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Today’s episode is from a 2017 conversation with Kyle Samani, co-founder and managing partner at Multicoin Capital, a crypto hedge fund based in Austin, TX. We discuss Kyle’s concept of managing a liquid venture portfolio. For the full conversation, check out Flippening episode 2.
Links Relevant To This Episode
- Nomics on Twitter
- Clay Collins
- Nomics API
- Nomics’ Fully Customizable Daily Crypto Newsletter
- Kyle Samani
- Multicoin Capital
Clay: Welcome to Daily Wisdom from the Flippening Podcast. These episodes feature short, to-the-point clips from our full-length interviews. We talk to the men and women behind the trades, crypto exchanges, and regulations with the goal of helping you become a better, more informed investor.
Michael: Hi I’m Michael Kaplan, editor of the Flippening Podcast. Today’s episode is from a 2017 conversation with Kyle Samani, co-founder and managing partner at Multicoin Capital, a crypto hedge fund based in Austin, TX. We discussed Kyle’s concept of managing a liquid venture portfolio. For the full conversation, check out [00:00:30] Flippening episode two.
Without further ado, our conversation with Kyle Samani, co-founder and managing partner at Multicoin Capital. Enjoy.
Kyle: Our thesis is that crypto is a fundamentally new kind of capital market. We have never before had high-risk, high-reward, early-stage technology investing, that’s liquid. Liquidity changes everything about portfolio construction when you think about high-risk, high-reward investing. The entire VC model is predicated on a lack of liquidity. Eight or 10 years of your [00:01:00] lockup, obviously because the underlying assets are illiquid, and therefore when you’re a VC, once you invest, basically the money’s gone, and hopefully you get it back one day. It’s extremely risky. All of your outcomes are very binary. You have no control over the exit price, you can’t change your mind after the fact. When you think about portfolio construction in venture capital, you basically need to be investing in at least 20 if not 30 companies out of a portfolio to try just thinking about risk. Basically, the goal is to catch a winner.
Clay: You’ve got 10 to 12-year lockups [00:01:30] and you can’t get your money out and all that stuff, yeah.
Kyle: Right. That’s one problem. There’s a whole bunch of reasons why that model is designed the way it is, but here, it’s liquid. The first thing LPs are going to say is “Why would I commit to a 10-year lockup, if the assets are liquid? That’s crazy.” Even though you can try and be pedantic and say, “Well you just don’t know what you’re doing. We’re the tech guys and we really know what we’re doing. We need a long lockup.” Maybe you’ll convince people to give you money on those terms, I haven’t tried to do [00:02:00] that. I’m not sure who would agree to those terms, but hey, you’re welcome to try.
We have a one-year lockup on our fund. It was just because we want investors who are willing to commit given the volatility, but no one would have a one-year lockup knowing we have month-to-month MABs, and that we will be judged on our performance, and our LPs expect returns in a reasonable time period. It’s hard to think purely like a VC, it’s actually counterproductive.
We think of ourselves as managing a liquid venture portfolio. Our investment and how we handle that in our investment process is [00:02:30] we have a unique, two-step investment process. Step one is do we want to own the asset at all? This is a function of venture style thinking. What’s the problem, what’s the solution, how does the technology work, what are the tech experience of the team? If it works, how big can it get? Those kinds of things.
We aim for 100x in everything we invest in. Obviously, we will not 100x everything but we need to see a return on that order of magnitude to justify the risk because the things we’re investing in are very risky. That’s step one, and then step two of our investment process is okay, we’ve got this [00:03:00] bucket of about 20 to 25 of these things that we think if they work as advertised, could become very large. From there, then we basically say “Okay, well of these 20 to 25 things, what do we want to be overweight versus underweight today?” This is kind of thinking with a hedge fund hat on, thinking opportunity cost of capital.
There are certain assets in our portfolio that we’re overweight on today, there are certain assets that although we are very bullish on in the long run. Our allocation today is actually zero because we don’t believe there’s any short-term price catalyst. [00:03:30] That’s how we think about managing a liquid venture portfolio.
Clay: What do you think is easier and harder about what you’re doing versus a traditional hedge fund? Obviously, trading is harder. What other things might be harder and easier? When you sit down and you talk with someone from Wall Street or a hedge fund manager, where are they jealous and where are you envious?
Kyle: Yeah. I’m envious of all the infrastructure they have to do things. [00:04:00] For us hiring a trader, right now we’re debating: do we hire a trader? If we do, the amount of security implications that has. We have to structure the system so the guy can’t run off with all the money. That’s just a big problem. No hedge fund manager is like, “Oh yeah, my trader’s are going to run off with all these Apple stock certificates.” No one thinks that.
I’m just generally envious of the entire financial infrastructure that traditional hedge funds have. So prime brokerage, leverage, shorting, fund administration, [00:04:30] reports, all that stuff, price availability. Nothing is standardized. I don’t have any tools that really work. I’m envious of that stuff. They’re envious of the obvious one, and that is returns. I would say I can have 1/10th of the IQ of a guy trading equities, I’ll probably outperform him just because I’m an exponential asset class that is going to change the world. If you’re just trading equities in a very efficient market, good [00:05:00] luck outperforming the exponential thing that’s going to change the world.
In that sense, I have it easier, but I just have a new set of problems. I think where my job becomes just different is actually evaluation, both technical/technology, but also how does value accrue? Value will accrue to these token things in a very different way than it accrues to equities.
There are no revenues or expenses. We’re buying currencies that are priced against other currencies. Figuring out demand for currencies and the willingness of people to hold the currency [00:05:30] are just a very different form of thinking. And then, how we get involved and actually generate real alphas. If you’re at a hedge fund and you’re invested in… I won’t use Apple as an example, that’s too extreme. If you’re invested in a company number 300 of the S&P 500, you might get the C-suite on the phone or some guy from investor relations to ask questions. You’re not really value accrued in any way, you’re just a guy on the sidelines who demands returns.
I had a phone call this morning with one of our investments. [00:06:00] We spent about an hour on the phone with them, and probably 75% of the phone call was them telling me their problems, and thus brainstorming on how I could help them solve their problems.
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All opinions expressed by podcast hosts or guests are solely their own opinion and do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
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