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How do you spot the unicorns of the future? How do you figure out what will be the next big thing in FinTech? Initialized Capital invests seed money into the early-stage start-ups of the Web3 world and it's Brett Gibson's job to find founders with a dream we can all believe in. And they have a good track record - from investing in Coinbase to Reddit to Rippling - they've definitely backed some winners.
Walter Jennings: Imagine you can travel back in time and invest in startups before they even have a product ready. Would you be able to pick the Coinbase from the baseless, the rippling from the dipping that today is the job of our guest. Now managing partner for Initialized Capital, he is a self-taught coder, philosopher, pizza maker, and pinball master before turning his hands to investments. Brett Gibson, managing partner of Initialized. Welcome to Finoverse. Not too many months into your leadership, we saw the implosion of FTX and uh, that no doubt led to some challenges in seed stage investments. Uh, how have your portfolio companies been responding in today's market?
Brett Gibson: Yeah, I mean, fortunately we didn't have as much, you know, direct, uh exposure to ftx, but it was certainly a moment for people that invest in crypto assets to sort of, to step back and think about, you know, what, why we're all here and you know, why we can't even keep ending up at this place with, with fraud. Um, and what is it about this top technology? Is it just the fact that it's, that it's novel, um, and there's exciting things going on and that sort of naturally attracts fraudsters? Or is there something sort of more fundamental about, you know, digital bearer assets where, uh, their ease of being used in crime? Um, so, you know, ultimately, it was as sad as it was and, the number of people got hurt.
I think that, you know, I'm personally, and as a firm, we still believe very strongly in the asset class, believe very strongly that, you know, monetary assets, you know, uh, it just makes too much sense for them to be digitized on some timeline. And then I would say in terms of, um, so, so, you know, with the portfolio, it's just, I think we've been here before with crypto winners and so it's, it's similar advice as before, you know, have runway if it's possible, paths, profitability if you need it, but, you know, just, you know, to be able to last the downturn. And then with our investing, you know, it's, it's actually, you know, seed investment is, seems the least hit by, you know, anything going out of FTX or macro conditions. So, you know, we're still seeing a lot of great, great founders building novel companies. Um, and there's still a lot to build in the crypto space. I think FTX is, you know, both sort of proves that in a sense, right? There's, there's a lot more systems we need to replace and build out to really have a crypto ecosystem that everyone can have faith in.
Walter Jennings: Now, Brett, you are investing much broader than, uh, digital assets. Uh, you've got everything from enterprise software as a service to sustainability. What are some of the sectors that you are particularly, um, interested in today?
Brett Gibson: Yeah, I mean, so, you know, personally, I think that the through line, um, to the things I look at is that I'll kind of always be a developer. I spent most of my career before investing, writing software or managing in small, uh, engineering teams. And so I've, you know, I, I tend to look at things where, where it helps to have that background and come from that context. So, um, you know, developer tooling, cloud infrastructure. And I think that right now it's really hard, uh, from that lens to be ignoring what's going on in AI and machine learning and deep learning and sort of, you know, along with a lot of people trying to figure out what, um, generative AI models and like large language models are gonna mean, you know, not just for society broadly. Cause it seems like there's pretty wide implications, but also for, you know, the startup ecosystem and, and the startup we investment on.
Walter Jennings: You mentioned you started as a developer and, uh, Garry Tan, the founder of Initialized once said about you and I quote - "In his code, you sort of see the philosophy major in him. He definitely has this sort of obsession with the platonic idea of perfection. There's something very elegant about that". If that's true, have you been, uh, seeing perfection in the startups you're working with?
Brett Gibson: You know, it's funny because it's like, you know, I guess startups never feel perfect, right? I think that is one of the most interesting things about the startup journey is, is how much of a roller coaster ride it is. You know, as a founder, even when things are going well, um, you know, there's always some crazy thing happening that you have to track down. And so I think that, you know, I guess what I see, you know, I wouldn't call it perfection, but what I see is like, particularly rewarding is, you know, founders that sort of roll with that, and have like, you know, that are very mission-oriented or very detail-oriented and have perseverance through, you know, all the things that, that the world can throw at, at an early stage startup. You know, that's, I don't know, that's, that's actually, you know, perhaps part of the job that I find gets me out of bed most in the morning.
Walter Jennings: Yeah, it's gotta be part VC investor, but also part, um, coach and, uh, you know, umpire and, um, putting, uh, band-aids on dirty knees sometimes it's gotta be a messy business.
Brett Gibson: Yeah, Yeah, absolutely. Uh, I guess, you know, pilgrim once compared early stage startups to mosquitoes, right? There's just no defense. It's just out there to score, right? There are plenty of reasonable, uh, ways to build a business, but when you're in, when you're in the business of just a high growth technology startup, you know, you're not, you are exposed in many ways as you try to get to market and as you try to grow very fast. Um, and there are natural forces that are, that are trying to stop you most, you know, most often kind of larger companies that that, that you may be stealing market share from. So it's a lot to hold together as a startup founder and, you know, so we try to be extremely empathetic about that.
Walter Jennings: Have you ever had a, "you had me at hello" investment proposition, a company that you were enamoured with, uh, right upon meeting them?
Brett Gibson: Yeah, I mean, I would say perhaps that's, that happens more often for us than otherwise. When you're doing like a late stage growth venture round, you know, you're getting closer and closer to kind of the motion you might do to underwrite, uh, a company that's in a public market, right? Where you're looking at, at financials and digging through and crossing all the T's and dotting all the I's whereas for very early stage, you know, there's as much risk of talking yourself out of things as there is in not doing enough diligence. And so, yeah, we, we pride ourselves and be able to move very quickly. And I think we have a lot of deals where you try to be very prepared for what comes in the door and then, recognize it when you see it. One that comes to mind is a company we invested in called Bison Trails, which did, um, you know, infrastructure as a service for creating, you know, validation nodes on proof of state networks.
They ended up selling to Coinbase, you know, I wasn't really sure what I thought at the time of even proof of stake or what was sticking around, you know, this is kind of like, it's like 2018, before you know it had been proven out that many of these networks would work, but they came in and, and the founders were so impressive and they had such mastery of both the technology, but sort of like how the market would develop that, you know, within an hour. I was kind of like, you know, certainly there's more work to do and some more work to research to be done here, but, you know, it was immediately clear I needed to take the company to the rest of the partnership.
Walter Jennings: Okay, Brett, and, uh, on the dark side of the coin, uh, likewise you've probably made some, uh, plays or investments in early seed companies that, um, maybe weren't as successful. What are some of the signs that the investments going bad or that the startup may not make it to late stage?
Brett Gibson: We invest before product market fits, so we often see things that just kind of never turn that corner. And it's u unlike growing a business that already has product market fit, it's a less deterministic process. So you see founders who, who work really hard and, you know, to keep tweaking and, and you never kind of know if they're one tweak away from, you know, finding that inflection point. But, you know, I think that, you know, those are never as disappointing. Those are the kind of people that, you know, that are really in the trenches working hard and we're excited and engaged. Uh, we're excited about even if the outcome isn't exactly what we want, um, what a truly bad investment looks like from my perspective is when you have sort of the same meeting every month and nothing changes and they don't try anything else, and it just kind of this kind of groundhog day of, oh gee, we don't know, nobody wants to use it, sort of thing.
Walter Jennings: Okay. So it's the, um, momentum, energy and movement seem to be vital ingredients.
Brett Gibson: I think those are crucial, especially early on because you know that it is a little more art than science and being creative and reacting to the market, talking to enough customers, figuring out what is going on structurally in this market that, that you, that you can figure out how to get a, um, a toehold on into it, and figure out what people want, and not just what they want to use from say, a software's perspective, but you know, how they're gonna react to it, from a go-to-market perspective.
Walter Jennings: Initialized Capital is known for its early-stage investment in Coinbase, which, uh, went public through IPO. How did that come about and uh, how did you manage to find the one exchange that's, uh, still standing?
Brett Gibson: You know, the first couple of funds for Initialized, were more like angel funds while Garry worked at Y Combinator. And I think that was, you know, that was, where the Coinbase investment came from. And you know, I think it was kind of a similar example of bison trails where, you know, Gary didn't, wasn't really, didn't have his strong thesis about Bitcoin, but he understood, um, what a good founder, you know, executing very quickly looked like. And you know, every time he talked to Brian, you know, something new and amazing had happened with the company and, you know they were having problems like running out of Bitcoin to sell, um, which, which seems like a, a very good sign for an early stage startup. So I do think it is actually perhaps a more interesting question what they've, um, you know, how they've had stay in power.
I believe it's back to sort of FTX slightly, right? There's, you know, I think the institutions that look good, uh, are either the ones that were entirely decentralized, so there's like DeFi or things that were actually entirely under a regulatory profile. And I think that like Coinbase has, you know, the United States government has not made it easy to do a regulated crypto exchange, but they've decided that they were gonna power through and figure out how to do it anyway. And I think that is kind of the fruit that is paid off now, right? They took the very hard way of being a regulated consumer-facing exchange in the US. Um, and the decisions they made along the way have sort of compounded to where they sit in the market now.
Walter Jennings: Shifting now to AI and the headlines worldwide around generative AI, how is that influencing your views on potential investments today?
Brett Gibson: It's a great question. I think that, you know, along with a lot of people, I'm sort of still trying to figure out where and how startups are going to, you know, leverage this. It seems what's interesting about AI to me is that for the first time it's, you know, normally when you have something new and cutting edge and um, innovative on this level, you know, there's some sense that perhaps the larger companies in the space might, you know, not pay attention soon enough. And AI is so, seems so obvious, like when you see generative AI, how it works and how magic it is, it seems so obvious it's gonna be integrated so many places that there's a lot less of this like innovators dilemma and a startup sort of building something that should have been obviously the big company for before, you know, and secondarily, you know, at least to date, like AI has, has incremental costs to run the inference, right?
It costs, you know, costs some amount every time you get a response from chatGPT. And so, you know, we've also had this thing where historically you've kind of ignored marginal costs of running software businesses. It's not really relevant. Um, and that may change if everything we do that's, you know, that involves software has also got some sort of AI component. So, you know, I guess these are a couple of threats of it I've been thinking about lately. I don't claim to have sort of solved how to approach AI investing, but you know, it's, so I'm thinking about a lot.
Walter Jennings: Aside from your philosophy degree, you also had a career in pizza production, so, what's the base of a good startup and then what are the sprinklings and sauces that go on top?
Brett Gibson: Yeah, I mean, so we're strong believers that like, you know, you need the founders, sort of, you start with the founders, and they need to, you know, smart is kind of table stakes, but you know, determined and thorough and sort of meticulous are highly effective, right? You know, just like getting things done part of it is very big. Um, and then from there, I mean obviously, you know, I think that generally, you know, if you, if you're looking for high growth, probably need more capitals, uh, because you need a team around you. When we think about the motion from, you know, from like from seed to series A and figuring out product market fit, one is this heavy product component. You need people who really can build product, both understand the product and the engineering side. And then once you have something you're able to ship, you know, you have to be thinking very hard about the go-to-market motion, um, and how to get people to actually care. You know, even if you solve their problems, they don't know it until you tell them. Um, and so thinking about sort of market and where you fit in and how to get in front of the right audience, are a big deal.
Walter Jennings: Brett, how do you get the pace right? Because if you go too slow, then you're at risk of obsolescence. If you go too fast, you're at risk of burnout. How do you pace the rhythm of your companies as they're going from seed to series A?
Brett Gibson: Yeah, that's a great question. And I think that it, it is very easy, you know, especially with the, you know, the types of founders, we run it back, they end up a little obsessive and a little pushing too hard. And so you, we do end up talking to them about, you know, it is a marathon, right? Like, and they need to set up a culture that is sustainable through, through all the stages that, that they need to achieve because, you know, there's, there's a next milestone that's very important, but then there's a lot, there's a lot of company behind that. I think it does tend to be the case that seed stage companies are probably, uh, burning a little too hot from a founder output perspective and, and that they, you know, sort of settle in as they build executive teams around themselves through, through later rounds. But, you know, I think that it's just a lot of conversations, a lot of coaching around, you know, what's the reality of what you can achieve and, you know, what, what sort of makes sense for you and, um, what makes sense for the culture of your company.
Walter Jennings: Brett, we mentioned generative AI. What other technologies or sectors are of, uh, greatest interest at the moment as you look ahead into the rest of 2023? Which areas?
Brett Gibson: Yeah, I mean, I think we tend to be generally pretty generous and sort of have someone on the team who's interested in most things. I think that climate is obviously like a big theme. Kim-Mai and our team have been spending a lot of time there. You know, there's still, there's still a lot of room to go and sort of the core of, you know, software in a lot of parts of the world. I mean, we still see sort of new processes that, that are antiquated in a way that, that a software company can come in and disrupt. I'm still excited and engaged about what's happening in crypto. I think it's a good time to be building a good time to be starting. Um, and especially I think on the, you know, the one thing I do say is even if all everything in crypto work out, like the advancements in cryptography itself, you know, will remain. And I think that it's gonna be really meaningful for privacy and security technology over, over the next few years.
Walter Jennings: You mentioned climate and climate tech. Introduce that field to me, uh, and some of the players.
Brett Gibson: It is pretty expansive and I think that it actually, you know, it born out of the scope of the climate problem sort of facing the globe today. We're looking at things all the way from hard tech, you know, where they're getting carbon out of the atmosphere somewhere, or like orchestration for novel, you know, solar, you know, and renewable energy sources. Um, and also, you know, this sort of economic-based approaches where you're doing a lot of tracking and carbon offsets, and that seems to be touching more and more companies. And so there's kind of just like SaaS-based software that's needed to keep everyone on the same page and, and to track how things like carbon credits move through the economy.
Walter Jennings: Brett, where do you focus your investments geographically? I know you're based in San Francisco, so obviously North America, the US is a large market for you, but where are some of the other geographies that, uh, attract your investments?
Brett Gibson: Yeah, I mean, I think that our primary mandate is North America. And, most of the companies we do invest in, uh, have a, you know, North America's a big part of their go-to-market. We originally, you know, it was at least ambiguous, if, if not forbid that we would be buying, you know, liquid tokens directly. And, so we amended our agreements with our LPs, in 2018 to be able to purchase those. And as part of that, we also sort of removed that requirement for companies in the crypto industry, you know, it seems a bit like, uh, you know, sort of both anecdotally, but there's kind of some reasons you could explain that it, you know, this is sort of extra-governmental money and so it is a much more global industry. It seems to pervade even the way a lot of crypto companies organize themselves, right? A lot of them are more likely to be remote first and there's a lot more traction outside the United States. And also if you just think about people who have problems with money, you know, the US dollar is, is a relatively easy thing to use, relatively a lot of fiat currencies around the world. So it's going to make sense that, you know, these decentralized assets are going to be more global in nature.
Walter Jennings: Well, that's great news for digital assets and I've heard the advances in cryptography. Uh, what about the NFT craze? We're seeing massive drop-offs in trades year on year. How do you think NFT technology will evolve into other applications and solutions?
Brett Gibson: Yeah, I actually, you know, I'm actually very bullish on NFTs. I think that, you know, basically like if you buy off on this, um, basic concept of sort of this, uh, censorship-resistant, you know, uh, zero counterparty risk, assets, um, there's no reason to stop at the fungible. It makes a little sense that they are money-like. Uh, and, and so you would focus on the money-like things, but you know, as soon as you can enforce digital scarcity, enforce digital ownership, you know, most assets or most things people own are not fungible. So it would make sense to me just kind of intuitively that there's a wide range of things that are non-fungible. I definitely buy into the concept that the 2021 sort of NFT craze is sort of analogous to the ICO craze, right? The NFTs themselves may not be as relevant, but the mechanism is quite relevant.
And I think, I think we're seeing that to some degree even now, you know, we're investors in manifold creator, um, they, you know, they are kind of the largest platform for NFT issuance on Ethereum. And what you've seen is a migration from just, you know, from high value, you know, so there's high-value NFTs to, to more low-value NFTs, I think both on the trading and the origination side. And I think that that is kind of how we're headed towards. And I think, I do think that, you know, there's certainly, I think there's a lot of applications like we haven't further explored, or I haven't really thought of that are probably gonna pop up, certainly think, you know, the basics like NFT gating or memberships or passes, like all make sense. But also, you know, uh, one way one of the founders of Manifold explained it to me that I thought was really interesting is like, if you think about, um, what in-app purchases sort of enabled for, for apps on mobile platforms. Now, now anyone can do those in a permissionless way. Just as anyone who creates or influences or engages with an audience online, they now have this sort of universal individual digital asset, uh, the thing that, that is very analogous to the kind of like how an app purchase gets sold in mobile apps.
Walter Jennings: Well, I'm looking forward to, as a communicator, looking at blockchain for engagement and community building and you know, really just, uh, creating a greater sense of community amongst the audiences that you work with.
Brett Gibson: Yeah, Yeah, absolutely.
Walter Jennings: I understand you're not a fan of the term web3. Why not? What's wrong?
Brett Gibson: Well, I, yeah, I don't know. I guess, I mean, the first thing was kind of like, you know, I was around when web two was web two and it, it's funny because it was kind of, I feel like the, that it's been sort of revised in, in hindsight. A lot of the things that sort of described the progression, um, don't seem to resonate with what people were calling Web two at the time. Cause you know, the original business was more about the functional, um, you know, the functional separation of sort of page loading and html from, you know, being able to get data from a backend and sort of what they were calling Ajax and stuff and not really necessarily about community. That was just the kind of application that was enabled. Um, I guess I felt that, you know, I felt that Web three was a little bit of a euphemism, you know, like I was kind of like, I will not embarrassed to be a crypto investor, and so why did we need, we need to make up a new word, to hide behind. Um, and yeah. And so I, you know, I think that was kind of the base of my interaction, and some concern that, you know, sort of an intentionally architected buzzword if people wanna call it web3, I'm not, you know, it's not a hell, I'm fine.
Walter Jennings: No, but it sounds like a fake label over a, not necessarily a designer label.
We end our show with a segment we call "Tracks in the Finoverse", and clearly we ask guests to tell us the music that would power them along on their journey in the Finoverse. And was wondering what music comes to mind as you think about your voyage.
Brett Gibson: That is a very interesting question. I guess I just kind of think about what my favourite music, I don't know how to contextualize, is actually on my, how it informs my walkthrough the Finoverse. But I remember big kind of the song "You" by Kendrick Lamar.
Walter Jennings: Oh, fantastic. Anything special about that song that, uh, gets it onto "Tracks in the Finoverse"?
Brett Gibson: It's just, I mean, I feel like he, you know, he kind of tells it from different angles. There's like, some of the verses inside the song have contrasting perspectives, so that's kind of part of the journey is sort of understanding others and where we all fit.
Walter Jennings: Fantastic. Well, Brett, thank you so much for taking the time to speak with us here at Finoverse. We really appreciate your time and insights.
Brett Gibson: Thank you for having me. This is great. It's a lot of fun.
