Tuesday, May 4, 2021

Out of the Crisis #26: Brian Armstrong of Coinbase on cryptocurrency, being mission-oriented, and institution building

A few weeks ago, Coinbase , which facilitates buying, storing and purchasing cryptocurrency and also operates a cryptocurrency exchange, went public. It was one of the year's most successful IPOs so far, and has been heralded as a "landmark moment" for cryptocurrency's entrance into mainstream investing.

Just before the IPO, I had a far-reaching conversation with co-founder and CEO Brian Armstrong as he approached this major milestone for the company he co-founded back in 2012. We talked about a wide variety of topics, including what the decline in public trust of institutions means for companies, how to codify company culture and intentions, remote work, the concept of the ICO--initial coin offering--and his side company, ResearchHub, which he founded to counter his belief that "there's a crisis happening in scientific research, that is just slowing down human progress."

We also talked about why he took a very public stance on the role of corporate leadership in social issues, and how it relates to fulfilling Coinbase's mission. It's a controversial subject, but one that so many companies are coming to terms with right now. Though Armstrong wasn't looking for the attention he got, he says "I wanted to stand up in front of the company and say, 'This is why we're here This is why I started this company. I want us to go solve this really important thing in the world." And I knew that that would upset some people."

 

You can listen to our discussion on Apple, Google, or wherever you like to get podcasts.


 




A full transcript is beneath the show resources below.

 

Highlights from the Show:

What is Coinbase? (:33)
Brian on his personal and professional pandemic experience (2:46)
On deciding to make Coinbase's pandemic planning for employees public (3:20)
On remote work and its future (4:23)
The moment when Brian became aware of crypto and the original Bitcoin whitepaper (7:17)
His thoughts on who Satoshi (the author of the paper) is and why it doesn't matter (13:21)
How Brian got into computers and coding (14:08)
How he got the idea for Coinbase while at Airbnb (17:44)
The company's first minimum viable product (MVP) (21:05)
Finding a co-founder and adding the "killer feature" that created product-market fit (24:42)
On being mission-driven (27:06)
Coinbase's mission: to create an open financial system for the world (29:51)
Institutionalizing intentions (32:21)
The value of marrying skillsets to form a company that's both innovative and compliant (37:20)
Building a company that lasts while also accepting the reality of creative destruction (40:43)
The role of business leaders in the creation of our civic fabric (42:07)
Fear of the new and mitigating risk (45:39)
The political dimensions of working on economic freedom (47:06)
Brian's thoughts on the firestorm he created by separating politics from the company mission and his advice to other CEOs (48:34)
The current lack of trust in institutions (55:28)
Creating the ICO (Initial Coin Offering)  (56:47)
ResearchHub, Brian's company for accelerating scientific research (1:05:32)
Brian's thoughts on the long-term impact of the pandemic and his hopes for the future (1:09:28)

 

Show resources:



Transcript for Out of the Crisis #26: Brian Armstrong 

 

Eric Ries: I'm Eric Ries. This is Out Of the Crisis.

What are institutions for? Can we build better ones? What is the role of public and private organizations in governing our shared civic fabric? These questions have come up again and again, as we've seen this crisis unfold. As you'll hear, BA became an entrepreneur without expecting to have to address such questions, but that's not how it's turned out. Brian is the CEO of Coinbase, a successful tech company, and one of 2021's most successful IPOs. Coinbase was founded in 2012 and operates a cryptocurrency exchange. The company's market cap at the time of their entry into the public markets topped $100 billion dollars. Coinbase's IPO reflects the massive growth in interest and investment in cryptocurrencies, such as Bitcoin and Ethereum around the world. However, cryptocurrencies raise fundamental questions about what the future of our institutions will hold. Can institutions be totally distributed or should they be rooted and loyal to a certain community or geography?

Do we need more regulation in this area or less? With a rise of cryptocurrency and its attendant freedoms be a boost to, or hamper the recovery that is just now underway? But beyond its products, Coinbase is an interesting company in itself. For many of us in Silicon Valley, one of the notable events of the crisis was Brian's public stance about the role of corporate leadership in social issues. Every company I meet these days is grappling with this topic, from ESG to employee activism, to so much more. The pandemic has brought these issues even more to the forefront of public attention. What are the responsibilities of corporations and leaders? In the years to come, are there limits and boundaries to politics or is everything political? Does our civic cohesion require some level of shared common ground? And if so, who gets to decide what that is? I spoke to Brian a few weeks before he took Coinbase public when many of these issues were at the forefront of his mind. Here's my conversation with Brian Armstrong.

Brian Armstrong: My name is Brian Armstrong. I'm the co-founder and CEO of Coinbase. Coinbase is the most popular way people can buy and sell and use cryptocurrency today in the United States and 33 other countries.

ER: Brian, thank you so much for coming on. Before we get into Coinbase and your history first, how are you holding up? We're having this conversation still in the midst of a seemingly never ending pandemic and lockdown. How has it been for you? How has your team been? How's your family? How are you weathering the storm?

BA: Yeah, thanks for asking. Well, I feel like we've been in a very fortunate position in that we've been able to run Coinbase in an entirely remote way. So I've been able to move to another location with my partner and another city, I should say. And just get a little bit more nature, not have as much time commuting and traveling around the world. And in some ways, it's actually been quite nice as an alternative way of working. So I feel very fortunate in that regard.

ER: Talk a little bit about the strain this has been on your team and as kind of the organizational challenge of having to make these shifts so rapidly.

BA: Yeah, well like everybody last year, we saw the pandemic starting to happen and got in a room and tried to think about what we should do. And of course, we started putting together a plan about how we might evacuate or get out of the office for day-to-day work and how we might start to provide services to employees. Our first thought was just, how do we take care of our employees? And we wrote up a plan about how to do that. One of the things I did was actually, I saw this great plan that was being written by the team. And I thought, you know, there's probably thousands of companies trying to figure out how to do this right now. Why don't we just put this plan on the internet? And I actually really liked doing this. It's one of those things that founders can do sometimes where other employees are afraid to do it.

But if I see a really great piece of work product, I generally will just try to, say hey, let's post this on the blog externally.

ER: Oh, if it's worth doing, it's worth blogging about.

BA: Yeah. And so I think we saved... We got so many positive inbounds from that. We got another bunch of other company's opinions saying, "Hey, thanks for posting that. You saved me a bunch of work I was going to have to do this week to try to put together our own plan." So it was good to collaborate a little bit during those times. And then after a few weeks of working remote, one of our employees came up to me and was like, would we ever think about keeping the company remote indefinitely? And my initial reaction was no way, like we would never do that. I don't see any big tech companies that have great cultures that are doing fully remote.

But I couldn't get it out of my head. And for the next couple of weeks, I kept thinking more about it, reading more about it. I got to hear some people speak about it. People like [inaudible 00:04:49] from WordPress who'd had a remote company for a long time. And eventually, I started to think about a few key points. One was, we're always trying to get top talents into Coinbase. And if you look at what percentage of the global population lives within commuting distance of one of our offices, it's a tiny fraction of the world, far less than 1%. And so, it had always been attractive to me. It'd be great if we could somehow hire people all over the world, that would be great. And then, the other thing I always thought about was, well then, are people going to actually be able to be creative, be collaborative? Have those sparks of innovation? Are they going to be able to build real true relationships at work and have friendships and be able to learn from their colleagues, if it's all just video conference?

And so it was a big question, but I eventually decided, you know what, we need to try this, or we're being forced to try it anyway because of COVID. So we might as well make the most of it. And as things started to work, I got more and more convinced that this was actually the future of work, that the benefits outweighed the drawbacks and that we were just going to go forward like that as a company. It was kind of more true to the ethos of crypto as well. And so far it's gone incredibly well. So I don't think we're ever going to go back. In a post COVID world, we're continuing to be a remote first company, which means people can go into an office if they want.

I understand some people have different work situations at home that make that easier and more difficult, but everyone, whether they're in an office or not is going to work as if they're in a remote environment, so that there's no disadvantage to being remote. And the executive team is going to set an example by never coming into one office in one location, because I think that would create a negative incentive for others to follow us there. So yeah, so far it's been great.

ER: That's really great. And I really applaud you for having that first impulse be about taking care of your employees. I mean, I think that's something that really has been a hallmark of the best companies during this time. And you can really tell even as a customer, as an outside vendor, which of the companies whose kind of first reaction was to take care of their key stakeholders and which reaction was kind of to look out for themselves first and people are paying attention in a crisis. They remember what you do.

BA: Absolutely.

ER: So let's go back. I want to talk about how you first got into crypto and how it first came on your radar. I can remember the first time I read the original Bitcoin paper and the kind of light bulb moment of seeing like a genuinely novel solution to a longstanding computer science problem, published anonymously and kind of in this unusual way was like a really dramatic... How did it come on your radar for the first time?

BA: Yeah, well, the first time I saw the Bitcoin white paper, I saw it on Hacker News, which is a website that YCombinator runs. It kind of aggregates technology content, I suppose. And yeah, I was just home for the holidays at my parents' house. I think it was December of 2010, and happened to just be reading that paper on the internet one day and just immediately captivated my attention. So that was my first interaction with it. I'm curious. What was your first reaction when you saw it?

ER: I couldn't believe it. I just thought it was so brilliant. And of course, I wasn't really interested in the finance side of it to me. So like the fact that it could be used... Obviously, the many things that it has subsequently been used for wasn't really foremost in my mind. I just thought it was a really brilliant solution to a problem that I had certainly spent a lot of time thinking about and on the computer science side and just how to do this kind of decentralized coordination. Maybe for those who are not as technical who are listening, maybe you can just give a brief description of what you took away from that paper that first time and what you thought it would be good for?

BA: Yeah. I studied computer science also, but when I first read the paper, my thought was, wow, this could be kind of like the internet. The internet was another global decentralized protocol that was being used to move information around and it kind of democratized access to that and publishing and moving information around. Well, this Bitcoin white paper was describing another global decentralized protocol, but instead of moving information, it was for moving value around. And that kind of captivated my attention in the sense of I'd always felt like the global financial system was a little bit inefficient and it had high fees and had these delays for no reason that something would work in one country and not another country, many countries had totally unstable currencies.

And so that the idea just initially made sense to me. I was like, that would be amazing if the world had a common set of standards for a monetary system or a payment system or whatever it ended up becoming that nobody could manipulate, nobody could abuse it. It was a decentralized common thing where we just had to trust in the laws of math instead of the laws of men. And it would be amazing. So from a pure computer science point of view, I had never really studied consensus algorithms in depth. I hadn't focused on that area of computer science, but the Bitcoin paper solved this long standing problem in computer science, which people refer to as the Byzantine General's problem. And basically, it's a coordination problem about how messages are passed and how do you know which ones are true and which ones aren't. And so the algorithm essentially proposes how using something called hashing power or proof of work. People can pass around these different transactions in a totally decentralized way.

And then the network can come to an agreed upon state that says, hey, this is a valid transaction. This one's invalid. And it prevents people from double spending crypto. I guess, an even simpler way to think about it is previously, if you had a digital thing like a photo or a message or something, you could make infinite copies of that photo. There wasn't anything that was digital that was provably unique. And in this crypto algorithm, they said, well, since we're all making this distributed ledger, we now have provably unique digital items that I can send  to you, Eric. And provably, we know that I didn't send the same copy of it to anybody else. So in that way, it was totally unlike a photo. It had scarcity. It could be used almost like digital gold or digital money.

And that was a breakthrough. Nobody had quite solved that problem before, and it's led to this entire massive industry now.

ER: What I think isreally interesting, when people hear that this was a novel computer science result, most breakthroughs in computer science, in kind of academic settings have to do with the kind of computational complexity of a problem or some kind of novel algorithm that takes advantage of some computational property that was really abstract, abstruse, and couldn't be figured out. What I thought was really brilliant about the Bitcoin paper was it was a novel result. Like this is a new way to solve a longstanding problem, but it relied on a kind of an understanding of what would be valuable to the many players. It almost had like a social engineering component to it, as much as it was an algorithmic breakthrough. And so introduced a new primitive into the world of computer science, which then people have built all kinds of remarkable things on. And I guess as I'm talking about that, it really is a lot like the early days of the internet. TCP and the other foundational technologies of the web had that same property, that there was something really computationally especially complicated about them, but it was their social value. When many people could agree on a common standard that unlocked all of the incredible value that has come into the internet and that we're especially now realizing how valuable those digital tools can be in navigating difficult times like that.

BA: Yeah, that's true. It had a number of kind of game theory elements in there that it really understood, if I'm trying to get this global group of people to come participate in this new thing, how do I align incentives so that they're aligned to be good actors in that and participate in it. And the early adopters would be rewarded. And so it attracted more people in. It really wasn't brilliant paper on a number of levels. The computer science part of it, the game theory part of it, the economics part of it. And I encourage everybody to go read it. Don't feel bad if you don't understand it the first time you read it. I didn't fully understand it certainly. And I had to reread it many times. It wasn't actually until when building the early version of Coinbase, I went and implemented a Bitcoin node in from scratch in Ruby of all languages, which was probably not the right choice.

But it wasn't until I actually implemented it and went through all of the details of the protocol, like after about 60 or 90 days, I was like, okay, I think I actually understand this protocol now, but that doesn't matter. Go read the paper, even if you only understand like a portion of it. It's really kind of a brilliant thing that was dropped onto the world. And it's an amazing artifact. And of course, we don't know who wrote it, which is another really fun and interesting point.

ER: You don't have to say who, but do you personally have a theory? Have you subscribed to one of the theories about who Satoshi really is?

BA: Well, I certainly don't know for sure. I've read about it quite a bit, of course. And it makes sense to me that it probably was some combination of Hal Finney or Nick Szabo and maybe others, I don't know, but it could have been a combination of folks like that. And the beauty of it is that, of course, that it actually doesn't really matter who Satoshi is, because the idea of it stands on its own. It's kind of like whoever discovered penicillin, you don't need to know their name. You can still go get a shot of antibiotics.

ER: So I want to go back. You compared discovering the paper to discovering the internet and the power of the internet. So tell me when you first had that realization, how did you first come online? When did you first learn to program computers? How did you come into this field in the first place?

BA: Yeah, well, I was fortunate enough to grow up in a household where computers were present and my mother actually worked at IBM. She was an early programmer there and she had started her career as a math teacher. And she kind of took a training course that IBM was providing to learn programming. This was as she explains it on punch cards and things like that back in the day. And so while she was at IBM, we were living in San Jose, California, where I grew up in the Bay Area. And so we had access to early IBM, 46 computers, things like that. And we got these in the house and I didn't really know what to do with  it at first. I played around a little bit with the command line and DOS and playing some simple games on the computer.

And it wasn't until the internet really came to our household, which, I remember having this thought, like I'm never going to be bored again. I remember I was always bored as a kid. I was trying to look at the same things in the house for the fifth time. And I would read books or run around my bike, the neighborhood or whatever, but we got the internet. I was like, I'm never going to be bored again. There's always something new to discover. And at that time again, my parents kind of exposed me to certain things where I got a chance to see what a programmer was, go do take your child to work day, things at IBM, places like that. And I got to meet other programmers.

And the first time I learned about programming, I thought it was very difficult and unapproachable. I remember trying to learn, like I had some books someone gave me, like learn Java in 30 days or something like that. And I was trying to read this book and I couldn't really understand it or get anything to work. And later when the web came out, there was HTML, which was a little more approachable, right? And I started to learn simpler languages like HTML, PHP. And I remember feeling like this was in high school now. I started to go to some community college classes on programming and things like that, and started to build early websites. And I remember feeling like this incredible feeling I had never really felt before. I imagine many people feel it when they find something that they really love, whether that's painting or art or whatever.

But I remember creating this early website. And I went to sleep and I woke up in the morning and I checked on the little counter or whatever. And like 500 people had looked at it or something while I was asleep. And that just felt like the coolest thing ever to me. It was like having replicated my brain or something. And I was able to help people, even while sleeping. It felt like a super power. And I thought maybe if I could do 500 people could help with this, maybe I could help a million people or something like that. And I basically just became obsessed with trying to start businesses. And with technology as a really important lever to improve the world.

And I had all kinds of little businesses I tried starting and things like that in high school that all failed spectacularly, but it was very educational.

ER: What was that first website that you created?

BA: I made a website for the middle school that I was attending, actually, in probably like seventh grade or eighth grade. And then in high school, I tried starting this little company that was reselling computer hardware with another friend of mine. And we ended up trying to find this like refurbished computers in the neighborhood or something like that. And we'd resell it online, like a very early e-commerce thing that was happening. So that was some of the first ones I built.

ER: So what were you doing when you had the idea for Coinbase and how did it start?

BA: Yeah, at that time, Coinbase really was founded in June of 2012. But the idea was germinating before that for about a year, a year and a half or so. I was working at Airbnb as one of their early employees. I was writing some software, I was doing some product management stuff. And I got a front row seat to see how difficult it was for them to move money to the 190 countries around the world where they were operating. It was so amazing, like we were trying to send payments into Uruguay to pay people who are listening to their homes on Airbnb. And I remember we were trying to work with this local payment provider there so that people could pick up cash and things and reading their API documentation. And it became clear that we had no idea how much money was going to show up on the other side of this API. We didn't know what the exchange rate was, we didn't know what their fees were.

We called them and they couldn't even answer the question themselves. And so we eventually just sent $100 through it and asked somebody in Uruguay to tell us how much money showed up on the other side. So we had all these kinds of situations like that. At one point we had to turn off all the hosts in Cuba, because US companies weren't allowed to work with Cuban citizens. And there was all these things about the global financial system. I always remember feeling like it was sort of inefficient. It was a barrier to innovation. Just to step back in history even more, of course so I had studied computer science and economics in college. I had tried starting another company in college that was a tutoring company. And we had just had massive challenges trying to move money to the different contractors we were hiring in different places.

I'd also spent a year living in Buenos Aires, Argentina. I had gotten to see what a hyperinflation economy looked like and what it had done to devastate the population there, especially the poorest people in that society, by the way. Because generally poor people hold their wealth in cash, which is the most affected by inflation. Whereas wealthy people can put their assets into inflation-resistant things like real estate or they can move their money overseas. And so I'd gotten a sense of what that could do to a population and it certainly wasn't unique to Argentina. Inflation had happened in various ways in many countries in the world. So I was sitting there as an employee at Airbnb, and I read that first Bitcoin white paper in December of 2010 was when I first read it, and that's when it kind of really kicked off this momentous thing, which now became Coinbase many years later.

But I guess what it really ended up doing was it caused me to start thinking about, "Am I ready to start another company? Is this the thing I want to start?" It sounded like a crazy idea trying to help people use cryptocurrency. It was such a new thing. All my friends thought it was kind of crazy or it might be a scam or something. I had tons of self doubt about, "Is this what I really want to do?" But my gut was telling me, "This is really exciting and this is going to be huge," or at least it could be. I thought there was a pretty high chance it could fail, but if it didn't, this would be enormous, like something on the scale of the internet. And so I kind of just couldn't get it out of my head. And I started working nights and weekends on a prototype, which I eventually submitted to YCombinator and that became Coinbase. So there's a lot more detail in there if you want to talk about it, but that was the journey.

ER: Talk about that first minimum viable product that you built.

BA: Yeah. So the first product that I had in mind was I wanted to build a hosted Bitcoin wallet that was easier to use. I didn't even have the idea to really make an exchange or a brokerage at the beginning to help people buy and sell it. But what I was thinking in my mind was SMTP is the protocol that powers email, and some people run their own email servers on their own computer, which is what people with Bitcoin were doing at the time. They were all running their own Bitcoin node on their own computer. But email quickly moved into the cloud. There was Gmail and services like that, where you could access it on your phone or your laptop. And if you lost your phone, it's not like all your email was gone. It was stored in the cloud.

And all the security and backups were being kind of managed by this company. So I had a thought like that, "Someone needs to make the Gmail for Bitcoin." And then I had another thought, if you look at Git, which is a tool that programmers use, which led to the company GitHub. Git is another decentralized protocol really for version control and software. It was difficult to use and all this and GitHub made it easy to use. So those were my two models, Gmail and GitHub kind of based around a new protocol that had come out. And so I thought, "All right, I'll make a hosted simple to use Bitcoin wallet." And that was the first thing I put out. And I posted it on Reddit and Hacker News, and some places like that. I got a couple of hundred people to come in and check it out, but they wouldn't really stick around and use the product at all.

And so my user adoption numbers were really kind of flat-lining. And I remember I just... In Y Combinator, they talk a lot about this idea, "Well, go talk to the customers." That's basically the loop of how you find product market fit is go talk to the customers, take their feedback, and go improve the product. Then talk to the customers, improve the product. You just keep doing that until you find product market fit. So as one of those surveys, I was basically emailed 10 of the people who'd signed up from Reddit. And I said, "Hey, I'm the founder of this app. I saw you signed up and you haven't come back to use it. Would you be willing to get on the phone with me and just talk about it?"

So I called some of these people, maybe three or four of them emailed me back. And I remember one of the people I talked to said, "Well, I kind of liked the product, but I didn't come back because I don't have any Bitcoin." And I thought, "Okay, well, if I put a button in there that said, 'buy Bitcoin' or something like that, would you use it?" And they were like, " Yeah, that would be better, because I think there's some way to buy Bitcoin, but there's these random exchanges like Mt. Gox in Japan and I'm not going to send a wire to Japan. If it was something easy then maybe I would do it." So I thought about that for a while and I basically started on the path to try to do that. And that was a simple feature to describe, but it was hard to build in the sense that I was now accepting payments from customers.

I had to think about compliance. I had to think about fraud and chargebacks, because I had read this book called PayPal Wars about the history of PayPal. And there were so many challenges with fraudsters and things. People would put in stolen credit cards and bank accounts and try to defraud the company. And luckily I had worked on that, a bit of that at Airbnb fraud prevention. So I knew how to build some of these systems. And through a process of just focus, and working 12 hour days, and calling banks, and trying to get the early bank accounts set up and integrating with the APIs of these bank accounts. I say we, at that time, right around that time, I found a co-founder finally, by the way, Fred Ehrsam. I had failed to find a co-founder to that point.

And I guess my main lesson from that was just keep making forward progress. I had reached out to probably 50, 100 people to try to find the right co-founder. None of them worked. And as Fred happened to move to Silicon Valley, he saw the prototype I had posted on Reddit, I think. And he reached out to me cold. At that time, the right co-founder reached out to me. Right around the time Fred joined the bank integration and all that was finally done, we flipped the switch so people could click 'buy Bitcoin', and that turned out to be the killer feature. But basically from that moment, we struggled to keep up with the demand as opposed to trying to create more demand. And that was the moment where we found product market fit.

ER: And the rest, as they say, is history. It's funny because founders always call me and ask for advice about whether they've hit product market fit or not. I always say, "If you have time to call me and ask me this question, I'm sad to say that you do not have product market fit. Because once it starts, you will know. I promise."

BA: Yeah. There's a great analogy I saw someone online wrote where it's, "You feel like you're pushing a boulder up a hill every day before product market fit. And then once you find it, it's like you crested the peak and the boulder is rolling downhill and you're chasing it as fast as you can." And we had some moments kind of like that where it basically became a working capital issue, because people would come into the site and buy Bitcoin. We would initiate a debit to their bank account, but we wouldn't receive the funds from their bank account for two to three business days.

And we had to make sure we bought the Bitcoin on the moment they clicked buy, because otherwise the Bitcoin price might be higher when their money finally arrived to us. So I think we had only raised maybe $600K or something at that point. And it quickly became where we were using maybe $500K of our raised money to serve the day-to-day, like basically as working capital to acquire the Bitcoin that we were going to receive the customer funds for in a couple of days. And we hit a point very quickly where we said, "All right, we're either going to have to turn off buys or go raise more money." And that was a good story to go raise money, by the way.

ER: My money printing machine is not able to keep up and I need money to keep my money printing machine going.

BA: Exactly.

ER: The best classic venture pitch. I want to talk a little bit about the organization that you built. We've been talking so much about the product and raising money for it and and finding product market fit with it, but I think one of the things that's really notable about the way that you've built the company is that you've always said that it was important to be mission driven and you've built a real culture and ethos around that. So, tell us what does being mission driven mean to you?

BA: Yeah. Well, I think it's important for every company to try to tackle something big and important in the world to try to improve the world. And the reason is, there's a bunch of reasons for this, but one of them is that doing a startup is just so difficult. Like your chances of failure are already so high. And basically, you're going to give up if you don't try to do something that's about more than, I don't know, just making money or something like that. Because usually the first couple of years of a startup are just moving from one setback to the next with enthusiasm. If somebody sues you, if somebody quits, somebody steals your idea, like whatever it is, and all these unanticipated crazy things happen. So I see people sometimes tell me, "Why are you doing this startup?" And it's like, "Well, it's such a good idea. The product is needed by people. It'll make a lot of money."

And I just keep thinking like, "You're going to burn out within the first two years, because you're not in it for the right reasons." So the first one is you got to be getting out of bed everyday for something bigger. The second reason is you got to be able to attract great people to come join you on this. And the best people want to work on really difficult important missions that are going to improve the world. I think it's hard to get great people to join a company just based on comp or even just based on learning or growth opportunities. They also have to feel like they're doing something important for the world. So, those are all important reasons to have a really big, ambitious, compelling mission. And I would say as the company, especially in Coinbase's case, as the company kept growing, we got over 1,000 people.

There was a moment where I realized we had sort of defined the mission a little bit ambiguously and almost euphemistically. And I realized the whole company wasn't even on the same page about what exactly was in scope for the mission. And this sounds like, "How could that possibly be?" But these things tend to happen.

ER: It's still common actually.

BA: Yeah, it's super common. And really anything, your values, a strategy document, everything. It's hard to get people to all really understand it in the same way. And so there's periods of time in Coinbase's history where I've had to kind of realign the company towards the mission and redefine it and re-clarify the definition of it. And so you want a lot of variety in the people that you hire. You want people from all different backgrounds and different skill sets around the table to get really an innovative and creative company, but you want everybody to be excited about the mission and have the same values that you articulate. So you want people to have the mission and the values in common, and you want them to be really different in every other dimension. That's how you create great companies. You got to get ready to keep rolling in the same direction.

ER
: So what is the mission of Coinbase?

BA: So our mission is to create an open financial system for the world. And what we mean by that is we want to create a financial system that is powered by cryptocurrency. It's more fair, it's more free, it's more global, and it brings more economic freedom to the world, because that was one of those other big things I had noticed when I first read that Bitcoin whitepaper was I was thinking about, "How could this bring more freedom to the world?" I always felt like people want to do good things, they want to be able to keep the upsides of their labor. They want to have property rights. They want to have the ability to work at the company they want to work out and join the company they want to work at. And this term economic freedom, it's kind of an interesting one. You can go read about it on Wikipedia and whatnot, but it's sort of a metric that economists use to look at the various countries of the world and measure how economically free those places are.

And what's interesting about it is that economic freedom correlates with a lot of things you'd really want in society, not just higher GDP growth and things like that, but also higher self-reported happiness of citizens, better treatment of the environment, better literacy, and all kinds of things. So the insight that I had and kind of more crystallized the longer we worked on Coinbase was this invention of cryptocurrency might be the key, the secret to allowing us to create more economic freedom in the world and inject this reliable financial infrastructure, property rights, rule of law into these countries all over the world. And we do that by creating the open financial system. That's what we kind of have boiled down to as a phrase. So I think it's a really important mission. I think it can have all these downstream effects in society and it's really ambitious too. It's almost like saying we want to create a new alternative economy for the whole world. So that's certainly a big mission.

ER: I think it's so interesting that you were conceiving this while you were at Airbnb. And I had a conversation a little while ago with Brian Chesky where he was talking about the importance of institutionalizing your intentions, and I'm sure you have heard him talk about this ad nauseum, having worked there, but I mean, a big part of what he has tried to accomplish and in taking the company public is to take his view of what a 21st century company should be and bake it into the structure of the corporation, so that it remains true to his mission, which of course what he's trying to accomplish is in some ways different from what you're trying to accomplish. But I wonder if that resonates with you. What are the steps you've taken to institutionalize your intentions, so that as this organization grows, as more and more people come into it as eventually someday someone else may lead it, how can you be sure it will remain true to that mission?

BA: Yeah, absolutely. So there's a important moment every company goes through, I think where in the first couple hundred people or something like that you, as a founder, can interview all of them, you can evaluate them, you can go around and talk to all of them, have some kind of regular touch point with a couple of hundred and just make sure everyone's on the same page, moving in the same direction. If you see something that's off track, you can help correct it. As the company gets bigger. I don't know, let's say 500 or some kind of threshold like that, or 1,000, you pass Dunbar's number, the number of people you can really remember, everyone's name, and what they're all doing, and what their relationship is to each other, and some people think that's around 150 or so, but it varies depending on the person.
And so you quickly reach a point where you actually can't interview everybody who comes into the door and you can't check in on everyone. You can't even know everyone's name. And so how do you make sure everybody is still aligning in this larger structure? You do have to go institutionalize and memorialize some of those ideas. So I think that CEO's have a couple of different tools in their tool belt to do that. One of them is to go write down what are the values. And the values are what we use to hire and promote people. Coinbase's values are on our website, you can go look at those. We also wrote down a culture doc. And the culture doc kind of gets into more details about, not only how do we hire and promote people, but how are we going to operate and work day to day?

How are we going to treat each other? That was an important document to write. And we did that with a bunch of input from the company and the employees. And you always want to have this balance in the document of like are you just saying euphemisms that any company could say or are you saying things that are truly distinct to your culture? Like one way to test that is could you say another company that had the inverse of your value? So you've got the values, the culture doc. Of course you have the mission. And I don't know, I think if you think about even much longer term, like how does Apple continue on in the spirit of Steve Jobs, even though he's passed away. Like how do you make a company that is multi-generational or something that can persist on. That's, I think, probably one of the hardest things to do. A lot of companies, frankly, when the founder passes away or moves on, they do lose a little bit of that magic spark or something that made it what it is. Companies need to evolve, you don't want something to be frozen in time. That wouldn't be innovative, but it does need to kind of stick true to what made it unique and what made it special. And so I think you see people like Ray Dalio, he's writing that book, Principles or he's written it. I think that's my guess, I don't know, that's his way to sort of try to memorialize that for the next 100 years or something at Bridgewater and see what people might do there. But yeah, I don't know if anybody's found a perfect solution to that. If you think of one, I'm curious to hear what you, Eric, what other ways have you seen founders kind of memorialize what made a company special?

ER: It's funny you ask me that, I literally have a deck of cards that I had made, which is sitting on my desk right now. If it wasn't for COVID, we could do this in person and I would take this deck out and show you, because I'm a collector of the structural things at the level of kind of governance, incentives, disclosure, economic alignment that companies can and do use to maintain this alignment. It's extremely difficult. And if you read the history of business and go back to case studies, and I think I've recommended this book on the podcast before, I'm not sure, there's a book called The Enlightened Capitalists, which is like 150 years of case studies of people who have tried to solve this problem and failed. So it's an old problem in capitalism, where people who find some more purpose-driven way of operating a corporation, if they don't have real alignment and institutional protections as it relates to their investors, usually, but their board and many other stakeholders, you wind up having these case studies.

There's a brutal story in that book about a founder who is literally on his deathbed. He built this purpose-driven company. He had run it for something like 40 years, built it into a behemoth, and then one day, some investment bankers in his board engineered a coup to kick him out, and take the company public, and basically strip-mine it and destroy what made it distinctive. And he was on his deathbed, had this regret, the regret of his life is that he hadn't required the board members he had stacked the board with to sign a pledge, a mission fidelity pledge, so that they were able to... They didn't even bother trying to justify that their actions were somehow in line with the company's mission.

So yeah, if you look at who is on the board, who has board power, who has voting control, how the company rewards and incentivizes its long-term investors versus its short-term investors, that's a common error that people make. And then, how does it engage employees and its other stakeholders? Brian Chesky is always trying to figure out how to put stock in the hands of his community and how to bring community input into the governance, because that's such an important part of the ethos of Airbnb. I could think of a lot of ways where the decentralized nature of crypto could give rise to other mechanisms that you could bring in that would be natural to think about.

And then, some of the stuff is just really brain dead simple, like make sure that you have a product and strategy committee of the board, somebody who is responsible for thinking about what the company strategy will be longterm, so it doesn't devolve into lawyers and lobbyists. Obviously, you have the mission pledge, obviously, what you do with voting control. So there are these mechanisms that people use, but what's so interesting to me, having worked with so many companies over the years, big public companies, private companies, companies going public, is how often, as the company grows, because the company is successful, everyone starts to get really overconfident about how this bad stuff is not going to happen to me.

And so then, the voices for the status quo start to get a lot more powerful, a lot, lot louder in the room. And so, all of a sudden, you have finance, and compliance, and bankers, and folks like that. Not that those people are bad by any means. I mean, they're incredibly important to build a compliant organization, to be able to successfully do something like an IPO. And yet, sometimes I meet with founders who are a little bit frustrated that this longer-term perspective of what is this going to look like 10 years from now, 50 years from now, 100 years from now, isn't really part of the everyday conversation. So I think creating mechanisms and fora for that are super important in an organization.

BA: Yeah, very well said. I mean, it's such a complex and interesting topic. I think you're right, that companies do best when they have this marriage of skill sets, or even you could call it a healthy tension, where there's a founder-CEO who wants to... The founder is a little crazy, right? They're contrarian. They think differently. They question why is that? They want to try ambitious things that look like toys today, but could be really big in the future. But on the other hand, founders can get a little too crazy and they can blow up companies. You need, really, steady hands operators, executives, and those other functions that you mentioned that are more like risk functions, legal compliance, HR.

And so, you can get a company that falls too far either way, right? We all can name some companies that probably the crazy founder blew it up a little bit too much. We also can name companies that they frankly just haven't innovated in decades because they're run by risk functions, more or less. And even if you look at... I'm not here to bad mouth any particular industry or anything, but if you look at some large banks in the US, most people would say they haven't innovated as much as they could. And they've almost become like quasi-government institutions in a way, and they're so focused on risk mitigation that it's not about innovation. There's the large banks and those are it. There haven't been really new upstarts or anything in that realm.

ER: Don't get me started about stock exchanges.

BA: Oh, yes. Yeah. I mean, so this is... Also, I'll just make one other final point. So I guess if you think about it, a company doesn't need to last a thousand years or something. I think it's nice. For the founder who created it, their ego is attached to it, and so it's nice to think about how do you make something that lasts. I think that's a very valuable pursuit. But there's also something beautiful about creative disruption, right? It's like, sometimes it's time for a new thing to come along. And if something does get too set in its ways, it stops innovating.

Jeff Bezos says it's always day one at Amazon, right? Steve Jobs, in his Stanford Commencement address, said, "Stay hungry and foolish." There's many versions of this. At Coinbase, we talk about repeatable innovation a lot. But whenever a company stops doing that, or a country for that instance, or just as another example, I think it's like they probably should be disrupted, right? That's better than never having anything new at all. And so, that process of something maturing, and then stagnating, and then something new coming along is kind of... It's the way we make progress to keep going forward as a human civilization.

ER: That's really well said. And bare survival should not be our goal. And I think we all have interacted with organizations that have become bureaucratic and who have no purpose anymore. They simply exist to preserve themselves. And when that happens, it's actually something like really genuinely dark. So I think trying to really find that spark of continuous innovation and to make sure that remains at the heart of our economic engine, both at the level of individual companies, and of course, as we think about the macroeconomics of our country, I think that that is really important. Talk a little bit about what you see as the role of civic leaders, business leaders, in advancing that for us, in terms of our civic fabric.

BA: Yeah. Let's just start with, I guess, the highest level, which is that I think if you want to improve the world, starting a company is one of the best ways to do that, especially a company that is trying to drive some kind of science, or engineering, or technology innovation in the world. There are some businesses you could think of that probably wouldn't be examples of that, but I think one of the beautiful things about capitalism and free markets is that if you want to... The only reason someone's going to part with their hard earned money is if you provided something that they really want and need, right?

And there's exceptions to that, right? You could think about addictive things, like cigarettes, or people that have monopolies, or whatever, but by and large, I think capitalism is a force for incredible good in the world. And let me give you an example. Some of the biggest problems in the world, let's look at climate change or something, governments all over the world have debated this endlessly. There's been so many papers written on it, the academics, there's the Paris Climate Accord, we're in, we're out, all these things.

And what's going to be the thing that actually potentially makes the most forward progress on solving climate change? It's probably one person who started a company, like Tesla, Elon Musk, and now, suddenly every car company has an electric car program. We're talking about solar in much bigger ways. So that's such a clear cut example. What other major problems are there in the world? Education, healthcare, financial services. I think if you want to solve education, look at things like Khan Academy. Khan Academy is actually a nonprofit. It's not a company. So start a nonprofit, too. I think those also can be very valuable. If you look at healthcare, I think technology is driving some of the most important innovations there. If you look at financial services, I think the same thing. FinTech is driving a lot of the most important changes.

ER: And we're all waiting in line for a vaccine that is a technological modern miracle.

BA: Absolutely. Biotech, longevity, energy, entertainment. I really think that there's a weird thing happening in the world now, which is that it's become fashionable to bash tech companies or something like that. And we see it in our media too. There's a lot of entertainment and stories that come out.

ER: Yeah. Well, not to say that we haven't had some deserved examples of mistakes, too. So yeah, fair enough.

BA: Sure. Sure. I mean, there's always... With any new tool, it can be used for bad or good. A scalpel could be used to kill someone or to save someone's life. Anyway, there's certainly... Nobody knows exactly how these things are going to evolve, too. If you latch on to some new technology, like Bitcoin or whatever other company examples are, you don't know exactly how it's going to play out in society. One of my views is that a vast majority of people in the world, 99% or more, are good. Yes, there's 1% of people who are going to try to abuse something. That doesn't mean we shouldn't keep making forward progress and building new things.

Do you need to mitigate the risks? Yes. Do you need to take that very seriously? Yes. But it shouldn't prevent us from trying and building new things. I think there's a bit of fear about change. There's a fear about new. There's a fear about how we'll be unprepared for that. And it's almost a negative message for young people to hear, I think, that these things are destroying society or whatever. If you want to advance society, I think that the best way to do it is, basically the best lever we have as a society is science technology, starting companies, building products that can help people. Yeah. I feel like that's a very important path forward.

ER: We've come a long way from the super optimistic message of Star Trek.

BA: Yeah, yeah. And Terminator, and all these things. Peter Thiel has talked about that. Why are the messages coming out of Hollywood often Terminator-esque, or Black Mirror, or kind of dystopian, I guess?

ER: Well, you see it in how people are responding to the pandemic, I think. Yes, we've had terrible bad news and it's been an awful year, but there's been some recent articles, and Zeynep, who we also had as a guest on, had a great article recently about why are people being overly pessimistic now, and why is there this tendency to downplay the good news that we're finally starting to see, and then the harms that that can cause. Because ultimately, it's our collective imagination and determination to make things better that is ultimately what is the driver of human progress.

BA: Yeah, absolutely.

ER: I want to go back to what you said about economic freedom for a minute, because I think that's such a really interesting concept, and it's such an unusual thing to have a CEO talk about as the mission of the company. But I think for some people who are listening, they're going to find it especially surprising, because one of the things that I feel like I'd be remiss if I didn't ask you about, one of the things that you've been... Those who follow the tech industry have noticed during the pandemic, that you came out and said that you did not want to talk about social issues and politics as part of what you're doing at Coinbase.

And yet, economic freedom, some people would say would be a very political agenda that, of course, the whole crypto movement is in some ways trying to push. So talk a little bit about what that experience was like being at the eye of that firestorm, why you felt the need to take that stand, and how do you reconcile that with the mission of the company and your political objectives in terms of rule of law and economic freedom?

BA: Yeah. So I think it goes back to what we talked about earlier with mission first, mission focused as a company. So I do think every company should have a very ambitious, important mission that is going to move the needle and improve society, and they should be pretty focused on that mission. So for us, that's about creating an open financial system. It's about creating more economic freedom in the world. And that certainly has political aspects of it. We engage with politicians, and regulators, and do all kinds of policy work around crypto for instance, and even economic freedom.

So to me, it's fine to do political work as a company as long as it's on mission. And one of the challenges that I went through last year was that I realized at a certain point, not everybody was aligned about what the mission of Coinbase was and what was in scope for that mission. And so, of course there were a number of challenging events happening in the world last year that were incredibly important, and rightfully so, many people were focused on it. I really wanted the workplace at Coinbase to be a refuge from that kind of division that was increasingly happening out there in the world.

And I felt like we already have a really important mission that's going to try to improve the world. And so, for us to really make progress on that, it's going to take years and years and decades of really focused and intent work. And if we try to boil the ocean and try to solve every problem out there, it's actually more likely we're not going to make progress on any of them. So that was my... It was a very difficult moment to go through. I think that it showed that I had not made that clear to the company. I had not done a good enough job of making sure everybody was aligned to the mission.

And so, that's one of the things about being CEO, I guess there's always something new to learn. And last year was my time to learn that, and go out and say, "All right. Let's clarify what the mission is, what we're all here to do." And I recognize that not everybody was going to be on board with that, so what we did was we made a pretty generous offer to anybody who felt that they had not signed up for that mission. And some people took us up on it, and they decided to leave. But as a result afterwards, I think the company is much more aligned. We're all moving in the same direction. I actually think it was probably the most important thing I did as CEO last year, even though it was kind of difficult and unpleasant to go through.

ER: Do you have any regret about picking that issue, that moment, to take that stand?

BA: I really, really wish it hadn't been that time, at that moment. I had no desire to get that kind of attention for that. I really felt that I just couldn't wait. I wanted to stand up in front of the company and say, "This is why we're here. This is why I started this company. I want us to go solve this really important thing in the world." And I knew that that would upset some people. And I was also worried that we're hiring people really quickly. When are we going to... The next 1,000 or 5,000 people join this company, I'm not doing them any favors by not making this clear.

And so, I just really felt like after three or four months went by, and I was like, "We can't wait. I've got to come out and say this." And I knew it would be somewhat controversial. I knew some people would misinterpret it. But it was one of those things where, looking back, I don't regret it. It was difficult, but it was important and necessary. Are there some ways that we could have done it better, in terms of how we wrote out the messaging? There's always some things we could have edited around the margin. But overall, I think it was the right thing to do, and in that sense, I don't regret it.

ER: Let me ask you, do you mind if we do one more follow-up about the politics thing? Because I think that's important for people to understand what you really meant by that. So, it certainly was a brave thing to do, and to put yourself really in the center of so much attention and emotion in that moment. Do you think all CEOs should take a similar stance? Or what advice would you give to other CEOs who are contemplating where they should net out on that question?

BA: Yeah, so I certainly wouldn't presume to say that every company should take such a mission focused approach, which is how I described it in that blog post. Just because, first of all, it's none of my business to tell them how to run their company. But also, I kind of like that there's a variety of ideas tried in business. That's part of what we find what works, and some people emulate it, some people don't. So I wouldn't presume to tell everybody to do that.

But if there are CEOs out there who are feeling like, "I just feel like the employees are becoming distracted, that they're focused on the wrong things." And if you just start to feel like something in my gut is wrong, maybe even that people feel afraid to speak up in the company because it's becoming a hostile environment or something like that, that's where I feel like maybe you have an obligation as CEO to stand up and say it.

And a lot of people did actually reach out to me, current employees and new employees who applied to Coinbase as a result of it, and others out there in the world who said, "Really, thank you for speaking up. I was increasingly feeling uncomfortable at work. This was a really unpleasant environment, and it was starting to affect my engagement." And I realized I was not the only one who was feeling that way.

And so, if you feel that way, either you're going to have to go as CEO or you're going to have to make it a company that you want to work in. And if you make it a place you want to work in, there's probably other people that want to work there too, from all different backgrounds and everything, by the way. So people from every different background want to work at a mission focused company that is trying to achieve something really difficult in the world, and it's a workplace that is a refuge from division.

Not everybody wants to work in that environment, but there's a great variety of people who do. And so far, it's actually, I would say... Initially, it sort of had a chilling effect on our hiring in the sense that some people were unsure, what is this, what does it mean? But I'd say, actually now, it's had a net positive effect on our hiring, and we have people joining who just understand what they're getting into, and they understand what the mission of the company is. And so, they're self-selecting in, and a number of them have been telling us, "Oh man, I was so frustrated at this at my past company. It was so hard to even get work done there." And that's the reason they came and applied to Coinbase. I don't know. If other CEOs are feeling similarly, maybe I would suggest something the same.

ER
: It does seem like we're about to enter into an era that, I think when we were growing up, and certainly for our parents and grandparents, it might've seemed like science fiction where trust has gone down in almost all of our institutions as so many of the institutions that govern our civic life have decayed in our lifetimes. And we're starting to see a world where the civic values that really matter are increasingly being defended, not by journalists and not by universities and not by politicians, but really by corporations. And corporations, because they want to be mission-driven, because that is the new demand of people where they want to work, and also investors and customers, that's increasingly important to them, we're starting to see a diverse set of companies stand for the different elements of the kind of core values of our civic fabric.

I almost feel like even if other CEOs who disagreed with you or had a different value set than you did, you took a similar stand, it might actually be better for our civic health overall, because if Coinbase is really standing for economic freedom and a diverse set of other people have a chance to bring their ideas into the marketplace and to stand for the other important civic values, maybe as a whole, as a society, we're better off.

BA: Yeah. I mean, that's a big question. It's certainly possible. I agree with you. There is a lack of trust kind of happening in media and in government and I think there's fewer even religious people now, if I'm remembering correctly.

ER: That's right.

BA: There is a strange thing that I didn't quite anticipate starting a company where, frankly, maybe this was naive of me, I was thinking when I first started Coinbase, how we're going to build a great product and people are going to want to build that. And a lot of people have started looking up to me and saying, "What do you think about all these broader issues?" And I never really anticipated that, which might've been naive of me. But yeah, I guess a company, it is another tribe that people want to belong to just like a university or a sports team or something like that.

I've always been sort of uncomfortable in that position, to be honest with you. I never really thought about myself as a natural leader. I always thought of myself as sort of an engineer who likes to build new products. I'm sort of a reluctant leader in that sense, but I guess it's been working out okay and I've sort of made peace with it and it's fun.

ER: Join the club. As we're recording this, your IPO for Coinbase is imminent. And I know that limits, of course, the kinds of things that we can talk about, but talk a little bit about the choice to do an IPO versus, say, do an ICO for Coinbase.

BA: Oh yeah. Let's see. For those who don't know, an ICO would be an initial coin offering. There's a lot of different words around that, which basically are referring to companies, could they someday go public, on the blockchain. And when I first heard that term going public on the blockchain, I thought, "What does that even mean?" And I guess what it means in practice is companies have shares, which are securities like stocks that can be traded out there. And some people have made crypto tokens or crypto assets that represent those shares, and those crypto assets can be traded on crypto exchanges, just like any other crypto asset. Today, most of the crypto assets that are out there that are being traded. They're not securities, they are commodities, they're tokens of various types, rewards tokens, governance tokens. And there was actually a big question in the industry about, are any of these crypto assets securities? And the SEC has come out and opined on several of them, which I won't get into.

But when we thought about Coinbase going public, I certainly, that was one of the first thoughts that went through my mind is, "Hey, how cool would that be? If we could go public kind of in a crypto native way. We're trying to build the open financial system. Why don't we use our own exchange to create a crypto asset and go public that way with a crypto asset that represents shares of Coinbase?"

There was a bunch of consideration that went into which one, right? One argument in favor of doing a crypto IPO is that most of the early people who got super into crypto, they were retail customers. Like, the big institutions were initially quite skeptical on crypto. And then in a way it's kind of like going to our base, going to the audience that got us here and saying, "Hey, all of your crypto traders, now you can own Coinbase stock." Like how cool would that be?

Now, there’s an argument on the flip side, which is that most, if you look at most IPOs that happen, the majority of the shares are owned by institutions. They're not owned by retail. I think maybe like 20 or 30% is owned by retail, like on some of the stocks I've seen recently. And so would we be actually missing out on a larger segment of the institutional money out there that would want to hold a stock like that? And now of course, just in the last two years or so, institutions have started coming into crypto in a major way. That's starting to change, but there's still, I would say probably the majority of institutional money out there can not actually hold crypto assets. Due to their bylaws and LP agreements and things, they can only hold public securities, like in the traditional sense.

So then my next thought was, "Okay, well, why don't we do both?" Sometimes companies do a dual listing, right? They might list on the long-term stock exchange and another exchange, or they might list on like the Hong Kong exchange and the New York Stock Exchange or something. So why don't we call it a dual listing, but this time, instead one of the listings will be a traditional IPO, one will be a crypto token that trades on crypto exchanges.

That was kind of what I was initially planning to do. Now, as life goes, things turned out to be a little more complicated than that. One of the things that we would need to have gotten done to start to do the crypto IPO and actually trade security, which is, of Coinbase shares, a security token they would call it, was we needed to get some more licenses and regulation in place. So that would be, in our case, like a broker dealer license, we needed to operationalize it. There's a bunch of control environments that need to be in place approved by regulators. And currently there's no crypto exchange out there that I'm aware of that, at least in the US, is licensed to trade security tokens.

So, we started to look into that process about how to go do that. And long story short, it would have delayed our IPO by, I don't know, at least a year or so. We may still do it in the future. I think that would be exciting to try. And I think there's a lot of benefits to that. I can talk in a minute about what it might look like for other startups to do that once things are a little more developed in the crypto industry, the market structure and everything. That's basically the short story about why we decided to do a direct listing, not a traditional IPO, but we did that in the traditional public security sense.

I would love to keep exploring that and seeing if we can make crypto IPO as a thing in the future because I think that's one more piece of the open financial system that we can innovate on and get rid of a lot of the inefficiency, which I'm seeing bits and pieces of going through it the traditional way. Crypto has the potential to revolutionize a lot of different pieces of the traditional financial system. But one of those pieces is how companies get formed, how they raise money, how they manage their cap table and how they eventually go public.

There's already been some large fundraisers in crypto, crowdfunding if you will. And it shows the potential where, in a traditional fundraising environment, you typically have to go to one of a few locations in the world where venture capitalists live and pitch them. And if you don't live in one of those locations, or you're unable to fly there, a lot of entrepreneurs around the world struggle to raise money for their brand new ideas.

In a way it would be amazing to sort of democratize access to fundraising. And some of these crypto fundraisings have been enormous. They've, not for specifically raising money for securities, but for other reasons, they've been able to issue tokens and get thousands of people around the world to put in money in a matter of hours. Some of them have exploded in spectacular fashion by the way, in a negative way, because it's a new thing, but it shows the potential for fundraising. That's an important piece.

Now, once companies have raised some money and we crypto could democratize access to that fundraising, they then need to manage their cap table. And this turns out to be a pretty expensive process. Companies spend a lot of money on legal fees and lawyers, drafting agreements and share transfers, restrictions, and all kinds of things. It's basically all managed through very expensive lawyers instead of if it was just a crypto asset and I wanted to transfer some shares from a to B, you can just transfer that on the blockchain and it would be as easy as sending any other crypto transaction instead of requiring hundreds of pages of legal documents.

Now, the last part of that lifecycle is that someday companies might want to go public and there's a bunch of pageantry or whatever you want to call it around how companies go public. There's a lot of archaic pieces that might not be necessary if it were to be created again today. There's a lot of fees baked in that go to the current groups of players that bring these things to market.

There's a really interesting opportunity to make that whole process just much more seamless where we could even 10x, 100x the number of companies that get created that way, if you were to able to democratize access to fundraising and reduce the legal fees, the friction, and reduce the overhead in terms of how companies go public.

In the early internet area, there was this thing called the .com startup that came out and eventually you didn't need to say .com because every startup was using the internet. My guess is that within 10 years, most new startups will be using cryptocurrency in some way, shape, or form. You won't need to call them a crypto startup. They'll just be a startup. And they'll use crypto to raise money or manage the cap table or accept cryptocurrency payments, or build their community in some novel way or go public on the blockchain.

I'll give you one or two quick soundbites about things that could be novel in that space. One is you could actually reward your community with shares of the stock, the customers who helped you grow the business. Imagine the hosts of Airbnb or the drivers of Uber or whatever had gotten shares in the company. Those kinds of things could be more possible in a world of crypto securities and IPOs. You might even be able to do other kinds of governance innovation, which I know you're a student of and have innovated a lot on yourself, which is, for instance, you could make a security token that every year that you hold it, you get an additional vote in the governance of the company, right? That would incentivize long-term ownership of the token.

ER: Indeed.

BA: Things like that start to become possible with this new technology and the open financial system with programmable money and securities. Those are the kinds of things that I think we'll hopefully see in the years ahead for crypto.

ER: I'm sure you're familiar with Professor Lessig’s idea that code is law and that's never more so than in the governance of corporations eventually, that the software we currently write in English prose, which is prone to so much ambiguity, will obviously eventually be in machine readable code and therefore able to be executed in a much more transparent way.

BA: Absolutely. Yeah. Smart contracts are a brilliant invention. I think that's going to have profound implications for governance and government and whole kinds of things in the future.

ER: I want to talk a little bit about ResearchHub. Can you tell us a little bit about what that is?

BA: ResearchHub is a project company I've started on the side that is something I'm passionate about, which is accelerating scientific research. Scientific research today is incredibly inefficient, both in how funding happens, a lot of the papers are not reproducible, a lot of the papers are frankly not really read by anybody, it's difficult to prioritize them, find actionable insights from them, commercializable insights, if you're an entrepreneur. And so there's kind of a crisis happening, I think, in scientific research that is just slowing down human progress.

I mean, think about whenever you get a company that actually is founded on a major scientific breakthrough, it tends to be an incredibly valuable company. I mean, Genentech, Google, like those were both founded on research papers that came out of Stanford, right? Even Coinbase is really founded on the research paper written by Satoshi Nakamoto, the Bitcoin white paper, which was a computer science breakthrough. Space X, Tesla, go down ... It was really the most valuable companies in the world. But most companies are not like that. Most companies are created that are basically just repackaging. Think about beverage companies, consumer packaged goods, like makeup or something. Those companies are 90% marketing and 10% product. In fact, they're often sometimes manufactured by the exact same factory as a hundred other products that just, they've outsourced the creation of the product. It's all about marketing.

Similarly, you have scientists that are coming out with some amazing breakthroughs, but sometimes scientists don't know how to go commercialize those, or they don't want to go build big companies. That's not their skillset. And so I kind of want to try to find a way to ... How do you bring those two worlds together, the scientists and the entrepreneurs, so we get more of these Genentech's, Google's, Space X's.

That's sort of the idea behind it. And by the way, it scratches one other itch for me, which is I'd wanted to sort of see what it was like to create a crypto startup and ResearchHub does have a crypto asset called ResearchCoin associated with it, which we're using to help incentivize the community to come together.

It's been a learning ground for me because one of the goals at Coinbase is we want to help the whole crypto economy take off with thousands of companies. Well, I felt like, okay, to better understand the needs of that customer base, maybe I should try going to create one of these and seeing what the real pain points are.

ResearchHub is still very early days. We have a V1 product out there that's gotten some initial traction. If people are curious, I'd love for them to go check it out and basically sign up and check out the particular areas of research you're interested in and help us build a community. It's early days, but the potential is enormous.

ER: Having talked to a lot of scientists and public health folks and biotech leaders and just, a lot of people related to the pandemic response, a recurring theme has been research delays and the inability to share has caused really important consequences that we only really appreciate and see research delays, especially we see it in COVID when organizations and scientists were able to share data and genomic data, vaccine data, how important that has been just saving so many lives. And when that doesn't happen, the consequences as well.

BA: Absolutely. Yeah. COVID kind of showed us how inefficient the traditional process was of peer review in journals and it takes years to get your thing out. During a pandemic, it was like, "No, publish it to Twitter. I want the right to see your peer review on Medium." That's the kind of thing that why doesn't all research happen that quickly? There's no reason for the journals to charge like thousands of dollars for people to access this stuff that was often funded by public funding. It should be free and available. So many areas of improvement there, I'm hoping we can try to make a dent in that.

ER: Kind of zooming all the way out and looking at everything that you've learned, especially this past year, in such difficult times for so many people, what do you really hope will be the long-term impact of this crisis? What do you hope for our society? What will we learn in the new normal as we get out of the crisis?

BA: I'm hoping that people have optimism about the future and they feel determined to get there and to improve the world. I mean, it sort of shows you the great resilience of human civilization, which is we see these big challenges come at us and we're able to rise to the challenge, whether that's creating a novel vaccine or creating new companies to help people work remotely, or finding new ways to support the local neighborhoods and small businesses.

In a way, it brought the world together. It helped us focus on what mattered. It also just pulled the world forward five years in some ways. Why can't we do that all the time? It's really a matter of culture and perspective and determination and optimism.

There's an argument that we should have that every day that we live. People always say that that's kind of a cliche thing, like live every day like it's your last, but I guess it's kind of true when we find these things that create urgency, they propel us forward. And there's a great value in that. I hope we retain some of that.

ER: Amen to that, Brian. Thank you so much for taking the time. This was really great.

ER: This has been Out of the Crisis. I'm Eric Ries. Out of the Crisis is produced by Ben Ehrlich, edited by Zach McNeese and Sean Maguire. Music composed and performed by Cody Martin. Hosting by Breaker. For more information on ways to get involved, visit helpwithcovid.com. If you or someone you know is leading an effort to make a difference. Please tell me about it. I'm at E-R-I-C-R-I-E-S on Twitter. Thanks for listening. Please rate and subscribe wherever you like to listen.

 



Friday, February 12, 2021

Investing in the post-modern economic era

One of most interesting things to me about the stock market’s recent wild ride is that it isn’t actually anything new. Short-selling is part of the way our markets work, and in fact it’s an important mechanism for creating liquidity. To those in the financial world there’s nothing unusual about what happened to company stocks like GameStop and AMC. What has made the last two weeks different is that now, everyone is paying attention. And that’s because a lot of ordinary people, joining together on social media, have been thrust into the public eye. Suddenly, the general public is asking why this kind of trading activity isn’t illegal, and how platforms can be allowed to pause due to volatility. What’s been less covered is the resulting question for companies: how can they prevent themselves from becoming the next GameStop?

That was the focus of a conversation I had last week with Amy Butte, the former CFO of NYSE, and G100’s membership. And a lot of what it came down to was this: what is the purpose of a market?

Fundamentally, markets are meant to be a representation of company value. But in the last fifteen to twenty years, the balance has shifted away from value and towards volume. In other words, away from investing towards trading. What’s happening right now is what I have been calling post-modern economics: the markets reward trading that’s about itself, rather than the development of the companies it’s connected to.

Liquidity is a good thing, of course, but there’s an urgent need to reinvest—figuratively and literally—in R&D and value creation. We need to consider the consequences of continuing to allow events like the GameStop scenario to happen. Bubbles and mania aren’t new, but prior generations classified them as a bad occurrence. Now, when we see people making a lot of money without making actual things our impulse as a society is to cheer.

One of the best tools we have to help rebalance is a stock exchange. That’s because in addition to being platforms for trading, exchanges are avatars for corporate governance. In particular, they can call for governance that demands value creation over time rather than quick, ephemeral profit. One of the most effective ways they can achieve this is by asking companies to bring on more long-term investors, which will significantly reduce the kind of volatility we saw last week (my colleague Martin has written about this).

In order for this to work, public companies need one more thing: transparency around who holds their shares. When companies go from private to public they move from a group of deep relationships formed over time, to a much larger, more anonymous field. The result is that they have no way to know whether their investors are truly supporting the company’s efforts versus looking to get in and out when the timing is right. In addition to seeking more long-term investor alliances, governance can also direct how companies engage with those investors. In particular, companies can suggest that long-term investors register their shares so they can’t be lent out for short-selling, signalling that the company is committed to long-term value creation and identifying the investors who share that goal.

Another way governance can empower value creation is by aligning incentives with all stakeholders in a company’s ecosystem. Think about GameStop’s retail outlet employees during the company’s upheaval. Everything happening to the stock price was completely disconnected from their lived experience as people helping the company meet its goals. They had, in every sense, no stake in it. But what if they had access to shares through a company-created stock endowment (like the one Airbnb recently created for hosts)? The company’s success would be their success, and the resulting shared dedication to growth would help support an entire ecosystem.

I believe so firmly in the need for a shift towards long-term behaviors that I founded LTSE to do it. Recent events have only strengthened my conviction that we need to focus as much on value creation as we do on trading activity. If you’re interested in learning more about the ways we’re working to help realign the markets with true value, please visit us at ltse.com.