Cash'ing in on crypto

In this episode, we dive deep into Aakash Kumar's (Principal at Matrix)journey of crypto investments - he talks to Rajinder Balaraman (MD at Matrix) about why he's been an early believer of the space, his thoughts on the rise (& fall) of the market & more. Tune in.

Rajinder:

Hi, and welcome to Matrix Moments. Today’s podcast is titled Cashing in on Crypto. And I have with me Akash who goes by Kash, my new colleague at Matrix. Aakash, welcome. Aakash, we’ve known each other for really long, I think it’s been more than ten years. We first met when you were at Housing.

Aakash:

At the Housing Terrace.

Rajinder:

At the Terrace. That's correct. And you’ve had a fantastic career since then and I'm sure it’s going to get only better with your journey at Matrix. For those listening in maybe if you could just walk them through the journey before joining and focus a little bit more on the crypto piece of it where you started investing in this space long time ago.

Aakash:

Yeah, I think across a lot of diverse roles and we met at Housing, life started for me earlier I think in 2009 as a founder trying to build a recruitment classifieds and failing at it. Then went again at it with a gaming company, again failed at it. I think that is when Housing happened where I spent most of my time reading product and strategy post which spent some time at a company called Indus OS, again leading product, strategy and monetization. And then Hotstar happened which is where I ended up spending the last four plus years before joining Matrix.

It’s again a cross, an intersection of roles across product, business strategy. And I think that has been the common element always but jumping to crypto I think that diversity of having looked at marketplaces, having looked at content and I keep saying that crypto is this two pronged phenomena of both a cultural force and a technological force. I think that just happened sort of naturally, I think a lot of it goes back to the gaming DNA. I think like anything in internet gaming tends to be one of the first ones to latch on to it.

So the initial chatter also even within crypto came from the gaming in the day of community and for me that started happening sometime around 2013. Actually it happened because my brother, my younger brother Aayush, when I was running a gaming company we had these nice heavy duty machines which could do crypto mining, which could do bitcoin mining. My younger brother used to work with me and he started doing that. And that was actually my first introduction to proper crypto even though the origin of it might go back to spending time, reading Satoshi’s first Paper, thinking about everything to do with I think I keep alluding to it a lot, philosophically it is also almost a denationalization of money sort of movement.

So all of that happened but, yeah, true hands on engagement with crypto started in 2013, slowly it became a pretty much full time activity I think sometime around ’19. I’ll run through that journey, so around ’15 is when Ethereum came into being and this is the post bitcoin world. Ethereum was the first time you had the concept of smart contracts and programmable money coming in which was transformational, which for me was a great moment in terms of saying that this is going to be the way everything works. Like if you go back to what Mark Anderson keeps talking about software eating the world for me that was the belief moment saying this is when we truly eat the world.

As an entrepreneur or as someone who’s been in consumer tech this was super exciting. Started tinkering around with it, started getting involved with a lot of crypto communities, a lot of block chain communities. And that led to building a much more deeper perspective, the so called rabbit hole, I went down the rabbit hole in a very, very different way where a lot of the first early starters in this domain. And around 2017 even though I’d started doing the public token market investing much earlier around 2017 is when I started actually also sort of doing individual investing of my own in early stage companies in crypto.

The first ones that I went after were infrastructure companies. I think when I was looking at the crypto architecture you had a backend which was fundamentally very different, you did not have your usual database logic applied. You now were talking about having block chain as one part of the layer, then much later we also started saying layer tools, we started saying identity becoming a different part of the stack. This was a completely different stack and the first thing I did was this is too complex I tried setting one up myself, that is the first thing we tend to do. The oldest habit used to be in the – early days used to be buying domains and then trying to setup a website, over here also tried to do that, found it to be super hard.

And my first set of investments were purely about companies who were simplifying this because if this is how developers are going to build new applications someone just needs to simplify this. So the first set of investments were companies like QuickNode, Blockdaemon, these were all pure not really Web 3 or crypto they were pure SaaS like companies simplifying crypto and helping developers build better.

The second sort of wave or the trendline which I caught on to pretty soon was the shift to proof-of-stake. So in crypto and block chain we keep talking about consensus mechanisms and bitcoin which was sort of the origination of how the crypto movement came into being was on proof of work and which was a very energy intensive way to do things. Proof-of-stake is more capitalistic in nature, it’s simply like just to make it do a for dummies version would be if I have x amount and I have more amount, I have more at stake, and if I do something wrong, if I'm a bad actor I lose more.

And hence things work out instead of moving to a proof of work where you’re competing for compute and trying to be the one who is adding to the block over here proof-of-stake sort of becomes a decisioning method to drive consensus.

Again took that trendline, spent time with most of the community who was working and thinking about it, made a lot of investments in that space so saying proof-of-stake is a trendline and ended up backing a company called SSV which emerged out the Ethereum Foundation and they were trying to do a shared secret validator protocol so that when you're running validators you don’t have slashing risk and all of those things work out.

Again very infrastructure as like approach to it, I think for me that was a common theme, more skewed towards saying what is the real tech and invest behind that and less to do with the usual suspects of D5 and Gamify. I did participate in those after one point but proof-of-stake backed SSV. In India there was a great company which emerged called Stader Labs, was one of the early backers in that. Again they were playing to the proof-of-stake trendline post which obviously now you’re moving up the stack.

Rajinder:

So going back, so 2013 started mining, 2015 started getting into the space more actively, 2017 started investing. Talked about the first trendline, talked about the second one, through this your portfolio that you had started constructing as an angel investor was it all crypto or did you do investing outside of that as well.

Aakash:

I think I used to enjoy collaborating with founders in the 0-1 stage. So individual angel investing started way back around ’14 I think in entirety crypto obviously grew towards the fag end of it but over the last eight years would have ended up backing 70 plus companies. So a good chunk was purely the bread and butter of SaaS and consumer, crypto started much later.

Rajinder:

How are the founders different in the early years?

Aakash:

I think the early year founders over here were more of the what I like to call the hacker archetype. Like in consumer and SaaS you would find people who have had exposure to that product problem statement whereas in crypto you can't find that, that's not going to happen, it is going to be ground up completely a way a founder coming in and imagining -- reading, imagining and thinking that hey, this is what I can do, this is how I can contribute in moving the ecosystem forward.

So I think that is one primary difference that it is the typical hacker profile which was getting into crypto early because in Web2 the distinction would be good founders would always be people who have been exposed to the problem statement. So I think that was one big difference. The second big difference was I think a mathematical bend of mind. Most of the founders when I look back they were mathematically and financially well versed in terms of thinking of capital markets, in terms of being able to think through how do you think of designing their tokenomics.

All of those pieces that was the other trait which I saw, again not a must have which used to be there in the Web2 archetype. I think those two were clear differentiated aspects of founder in this space.

Rajinder:

So for you at least in your crypto investing journey what was the turning point, like when did you actually feel like it’s more of a passion kind of portfolio now it’s actually looking like it’s real and it’s actually got some momentum behind it.

Aakash:

I think it happened sometime around ’19 and obviously during the ‘22-‘21 period that was a different time zone completely. I think around ’19 what happened is I realized that I was spending time during my day job driving growth and doing everything as an operator but initially what started only as weekends wherein weekends would go reading, tinkering, talking to founders, working with them it started overflowing into the weekdays. So evening started getting eaten into and when that started happening is when and by that time the portfolio had also both on public tokens and private investments was becoming substantially large. One reason obviously being that the inflection evaluation in crypto is much faster, I don’t know if it’s good or bad, but it’s much faster and hence the portfolio was becoming larger compared to the overall one.

And which is when around ’21 we started engaging and I was considering very strongly to move full time into doing this because I realized I enjoy this more and this is where my heart is, so would love to do this as full time.

Rajinder:

I know, I remember the conversations, so it’s great to have you here and I know that our own journey on where to invest where to spend time frankly where not to spend time has been informed a lot over the last year thanks to you. You spoke of the first two trendlines and then we shifted, maybe if you could just for the listeners just maybe walk through the overall crypto portfolio and construction and maybe also a little bit of what you learnt from those early companies and what of those investments and those models still holds true, what has completely changed thanks to underlying change in technology?

Aakash:

I would see in retrospect always one can put method to the madness so I’ll put that caveat out, I think mostly it was going after trendlines. But later the other part of the folio was more of saying, okay, we’ve solved for proof-of-stake, we have gone after the infrastructure for developers, what comes next. What comes next is a higher order products and applications. And one of the head for crypto and which I still think could be and at least 2-3 years back all of us in the ecosystem believed would be was NFTs, NFTs, Gamify.

I think those two narratives I did and because of previous background in gaming and always having been a gamer those two really struck a chord and I again went after backing and working with founders who were trying to build NFT infrastructures. So this would be companies like in India you would have NFTICALLY, Dehidden, there would be companies like Artiverse which is gaming madhours again I'm using a lot of these buzzwords but a company who’s trying to build within that space.

So a lot of gamify projects which came out of Southeast Asia these were companies which were – and for me the evaluation framework and I will come back to the portfolio construction also. I think in gaming thankfully and luckily I got one thing correct which was a game always needs to be a game, I do not subscribe to play to earn, you play to play and you play for fun and everything else is a secondary outcome. And I think having that lens of being able to talk to founders and evaluate projects which were real games which would leverage the financialization that crypto brings I think that really helped in being able to pick what I would call winners which would be long term gamify companies.

This would include the likes of 9 Heroes, Kribada, again non-Indian companies gaming has not really been an area of strength for us in India I’ve been a victim of that myself. But so Game5, higher order applications, lastly the last leg of individual investing was behind enterprise or DAO tools which would include companies like DowLens and lot to do with the financialization or the open finance ecosystem which is about bringing more efficiency to fintech, bringing reducing rent seeking points and just making things more efficient.

Trade finance on chain, backed the company called PolyTrade, on again on the real-world asset lending side worked very closely and backed the company called Mohash. So, yeah, I think broadly the construction of the folio was gravitating towards SaaS, fintech and some element of gaming creator.

Rajinder:

Very exciting, I think frankly the diversity of the portfolio is what’s even more interesting than the fact that you’ve gotten into so many exciting companies because as different trendlines and I'm just now thinking back at least a couple of the names that you mentioned continue to be very prominent companies in this space. So I'm hoping that the portfolio is doing well, I know that the drawdown has been a little painful for folks in the last six months, I'm guessing no different for you.

Aakash:

I think one thing which happens when you started in ’13 there’s a meme which was circulating in the last few months which was for people who got into this for whatever reasons maybe post ’17 I think I have gone through, this is the third one so it’s okay.

Rajinder:

You said this before, right, hype cycles are needed and the inverses also to --

Aakash:

Hype cycles are always needed, these hype cycles always tend to bring, and going back to what you were asking about founders, these hype cycles always bring new set of founders. And these new set of founders in a space where you're imagining what you can do with these transformational pieces I think new founders bring new energy hence new narratives and hence more innovation. So these hype cycles are always needed, we are working with a financialized world especially in crypto from day 0 so these hype cycles also lead to worse drawdowns, a lot of pain for a lot of retail investors but that's part and parcel of how this world is.

Rajinder:

What are the trendlines you're spending time on now like what are you excited by now that you’ve spent a little under a year here, you’re hopefully calibrated on all that's going on out there in the ecosystem, what are you excited by now?

Aakash:

I think what I and we as a firm are excited about remains pretty much the same, I think those core trendlines of saying fundamentally what block chain does and as a technology and what it enables and two, the cultural shift towards decentralization which actually is the underlying force behind it would be can we create more equitable distribution. So when I say more I would stress on that word, we have had in Web 2 itself companies like Airbnb which I think have distributed more than 100 billion plus to stake owners. So it’s not that Web 2 has not been distributing rewards but more equitable distribution of value to positive contributors.

A lot of the companies in Web 2 have been built with the other stakeholders beyond the company and the cap table. Now more equitable distribution gets enabled through tokens, you have blockchain bringing efficiency into finance, the thesis area still remain the same. It is an innovation you can do in capital markets, you can design newer products for capital markets, you can reduce the cost of doing transactions, you can do securitization on chain which allows it to be transparent and tamper proof. So that's everything to do with finance.

You can go after enabling every developer who is going to come in and help build this which is a SaaS theme and the third theme which is probably not as hot for us or for me would be the consumer, end consumer utility. I think over there crypto and block chain still lack a hero application. And most likely it’s going to be an outcome of serendipity. I think everything we have seen till date has been more a force fit of trying to say that let’s imagine and then let’s build it.

I think over there it might just be an element of serendipity so hence over there, yes, we do believe there are thesis areas like ticketing, NFTs in music, creator NFTs, but I would say lukewarm on those.

Rajinder:

I was going to say that you started off saying that more equitable distribution and I'm just trying to imagine outside of the creator economy I can't think of a single use case that has emerged thus far where that statement is actually true.

Aakash:

Very true. It hasn’t. It actually hasn’t – like let me correct that. It has in smaller impacts have happened and there is decentralized networks like Helium Network which is trying to create a distributed wide area wireless network. So there are pockets where we’re seeing that happen and again as I said block chain is still trying to find it’s end utility purpose so some of these will keep emerging over time but majority of investor money, venture capital money has actually gone after on the third aspect whether the consumer app or the utility side has still gone after trying to drive narratives that we believe in but not really where we’re seeing real demand side growth.

So till the time demand side growth kicks in and maybe the lots of things which need to happen for that you still need to solve for the consumer experience. Like if I was to ask you how has your experience of ever interacting with crypto been it’s not that great. So I think those things still need to get solved and most likely some fine day one great founder would emerge who would show us that path that this is what block chain and tokenization can do for end consumers.

Rajinder:

Yeah, awesome. I think the one thing I wanted to just close out this topic was you spoke of what the founder archetype in the early years was, how has that changed and this one magic application or this one magic founder if you had to speculate and say what kind of archetype would that founder likely be what do you think it would be?

Aakash:

I think there’s been a positive change. The positive change would be we’re now seeing people who have built products in the Web 2 world embracing crypto. The earlier adopters were not necessarily from that world, not necessarily people who came with an experience of having tackled product problem statements. So that's one, on the question of the archetype of a likely founder who creates that hero app I would say most likely would be someone who comes from a Web 2 consumer tech background, has looked at the decentralization equation of the spectrum.

So what tends to happen in Web 3 and hence there is a lot of polarizing views around it is builders tend to be very zero one in terms of decentralization, centralization, very anti something which has already been there. I think founders who would come with experience would embrace the goodness of what a lot of stuff that centralization used to have and then figure out saying that the fundamentally you want to solve for equitable distribution, fundamentally you want to solve for transparency, you want to solve for permission data access, pick those things and then build out something which is as transformative maybe again as Airbnb, I don’t think any of us imagined Airbnb when it happened. A founder archetype like that would surely create that hero app.

Rajinder:

Kash, thank you. Really enjoyed the chat.

Aakash:

Thank you RBS.

Rajinder:

And let’s pick this up in six months.

Aakash:

Yes, for sure.

Salonie:

Thanks for tuning in. For more Matrix Moments episodes, you can head to www.matrixpartners.in/matrixmoments . You can also follow us on Twitter, LinkedIn, and YouTube for more updates.