050 - Eric Yakes, Epoch VC: Bitcoin as a Neutral Global Monetary System

In this episode, co-hosts Lynne Bairstow and Israel Muñoz chat with Eric Yakes of Epoch about investing in Bitcoin infrastructure, fundraising challenges for Bitcoin-focused ventures, and the shifting landscape of Bitcoin adoption. 

Eric discusses his transition from Bitcoin author to venture fund founder, stressing the importance of a solid Bitcoin foundation to evolve it from a speculative asset to a neutral monetary system, while highlighting innovation and strategic benefits of Bitcoin as a treasury asset for startups.

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⚡  Get more personalized onboarding at River for Bitcoin-only financial services: https://partner.river.com/buildwithbitcoin
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Chapters

04:00 Eric Yakes' Journey to Bitcoin
06:52 Investment Thesis at Epoch Venture Capital
10:00 Challenges in Fundraising for Bitcoin Investments
12:55 The Bitcoin Ecosystem and Its Growth
16:00 Bitcoin as a Treasury Asset for Startups
19:08 Strategic Capital Allocation in Bitcoin Startups
31:35 The Impact of Bitcoin on Business Models
33:16 Revolutionizing Venture Capital with Bitcoin
38:02 Annual Bitcoin Ecosystem Report Insights
43:16 Bitcoin as Collateral: Emerging Opportunities
49:02 Investing in Bitcoin's Peer-to-Peer Payment Innovations
52:34 Guidelines for Startups Seeking Investment

References:

https://epochvc.io/writing/
https://x.com/ericyakes

https://www.buildwithbitcoin.xyz/
https://x.com/BuildwBitcoin
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❗ DISCLAIMER: This show is for entertainment purposes only. Before making any decisions consult a professional.

Transcript

Eric: 0:00

What we're doing, from a venture standpoint, by investing in the infrastructure around bitcoin is going to be the key determinant that determines whether Bitcoin just becomes digital gold in the future, or if it becomes a neutral monetary system for the world over the long term. You

Israel: 0:23

Lynne, how much opportunity is there in Bitcoin ventures, and why is the infrastructure layer so important? We get into this and a lot more, including epochs 2024 the Bitcoin ecosystem, annual report with managing partner Eric Yates as a reminder, this podcast is for educational purposes only. If you enjoy the content, please remember to subscribe, share or leave us a comment. Lynne and Israel are partners at baystow Air advisors, where they employ their strong network of Venture Capital Partners and startups to connect investors with unique opportunities within the Bitcoin innovation space. Alongside this, they support founders with their strategic growth and fundraising goals. Visit our website's advisory section to learn more. Welcome to build with Bitcoin. I'm co host Israel. Munoz joined with co host Lynne Bairstow. Today we have the pleasure of welcoming Eric yikes from epoch venture capital firm. Eric, welcome. Thanks for Thanks for coming on today.

Eric: 1:15

Excited to talk about building on Bitcoin. We

Lynne Bairstow: 1:18

always are happy to talk about building with Bitcoin, and especially welcoming. You know, Eric, you're one of the newer funds to launch that is fully supportive of Bitcoin technologies. So we're really number one, happy to see more support for entrepreneurs and startups in the ecosystem. And so appreciate your efforts to launch a fund to support that and get into a little bit more about, you know, how you came about it. I mean, I first was introduced to you, Eric, through your book and which I love, and I think it was just a fantastic book, the seventh property, Bitcoin and the monetary revolution. But would love for you to share a little bit with our audience about number one, how you came to Bitcoin and write that book, and then what led from being a Bitcoin author to then starting your own venture fund to support Bitcoin startups?

Eric: 2:11

Yeah, I appreciate the kind words about starting the fund, too. It's definitely starting a fund for the first time, isn't the most fun experience in the world, and it's, there's a lot of rewarding aspects of it, but there's a lot of really challenging aspects too. So thank you. But it's, you know, when I got involved in all this, like my, you know, in terms of my background, I studied finance and economics in college, and I just always viewed finances. It's a great tool to operate in the business world with, and economics was just kind of my passion. It's like much more philosophical, and it's like the most quantifiable form of philosophy. And I just always loved it. Is what I read about over Christmas breaks in school and, you know, dug into all that. And, you know, I was lucky enough to have been introduced to a lot of thinkers that were outside of the education I got in economics that teed me up well, much longer term to understand Bitcoin in a better way. And, you know, I before I really, you know, before I got into Bitcoin, I just had a very nihilistic view of how things worked in finance. I didn't think that markets operated in a way that was free and, you know, therefore efficient or correct and and I kind of built a lot of my career based around that thesis. So I worked in corporate restructuring to start my career. I started in a firm, FDI consulting. Ironically, when I got involved in this industry, I was actually out of the same group that Parker Lewis was in at that firm until he came in. I found that out later, which was really cool. And we're the largest restructuring firm in the world, so if there's a major bankruptcy that happens, there is advisors who get hired to come in and, like, take control of everything, and they specialize in handling crisis company. So I started my career in that area, and then I moved to a private equity fund that specialized in acquiring companies that were in, you know, precarious positions and needed to be turned around in some sort of form. Yeah, I got my CFA along the way through that process. And in the reason I kind of, you know, went this direction is I just always viewed that in the type of you know, from my economics perspective, this is a profitable business to be in, given what central banks do and where economies typically go, and the more that you know, credit continues to get expanded within the economy, you can bet that things will go wrong over time and and, yeah, so that was kind of my background. I misunderstood Bitcoin for a long time because it was pitched to me as, like, blockchain technology, and I was never really much of a technologist. You know, we looked at different businesses in these areas, but I wasn't like, you know, Silicon Valley OG. Who's thinking long term about all these other different technological ideas, and it just didn't resonate with me that much. I was like, okay, cool. It's like, a, you know, Blockchain database structure thing. Like, there's no way to, like, value Bitcoin as an asset. I don't know how to value this thing. It's not the type of investing I do. And I just, you know, was, like, this thing's just really speculative, and I don't have a way of determining a fundamental value. And it wasn't until I heard that, like, No, this is, like an alternative to central banking, that I got really interested. I was just like, oh, wow, that's, that's a cool idea. This is, this is a really, really big problem. It's like, probably, out of all the big problems in the world, I'm aware of, the one that I'm smartest about, and, and that got me really interested. And I started digging a lot more into Bitcoin. And then I spent, you know, probably, like, a year and a half, two years learning more about crypto, before realizing that Bitcoin was the area that should be focused on over the long term. And, and that was kind of my story. It just once I got obsessed enough over the idea was when, you know, I decided to pursue entrepreneurship and then ultimately do all these things that I've subsequently done within Bitcoin. So, you know, the way that I started in the industry was similar to my prior job. It's like when we want to understand a company, well, we have to model out all the details of the financials and look at all the contracts, and, you know, understand it at the lowest level of detail that we can before I can really form an opinion on things. And when I was understanding Bitcoin, I was applying a similar logic, I was like, Okay, there's a lot of things that I want to do. I want to read into a lot of things. I need to actually understand how it works. I don't want to just like, understand analogies about how things work. But what, you know, what is it? What's happening with the code? And so I, you know, the first thing I really did was read for about 10 months straight into certain areas banking history, and, you know, certain aspects about the history of inflation, and got deep enough into Bitcoin, so I had to, like, teach myself how to code Python so that I could ultimately do Jimmy song's programming Bitcoin book. And that was a great book that helped me understand what's going on under the hood. I got a lot more comfortable with how you know transactions work, how they're structured, what makes cryptography secure, how things propagate throughout the network, and what's really happening when you're running a note. And it's funny because, like, a lot of that stuff's not in my head anymore, but back then, you know, I I was able to really talk. I was much more fluent in Bitcoin, I'd say, after I'd read that book, than I am now, but, but nonetheless, you have the same high level items that still remain. It through that whole process, I got to the point where I was like, Okay, well, I should be writing all this stuff down. I just have a bunch of notes. But I was like, I should but I was like, I should really try to synthesize this into my perspective on the industry, and that'll help me make it, you know, determine where I what I want to do. And and then I ended up writing so much, and I was like, Oh, I guess I could turn this into a book and learn about how to, you know, create a book and what you got to do. And then I just turned it into a book. And then it was really cool, because the book did better than I ever would have expected. And and that helped me develop a network in the industry and a brand. And I was always interested in had the idea of venture in the back of my mind. But there, you know, my book came out in 2021 and for a period of time, I just thought it was a bit pretty mature to do something adventure and and it really didn't hit me until 2023 that now things are kind of shifting in the right direction now, and there's going to be a lot of investable opportunities. I also think that as I learned more about the industry, there were some things that I viewed as opportunities that had already emerged for investment that that were gone now, and I realized, like, no, there's actually just going to be a lot more of these opportunities that keep coming. So I think that a lot of people view funds coming in from the perspective like l2 seasons coming or, you know, all these new protocols that are emerging is going to create new opportunities to invest around Bitcoin and, like, while we're looking at a lot of that, what I think I was wrong about is just like brick and mortar businesses that are going to be supporting Bitcoin, some of that's been created, but there's a lot more opportunity for more of it, and there's a lot more opportunity for more of it within different geographic locations around the world, where you can kind of replicate the same business models in new areas, and You can kind of de risk it quite a bit if you can get comfortable with the regulatory environments. So that was, you know, when my thinking started to change around that I set out to start the firm. And then, you know, that's, that's been a whole journey of kind of getting the right team together. And we, you know, we closed on our capital last year, and we're an early stage Seed Fund, that is, you know, we're looking at businesses in the seed to series a range. Sometimes we're first money into a business. Generally speaking, we've kind of leaned more towards, we're post pre seed and, and, yeah, I'm happy to talk about any details around all that.

Israel: 10:00

Well, I mean, there's, there's a few points that I think will be great to expand on, Eric and I appreciate you sharing your background and story with us. You touch on a few relatable points of doubt and things that are hard for people to understand when when they first come at Bitcoin. I was actually just sitting down yesterday for dinner with a friend from traditional finance, and we got into the topic a little bit, and he touched on a few of those points you mentioned. You know, it how it's just seems hard to understand because it's abstract, because he doesn't see people actually using it, you know, at restaurants day to day. You know, no cash flow. So the some of these points that you mentioned are are very tough for people to wrap their head around, until they, you know, put the work in, spend the hours reading, understanding the technology, such as you did. And great plug for your book, the seventh property, I think that's that's a great starting point for anyone who's coming at this, at this ecosystem and and trying to understand what has happened, where we stand, and why this is such a powerful new monetary system. Definitely recommend the seventh property, which we'll, we'll have a link to in the show notes. But you know, I want to, I want to kind of connect the dots with what you what you mentioned was the next step for you after understanding Bitcoin, this new protocol, why we're just beginning to touch the surface of a lot of new innovation. Can you? Can you expand a little bit on what your thesis is? Your investment thesis is at epoch Eric,

Eric: 11:34

yeah, yeah. So our thesis is that we're investing in Bitcoin adoption. So there are a variety of different variables, some we're aware of today, some that we may not be aware of yet, where as the price of Bitcoin goes up and as more people continue to save in it and use it for other use cases, these metrics will expand more so like, number of addresses and number of users continues to grow very rapidly. Volume of transactions continues to grow, collateral use cases and lending and expansion in those markets is starting to grow pretty rapidly, and we've seen that grow pretty rapidly in the past as well. So there's all these things that are tied to the growth of Bitcoin, but they're growing in their own distinct ways. And the best way that we like to create an analogy for that is we don't really like the like layered architecture analogy for the Bitcoin ecosystem, because it describes some components of it, but it's not really complete. Like the Bitcoin ecosystem is a tree, and within the layers are within the trunks. They're the rings within the trunks, and then Bitcoin itself through all these layers, is like, there's this base protocol stack that's the trunk of all of it, and then there's all these branches that are going to be emerging off of that protocol stack. And that's all these different types of companies, that's peer to peer applications, that's centralized, you know, brick and mortar financial service type companies, that's hardware manufacturers, you know, all these other different types of service providers and apps that are being built and, and what we're doing is we're investing in we're making bets on what branches are going to find the most sunlight and are going to grow the most rapidly as this trunk continues to grow. And, and we're looking at particular markets that we think are relevant to the the timing of today, and in all very fundamental to that thesis of what's relevant to invest in today versus tomorrow, and much more longer term. There's a lot of big ideas we have, but we think it's going to be 510, years before those are investable things within the ecosystem. But it's like, what's really relevant today are usually businesses, applications, concepts that are associated with Bitcoin being used as a store of value or a form, some form of like collateral or collateral settlement and and those are kind of the primary things that we're targeting in terms of Bitcoin adoption. The last thing I'll add is, I think it's really challenging to say whether you know if we exceed kind of market returns on this fund at this current point in time, if that's going to outpace capital appreciation of Bitcoin over a similar time horizon. But I think that over the long term, one of the interesting concepts that remains to be seen, but that we're making a bet, that we think will happen, is that even over the long term, as Bitcoin gets larger and larger and it experiences diminishing returns, small percentage increases in Bitcoin are going to become very massive in terms of the amount of capital that's flowing in. So if we're talking about a $10 trillion asset, and it goes up 10% a year, that's a whole other trillion in terms of capital that's effectively flowed in. And we think that that 10% increase leading to a trillion in capital means a lot of new users, a lot of new forms of adoption have now happened, and that growth rate is only going. To expand in these branches as the trunk even grows in smaller and smaller amounts. So that's kind of how we're thinking about things.

Lynne Bairstow: 15:08

I love your description of it as a tree. When I read that in your recent report, which we'll get into, it just made so much sense, because even on the branch that's like the Lightning Network, or on hardware. You have all these different sub branches of how that might grow. So I think it's a I think it is a much better analogy than the than the layered approach. But before we get into some of the kind of the innovations and the and the opportunities that you see, I'd love to talk a little bit more just about your fund itself. When you launched it in 2023 you yourself expressed that you explored crypto, and obviously that's a big trend. The amount of funding that has gone into the crypto ecosystem versus the Bitcoin only ecosystem. Did you have any particular challenges in raising LP capital or to explaining to potential LPS about what the opportunities were in Bitcoin versus crypto, or did you stay focused on Bitcoin oriented investors? Or how did you approach fundraising for your fund? And yeah,

Eric: 16:13

so, I mean, the reality for a first time fund is Beggars can't be choosers. And we had, you know, talk to the people that we had to talk to. We definitely had, you know, conversations with people that were highly ideologically aligned with us, and some that were, you know, very opposed to us, you know. And I think that with this, the distinctions there, I guess there's a lot of comments around with us being specifically focused on Bitcoin is how that's perceived based on the specific type of investor that we're talking to. And I actually think a lot of these things have changed pretty drastically within like the broader cultural zeitgeist over the past even year. I think that there's a lot of people in the tech community now, who either were removed from the crypto industry or were formerly a part of the crypto industry, that are starting to think of crypto Association as just being scammy, as opposed to ground groundbreaking tech, which was just never really something. I heard like I was at a wedding in Guatemala City a couple weeks ago. Bunch of tech people, they're very like, Silicon Valley type of network and and so many people that I talked to were all just like, very turned off by the crypto industry in general. They're just like, we, you know, they're all thinking, it's just very scammy. And I was like, I hadn't really heard that that much before, other than I heard a lot of founders that were much more like, critical of it in terms of they thought a bunch of dumb money was flowing into it, because it'd be like, if you write crypto on a napkin, like you can go raise your series A within a few weeks. You know, it's just all about the vertical association that you're in. But now it's much more like, I think people are just kind of becoming a lot more aware of some of the dynamics. So there's a bit of that reputational thing that I think is newer. Well, we've talked to a lot of people, you know, it's like, usually we're talking with family offices, and usually family offices don't have quite as firm of an opinion on Bitcoin versus crypto. They think it's all pretty interesting. Typically, the ones that do have an opinion. It's a lot harder because the opinions are formed based on mainstream media and, you know, not having an actual technical understanding of what's happening. So there's a bit of rewiring there in conversations, usually, that we'll start with. But the, I think, probably the most positive thing about being a Bitcoin focused fund is that there is such a large asymmetry and capital competition between being focused on Bitcoin and everything else, and the amount of capital that's been allocated into the crypto industry. And if you go back to like 2021 it was like 30% of global venture capital was effectively falling into that. It was absurd. And there's a lot of reasons why that we, you know, I can talk to as to why I think that happened. But it was just this unprecedented amount of capital flow that went into crypto back then and and none of that was really focused on Bitcoin at all. So there's this huge void because, you know, Bitcoin has proven to be the best performing asset within the whole industry over a very significant period, at this point, and in de facto, for that reason, the most adopted, I think people rule out the idea of it being a store of value is not adoption. And I think that that's, that's foolish, like it's it is the strongest form of product market fit that we've found within this industry so far, far and away, it's historic, actually, how quickly that that amount of growth has happened. And so I think that there's just this huge void between venture capital allocation within Bitcoin and crypto, and that's a huge opportunity for funds like us, like that's that's what we're talking to with investors. We're saying, You. Yeah, everybody's wrong about this thing, and we're right about this. And if you believe in this idea, then there's a quite a bit of money to be made because of this massive void that exists today. And eventually, all that capital is going to start flowing into bitcoin over time, and we're going to be, you know, we will have already skated to the puck. And when we look at investments, we try to look at investments we try to look at investments that are going to help streamline that process of helping move value from the broader crypto ecosystem towards being built specifically

Israel: 20:27

on Bitcoin. Yeah. I mean, we absolutely share, share a lot of those views Erica. I mean, Lynne and I have been fortunate through this podcast to to speak with many of the of the primary Bitcoin focused investors. And as you're alluding to, it's really astonishing that for an asset class, which we know will be multiple trillions in size, there's still, you know, maybe, you know, under 20 venture firms globally, and that's probably being, you know, a bit a bit loose, which actually you have some of those concrete numbers in your report, so we can get a little bit into that in a second, but it is just kind of breathtaking, almost to see how big this gap is. I mean, I think, I think that will probably close relatively quickly at some point in the near future, because people are starting to wake up before we move on to the report at epoch itself, the investment firm, Eric, how many of you guys are there? Can you give us a little idea of who, who the team is at epoch?

Eric: 21:29

Yeah. So you know, co founders are myself, and then my operating partner, Vijay. Vijay is super bright guy, who he was at my the first company that I was at, and he was in a different group that I was in, but, you know, super bright guy left to go to Harvard Law. When he left there, he went to a Boston Consulting Group who's kind of working on their crypto practice there, and and then he was running a strategy lead at Coinbase under Emily Choi, and he got an offer, actually, from this was, you know, years ago now, but he started the week at Celsius as their VP of strategy. That everything happened. So he basically just started and was retained throughout a bankruptcy. And he's gotten a ton of really valuable experience through all of that at some of these firms, and kind of learning what's, you know, going on behind the scenes, how Sasha just made and how things can kind of go wrong. So yeah, he helps us with, like, a strategy, operations and legal background for how to think about, you know, financial services in the industry in particular. And then we've got Adam, who's our analyst. Adam was a Northwestern grad who was working for a hedge fund, and, you know, got really interested in the whole crypto industry and gravitated towards the idea of being focused on Bitcoin over time. And then we have, like, part time venture partner roles. We have Clark moody, who's like our technical advisor and helps us with, you know, assessing stop software stacks, and, you know, understanding some of the more technical details and complexities of investments that we're looking at. And, you know, Clark's got great experience in the industry. Super OG was building a lot of the real time data on Mount Gox back before it existed. And, you know, founded multiple companies and exits within the industry. So like, his last company was with Dan held, and they sold the Kraken, and he was just there since. But yeah. And then Danny Knowles, who's our venture partner on the business development side, and has the what Bitcoin did podcast, which we've also invested in with the rebrand, or not, rebrand, restart and, and, yeah, Danny's. Danny knows a lot of people in Bitcoin, and he's, he's been in this industry for a while, and he's really smart about a lot of the companies that

Lynne Bairstow: 23:49

we're looking at. It's a great team, and it has such a nice balance to it. So, you know, and I and when you look at your differentiator, I think with epoch, I think just, I mean, coming from starting with your book and then coming down to the report that you published in February, you took on the massive task of really defining what the Bitcoin ecosystem is, and 148 page report called The Bitcoin ecosystem 2024, annual report. So first of all, congratulations. I mean, I read it when it first came out. And then, you know, over the last week, I've been really diving deep in it to prepare for our talk today. And you know, I just can't thank you enough for all the work that you put into it. It's so comprehensive. It goes from everything from adoption to, you know, the parts that Israel and I really are attracted to, which is the innovation in the Bitcoin ecosystem and and to your point, I mean, when you first looked at going into venture inside of this ecosystem, it's like, I mean, with some of the questions Israel and I had before we started this podcast almost a year ago, was, Are there enough companies innovating? What does that look like? What are the opportunities for actually creating profitable. Businesses, especially when so much of the technology is open source and and just the just the kind of And the big question is, how will companies potentially outperform Bitcoin itself, as it as an asset and as a price, and the differences between the technology and the asset, and how to kind of make people more aware that it is a protocol and not just and not just an asset. But we'd love to dive into just a couple of the key aspects we'll certainly link to the report. And I know you've had conversations on other podcasts, including Danny's, that really go deep into the adoption and kind of the macroeconomic picture of of Bitcoin. But you know, for the purposes of our audience, we'd love to talk a little bit more about the innovation and the investment side of the Bitcoin ecosystem. So one of the things that really jumped out to me, because Israel and I are finding this in our conversations, is the concept of having Bitcoin as a treasury asset, especially in the really early stage, part of companies, mostly, you know, companies are taught to conserve, to really spend cash, have a high burn rate, raise what they can but in the Bitcoin ecosystem, we're finding that it's a little bit more of a conservative bend. People do tend to save some of their cash. Save it in Bitcoin, have a lower burn rate. And you actually state that Bitcoin can serve as dilution protection for startups in your report. And I'd love for you to just explain that sentence a little bit more audience and drill down on that

Israel: 26:30

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Lynne Bairstow: 26:46

Lynne, I am, I am. I feel so confident referring people to River. In addition to what you mentioned, also, they've got us based phone support, which I think for somebody who's less familiar with the space or used to personal service, is really helpful. In addition, they have a private client services division. So if you're looking to invest 100,000 or more, they have a special suite of services designed for you, whether you're a high net worth individual, a family office or trust. I also really appreciate the continued improvements they make in the back end, so that that reliability and security continues to be really apparent.

Israel: 27:18

They They additionally also have US dollar cash deposits paid out in Bitcoin. They have a yield product for that, which is an interesting alternative way of accumulating Bitcoin. Overall, fantastic suite of services. If you're interested in onboarding and opening up an account at River use partner.river.com/build, with Bitcoin for personalized onboarding.

Eric: 27:41

It's funny too, because that was one of the things that I kind of assumed would be this, like, boring thing that most people overlooked. And it actually ended up getting a lot more attention from the report than I expected. A lot of people really liked that. So, like, when we talked to it was just something that we'd heard frequently in conversations with founders. Putting Bitcoin on your balance sheet has been this popularized type of strategy, and startups have been considering and plenty have done it. And a lot of times we're just having conversations with founders where it's like, okay, if we do raise and we want to put Bitcoin on our balance sheet, how much? How do we think about this question? Do we raise more if we want to put more Bitcoin on our balance sheet, do we do that today? Do we do it next round? And we would just put together financial we had, like a kind of a template financial model that we put together that we'd send to founders back look, here's how you guys should think about it. We kind of have our opinion here. It's your it's your call, but here's how you can kind of think about it. One of the key, like the thematic aspect of it, that you're trying to make a decision of as a founder, is, if I raise more capital in this round today at a lower valuation, so I'm getting hit harder on on dilution right now. But nonetheless, if, if we raise more capital today, and we put that into Bitcoin, and we have all have the expectations of Bitcoin that we do, then that could put you in a position to actually end up skipping around. And there's kind of an economic, economic calculation that you can do to say, Well, if we wanted to raise 500,000 in the seed round, but it says instead, we raise a million. Put 500,000 into Bitcoin, and the other 500k gives us two years of runway. Then if we think over that those next two years, that 500,000 in Bitcoin could turn into a couple million. We might be able to skip our seed round and just jump straight into series a I mean, there's a bunch of different ways that you could look at it, but nonetheless, you could probably end up skipping the round. So it's like, how much dilution Should I take incrementally today to potentially offset a lot more in the future? And if you think the price appreciation of Bitcoin and your exposure to it is a risk worth taking on to preserve some of that dilution, which can have a lot of long term benefits to the business in terms of founder incentives and employee incentives.

Israel: 29:52

Yeah, and we've also had some conversations with founders who are are perhaps taking their out of the Earn part of their revenue. Who's in Bitcoin, and maybe those are the, you know, kind of reserves to call them, that, that they try not to touch. But, you know, it is interesting. There's a few, you know, there's a few different ways of coming about, or of coming to this Bitcoin strategy for a startup, it depends a lot on the context, the type of sector, how large your burn is, all these factors. But I think what's fair to say, right, Lynne, is that pretty much all the founders that we've spoken to so far do say some variation of Yes, implemented in one way or another.

Eric: 30:37

I do want to say that to play devil's advocate of all of it. One of my biggest issues with running a Bitcoin balance sheet and running a startup at the same time is that by not allocating capital to the, you know, development of your product or growth of your business, you're effectively putting into Bitcoin. You're effectively making the argument that Bitcoin is a better form of capital allocation than my enterprise and and that's something that I think can be alluded or alleviated. If there's some sort of strategic benefit specifically within your business to having actually a reserve of Bitcoin, beyond just that, its price is going to go up, like if you're, if you're a company that requires some sort of reserve of Bitcoin, whether it's for swapping or as a form of collateral in a relationship, and something that actually can be used as an asset within the business that's more productive than just for you know, its prices going up. That's one interesting way, I think, another interesting thing too, that you'll see is common within marketing to have a Bitcoin balance. This is typical, more like larger scale enterprises or public companies that are in a their own particular vertical, and they can be like the, you know, say, consumer product of their vertical that has a Bitcoin balance sheet, and that can be a differentiator against all of the other competitors, because there's millions of people around the world who all like Bitcoin and want to buy products and services for people that support Bitcoin. So, like, we've seen a lot of that, like tahinis is one of the original examples of a company that drastically changed, you know, it was like four franchise locations blew up to 50 within three years and has a million subscribers on YouTube. You know, completely changed the entire business model because they started supporting Bitcoin and preaching it online, that their business that supports it. So, like, there's plenty of strategic, creative, strategic benefits that founders can find from adopting Bitcoin in some sort of way and and that kind of changes how you would think about it. Is just like a direct opportunity cost to your actual business. But I think when you think about it, if we're raising more than we otherwise would, that we don't want to be investing in operations to instead take that dilution hit today, to offset it in the future, because we think Bitcoin will grow so much to do that, then that's another way of thinking about it, that that I think can be a little bit more conservative and make more sense and be aligned with your, you know, your own personal view of your business's potential.

Israel: 33:06

It does make quite a bit of sense to maybe upsize the current round and just make sure you're still investing in the growth and operations that you were already planning to kind

Lynne Bairstow: 33:17

of on a related basis, Eric, I mean, one of the things that we think about, I mean, I feel like Bitcoin is remaking early stage funding, and at least for Bitcoin companies. But, I mean, do you think about how it might remake VC itself, in terms of exits for these companies? I mean, do you think there's a potential of the company paying back their investors and Bitcoin kind of dividends or or, do you still look at it in more of a traditional VC, that an exit, either through a sale or IPO or SPV or whatever would be the way that they that they return money to the investors, and then also you to your investors from the fund?

Eric: 33:57

Yeah, it's really interesting. I think we, you know, we do have one investment where that type of thinking is, you know, kind of part of the thesis. Think that the idea, so, you know, correct me if I'm wrong. But effectively, what you're asking is, do we think that liquidity is going to come from some, some other primary Avenue than, like, acquisitions directly, because, you know, it's a camera, the precise average, but it's kind of like you would expect around like 40% to 60% of exits are going to happen through an acquisition in private markets of some sort. And will that shift because of, you know, management building up large Bitcoin balance sheets and being able to effectively execute like a management buyout of the equity, or if they just want to be distributing dividends directly, you know, I would be when we're thinking about a company that's as like early in the growth stages as they are, then it's usually capital is much more scarce, and it's really opportunity cost for not growing. Growing that can become the biggest cost to them when the model has been proven and it's transparently proven within a competitive environment. So it is like the idea of dividends is not necessarily something that I would expect would start happening. I would presume that once they get to the growth stage, that what it would probably do, more than anything, is it would minimize the value of or it minimizes the value of capital, specifically from future capital partners. So if you know, you're a few 100 million in revenue type business that's really established, and you want to get a growth private equity fund involved to really see if you can turn this into a billion dollar business, and you have like this equity partners come to you. You know, the check size that they can write is probably a lot less valuable to you at that point than the actual strategic benefits that they can bring to your firm. So it'll probably create more strategic and emphasis on more strategic relationships, and then that means it probably gets a little bit harder for capital providers to be competitive. And who does it get a little bit easier for is the exit opportunities that firms are usually looking at where larger scale strategic partnerships that could be potential acquirers in the future start to drive a bit more the capital allocation in these stages is the alternative, which I think, in theory, I guess, would lead to more exits occurring with if that's, you know, the what's happening more frequently in the market? Yeah, so I guess, I don't know. I don't really have a clear answer on it, but that's kind of

Israel: 36:39

my thing. I fully agree with with what you just highlighted there towards the end, Eric, I mean, I think this flips the equation a little bit. And I mean, in general, in business, the best time to fundraise is when, when you don't need it as much, right? You know, when you're less vulnerable. To put it in a way, and I do think that Bitcoin is going to be just this kind of rocket fuel for early stage entrepreneurship and innovation. Of course, you know it's it's still a very tough thing to do, but those who are able to execute successfully, I do. I do fully, fully see a future in which the later stage rounds are just less necessary for these businesses, because they've been built on just a much more sound, you know, foundation. We'll see how it how it plays out. But I I see the opportunity for VC investing precisely in this early stage, getting back to the to the report, like, what can you share? I'll just second. Lynne, initial comments that you know, thanks from the community for putting this together. Because it's, it's the first very, like, fully comprehensive report on the Bitcoin ecosystem. So highly encourage everyone to have a read. Do you plan on doing this on a yearly basis? I'm assuming correct me if I'm wrong if there were other variables, but I'm assuming the main motivator was that, for you as an investment firm, looking at early stage private companies, this was extremely helpful for you guys internally. I'm assuming that was the main motivator behind it. But what? What's the plan going forward with with this report, Eric And were there any things that surprised you or that you might do differently regarding, yeah,

Eric: 38:25

we're going to do it every year. And, yeah, I mean, that's what was cool about it, is that there is a ton of work that we would want to do anyways, internally, that we can use in this report, and some of it was just a product of internal work that we had done for specific questions we wanted to answer, or we had answered already, and we just kind of, you know, put it into interpretable format for the masses. But, yeah, I think that the you know what surprised us about some of it? One, there's, there's so much more that I would want to do, like I, we didn't have enough time to really build out more around the business model section. We didn't really have enough time to build out more around the protocols section. You know, we I briefly skimmed a report from thesis, which is like an accelerator, and they, they have a Bitcoin protocol focused annual report that they put out, and that's something that I plan to read more into next year. But, you know, I wanted to provide a little bit more detail on kind of what we're seeing around some of those things, but we, we just didn't really have the time this year. So I think for next year we're gonna, we're gonna try to elaborate a bit more on some of that, and I think that'll be good. Hopefully it's not too many more pages from it. But, you know, we'll see we once we start right, and it's just hard to stop, and it gets longer and longer, but, yeah, I think, I think things that surprised were. That. Oh, well, I guess another thing I'll add is that we wanted the we focused on areas that didn't matter to us that much internally, but we knew, or just, you know, we want to be comprehensive. So we want to cover things that everybody's interested in. So like, you know, like the sections on kind of, like price and a lot of the detail around adoption were how detailed we got around some of it isn't really but not things that we really care to dig into, because they're kind of foregone conclusions from us. It's like, yeah, we know it's going to keep going rapidly. Yeah, we know there's a lot of people that are going to do it, yeah, we know that there's going to be a ton of demand for it. And, you know, we quantified a lot of those things in, like, creative ways, so that people can kind of be like, Whoa. Like, there's a lot of demand coming for Bitcoin, you know, and that stuff gets a lot of eyeballs, and it's good marketing for the report, but it's not something that you know we care too much about, because we just know that that's going to happen because of the incentives of Bitcoin, and that Bitcoin creates wealth, and people like wealth, and a lot of people are going to continue to want it, so, but nonetheless, it's fun, and those are definitely things that help get a lot of eyeballs in The report. And we'll keep doing those every year. And, yeah, I think that in terms of what you know, that was definitely something that got a lot of attention, that we expected to get a lot of attention. My personal favorite section was our regulatory section written by my partner, Vijay. And that one's like, it's really creative. It's really in the weeds, and it's really giving a good perspective in areas that, like, you know, I think are kind of foggy for most people, and providing kind of the reality of what's going on and but people don't like regulatory that much. It's only the people that are kind of more in the trenches. And I think, you know, hopefully some founders got some interesting tidbits out of that. I think that's also kind of tricky, because we want the report to be read by an investment community. We want to be read by the founding community we are. We want it to appeal to as many groups as we can possibly make it. So we tried, you know, to thread the needle around that. And I think that for next year, some of the detail that I wanted to add around protocols and around business models, I think it will particularly make the report more valuable to the founding community. And for this year, it was probably more interesting to the general investment community because of what we focused on.

Lynne Bairstow: 42:18

Yeah, yeah. And I just want to point out that although it's a long report, it's incredibly well organized. So you can take a section like regulatory aspects of the Bitcoin ecosystem, and then just look at the conclusions and then do a deeper dive for anything. Or if you're looking at the the different layers, you know, you can see if you if you're on the conclusion side, if you're more interested in arc or lightning or some of the other things that are going on. So, you know, the I the the organization was just fantastic to make it really easy to read and easy to just jump around to the sections that are most pertinent to your interest in it. And I mean, my interest was in the innovation part, and then you're in the tree. And I just wanted to ask you a little bit more getting from the report to epoch specifically, it's like, what are the areas that you're most interested in or most excited about, or what parts of the innovation ecosystem pertaining to Bitcoin do you find has the most potential? What are you looking at?

Eric: 43:16

Yeah, bitcoins use case as a form of collateral right now, I think we're going to see some really extreme growth from businesses that are built around that is a form of like collateral settlement cross border. You know, this is not unknown. There's a lot of different businesses going after this, but there's definitely, there's plenty of untapped markets around it, and there's a lot of companies that are trying to solve some of these problems. We're starting to see more strategics in the industry get very interested around investing in that idea. And I so, so that's interesting. Bitcoins use case is a form of collateral for lending contracts. That's also been blowing up. There's all these different businesses that you know. There's been Bitcoin companies that have been doing loans for a long period of time. There's been broader crypto companies that have been doing loans for a long period of time. What's changing is more kind of the integration with traditional finance that's happening. There's a lot of people that are applying Bitcoin to traditional asset loans and and using it as a if you mix or become duplicative with the form of collateral, then there's better terms that can ultimately be offered through traditional products, and then associating Bitcoin with other asset classes, which is, you know, it's kind of a funny thing. It's more, it's more like product arbitrage that's happening within traditional finance. It's going to work. I don't think it's, I think a good example is kind of like CARDONE brothers and like their new REIT that they're trying to launch, and they're just like, putting Bitcoin in a REIT or something. It's like, cool. Well, now you get a rate with some bitcoin in it that they get to earn fees off of. And when it's going to work, because they're probably, they're categorically going to be in a REIT classification, Bitcoin is going to go up. They're not going to outperform their peers, and it's going to attract a bunch of Trad five people that want exposure to REITs, because it's part of their mandate, or whatever it is. And it's kind of playing a little bit of art. Arbitrage within like, investment categories for investors. But the reality is, is like, in the truest sense, it's like, you should just like, you know, if you want to read by a REIT and if you want Bitcoin Buy a Bitcoin, don't let the CARDONE brothers trade you fees on Bitcoin exposure. But nonetheless, like, there's a lot of companies kind of doing this little bit of arbitrage within categories of traditional investment, and that's just because of how a lot of investment management works today, but that's, that's, it's kind of interesting how a lot of lending is going to expand. And then you have the repeal of Saab 121, we're working on a firm right as a firm right now on a report for what we think bank adoption is going to look like at a pretty technical level when it comes to Bitcoin and stable coin specifically, and and I think that that's really going to change the game in good and bad ways. I mean, as this adoption starts to come, and as we start to see, you know, more replicas of Michael Saylor emerging in public markets, and you know, there's not that much of the convertible debt market that's been tapped in through to through Bitcoin specific type collateralized loans. And there's plenty of other credit markets that haven't been tapped into at all. So we think, you know, banks and investment banks are probably going to start participating in these markets in a pretty significant way and and, you know, we make that point in the report that we expect that this will probably be the largest form of credit expansion around Bitcoin, which will probably really drive the next large run up in price and then ultimately subsequent collapse when people get too exuberant with how much credit they're taking on to leverage Bitcoin acquisition. But I think that the that that expansion is something that is, you know, it's going to be pretty significant over time. There's just a lot of untapped markets that are starting to move in. I think small business adoption, it's like huge and, you know, the tools that they're it's a highly fragmented market in terms of, like, software solutions that are used by small businesses. And it's kind of like, how many Bitcoin companies can really win this market? I don't, it's definitely not going to be a winner. Take all type thing, I think, you know, square is going to be very significant in the type of features that they're in, they already have been, but with the type of features that they're providing, but there's going to be a lot more interesting developments for small business solutions that where they want to be participating in the Bitcoin Economy in some sort of way. Yeah. I mean, those are, I could keep going. There's other stuff, but

Israel: 47:34

yeah, we see a lot of that, even just through some of the founders that we've had on the podcast, I mean, to some of the year recent points. I mean, we've had an orchestra on recently who's attacking the Small Business adoption side of things. We've had

Eric: 47:51

only Bitcoin funded orchestra.

Israel: 47:53

Oh, I've spoken to them and, yeah, they told me of that interesting mix are doing. I think they're attacking a a massive market, as as you were kind of pointing, pointing out. And we've also had some of the, you know, collateralized models, some episodes there Latin we've had with, uh, deify, which actually, I believe epoch is also invested in. So there's definitely this, this this financialization side of Bitcoin, I think is the kind of elephant in the room, as you're kind of alluding to, but I have also heard you on other interviews, Eric, speak to the medium of exchange. And you know, this peer to peer payments aspect of Bitcoin that I fully agree were, we're very close to beginning to see a lot of growth in we kind of had this, you know, first stage of Bitcoin, establishing its place as a successful store of value, and now you have some of these layer two technologies that are enabling a lot more innovation of being able to just transact peer to peer in a very efficient way. Is that an area that you guys see as very investable right now as well? Are you kind of sitting back and letting some of that play out as well?

Eric: 49:02

We're definitely investing. It's, to me, it's going to come at some point, but, like, the timing is still a bit up in the air. I want to say that I think it's the timing's up in the air within a matter of, like, probably 12 months. I'd guess, like, some people think it's going to happen later this year in a pretty significant way. It can't take a whole nother year from that for some of this to really come to market. But there's the So, one of our most interesting investments, the question because, like, okay, so this thesis of, like, value is going to flow out of broader crypto and into bitcoin over time. And then the question is, like, well, how is like, well, how is it going to do that? Are you saying people are going to sell their tokens in crypto and buy bitcoin with them? And yeah, that'll definitely happen to a degree. There's a lot of other reasons that people are using crypto for what's kind of de facto forms of gambling. And, you know, most senses and and those are significant. Markets, and those are going to move on top of Bitcoin through some of these layered ecosystems. The questions like, well, how is that all going to move over? And that's probably going to be a really high friction process. And I think what we don't want is for like everybody to just have like wrapped Bitcoin over time. And there's probably going to be more efficient and much better means of doing this that are much more permissionless than a system kind of like that. And one of the interesting companies that we invested in is called lemon drop, and it's not live yet. They're currently, you know, in like alpha testing, but they're creating a bridge for Solana D gens to effectively apply, like a DCA into their trades, to get into Bitcoin and and that's an orient it could be that. It can also be like an acorns model, where you're, like, rounding up on different trades and stuff like that, but they're just creating a way to, like, automate savings for the broader crypto community. And what we really like about that is, when we wrote our investment philosophy paper, like, we're completely focused on Bitcoin, but we think that, you know, Bitcoin is for everyone. Bitcoin is going to be used by everyone, and for people that are like, oh, you know, we want to advocate for Bitcoin, and we want Bitcoin to grow, and we don't really like what's happening in crypto, and it's like, do something about it. And if you really care that much and you want to be that vocal, then you do something about it. Educating people is one thing, but there's a lot of people that just kind of people that just kind of complain about it in the Bitcoin community and and what I love about a solution like this is it's like meeting the D Gen community, where it is, and finding a solution that works for them, that's going to bring them into bitcoin over time and and I think it's really going to help them do the math on how much money they ended up basically saving by not Degen, trading it, and by owning Bitcoin instead. And, and I think it's like a really, it's, it's exactly the type of things that you want to be building to, you know, put your, put your money where your mouth is around, how we're really going to get more people involved in Bitcoin within the broader crypto community over time. Yeah, and I think it's just the market timing is pretty great for a solution like this. So Eric, for

Lynne Bairstow: 52:10

startups that are interested in reaching out to you how, what is the best way to do that? Or can you give any guidelines about what the process is for an evaluation through epoch. And if you have any areas that you absolutely don't look at, you know, but what would you what would you advise for startups who want to, you know, see if they can partner with epoch for funding?

Eric: 52:33

Yeah. So for, you know, the evaluation period, we usually start off with about a five hour behavioral interview. I'm just kidding. We don't do that. And, yeah, just reach out to it. We have our like info email on our website, so you can send an email to that and or DM me on Twitter. That's that's another good way to get in touch too. You know, in mandator, things that are growing Bitcoin adoption, we try to be broad about how we think about that, but for us, we typically like to see a bit of traction in what's happening. And, you know, product that's well along the way and has been built to some degree. It's not that we don't really invest in ideas, but that happens with people that we have long standing relationships with, and typically, you know, who have, like, a track record of experiences and entrepreneurship. Entrepreneur. So if you're, like, a brand new entrepreneur and and you're just coming up with an idea that it's, you know, we're happy to talk, but it's probably not something that, like, you know, we would be investing in at this time, until we see something more proven.

Israel: 53:34

And with regards to deal flow geographies, can you? Can you tell us what you're what you're seeing there as well?

Eric: 53:43

Eric, yeah, it's funny because, like, I don't really have much of a rhyme or reason to a lot of it, because so much of what we do happens on the internet at this point. You know, I travel a lot, I go to different things, but, you know, most of the relationships are things that have kind of developed online. And I guess, like, for founders, it's, if you're doing cool things on x then, and we see it then that's always really cool. One of our portfolio companies was a group where, like, I was really excited about the first call, because I saw some of the stuff they'd been doing on X over the years and and that got me much more excited to talk to them. And you know, it was something that we were pretty focused on out the gate, because I was like, Oh, these guys have been building really good things that are interesting. So that's definitely always something that helps out. And, yeah, but in terms of, like, geography or anything, we technically are, you know, we'll invest in what we can, but it has to be within where we aren't taking on certain forms of regulatory risk that we're uncomfortable with, and from an actual like investment tax standpoint, needs to generally fall within either the Delaware C Corp structure or something similar, within a comparable market so international we're open to, but can get tricky for us, depending on the nature of how you're forming

Lynne Bairstow: 54:59

for the five. Fund itself. What will you be doing? I don't know. Are you actively raising right now, or will you do another fund coming up? And if somebody is interested in investing in epoch, how would they go about doing that same?

Eric: 55:13

Oh, yeah, just reach out to us on our on our website, same thing, or DM me on Twitter. And yeah, always happy to talk to people interested

Israel: 55:23

in this. All right? Well, it's, it's been a great conversation. Eric, I mean, there's, there's many, there's many talking points that we briefly touched them, that that could be expanded on. But, you know, maybe we'd, we'd love to have you on at a future date, see how things are evolving. And you know, at another opportunity, we can get a little more into into some of these other aspects, but we do want to be respectful of the time as well. We really appreciate you. You coming on to the podcast, any, you know, final comments, or, you know, maybe what the roadmap is for you at epoch,

Eric: 55:55

yeah, the the big picture idea here, like, why am I doing all this is that I think that what we're doing, from a venture standpoint, by investing in the infrastructure around Bitcoin, is going to be the key determinant that determines whether Bitcoin just becomes digital gold in the future, or if it becomes a neutral monetary system for the world over the long term. And we have to invest in infrastructure around it for that vision to happen. And so like, if you're just a Bitcoin bag holder and you don't care, your interests are actually aligned to invest some of that in infrastructure, because it's going to make the potential market size of Bitcoin drastically larger as it gets developed, to a more significant degree. And I think digital gold's just not going to have freedom enabling aspects that I'm so passionate about in this industry, and it's just going to make some people rich. Some people rich over the next decade. But I think that if we can really build like a truly neutral monetary system, that's that's what makes Bitcoin the most impactful innovation of our lifetimes, and that's what I'm here for.

Lynne Bairstow: 56:53

Goodness, thought a better way to close this, Eric, any, any places that you're going to be speaking coming up soon, or places?

Eric: 57:01

No, I'm pretty excited not to, because I travel all of q1 and I don't want to travel anymore. I want to exercise and eat good food for a little bit get healthy. But I, you know, I think I technically, in August, I'm talking at a Bitcoin Helsinki in Finland. So that's exciting. I've always wanted to go to Finland.

Israel: 57:20

Well, there we go and enjoy the healthy lifestyle. In the meantime, Eric and there's there's certainly the online channels that people can get in touch with you. So we'll include all of that in the show notes. And again, thanks for coming on to the build with Bitcoin podcast, Eric. We appreciate it.

Eric: 57:35

Thanks guys. Appreciate it.

Unknown: 57:42

You. Thanks

Lynne Bairstow: 57:45

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