Miko Matsumura founded crypto exchange Evercoin, is a Venture Partner with BitBull and investor in the Pantera Capital ICO Fund (a $100M ICO-only fund). As a 25 year operating exec in Silicon Valley, he has raised over $50 million in venture capital for Open Source startups and over $200M in ICO capital.
Recently we discussed questions that are not just on my mind, but on the minds of everyone who is in the space.
What's most important to you in an ICO?
First of all, I think your characterization is too kind. There are so many incredible people in the space, and I have a unique vantage point from which to study my own fallibility and weaknesses. What I can assert is that I do love the cryptocurrency movement and the incredible people that I've met along the way.
As far as looking at ICOs, the first thing I would like to tell everyone is to please pay the most attention to their allocations. First and foremost, please allocate a comfortable portion of your investable net worth into cryptocurrencies. If you are going into debt to buy cryptocurrencies, you are way past any reasonable allocation. When I say comfortable, you need to be comfortable with that amount going to zero. I don't believe Bitcoin will go to zero, but there are scenarios such as the appearance of a new dominant cryptocurrency that could cause something like that. The second thing is to think of ICOs as a risky subclass of cryptocurrency. Yes there is huge growth potential in ICOs, but there is also substantial risk and most ICO cryptocurrencies will go to zero value. So ICO allocations should be a fraction of a small fraction of your investable net worth.
As for what I look for in an ICO, my basic mindset is similar to that of an early stage Silicon Valley venture capital investor or angel investor, so if you pick up a copy of Jason Calcanis's book "Angel" you will have at least a base platform from which to understand my mindset. There are several key factors on top of that that are unique to either the ICO space or to cryptocurrencies in general, and some to me in specific.
The most important variable to me is my own enthusiasm. I find that if I am excited about something that I have boundless energy and time to work on it, and that I am much more effective at everything. This is fairly intangible, but some of it is chemistry with the founders. This is a personal matter and there are many reasonable and even venture-class opportunities where I just don't have personal enthusiasm. In those cases I have to apologize and decline and I hope the founder entrepreneurs don't take it as a belief that they won't be successful, rather it is a statement about my opportunity cost and the rate limit of my effectiveness, which is limited by my personal enthusiasm.
Another screening criteria includes certain vertical domains where I feel like I don't have a significant experience or ability to diligence. Areas such as AR/VR, Real Estate, Health Care, Energy, Natural Resources, Insurance. I tend to pass opportunities like those onto my friends and partners because I don't have enough domain knowledge to comfortably understand good from bad businesses. In addition, post ICO I am less likely to refer business or to provide strategic and operational advice, so I am less useful to those entrepreneurs. Again, hoping people don't take that personally either.
Specific to token sales, what I like are good governance practices, which you can see on http://icogovernance.org
and I also like good tokenomics. I tend to like pre-existing products with pre-existing customers and pre-existing revenue. All of these things de-risk execution. In the case of deeper blockchain technology I am willing to go without those things, or in certain cases where I am excited about certain founders. For example Propy and Bee Token were both in fairly early stages with product, but I have great confidence in those people.
When you advise ICO's — what do you focus on usually?
When diligencing ICOs, I focus on the people, but as far as advising, the first thing I tend to focus on is the mindset of the entrepreneur reflected in the mindset. If the mindset is wrong then no amount of investment can create success. This kind of engagement helps me and the entrepreneur a lot because it establishes the foundation of the source of shared enthusiasm, the coachability of the entrepreneur, and it tends to set the strategic direction of the opportunity. In many cases what is missing is the balance between the huge opportunity and the grounded pragmatic execution. I find most entrepreneurs are focused on one or the other, but it's hard to find pragmatic executors with huge vision. Other topics that are exceedingly important include token economics, legal / regulatory compliance, executive coaching topics, hiring, and industry specific things such as introductions to investors, exchanges and domain experts.
What made you believe in ICO's in the first place?
From the perspective of ICOs as a whole in some ways there are many troubling practices and because of the inrush of opportunists that is a lack of professionalism in many cases, and in some cases incompetence or even outright fraud. That's disturbing and so my belief in some ICOs should not be construed as a belief in all ICO or a blanket glorification or valorization of what is clearly an overheated and overvalued asset class.
That said, I consider myself to be an "Open Source Money" maximalist, so I feel that there is a huge positive opportunity for open source smart financial infrastructure to help improve and reinvent the economy. I know as a community we have a lot of proving to do given the large valuation of cryptocurrency, but I believe in the fundamental mechanism that combines open source competition and brilliant developers because I have been working on open source software for the past 25 years and have seen the incredible results. Open source developers have created "immortal" projects that have forever changed the course of software and arguably human enterprise, and I see Open Source Money doing the same. When I say open source money, I am looking past just financial infrastructure, since money is the utility that enables financial incentivization across all vertical industries.
Where do you think regulation will take us?
I don't have a crystal ball here but I can report what I am seeing. In the US I am seeing an ever tightening regulatory framework, but regulatory organizations which are taking an approach of gradualism and caution to not stifle innovation. So you can see the beginnings of enforcement action, and you are seeing staffing up in this area. Anyone is able to enter into email exchanges with the SEC, as I have, and it's encouraging to see them providing individual guidance and directing people towards relevant resources.
For sure KYC and AML are going to be dominant themes in 2018, and with the SEC being more aggressive it is advisable that most ICOs should stay away from selling to US retail investors or from US investors altogether.
From a global perspective, the genie is out of the bottle and impossible to put back in. China experimented with banning ICOs and Exchanges and it merely enabled countries like Japan to benefit hugely from the cryptocurrency boom. We see governments around the world moving to suppress or embrace cryptocurrency, and the ones that remain open will gain the largest economic stimulation. Because the people want an alternative to the problematic combination of too-big-to-fail banks and governments controlling money supply, we see huge appetite for cryptocurrency. Because of the huge appetite it becomes hard for governments to outlaw it. When all the cars on the highway are exceeding the speed limit by 5 miles per hour, the police find it hard to enforce the letter of the law and instead focus on pulling over egregious and dangerous offenders.
The other trend are things like Petrocoin in Venezuela. I was invited to go to Caracas to advise that project which is now endorsed at all levels of the government there and will likely become a strong stabilizer for the country's struggling currency. I believe that governments launching their own cryptocurrency will increasingly be an effective approach for governments to participate in and help guide the fate of cryptocurrencies. Government backed cryptocurrency is a way forward because if you establish KYC within a novel cryptocurrency environment, you actually gain an unprecedented transparency across every transaction in the entire cryptoeconomy of that currency via the public blockchain, which is something that every government should want.
What do you think will be the future of bitcoin?
I'm not someone to participate in price predictions because I believe it's unfair to people to throw numbers around that they could misconstrue as financial advice. I am not a financial advisor, nor a licensed broker/dealer of securities.
That said, without declaring any prices, I personally am not selling bitcoin right now, and I will say that the thesis of Open Source Money maximalism suggests that through the mechanism of many forks and variations and through huge participation and innovation and hard work of developers, many of the existing problems and complaints around cryptocurrencies will be resolved. Some of these problems include the lack of scalability for transaction volumes, the lack of stability in price to facilitate usage as a currency (I don't see bitcoin itself as a payment system, but more as a digitally improved store and transport system of value such a gold). Another problem is the burning of electricity, which is wasteful since the computations are effectively throwaway computations and they contribute to global warming. By enumerating these major concerns (among others) I want to recognize that bitcoin isn't perfect — and the result will be either bitcoin being dethroned by an alternative open source money platform or bitcoin itself will be forced to improve along all of these lines.
Because of my belief in open source software development and developers, I believe these problems will be solved. The danger to bitcoin is that they will be solved by some other cryptocurrency, and that the code will somehow be hard to port or absorb into bitcoin. Thus far bitcoin has done a good job defending itself by absorbing features of other cryptocurrencies, and open source software generally makes it easier for bitcoin to do just that.
So I am bullish about the future of bitcoin but also believe that there will be a "power law" distribution of cryptocurrency value — thus in my belief it's important to hold bitcoin but also to diversify your crypto holdings to hedge against risk in bitcoin as well as participate in the growth of smaller crypto assets. But again, please be safe and keep a level head, don't invest more than you can afford to lose, don't invest in any ventures that seem at all scammy or ponzi or pyramid like, please don't invest in any shady or unethical people, and please maintain good computer security practices and be safe.
Interesting points from Miko. I hope to continue the conversation soon.