WBD005 Audio Transcription

Crypto Asset Valuations with Jamie Burke from Outlier Ventures

Interview date: Wednesday 14th February

Note: the following is a transcription of my interview with Jamie Burke. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this podcast, I chat with venture capitalist and CEO of Outlier Ventures, Jamie Burke. We discuss crypto asset valuation and what Jamie and Outlier look for when investing in crypto startups.

Interview Transcription

Peter McCormack: Hi, Jamie.

Jamie Burke: Hi there.

Peter McCormack: Thank you for having me here in your office to do this.  In planning this interview, I looked at your LinkedIn and saw that you had an agency background, digital agencies.  Can you talk me through the journey from that to now being the CEO of a blockchain-based venture firm?

Jamie Burke: Yeah.  So, originally started out in communications, worked in WPP and was a kind of digital strategist planner.  Actually, when I started out there, it was just before Web2 was kicking off and the social web and all that kind of stuff; and all the old dudes in there looked round and none of them were on Facebook, none of them knew what Myspace was or Twitter.  So, as is common in these things, they pull in the only person who knows what it's about, who's often one of the younger people in the organisation.

Then, before you know it, I was inviting in Facebook to present to the whole group, with all of the account directors and a lot of large accounts within JWT, and that kickstarted the journey really.  Fortunately, that kind of fast-tracked things for me, so I ended up setting up agencies for other people, and I have no concept of time now, to be honest with you; the crypto world's destroyed any concept of time.  But, at some point, I ended up setting up a consultancy and grew that into a 100-person outfit working with blue chips like Honda, Mastercard, Tesco on digital innovation, change management and stuff like that.

So, exited from that and ended up becoming an angel investor and it was that journey, as an angel investor, that led me into initially Bitcoin; well, I guess it was over four years ago now, something like that.  And then, increasingly became convinced that all of this stuff represented the next phase of the web, and was something that I wanted to dedicate time and capital to learning about.

Peter McCormack: And on the Outlier website, you refer to Web3; so, you've just talked about Web2.  So, what does Web3 mean to you?

Jamie Burke: When I looked at Bitcoin and the Bitcoin blockchain, and of course the emergency of Ethereum and smart contracts, the combination of these technologies, so distributed ledgers, cryptographically secure and unique digital assets where you can introduce scarcity, and smart contracts, the combination of all these things for me meant that you could enable a web actually that was closer to the original vision of Tim Berners-Lee, which was a more peer-to-peer web commons.  Obviously, the way that Web2 was financed, you end up with these platform monopolies and actually, not that much disruption happening; it disrupted ecommerce and media, but a lot of other industries are perfectly intact. 

So, when you look at Web3, these technologies enabled a more decentralised web, and the important thing for me is decentralised is a spectrum; it's not either/or.  You're not decentralised or centralised; it's where on the spectrum is it sensible for that particular function, business, use case.  It would create a more true peer-to-peer environment, so removing intermediaries, and peer-to-peer could also include machine-to-machine, which was a particular focus for Outlier, or autonomous agent-to-autonomous agent, as we're introducing bots and AI.

Linked to that, this would be an increasingly automated environment and then potentially, having kind of autonomous entities.  Obviously, DAO was the first attempt at that, but the principle of having these self-governing, intelligent systems is what was most interesting to me.  So, that's how I describe Web3, and that's the context, the lens through which we look at the emerging stack that's happening now.

Peter McCormack: So, there are specific categories of decentralised businesses and blockchain businesses you're looking at?  You talk about AI on the website, you talk about Fintech there's like a service for?

Jamie Burke: Yeah.  So basically, our thesis that we've developed over the last four years -- Outlier Ventures was set up four years ago.

Peter McCormack: During the crash, just after Mt. Gox?

Jamie Burke: Yeah.  So again, I forget the exact date, but I know we had our Christmas party and we were going, "Yeah, it's probably about four years since we began the journey".  When we initially began, I brought on a co-founder, a Dutch guy called Aron van Ammers, who's our CTO, and pretty much put aside some money to underwrite him and a team of developers learning about the space, exploring and playing with the tech and getting applied learning.

At the time, the vision was to be what Outlier is today but at the point, in reality, there was nothing to invest in.

Peter McCormack: Did you finance the whole thing, or did you have outside investors joining?

Jamie Burke: Up until probably 18 months ago, I financed it myself.  I was prepared to underwrite it for probably about four years.  Fortunately, I didn't have to do that; things kicked off a little quicker than I'd hoped.  So, what Outlier now is, is an LLP partnership.  We've got, I think, 16 partners; a lot of them are ex-bankers, a lot of them semi-retired, retired; and then collectively, we've been deploying capital.

So initially, we were looking at these equity-based investments and there wasn't really much out there.  The reality is, what was out there was trying to build on things like Ethereum at the application layer when Ethereum, still to this day, a lot of the infrastructure is just not there to support these use cases.  So, over that time period, we spoke to 1,500 blockchain start-ups.

Peter McCormack: Wow!

Jamie Burke: We actually put them in a tracker; it's online somewhere.  You can have a look and categorise them by geography, country.  So, we spoke to start-ups from Kenya to Tokyo to Toronto, all different use cases, and in a large part when we were looking at them, we became convinced (a) the infrastructure wasn't really there to support them; and (b) there was this kind of unease that a lot of these entities were trying to build proprietary businesses in effectively an open-source environment.

It was the elephant in the room that we were ignoring, they were ignoring, everyone thought, "Well, we'll figure it out".  Fortunately, we did figure it out; the emergent model of tokenisations had come about.  But at the time, there was this growing unease.  I actually wrote a fairly infamous blogpost called, 99% of Blockchain Start-ups are Bullshit, which articulated that.

But what was interesting throughout that period, we started to see, again I think it's probably not last year, the year before, we started to see non-blockchain start-ups, so start-ups from, say, AI or IoT or 3D printing going, "This stack that I just talked about, this Web3 stack, actually solves a lot of our problems of scaling our technology securely".  So, for AI, how do you unlock data; how do you break it out of data silos in a way that you can compete with the AI monoliths that have that data advantage?  In 3D printing, how can you secure a 3D CAD file as a digital asset and ensure its integrity, so it can't be copied or duplicated?  All the way down to the printer; so, the printer's a wallet, the CAD file's a digital asset, and the printer has to transact on a ledger; you can do all kinds of IP distribution.

So, stuff like that was most interesting and when you start looking at use cases of distributed ledger technology being used to secure AI, 3D printing that goes into autonomous robotics, drones, decentralised drone networks, increasingly you end up in an environment where you're looking at more B2B use cases.  So, you're looking at Industry 4.0, which was born out of Germany, all the industrialists there, looking at how do they do industrial IoT; how can they secure supply chains; how can they more autonomous and automated --

Peter McCormack: It sounds very German!

Jamie Burke: Very German, yeah absolutely!  And, they're world-leading in actually the adoption of blockchain in AI now as a market.  So firstly, it was securing these individual, deep-tech plays; but then interestingly, we started to see combinations of these technologies.  So, once it almost becomes this kind of shared infrastructure, and whilst different protocols may be used to service those technologies, or the digital economy for, say, 3D printing compared to industrial IoT, because there are similarities, it creates this interoperability.

So increasingly, you can see use cases.  We started to invest in use cases where you would have practically every buzzword going.  So, you'd have somebody that was wanting to create a decentralised commanded control for fleets of drones, so autonomous drones; for data collection, so it's IoT, autonomous robotics drones, blockchain and AI.  So, that was really interesting for us.  It was kind of blue ocean.  So, whilst everyone was looking at financial services use cases, we thought, "Well actually, nobody's really looking here, and this is something that we can own". 

So, that's where we focussed Outlier's attention over the last 18 months to two years, engaging that corporate ecosystem, so people like Bosch, Siemens, BMW, Daimler, as well as entities like Virgin Group, Samsung, and what have you to say, "Okay, how can convergence be relevant to your business and your supply chains?"  And, it's with those kinds of institutions that we do a lot of co-investments with.

Peter McCormack: So, some people will look at the speculative bubble we're in and look at it being bad and have negative views on it; but actually, has that been good for you in that it's opened doors, it's made it easier to raise money; has that been a good thing for Outlier in some ways?

Jamie Burke: Well, look.  I think 2017 was a great year for everybody in crypto, almost indiscriminately.  You didn't even really have to be doing anything of any value, and you still probably would have had a good year.  I think 2018 is going to be very different.  I'm personally frustrated that, for somebody that's been in the space for four years now and is very much focussed on value creation, everyone's done very well from the speculative aspect of it, but I think it's run ahead of itself, which is normal.  So, a bubble is basically where capital is laying the foundation for a technical innovation that it can't yet quantify. 

So, everybody knows that this stuff, all these use cases that we talk about, that people are trying to build on Ethereum or whatever, it's a little bit too early; they will happen, these things will happen, it's just not right now, for a number of reasons, the infrastructure's not there.  So, where we're investing, we're investing in infrastructure, pretty much infrastructure only, so we're not investing in app tokens or anything like that.  We're investing where there is a technical innovation which we believe involves this next-generation thinking, about how distributed ledgers, whether it's DAGs, or whatever, can be leveraged to secure something like industrial IoT, in the case of IOTA.

We're making long-term investments, so it doesn't really matter to us the state of the market.  Obviously, it impacts how much capital can be raised by these things that we're involved in; but to be honest, everybody was raising too much money anyway.  Nobody needs that level of capital.  There are very few use cases where you need that level of capital, and it creates a misalignment of incentives and perverts or corrupts the innovation cycle.

Things like McAfee's Token of the Week, I just can't stand; I think it's everything that's wrong with the industry.  And the worst thing is, it works.  Really, that highlights where we are in the market at the moment.  I was doing a panel for Reuters with a room full of hedge funds and it was standing room only.  They normally have 50 show; there were 350.  And they're all piling in, because they love volatility.  They don't care whether it's going up or down.  Obviously, there are more ways to get exposure to down now, with new instruments coming onto the market, but they love volatility, so they proactively look for emerging markets and stuff like that.

So, I think all that interest is going to break the market at some point this year.

Peter McCormack: Potentially bringing regulation?

Jamie Burke: I think they're separate, because it's still not anywhere near the scale that it's a systemic risk to any one economy, unless you're probably looking at South Korea; I think one in three people hold crypto.  Maybe there it's a risk but on the whole, it's a blip really, for the size of the capital market.

I wrote a post a week ago where I called for a 50% haircut; 75% is probably more where we should be.  But all that's happening in the market at the moment is momentum trading and people are trying to either pre-empt a direction, or they create it.  It's a very opaque market, it's very open to manipulation, but as are many small commodities markets, by the way; speak to any commodities trader and they've been doing it for years.  So, it's not inherent to crypto; it's what happens when you've got a small market, thin liquidity, it's very easy to move the dial.

Peter McCormack: Especially with a market maker with deep pockets.

Jamie Burke: Exactly, and it's a great dark market.  You can do lots of OTC trading and so, the kind of old-school traders love this market.  My concern with it is that for those of us that are trying to build value, when the crash happens, and there will be a crash, I think it will be this year, but never try to call the top --

Peter McCormack: But what is a crash, right, because we've done 50% this week?  We've never had that in the stock market.  That would be the end of the world.

Jamie Burke: Well, it's quite normal in this space, where I think how sustained is it?  This one feels quite sustained, which is good; I think it's a positive thing.  I always felt that 80% and sustained for -- I can never see it going for more than three months.  But three months, have a mini crypto winter, some part this year, where a lot of the tokens that are just being used purely for speculative trading, so Dogecoin is a perfect example.  It's just a store of value, it's just a speculative asset.  I mean, it's a parody and yet, it was a $2 billion market cap at one point; I don't know what it is now, but it's certainly not disappeared.

So, that's endemic to a large amount of the remaining asset class.  So, I think we need a clearing out where we can begin to establish some fundamentals and people can genuinely begin to invest, make long-term investments.  Of course, you need speculation in the market, you need traders and all this kind of stuff; but I think the problem at the moment is, the speculators by far outweigh the value creators and that's not going to be good for the speculators, because ultimately you're assuming that you can be ahead of the market, so you can move before the crash or you can pre-empt it.  There'll be a lot of luck involved in that play.  I wouldn't like to call it and I've got 30 people and all we do is focus on analysing the market.

Peter McCormack: I compare it to playing poker.  You can be the most skilled player and lose with a bit of bad luck; and you can be a terrible player and win with a bit of good luck.

Jamie Burke: That's right.  And the challenge is, so I had this conversation.  We were helping a portfolio company in their raise at the moment, they're doing a very large SAFT, and we're speaking to a range of investors in our network, from corporate VCs, family offices, hedge funds, traditional VCs, crypto VCs and then trader groups; very loosely connected, 20 to 100 people, groups that kind of invest individually, but as a collective, and do collective DD. 

I had the perverse conversation where we were talking about the assumed market cap of one of the projects we were involved in, and he felt it was too high; not because it wasn't ultimately worth factoring into the value, so they'd got very large corporates already engaged, they've got existing product and existing business, but the existing team, already worth several million because they've taken VC funding, and they've gone on a journey for over a year in converting into what will be a tokenised open-source proposition; but because they didn't have enough FOMO!

It was literally comparing it to an equivalent in the market and saying, "You can't justify the valuation against that, because that one has lots of FOMO around it.  Nobody knows about this one; everybody in the crypto space knows about this one.  Yes, I get it's actually got inherently more value, it's got a working product, it's got customers; but that's not valuable; that's not going to give me an uptick at the point of ICO".

So, even though he understood the fundamentals, he said there's no point investing against them, because the rest of the market doesn't understand the fundamentals.  And I kind of sympathised with it, because at the end of the day, there's no point, if you're a trader, looking for fundamentals in the market right now is almost not worth doing, because if the rest of the market doesn't understand them, the price will not reflect.

Peter McCormack: I tend to find with my trading that fundamentals come into play when there is a bit of momentum, because it can support the momentum.

Jamie Burke: Sure.

Peter McCormack: But silly things, like a rebrand or a new website can carry momentum.  But the fundamentals don't come into play until the market maker wants to start moving the price.  So, it's all really interesting.  So, one of the reasons that I wanted -- actually, have you read the John Pfeiffer white paper he did on valuations?

Jamie Burke: No.

Peter McCormack: So, it's a really interesting white paper.  I'll send it to you and I'll put it in the show notes, but he was talking about most protocols and utility tokens are going to be overvalued, because they don't have the velocity when they hit the market to justify them.  But he still thinks that Bitcoin is potentially undervalued and I personally agree.  And I think the two that I support are Bitcoin and Monero, in that I kind of have this feeling we need global currencies.  We need global currencies for tech, for machine-to-machine payments, and that could only ever happen in a decentralised way, right?  You couldn't ever centralise it, have it run by one government or the UN.

So, if we were to have global currencies, whether they are IOTA, Bitcoin, Monero, actually they could be potentially undervalued, or a decent speculative investment compared to, say, a protocol.  What are your thoughts on that, because you were invested in IOTA?

Jamie Burke: Yeah.  So, I like Chris Burniske's distinction, and it's a great one, but distinction between currency and commodity.  Whilst a crypto asset that's a commodity might have currency-like features, characteristics, so it could be being used just for store of value, when it's perhaps lacking utility, or utility's being built in the network; but our focus is primarily on the commodity piece.

For example, we're looking at infrastructure.  We have one investment that some ex-DMINE guys, very early DMINE team, that have built a protocol bottom up, because they want to create things like autonomous economic agents, so they want emergent intelligence.  They said, "No protocol supports that, neither technically, nor the economic design".  The behaviours that they need to incentivise within that digital economy are very different to a general-purpose ledger. 

So, for example, the thing for them is making data available; it's having a ledger that learns, that self-organises.  It's quite mind-blowing actually, the innovation.  It's called Fetch.AI.  But the way they've gone about, we've been working with them for 12 months now with the Imperial College.  We have a three-year R&D programme with the Imperial College Economics Department, their Computer Science Department, and we've worked with them to say, "Okay, if we're going to design the digital economy for AI, for a decentralised AI infrastructure and marketplace, who are the stakeholders; what are the behaviours today; what are the behaviours we don't want; what are the behaviours we want to incentivise?" and bottom up, begin to apply game theories to how you want this economy to scale.

So, there are many things that come into that; velocity of money is one of them, but there are a number of other aspects when you're thinking this through.  So, for us, when we're designing a token or a set of tokens, there might be more than one in a particular system, the idea is, how do they become the commodity, whether it's the gas or the oil that's going to power this system, and what's the appropriate level of scarcity for that to retain value? 

We're the first VC to hire a Head of Crypto Economics, a guy called Eden out of Toronto.  His focus is specifically on this; it's, how do you design these things?  And for me, it's actually the most exciting thing about what we're doing here because if you think about it, we're at the point of probably unparalleled innovation and experimentation into socioeconomic models, and we're going to be able to quantify how they perform almost real time.  And in theory, that experiment can be continued, because you can fork them.

Peter McCormack: Was it Brock Pierce who said last week, "Essentially, we're running a continuous live split test"?

Jamie Burke: Exactly, yeah, and that's really interesting on a number of levels.  So, one, for the first time ever, we're able to hard code monetary and fiscal policy into economies; in this instance, it will be digital economies.  That's like the Holy Grail for economists; how do you make a market orderly, or an economy function in an orderly way?  Normally, you have some basic levers, inflation and deflation and whatever, and that's it; you're out of your tool kit, because people are irrational.

What's interesting here is, especially when you're looking at digital economies for AI or bots, or whatever, they can behave rationally.  So, as long as you create the right incentives, the likelihood is that they're going to take those incentives, where a human might be less perfect.  So, this is going to be a huge experiment in socioeconomic design.  Hopefully, that then starts to trickle through into the wider economy.  And, as an asset class, I think there should be a premium on this asset.

When you say, "How do you value a particular token?"  Well firstly, you're valuing a digital economy, you're not valuing a company generally; it's a bit of a blur because, of course, there are some plays out there that aren't either totally open source, or the success is very much linked to a proprietary-based business; low correlation between a token and the business.

Peter McCormack: So, you're essentially saying the company behind the token could almost be valueless?

Jamie Burke: Yeah.  So, we've got five investments coming off the ramp between now and summer.  Almost all of them, we've been working with for at least 12 months, where they've been existing businesses, existing products, existing customers, often blue chip customers already worth several million, already taking VC investment; but they would benefit from network effect.  So, being able to open source is the dream, for them to be able to open source what they're doing.

But, prior to being able to tokenise value in that system and almost have this kind of crypto equity, that would mean foregoing proprietary IP and all this kind of stuff.  The only reward for open source was fame, ego.  Now, open source is a business model, it's a viable business model and if you think about those thousands of start-ups that I mentioned that we spoke to that were equity-based proprietary businesses, up until the beginning of last year, 90% of start-ups that come to us now are open-sourced projects.  I mean, that's amazing if you think about the large majority of technology start-ups will now be open source.

What that means is, and it's not always so black and white, but we're no longer relying upon any one team to execute.  As long as there is genuine technological value somewhere, you could just cede part of your technology, open source it, which is what some of our projects are doing, and then allow the community to pick it up.  It could be forked once; it could be forked innumerable times in parallel; and what's interesting about that is, if you think about how equity-based start-ups are financed, 90% of them fail in their first three years, sometimes in the first two years.

So, that's billions and billions of VC and angel capital just wasted, because when an equity-based proprietary start-up fails, IP's lost, know-how's lost, teams dissipate.  I mean, a fail is a real fail.  Here, you can have one team who fail to execute, or part or all of the community disagree with the direction that they're taking it, or the management, the governance style, and it can be reformed.  So, it's almost a biological system, where things can evolve.  You can have offshoots that get so far and die off and therefore, again in theory, if you were to fork and maintain the ledger, so to maintain the holdings of the people from the genesis, it's almost like a cap table, it's a living cap table, where your holding's preserved in any child of the original parent.

What that means is that you're less likely to lose your money.  In fact, you can double your money, as we've seen with Bitcoin.  Having a child doesn't make you half a man, right, which for me demonstrates it's more biological in nature than this very brittle, fragile, equities-based model.  And therefore, you could argue that there should be a premium on crypto assets, because they're more likely to retain some value, as long as there is underlying technological innovation there.

Peter McCormack: So long term, to get through the speculative bubble and have this innovation continue, crypto economics seems to be one of the most important areas of skills required in the space, and probably most lacking.  I mean, how many of these token-based businesses are actually looking at the economic model of their tokens?

Jamie Burke: Well, that's it.  And most aren't even thinking of themselves as a digital economy; they're still thinking of themselves as a start-up.  I think the two things, if you were to look at what are the fundamentals, and again, to be honest with you, this probably won't make you any money this year, it will probably save you some money; one is the economic design that goes into these solutions, which is incredibly complex.  I mean, to be honest with you, even I'm not qualified to do that; I have a dedicated team and partners.  And then, you have the governance. 

I think, if I were making an investment now in market, one of the challenges is it's incredibly opaque.  So, there's a lot of information asymmetry.  If you're not on a foundation, or you're not in with the founders, it's very difficult to know what's really going on there; there's so much FUD.  I mean, even mainstream media accidentally pick it up, right; it's such a fast-moving marketplace.  And everybody's talking up their book and they're talking down everybody else's book, and it's just very difficult.

I was speaking to an editor of a leading US tech publication, probably one of the leading ones, and he was genuinely frustrated because he couldn't get to terms with, for example, IOTA.  He said, "I don't know who to believe.  I've got one camp aggressively telling me it's got all these problems; and I've got the other camp telling me that that's all FUD".  So, if he's not qualified to distinguish between fact and fiction, how is the average person, who's maybe day trading on the side, going to do that; or even a generalist angel investor.

Peter McCormack: And that's something we've seen quite a lot recently.  I think that the most evident example is Ripple and XRP, where Ripple appears to be an amazing business, doing some really amazing, innovative things; yet pretty much everybody I know who's been trading for quite some time says the XRP token has little to no value, yet it had at one point a market cap of, what was it, $125 billion, and one of the owners, I think, became something like the sixth richest guy in the world for a couple of days!

Jamie Burke: Yeah, it's crazy.  And for me, that's also indicative of how the market's changed more broadly.  So probably, up until maybe even midway through last year, most people investing in the space were fundamentally aligned to decentralisation and a lot of the principles of Bitcoin.  I think the large majority of the market now, as you can see, people moving into altcoins, I don't even think you can warrant the world "altcoin" now; "not Bitcoin"!  And, a lot more money's moved into that market now as a portion of the capital, and that's, I think, two things.

One, because new investors to the market don't care about decentralisation, or at least not as much.  They care about usability, they care about adoption, so they're not as puritanical about it, which is not a bad thing, I think, to be honest with you; it's just a bit more pragmatic.  However, to the extreme of something like Ripple where they might not even be able to differentiate between centralised and decentralised, or the inherent value of a token and its utility in a particular system; and equally, you've got retail investors or hedge funds moving in and to be honest with you, they don't care.  They want up and down; well, they want up largely.

Peter McCormack: Yeah, I mean it's like, they don't care Tesla is an electric vehicle versus GM, which is still burning fossil fuels; they care about the fact that it's innovative and they're going to make money.  And they don't care about centralisation or decentralisation.  There isn't a fundamental belief, so it's just speculation.

Jamie Burke: Right.  And it's that momentum trading.  And so, I think you've got a less discerning market and equally, one that doesn't care about the fundamental principles.  To a lot of people, certainly that attracted me to the web and, look, I'm here to make money as well, make no mistake about it; but I also believe that Web3, without getting utopic, could be better distributed, more equitable, than what we've currently got today. 

Actually I think, in this blog post I did last week, when I said I felt I needed to have this kind of haircut on the market, I referred to it as "getting back to the future", because a lot of us, the focus is on building the future and everybody's got distracted, everybody's checking the current market cap far too many times in the day and paying attention to these micromovements; when really, what we're talking about long term is a multi-trillion-dollar market.

The danger is, and this is why I welcome this haircut that we've got, hopefully it being sustained, and I wouldn't even mind a little bit more off, even though it hurts my holding in a number of things, is because there is a large existential threat here which is, Web2 and the platform monopolies in Web2.  So, FANGs and BATs, Facebook, Amazon and the equivalents in Asia, because of the data advantage that they have, they're building up an AI advantage to the point whereby, through recursive learning, the advantage compounds and you can almost never catch them up.

So, I think we're at a tipping point where we have the opportunity to build a new web infrastructure that's more decentralised, where the value of things like AI can be better distributed.  I mean, even AI cooperatives, the idea that we could collectively, communally own AIs and intelligences derived from our data, we have a small window to deploy that new web; and if we don't, it doesn't matter how good it is, we'll be too late because at the end of the day, the average user will always pick speed, efficiency, cost and convenience.

If what we're building is not competitive from all of those things, decentralisation being last, then we won't have a competitive Web3 and we've pretty much handed over dominance to Facebook and Amazon and fewer and fewer of them are going to control more and more of our lives.

Peter McCormack: And, in this commodities space within crypto, which you are invested in, if you're taking a fundamental approach to the crypto economics to make these economically viable companies -- do you call them companies?

Jamie Burke: Economies.

Peter McCormack: Economies.  So, if you're doing that, if we do have some considerable crash and, like after the dotcom crash, the VCs started looking at more fundamentals of the team and the business, there is a chance that a light will be shone on the things you're involved in; and then, they also will become speculative bubbles, because you've justified the economics of it.  Is that a risk to you; do you want more stable growth; or, do you not care?

Jamie Burke: So firstly, when a crash happens, it will bring down the whole asset class, precisely because there are no fundamentals and nobody can distinguish between what does have value and what doesn't have value.  However, it will completely kill off some and others will just be there, almost frozen for a little bit.

Peter McCormack: Well, one thing also though that's different from companies is that companies, when they run out of capital, die.

Jamie Burke: Exactly.

Peter McCormack: But, tokens, I mean the Bitconnect token is still tradable.  So, things still become tradable, because it's the computers doing the work rather than the company.

Jamie Burke: That's it.  So, what will be interesting is, the good tech, which has community, proper developer community, not just traders, it will be sustained.  And so even if the foundation that's supposedly driving it runs out of money; and by the way this is a huge risk, just basic treasury management, I come back to the governance piece of these things; and sadly, most people don't have visibility on this so generally, we don't trade in market, because if we can't see how the money's held, have they held it in Bitcoin or Ether, have they converted some to fiat to have effective hedging and treasury management, a lot of these guys, when the price goes down on Bitcoin or Ether, they haven't converted it into fiat, they can't pay anybody and they'll go bust.

So, a lot of the foundations will just be wiped out, but the community will be there, the tech will be there, and there'll be an opportunity, you know, phoenix from the ashes, for community members, maybe multiple groups to say, "Okay, we're going to pick up the technology and we're going to drive it forward". 

So, I also think from an investor perspective, things that aren't totally open source, and I appreciate questions around IOTA, and I always say, "I understand the rationale as to why it's not totally open source now, because of its design and how it scales".  I believe it will become open source; and if that didn't happen quickly enough, then I would have serious concerns as an investor, precisely because of this point, which is if a winter happens, it being open source is almost an insurance policy on my investment.

Saying that, if you're a trader, it's a great buy opportunity.  If you've only got a small portion of your capital deployed in the market at the moment, maybe you've taken back what you outlaid and it's just pure profit, it's going to be a huge buy opportunity, because stuff with lots of value is going to be bargain basement, and you can go in and start investing against fundamentals.  But sadly, it doesn't make any difference to us, because we don't day trade; so, we stupidly are locked in to our investments, we opt to be locked in.

Peter McCormack: Maybe not stupid though?

Jamie Burke: Well, yeah.  I mean for me, for those where we're involved in the underlying design and we've taken 12 months and we've effectively underwritten that process, and IOTA wasn't one of those, by the way, and we've invested in Ocean and Ocean wasn't one of those either; but those where we're more involved, effectively we're acting as a signal to the market.  So, we have a not insignificant amount of the monetary supply to deploying the capital, for doing the advisory; and we only get that whilst we retain integrity, when people know that the things that come out of Outlier are going to retain value, they're going to be sustainable, they could survive a crash.

So, we need to demonstrate that we believe in the long-term viability of it, so what we've chosen to do is, our tokens effectively vest alongside the founding teams, and usually that could be up to three years' vesting cycle.  In some instances, where it's a business with an existing IP and they're open sourcing it, there is a transaction there; they get that monetary value back.  They have to renumerate their shareholders that have put in the initial capital, but for any new deployments, they only get paid on delivering stuff.

So, this comes back to the governance, which is pretty standard in the VC world, right?  Vesting; you don't get given a load of money until you do something, and your holding vests with progress and what have you.

Peter McCormack: So, are you also providing some kind of mentoring support as well, which obviously for some of these blockchain-based businesses, they're not getting?  They're raising a bunch of money on ICO and then they're just off doing what they want to do.  There's no support from a traditional structure.

Jamie Burke: Yeah, so we regard ourselves as a venture platform.  To date, a lot of the focus has primarily been on pre-ICO, because that's where everybody is.  And as I said, the large majority, we've been working with for several months now.  As a number of them are coming off the ramp before summer, we're increasingly developing our competence around this post-ICO phase and so, focus on that will be supporting on the governance; it will be corporate engagement and adoption, so leveraging this corporate network I spoke about earlier.  Actually, many of those, we're getting to coinvest; so, we were involved in discussions between Bosch and IOTA, and we have a number of other of those looking at others in our portfolio.

Then, most importantly, it's scaling community, developer community; because ultimately, if you're going to value an open protocol, it's going to be how many people are deploying on it.  And I think the standard is Ethereum, putting aside the debate on how useful those things are, but consensus have done a great job at building a seeker system around Ethereum, both corporate and individual developers.

So, a big focus for us will be, when I was talking about the convergence thesis earlier, we have a vision for the Web3 stack and it starts with IoT and Sentry data; it moves up to data market places; and then up to AI and autonomous systems.  We're investing at each layer.  Sometimes, we might even have two in the same layer, but at the moment we're picking what we think will be the leaders in each layer of this Web3 stack.  So, in theory, they should be very complementary to one another.

I know IOTA announced a partnership with Evernym, who are doing the Sovrin tokens, not live; it will be the summer, which is an unbelievable project.

Peter McCormack: Is that another one of yours?

Jamie Burke: Yeah.  So, we're the lead investor.  We've been involved with them for seven months on the design phase.  And so, they're looking at identity and verifiable claims, and that can be verifiable claims between people, things, machines, objects, Sentry devices, or organisations, including autonomous organisations.  What that means is you can do verifiable claims in a zero-knowledge proof environment.  So, I can prove something is true or not without you having to reveal the data behind it.

Peter McCormack: So, IOTA becomes important because it offers no-fee transactions that support this infrastructure?

Jamie Burke: So, the relevancy is, for IOTA as a network to be able to have transactions with machines, you need identity.  How do you identify a machine; how do you have that machine pass data to another machine and trust the data, the data quality and all this kind of stuff?  So, identity is a fundamental layer to all of these things, and it's no different for anything in the machine economy.

We also have a play which is doing a bot marketplace.  The idea is that you can sell constituent parts of the bots that will be trusted, they almost have their own DNA.  You can configure a bot and you can trust it in totality; it's not going to do anything malicious, because of the DNA of its constituent parts.  That's called Botanic, and they're doing a SEED Token.

So, all of these things are complementary and the reason why I mention that is, our plan is to begin to build an events platform for convergence.  So, it won't be devcon for one protocol; it will be devcon for the whole stack.  So, we're looking at doing a big conference towards the end of this year, doing a number of hackathons.  We worked with Datarella that did a hackathon in Poland with IOTA.  We're forging a lot of relationships with academia; Imperial's one of them, but we're speaking to any number of technical universities, in order that we can build this developer community, both virtual and then big physical conferences.

So, when we have a new investment, we can say, "You're going to be introduced to 20,000 developers, all interested in the space", so very quickly they build up that traction.  For me, that will be the fundamental.

Peter McCormack: But you're also working with the Wall Street Blockchain Alliance, so it feels to me like you're quite sensibly going, "Right, let's build the developer community this side; but let's also make sure the capital's available too"?

Jamie Burke: Yeah, the Wall Street Alliance is slightly different and the name's a bit misleading.  So, as an organisation, it is largely Wall Street players.  The reason why we joined that is more from a regulatory perspective.

Peter McCormack: Oh, okay.

Jamie Burke: So, we have a guy called Greg based out of Toronto again, so we have a London Toronto office and one in Germany very shortly.  So, Greg, all he does all day long is speak to regulators and lawyers, to the point whereby he starts to talk like a lawyer; you can't get a straight answer from him. 

But he does things like, he went on a retreat to Wharton Business School for a weekend and it had every major regulator from around the world there with chat-up house rules; so, you couldn't report what one said.  All the leading law firms; we were the only VC that were invited to go.  That came through the Alliance.  We got an inside view on how regulators were thinking about this as an asset class, what their concerns were, by jurisdiction.  So, for us, the most important thing, because we're helping people in terms of issuance, and if you were to look at risk, not just risk for issuance, but risk more generally in the market, regulation has to be the key one.

Having an understanding for if, so for example, France and Germany are talking about taking to the G20 a proposal for regulating cryptocurrencies at the moment.  Equally, at the moment we're talking to different parts of UK Government, FCA, HMRC, to say, "Look, post-Brexit, this could be a huge opportunity", because if you think about it, what does the UK have?  Well, it has capital markets that are slowly leaving, so if you can tap into an entirely new capital market with a friendly regulatory environment, and the FCA's got really good form for being creative and supportive of emergent financial products, peer-to-peer lending, equity-based crowd funding; people still passport, in other markets in Europe, UK licences, because they still don't have them in, say, Italy.

Peter McCormack: Right, okay.

Jamie Burke: So, the FCA's been really forward-looking.  So for us, we've got forward-looking regulators that are really good with Fintech; we've got a very healthy angel community; a large part of VC activity was out of UK for Europe; a lot of the European bank investment was backing UK investors, 50% of the money came from Europe; we've got professional services, accounting firms, lawyers all centred around capital markets.

Peter McCormack: And we will have self-governance?

Jamie Burke: In theory, we will have self-governance.

Peter McCormack: Depending on the deal!

Jamie Burke: So, we could make it a friendly environment for issuance; we could make it a friendly environment for -- for issuance, it's a tax question actually -- as a market to sell into, giving greater surety as to definitions between utility token or commodity token and a security token. 

So, engagement with regulators is something we're putting a lot of time into.  I wouldn't say we're lobbying, but we're certainly helping them navigate the space, and certainly helping those in the UK to say, "Look, if there was one opportunity where you could say this could be an advantage to Brexit, it's probably this".

Peter McCormack: Interesting.  So, in terms of you've talked a lot about essentially the platforms are being built, we're establishing.  How far away do you think we are from some truly large-scale, successful, decentralised blockchain businesses; and what are the things keeping us from that happening?

Jamie Burke: I mean, I think realistically, if you're trying to build an app-based business, or a dapp-based business, or something like that, the infrastructure's not going to be there for you for 18 months to 2 years.  And honestly, I'd say if you're investing in dapps, you're throwing your money away, because if you speak to anybody, and we're fortunate that we have this corporate ecosystem who've been building proof of concepts for the last three years.  They've got these proofs of concepts that are a guilty little secret in their drawer that they don't tell anybody about!  They've got a load of money; they convince senior management that they should be playing with a given protocol; and CryptoKitty comes along and kills --

Peter McCormack: Kills it all; yeah!

Jamie Burke: Yeah.  And we have partners that have actually deployed commercial propositions on, and I don't want to sound like I'm beating up Ethereum, this is not specific to Ethereum, almost all infrastructure, including that which we've invested in, at the moment is very difficult.

Peter McCormack: What, even Bitcoin?  I mean, that's the big war over the last few years, has been scaling issues.

Jamie Burke: Well, exactly.  So, we need to focus on the plumbing and the piping, the infrastructure.  The thing that interests us most about Evernym and Sovrin was identity.  Until you solve identity in a decentralised environment, forget it.  You're going to have to rely upon central parties massively, major intermediaries.  So, there are some basic things: reputation, trust, identity. 

I mean, look, let's fact it, if you look at the exchanges at the moment, we don't even have an orderly and functioning means of exchange which, to be honest with you, is why so much heat was getting trapped in the system, because it's actually difficult to take your money out of the system.  By the time you'd got around to maybe going, "I'm going to move it all out into fiat", it was back in green and you go, "Oh, I'll go back in again".  So, in a way, that's kind of trapped a load of money in the system.

Look, I'm really bullish on long term.  This is the next phase of the web; it's going to be a multi-trillion-dollar market, and we get approached by people all the time by people saying, "We're building an app business; we're launching an app token to do logistics on Ethereum", for whatever use case.  I'm like, "Well, good luck with that".

Peter McCormack: I say to everybody, you know, I've got a group and I say to everyone, any family or friends coming in, they say, "Pete, you know about Bitcoin [or] you know about that; what should I do?" and I always say, "It's a three- to five-year play.  But if you pick the right investments, you can see some great growth.  But it's three to five years".

But in that, are you saying it's just a matter of when; or, do you see any scenario where these things just cannot happen; are the problems so difficult they can't be solved?

Jamie Burke: Well, what's really interesting about this phase, and it's really evolved over the last three years, last four years actually since I've been involved, it's one of the greatest brain trusts on the planet.  It really is attracting the great and the good, people infinitely more intelligent and technically competent and able than me.  And so, I have great confidence that if any community, if you can even call it that now, because it's just so broad and diverse, is going to solve this, they will.

The great thing is, this tokenisation has given a very real incentive to solve it.  And because of the open-source nature, again you don't have to get it right first time.  You can have multiple shots at refining and tweaking as it evolves, so I'm really confident that most of the big challenges that we're going to be facing -- Tim Berners-Lee did a really good article at the end of the year in Wired about, the web's broken; how can we fix it.  And almost all the things he talks about in there, I believe will be solved by this community.

That infrastructure's going to be laid down over the last 12 to 18 months.  So, if you imagine that you could get in on a Sovrin and an Evernym, let's say they solve the problem that they're trying to solve, it's huge; how do you even quantify that?  I wouldn't know how to even quantify that.  So, there is definitely a lot of opportunity. 

I think, even with the haircut that's happened, if you're looking at buying what's in market at the moment, I think it's all overpriced, I think it's very difficult to find value.  It will go down further in value before it's going to go up over the course of this year, but that might be fine.  You might just say, "Well, look, I'm going to put it in there and I'm going to forget about it for two to three years"; that's one way to approach it.  But I'm more interested in what's coming through now, and I would say that because I've got five coming online.

But I do think, if you look at technology cycles, it's usually the second or third generation where you actually get things that work and scale, because you have all the hindsight of generation one and two that have gone before it.  And I think, looking at Tangle and the DAG, they're not the only one deploying DAG now; there's three or four going to be coming out this year.  These are direct evolutions of things that proved either they have very narrow utility, so they wouldn't serve as general purpose; or, they couldn't be applied to specific problems.

So, I think what's more interesting is not necessarily what's in the market now, it's what's going to be coming online over the next 18 months.  I think that's where you're going to see a lot of value, and it's getting in on those pre-ICOs where there's discount with some value.  Now, even those things, they're not going to be cheap.  They're still going to be assuming a market cap based upon what they think is sensible in market now.  But at the very least, you're getting a discount on what that might be.

Peter McCormack: But that will increasingly likely probably just go to the hedge funds and the large-scale investors, rather than as the market matures, it won't be somebody who wants to buy 5 Ethereums?

Jamie Burke: Yeah, well it's interesting and this is the challenge.  So, a key part of the success of a token will come from its distribution.  So, one of the challenges at the moment is, because of the regulatory uncertainties, and this is something that we've advised to -- well actually, I don't think there's regulatory uncertainty; I think it's very clear, there's lots of clarity.  If you really speak to regulators and you really speak to lawyers, who are prepared to give you an opinion, I think there's a very clear distinction between what is a security.  It's linked to an underlying asset; it promises dividend; or, you market it, "promising return of investment" and all these kinds of things.

Securities already exist; you don't need new laws, they already exist and those markets function in a very orderly way; and I think the SEC have actually been very positive in their engagement, where people are clearly violating securities laws, unbeknown to them, because they've just not bothered to check, and they've said, "Sorry, can you stop marketing that", which is unbelievable if you think that's the SEC.  Normally, they just lock you up!

Peter McCormack: But do you not think these security laws are outdated in that, actually, if they're a security, at least there is some kind of understandable benefit to owning some of these tokens?

Jamie Burke: So, I think yeah.  Well, I don't think it's out of date.  I think that the security token market will be bigger than the utility token market over time, because I believe everything will be tokenised, fractionalised and securitised.  So, if I'm going to build a massive property development and it's going to cost me $100 million and it's residential or commercial, increasingly I'm not going to go to a bank to do that; I'm going to pre-sell the properties.  That could be fractionalised down to $5, I don't care, and then you have this very healthy secondary market where people are speculating on its success or not.

I think high value assets and a lot of alternative assets like art, fine art, that are inaccessible to most people, because the ticket price is $100k or more, increasingly these asset classes will open up, because they want the liquidity and anybody and everybody to be able to invest.  If you think about the market cap of fine art in the alternative asset space, well if you could bring in retail investors into that to buy fractions of a Damien Hirst, you bring in several million into the market in terms of liquidity.  So, it's in everybody's interest to open up these asset classes.

So, I think that's going to be huge.  At the moment, there is no liquidity for security tokens, because exchanges don't want to list them; but that will be sorted out.  There are already some exchanges, I think one in Gibraltar, that's looking at doing security tokens and utility tokens.  The question then becomes more of a philosophical one, which is in the States; you want accredited investors only.

Peter McCormack: Plus $1 million only?

Jamie Burke: Plus $1 million, yeah.

Peter McCormack: And, $100,000 income?

Jamie Burke: Yeah.

Peter McCormack: Do you not think that's unfair though, because look, there are probably people with over $1 million, who might not be smart investors; there are some really smart guys out there who have very low income.  Do you think it's actually fair?

Jamie Burke: Personally, I don't, but I live in the UK and in the UK, all you have to do is tick a box and say you're an accredited investor, which is why we've got the healthiest angel environment in the world, I would argue.  It's why the majority, well not the majority; Europe is the leading market for ICOs this year over the States.  It's a huge opportunity, because we have a more open system for early stage investing and it served us very well.  So, I'd rather not comment on -- I think that's a failing of the States; I think it's a huge opportunity for us in Europe; but it is the way that it is. 

Now, if you go back to the commodity token piece, or the utility token, what we've done is, until you can point utility, so until somebody can buy the token and actually use it for something, as far as we're concerned, you're promoting a security; if you're letting somebody buy that and actually, you can't do anything with it other than speculate, it's a security.

Peter McCormack: Somebody called it a Debt Token the other day?

Jamie Burke: Yeah, exactly.  But the point is that you are marketing something on the promise that it will have utility.  Now, if you happen to then deliver utility, you might be okay.  So, Ethereum didn't necessarily have utility in the beginning with Ether, but over time it delivered on the promise and therefore, everybody's okay, nobody's in jail from Ethereum.  But let's say a crash happens and you run out of money, or one of you gets hit by a bus, or whatever, all these things that happen in life, and you fail to deliver the utility you promised, and as we're seeing with things like Tezos, and what have you, failure to deliver on the promise, when you've made that promise to a retail investor, is a very dangerous spot to be in.

What we do is, in this early stage of underwriting, us as professional investors and our network that we syndicate out to, we do SAFTs.  So, that is a security, you have to be an accredited investor to be able to participate or an institution; that converts to a token at the point that there is utility.  And only at that point would you do an ICO.

Peter McCormack: Right, okay.

Jamie Burke: So, what we're doing is we're saying, "Look, until the technology's there, even a basic MVP", and you can demonstrate that you've designed utility at its very core, you should not be allowing users to buy that token.  Now, at the point that you can use that token, I think there is no law in the world that can tell you that's a security, because at the end of the day, it's like a ticket.  There are secondary markets for tickets.  I buy a ticket to Adele or whatever and if I want to sell that to a secondary market, that's entirely up to whomever, but it just gives me access to something, whether it's an API key, or whatever the function in the system.

I always say, "Nobody from Ethereum's in jail yet"!  Some came close because of the DAO, but nobody from Ethereum's in jail yet.  And until somebody from Ethereum's in jail, the concept of a utility token exists.

Peter McCormack: And it's not going to happen really.

Jamie Burke: No.

Peter McCormack: Okay.  Cool, this has been great, really good.  I've got hundreds of questions I haven't even covered yet.  I think I'm going to wrap it up a bit now.  What would be a good way to finish off, what's the future for you and Outlier; what do you think the market needs?  And then, do you want people to be getting in touch with you on specific projects?  Do you want to let us know what people of interest you've got and how people can get hold of you?

Jamie Burke: Yeah, sure.  So, our focus, it's interesting, because we've got our annual strategy meeting today, immediately after this.  So, we've actually spent quite a bit of time thinking through the three-year plan, and this year in a concept with that three-year plan.  We've built the beginnings of this venture platform; we're never going to be an ICO factory; so, we'll only be doing a handful of deals each year that fit within the thesis.  I think having a thesis is really important.

So, for us, our objective is to be known at Outlier for quality and to be a very strong signal to the market.  So, anything that dilutes that signal is something that we don't want to focus on.  So, the way that we want to be regarded by the market is when people see that Outlier have invested, and especially when they see that we've been involved in the design and implementation of something, that they know proper diligence has been put into design of what this think is, it's probably taken over 12 months; that the team behind it are going to be credible; that the technology is innovative; that there will already be degrees of corporate adoption; that there will be appropriate governance; and that ultimately, their investment is as safe as it can be in a high-risk environment.  And at the very least, it should survive a winter or a crash, or anything like that.

The main thing for me is, we're doing a revamp of the website at the moment, it's not so easy to find, but we have a daily newsletter where we have a fairly balanced and impartial view of the market and in that, we feature any investments that we're making.  So, I would encourage people to follow what we're doing and hopefully, if the rationale as to why we've invested makes sense, check out the tokens and protocols.  I don't promote investment opportunities to people, but we always articulate why we've invested, the rationale and the thinking; and what we're really keen on is not necessarily to say we want more investors to follow into the tokens we're involved in, but certainly developers, people that can add value to the community beyond just capital, who can come and contribute and help these things scale.

Ultimately, until we have developers committing and building -- protocol is nothing without a developer community, so that's the focus for where we want to go as a business.  So, yeah, hopefully we get known for that and we like to think that we're the leader in Europe for what we do, so we want to try to entrench that leadership position; and our ambition is to be in the top five globally in the space.  The frustrating thing is, when you see these tables done by whomever about leading VCs in crypto, it's always the amount of deals they've done and the amount of capital they've deployed.  It's very easy to spend money. 

The question should be, "What is the quality of the portfolio?"  So, if they've got five logos on their website, but all of them are billion-plus cap with lots of developer commits, significant code on GitHub and traction, that for me is infinitely more interesting than having 30 logos and being able to say, "I've deployed $1 billion in capital".  So, it's that nuance, it's that quality and yeah, hopefully being a signal.

Peter McCormack: Great.  Listen, thank you so much for this; this has been a really interesting interview.  It's probably the one I've looked least at my questions, so just I really appreciate your time and that's been great.

Jamie Burke: Well, happy to come on again and we've got other members of the team, ranging from the people involved in crypto economic design, we've got a Head of Research that tracks the market, a team of analysts.

Peter McCormack: I think Eden would be a great one to have.

Jamie Burke: Yeah, absolutely.  So, we're always happy to chat.

Peter McCormack: Great, thanks. Awesome.