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Family Offices and Their Strategies for Web3

September 23, 2022
Linqto Learn Presents “The New Economy Underpinning NFTs”

We are in a critical moment in history; a new era of high inflation, rising interest rates and shifting technological, geopolitical, economic and climate terrain. So now is a great time for professional investors to reassess their investing strategies and consider new asset allocations because there are always opportunities in crises.


Because Family Offices have longer time horizons than most investors, they can really examine the bigger picture, and as a result, their investments can really direct our future. Family Offices are shifting from fixed income allocations into private equity – sacrificing liquidity for returns. Of course, no two Family Offices are the same, so we make no sweeping generalizations here, but they are nimble and due to having longer time horizons, we wanted to hear some Family Office opinions on blockchain and its potential for oversized returns.


All of our speakers on this panel are such heavy hitters, we gained a lot of valuable insights and deeper ways to think about investing.


The impressive and well-respected Erica Lill brought our panel together and kicked us off. Erica is an Advisor with the IRIS Family Office, a serial entrepreneur, an impact-driven professional and investor for over 25 years. Her vast knowledge in real estate and start-ups makes her an influencer for investment strategies for multiple family offices and ultra-wealthy families.



Reggie Middleton joined us from Brooklyn, NY. He is the founder and CEO of Veritaseum, a blockchain technology company that specializes in producing technology that facilitates the zero-trust peer-to-peer transfer of value without any authoritative or trusted 3rd party. Mr. Middleton invented DeFi technology in 2013, over a year before the launch of Ethereum, and successfully patented it in 2014 in US and Japan, with the EU, UK and China pending. These patents cover Ethereum, Bitcoin and Solana, just to name a few. Reggie is famously known for calling historic financial events early.


Bryant Hayward joined us from Parker, CO, where he is the Chief Investment Officer at De La Prym. De La Prym is a Single Family Office that has made over 58+ direct and syndicate investments this year alone and is leaning hard into sectors like Biotech, Crypto - Blockchain, Ag tech, and Robotics. Bryant builds custom venture portfolios and directs Web3 investments that produce outsized returns on behalf of Family Offices, Sovereign Wealth Funds, Pension funds, Institutional Banks, Wealth Managers, and Corporate Venture Partnerships.


Kevin McGovern had to reschedule due to circumstances he couldn’t control but we will be having a fireside chat with Kevin in the near future.


So let’s dive into what their individual takes on the future of investing in Web3 is for their Family Offices.


Bryant reminded us that fortunes are built and made in down markets and his bet is on tech. Unless you believe that the tech sector overall will stop moving forward or slow down, then you have to dollar cost average. No one knows the timing of markets, but you can see that tech innovation in Web3 is accelerating. For example, Dapper Labs became the official NFT wallet for Meta (Facebook), so you can see outliers breaking out with a lot of potential


Just to keep things interesting, Reggie reminded us that he’s “that guy” who loves to be the contrarian. Reggie doesn’t believe there’s a tech sector. In his view, Tech is just another way of doing business. He reminded us that first we had the stick, then fire, then the wheel. Every company that utilizes tech to do its business is a tech company. Banks and utility companies are now tech companies. The opportunity, he reminds us, lies in the adoption of the next phase of tech.


The adoption of distributed ledger technology – or Web3 - is happening faster than smart phones and personal computer adoption did – and they were historically fast. Reggie sees the big opportunity in Web3 in the infrastructure, not the “units of account”, like crypto. If you look where the big banks like JP Morgan are investing in this space, you see their money is going into infrastructure startups. Retail money is going into units of account.


Reggie walks us through that you have to go back to 1997 to correlate this moment to the moment of the internet. You can invest in IP / internet protocol packets or invest in internet infrastructure. The IP packets went up 2000% but every company like Google, Facebook and Amazon that uses the internet for ecommerce has to pay the infrastructure owners a toll to use it – each and every time.


Reggie’s advice is if you have the time horizon and can afford the time and volatility, this is the path for largest returns. And just what is Reggie investing in? He’s investing in patents. His own patent covers ETH, NFTs, Solana and the transfer of NFTs, essentially Web3.


Next, we asked our panelists about their due diligence process.


Bryant has an office that provides him with in-house counsel and a team of analysts who scrub things pretty hard internally before they then get a stamp of approval by legal counsel. For early-stage investments, they look deeply into the patents and look particularly closely at the team. And they’re very quick to make a decision. Of course, they consider the early-stage companies' innovation, its utilization, adoption, confirms that there’s a great team, and then checks whether the company has or portends to have real revenues.


Karim: When a Family Office looks at inv opportunities, are you different than a regular VC or Private Equity firm? How different do you guys approach investing?


Bryant offered that each Family Office is different. Some have investment teams. His focus is venture only so his Family Office expects him to bring really good deals in. Bryant is well connected to Draper, Lightspeed and other name VCs, so they expect unique dealflow. A lot of venture is about relationships so they decide within hours, days or soemtimes a weeek or two. They don’t mull it over – the market moves fast. “When you're in front of really good founders, you can feel it. You know when they have it.”


Not all Family Offices do venture and they can be effective at $300 to $500M, but Bryant is working with Billions. Some Family Offices are very hands on – they want to scrub every deal. But Venture moves faster. Private Equity deals can take 6 months to a year. Venture is all about speed which works when you have relationships.


Reggie, as the contrarian and coming from the public markets, has a very different style. Reggie started in 2007 in Real Estate in downtown Brooklyn; he understood the area and saw the opportunity in the housing market correction. Rampant gentrification and accommodating interest rates made that decision a winner.


Before 2007, Reggie pored through balance sheets and saw that there was a lot off by looking at old fashioned fundamentals; so he shorted Behr sterns and the others that would soon fall and he did very well. To outsiders he looked like a contrarian, but he was just using fundamental basics.


Fast forward to today and Reggie is still relying on old school fundamental analysis. Math is still math. And he relies on old fashioned Due Diligence. Reggie sees famous investors making fundamental mistakes. You have to look into IP. Tech is 100% IP. If you were a PE firm or Family Office and you want to invest in chip fabrication, you better be asking if they own patented defensible IP, as well as who their competitors are. Reggie believes that these fundamental questions aren’t being asked in the Distributed Ledger field.


The second thing Reggie advises is that we look at how capital is being deployed. Right now you see a lot of capital being deployed by VCs, Private Equity and Family Offices into DAOs (distributed autonomous organizations). DAOs are facing legal pressures because they aren’t legally incorporated – they are unincorporated by design.


The potential risk you take here is say you put $5k into a DAO and later they were found guilty of patent infringement, which exposes them to an $800M liability? “Your $5k investment is liable to that oversized liability. You took an outsized risk. This is what I call Return-free risk.” Right now you hear a lot of folks saying that the story is different this time, but math is always the same. “Don’t fall for ‘this time is different’”.


Karim observed that it takes a lot of courage and clarity in the midst of such Momentum investing to take the actions he did when faced with so much potential FOMO.


Reggie noted that if you’re a Family Office or a long tail insurer you don’t have to worry about FOMO because opportunities come daily. If they’re in doubt, they just let it go because there will be more opportunity tomorrow.


Bryant added that you can feel it right now. “It doesn’t feel like the bottom is here.” Bryant also felt it was too good to be true back in 2007 and he, like Reggie, shorted as well. Bryant also agrees that there are new opportunities every day. This correction seems more natural and thinks we’ll get back on track in this market in the not too far off future.


Reggie doesn’t think we’re in inflation today; he’s calling our current state stagflation. With Covid we saw rampant monetary and fiscal policy stimulus. You could watch the money supply going straight up. According to Reggie, in the history of record keeping, money has never been printed as fast as it has in the last few years. “Look for outliers, every paradigm shift is when a significant capital formation paradigm occurs because the Addressable Market gets larger. Look back to Personal Computers and IBM. Then Microsoft found a more efficient way. Later you see Microsoft triy to force their version of the internet on us, but we were already onto a new paradigm.”


Reggie laid out how Netscape created Navigator, which gave us a new operating system. Today you have a massive amount of operating system disintermediation. Distributed realities are now available to everyone, not just big companies. Think of music, movies, banking; a few years ago, this all would have been totally unheard of. Banking infrastructure, media, entertainment and logistics are all at risk today of being disintermediated. Though he does remind us that Banks are very good at surviving; they bought up a lot of Web3 infrastructure but... don’t own the IP.


Karim then shifted the subject over valuations and what is happening to them in the last 6 months. We ask whether our panelists are seeing founders coming to them with old term sheets? Or are they re-evaluating before they come to you? Or do they have to push them down?


Bryant sees Founders with good companies holding up their valuations. Founders in struggling businesses who don’t have revenues are now competing with thriving companies. To him it signals that their Business Models are broken.


We then shifted the conversation to a big topic of the day - disintermediation.


Bryant advises us to look at the macro view - and cautions that patents can only tell us so much. He learned that patents are only as good as you can litigate them. That’s when you know you own it. He’s learned to pay attention to the patent agents, who counsel is, and to read carefully what the patent agent said in the files. He looks at how novel the patent is.


Braynt works with a global Family Office and they’re moving to what he sees as the exciting frontier of emerging markets. There are making a lot of Indian, Israeli and African investments because of patents and their speed to market.


For Bryant, he thinks it’s crazy for Family Offices not to be looking at emerging markets. He sees a lot of entrepreneurs with huge opportunities to take ideas from 500 startups, for example, and take those ideas over to Indonesia or India and duplicate the innovation but without all the red tape.


And Reggie, ever the contrarian to the chagrin of his kids, wants to go where there’s less conversation going on. He's paying attention to the abysmal approval rate for blockchain patent files- 9 out of 10 are rejected. He agreed with Bryant that indeed Patents have to be litigated to hold up but he still notices a big problem with how little patent analysis is being done in this space.


“Many companies went public and raised a lot of capital without any mention of IP risk. Now there’s a bifurcated risk. There will be a battle in the courts and also risk of shareholder suits – a prudent executive would weigh the risk. A foundational tech patent will cover 85-90% of revenues of all companies it effects. Now you’re either in business or out. Is the court fight worth it?”


Reggie continues that we’re seeing maturation of this industry – now sophisticated investors should look at the risk of shareholder suits, in addition to the high regulatory risk from the SEC. For analogy, Alexander Graham Bell had the telephone patent and controlled communications in the US for the next century. He even owned equity in the Baby Bells when they broke up. AT&T is a remnant Baby Bell. That’s a powerful return for a foundational tech patent.


Karim then asked: in the midst of so much disintermediation, blockchain hype, regulation risk, issues of local and global patents... if you could look forward to the next 12 –24 months – what should investors in early-stage startups look out for?


Bryant is clear: you can't fight the Fed. They overshoot yet he remains cautiously optimistic. A war is geopolitical risk. Do you believe the media? Is China watching us? What’s going to happoen to Taiwan? He thinks we’ll get through this correction and have a nice rebound and he would be adding positions in tech companies. He’s usually right about these things and tends to be early, and he thinks things will get better. He would make investments into startups and founders you believe in.


Bryant personally likes robotics as a service, such as the automation of farm tractors. Ag tech is also high on his list. We’re going to have a food crisis and we can’t live without nutritious food. Those innovations are going to change the world. He invites us to ask ourselves what we need to live on a different planet. He’s also investing in a lot of female founders because he sees lots of success there. Biotech makes sense to him though he doesn’t invest because he’s not an expert. He also sees Ripple / XRP as a real opportunity because it is infrastructure.


Bryant points out that the SEC is conducting unprecedented litigation against Ripple and XRP holders, but he thinks Ripple has a bright future making money without the primary US market.


Reggie agreed that Ripple is disintermediating the SWIFT system with a cheaper, faster solution. He reminds us that XRP is a unit of account, but Ripple is a business.


Reggie is personally bullish on real property, particularly residential and last mile warehousing and tech warehousing. In the short term, investors may take a bath because of stagflation. And non-performing assets for companies will start taking effect. When everything dips, there are monetization opportunities.


Lastly, Erica Lill, who pulled this fantastic panel together, responded to what she sees Family Offices investing in in the next 12 – 24 months. She advises many Family Offices and she’s noticing that many are in bankruptcy courts buying distressed companies and sees a lot of optimistic about the Web3 space.


We strongly suggest you listen here to the full episode as we just scratched the surface here.


Please join us Oct 6 for a session “Unlocking Unicorns: North America vs Emerging Markets"


@reggiemiddleston – Twitter


Google Bryant Hayward to contact him. He’s super friendly and will give you advice to help you upward.

Linqto

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