe them as crypto curious. Many of them worked in big technology companies like Google, Netflix and Amazon, and maybe some of them had bought some crypto in 2017, but hadn’t really yet taken a deep dive on it. At those companies, they don’t really have an avenue to explore this sort of new and very quickly moving space.

We intentionally designed the program to have a balance of crypto curious students and others that are more crypto native or people who are already deep down the rabbit hole, including people already building projects in the space. That dynamic between the two groups worked well, because the people who were new to the space came in with a healthy degree of skepticism.

How do you look at team-building for crypto protocols, especially since they enable global participation?

It’s more distributed, which is good in the sense that the goal of many crypto networks is to become fully community owned and operated networks, meaning that any user anywhere in the world can contribute to the network and earn value in exchange for their contribution. However, I would say that distributed teams do have a cost. If you look at the numbers, there are very few multi billion dollar companies where the teams started distributed.

Even though I’m very optimistic about that changing, I do think it’s important for startup founders to consider the fact that the most successful technology startups in the world started as traditional centralized teams. It can be helpful in the early days to have a very tight, close knit team that’s able to execute rapidly and ship, iterate, and learn. Once you’ve shipped a product and you have people using it, you can progressively decentralize both the control over the product itself, the team and the contributors to it.

What are the key differences or similarities between protocols and traditional online marketplaces?

The biggest difference is how you bootstrap liquidity in the marketplace. But let’s talk about similarities first: I think many crypto networks can be thought of as traditional marketplaces. For example in the Bitcoin network, there’s a simple marketplace with supply and a demand. The supply side consists of miners who provide blockspace and the demand side is investors or users who are sending transactions in order to invest or transfer Bitcoin, for which they pay a transaction fee. That transaction fee goes to the supply side, i.e. miners of the network.

Hopefully that illustrates in broad strokes that the business model is the same: you have at least a two sided marketplace with a transaction fee in the middle. What’s different is what’s done with that transaction fee revenue. Instead of that revenue going to third party shareholders, as is the case with most Web2 marketplaces, that revenue stream in crypto networks is distributed directly to the contributors on the supply side of the network — the people who make the network valuable in the first place. So, in Bitcoin, that’s the miners and in a network like Compound, that’s the liquidity providers who make the network effects of the Compound money market. And the fact that contributor’s are able to earn some of the value that they contribute is an incentive for them to begin using the product and see the product continue to grow over time.

That’s what’s fundamentally new about crypto networks. What’s different is that they can solve the classic chicken and egg problem of marketplaces by giving direct economic incentives or control over the platform directly to the users.

In addition to DeFi, what other use cases or verticals are you most excited about?

What’s going on in DeFi is something that I’ve been calling the ownership economy, which means that the users of these financial marketplaces are able to earn some of the platform value of the marketplace itself. The users own and operate the platforms that they interact with every day. I think that the same idea of user ownership is starting to increasingly play out in consumer facing verticals. At first, it started out with Bitcoin and Ethereum, where the early users of those networks were technologists and developers. They understood that the value of these tokens was, in fact, the value of the network as a whole.

Now that same idea is starting to get productized and applied to other areas. We’re starting to see this happen in consumer facing marketplaces like Foundation and Forte. In the case of Foundation, they’re helping creators fund and monetize creative projects by turning those projects into tokens and allowing their audiences to buy those tokens. Users can then sell them on the market or redeem them for the actual work. The result is that both the creators and their audiences can benefit from increased demand for the creators’ work, because as the demand goes up, so too does the price.

I would also give Reddit as another example. They’re running this great experiment where users of the Reddit mobile app get an Ethereum wallet and they don’t need to know or care. All they need to know is that they’re able to earn value for the contributions that they make — whether that’s moderating or posting content. Users can earn community currencies whose value derives from the product features that Reddit has built. For example, users can pay for gifts or badges with those community currencies, thereby giving them fundamental intrinsic value. What’s cool is that Reddit is distributing that value directly to the contributors, meaning that Reddit is aligned with their users’ success since the company retains 20 percent of each community currency they create. The company’s success being aligned with the users of the platform is an important new example of this model playing out outside of developer infrastructure and finance.

You recently launched your own crypto fund Variant. What’s the fund’s investment thesis and focus?

The ownership economy concept, which I touched on earlier, is the thesis for Variant. In short, it’s that crypto networks have highlighted a new economic foundation for the next generation of Internet products and services. It is a foundation where users own and operate the network. I know that may sound kind of far fetched, taken at a glance, but if you zoom out and look at the history of software innovation over the last 20 years, I actually think it’s a very linear progression, in that one of the biggest surprises in the software industry is the success of open source software. Twenty years ago, if you’d said that billions of devices would be powered by code written by random people all over the world, people working at the biggest technology companies likely would have laughed at you. But that is, in fact, the case today, where billions of devices, most of the Web servers, most of the major websites that we use everyday, rely on open source software that is crowdsourced from independent contributors all over the world.

What’s remarkable is also what’s been built with that open source software. Many of the most valuable platforms like YouTube, Airbnb, Uber, etc, also crowdsource a lot of their value directly from their users — content on YouTube, rooms on Airbnb, cars on Uber. The products and the content that make these platforms valuable is crowdsourced directly from the users.

Now that we have this technology breakthrough of crypto tokens, we’re able to distribute value in the way we distribute information. The fact that we can distribute value instantly to anyone, anywhere in the world, I think, is a major unlock for the next step in this evolution. We don’t only crowdsource code, content or products, we actually crowdsource the operation of the products and services we use every day directly from the users as well.

The thesis is that progression is going to play out across all technology or all Internet products and services, not only hyper technical platforms like Bitcoin and Ethereum, but with increasingly more consumer facing marketplaces and platforms as well.

What’s your call-to-action for builders in the crypto space? Which areas still need to improve before crypto becomes the default tech stack for entrepreneurs?

We need many more product driven builders in the space. The last 10 years or so of build out in crypto have been very infrastructure heavy. There have been a lot of deep technologists working on distributed systems, consensus and hard cryptography problems.

So the infrastructure is advancing at a rapid clip. But what’s necessary in order for the Ownership Economy thesis to be realized, is that we are going to need many more product driven founders that come in and make this new model and technology stack accessible to everyday Internet users. The experience of interacting with products and services built on this new stack needs to be on par and outcompete the experience of traditional web applications. We’re just starting to get to the point where that’s now possible in that we have the means to abstract complex crypto wallets from end users. We also have the means to extract the volatility of crypto through stable coins.

So there are fundamental building blocks in place today, meaning that great product people can come in and use those building blocks to build beautiful and intuitive product experiences. That’s only going to happen if we build a bridge from crypto to the traditional technology world, where there is really great product talent that has shipped software that’s reached billions and billions of users.

You can find more information about Jesse on his website, and follow him on Twitter.