This is an edited transcript of our podcast episode with Richard Muirhead, co-founder and Managing Partner at Fabric Ventures – a VC fund adapting the early, technical, and patient approach of venture capital to investing in Web 3.0 and decentralised data networks. In this podcast we discuss starting companies versus investing, what makes start-ups and their founders successful, what returns should one expect in VC, and much more.
Josef’s Background and Career Path
Bilal Hafeez (04:07):
Now on to this episode’s guest Josef Ackermann. Joe is a former Chairman of the Management Board and Group Executive Committee at Deutsche Bank. Under his leadership in the 2000s, Deutsche Bank became one of the top investment banks in the world. He also managed Deutsche Bank through the Global Financial Crisis. After he stepped down from Deutsche Bank, Joe went on to become the Chairman of the Board of Directors of the Bank of Cyprus until 2019. Joe studied Economics, Social Sciences at the University of St. Gallen where he earned his Doctorate. Now onto our conversation.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
This is an edited transcript of our podcast episode with Richard Muirhead, co-founder and Managing Partner at Fabric Ventures – a VC fund adapting the early, technical, and patient approach of venture capital to investing in Web 3.0 and decentralised data networks. In this podcast we discuss starting companies versus investing, what makes start-ups and their founders successful, what returns should one expect in VC, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Introduction to Richard Muirhead
Bilal Hafeez (00:00:01):
Welcome to Macro Hive Conversations with Bilal Hafeez. We aim to bring you the best macro to help you successfully invest in markets. For our latest analysis, visit macrohive.com. It’s been a rollercoaster week. Markets have been battered by news from China on real estate developer Evergrande is potentially defaulting. And in the middle of this all, the Fed announced taper, which saw bond yield surge, and surprisingly, so did equity markets. With this backdrop, we published several provocative notes, one on the Fed, another on how Bitcoin is faring through all of this, especially in comparison to Ethereum. We also step back and look at whether ESG ETFs do actually follow ESG guidelines. And we look at the latest academic work on whether retail investors actually beat professional investors or not. Finally, I’ve written a deep dive on China, which touches on Evergrande, real estate, China tech, and COVID. It’s available to our institutional or professional members. So if you’re interested in that note, then drop me an email on firstname.lastname@example.org. That is B-I-L-A-L, email@example.com. You can get access to the rest of the articles and our member Slack room as a member of Macro Hive Prime. When you sign up at macrohive.com, the first month is free, and then it’s only the cost of a few weekly cappuccinos. It’s well worth it. And many call Macro Hive the hidden gem for investors. Once again, sign up at macrohive.com.
Now, onto this episode’s guest, Richard is co-founder and managing partner at Fabric Ventures, a VC fund adapting the early, technical, and patient approach of VC to investing in Web 3.0 and decentralized data networks. Fabric has invested in the likes of Polkadot, Ocean Protocol, Orchid, Blockstack, ZeppelinOS, and Keep, among others. Richard combines a pedigree in open-source developer-orientated tools and early-stage venture investing with a blockchain focus since 2013. And he’s invested in Pantera venture fund, Bitstamp, Bitrise, Tray.io, Transferwise, and Citymapper. He’s previously a three times software entrepreneur building and scaling Automic, Tideway, and Orchestream, reaching a cumulative market cap that runs into the billions of dollars. Onto our conversation.
So, welcome, Richard. It’s been great to finally get you onto the podcast show. We’ve rearranged our schedules a bit to finally get here. And also, I should note to our listeners and viewers hopefully, that this is our first in-person podcast interview that we’ve had since the pandemic.
Richard Muirhead (00:02:31):
Well, look, I’m super happy to be here, Bilal. And I think the time it’s taken to get here is not a reflection of our enthusiasm to come and join you. And simply, I guess, a little bit of a reflection of the pandemic, but a little bit of a reflection of the very exciting activity in the sector that we’re operating in.
Where it Started for Richard
Bilal Hafeez (00:02:47):
Yeah. And I’ve actually learned a lot through our interactions, our conversations in the run-up to this podcast. But what I always like to do with all my guests is to find out their origin stories. So where did you go to university? What did you study? Was it inevitable you’ll end up in the investing, company-building world or not?
Richard Muirhead (00:03:06):
Yeah. Fair question. I’ll start with my parents. Only a tiny bit. My parents hail from Australia, although actually I was born here. I was going to say technically. I’m not sure you can be untechnically born somewhere. I was raised quite a bit in Australia up until the age of seven.
Richard Muirhead (00:03:22):
I identified with Australia, I guess, strongly because I learned to play cricket and Aussie rules football and everything over there. And so I felt like a little bit of an interloper when I came across. And then I think it’s always good to start with a little bit of a hats-off and thank-you to your parents.
Bilal Hafeez (00:03:39):
Yeah, of course.
Richard Muirhead (00:03:40):
And both of them are extremely enterprising and energetic. One’s a family lawyer, one’s a lawyer who became part of the music industry. But I was very familiar from day one or day zero with small businesses in a back room of my parents’ apartment, both apartments since they were separated and divorced. And so, I think that normalises that kind of behaviour, that being entrepreneurial, just getting stuff thrown together, putting together an office and getting going. So, you didn’t have that pressure a lot of people have, which is, do well academically, become a lawyer or a banker, that track of going to the professions. I think 100% that pressure was not there. I’m the eldest of six kids, three brothers. And as the firstborn, I probably definitely felt a little bit of the pressure of, “Hey, go and collect the accolades that you can. Go and get the badges, the Cub Scout ones, the whatever.” So definitely slightly in contrast to Charlie my next brother and then Will, for example. But generally speaking, yeah, it was more of a… It’s totally fine to be going and building something. You just got to get on and do it. And you can build a career from a small business. And then I think probably more particular on my dad’s side, he, as I said, moved into the music business. And once I realised that I was not going to have a career in singing or strumming or whatever, the closest thing to that super fun rock and roll band type existence is building a startup. And so we thought we’re going to do that. And that whole notion of getting together in a garage or the backroom or whatever and just trying to put together that song or that business plan definitely appealed. And so I was educated in the UK and went to school in London, a school called Westminster, and then I went to Cambridge to do engineering.
Bilal Hafeez (00:05:43):
And why engineering, out of interest, and not economics or history?
Richard Muirhead (00:05:47):
Yeah. Probably a bunch of different reasons. One is that, I think this is still a case in the UK education system that at the age of 14, and I can remember this conversation distinctly, you can sometimes get sat down by your housemaster or teacher, whatever, and say, “Okay, what do you want to do for the rest of your life?” Because the decisions you take right now about your O-levels, GCSEs are going to guide that. And you’re now in a funnel towards your destiny. And so at that point in time, I do remember that conversation. I just felt that choosing to do English or history precluded concretely a bunch of possible future careers, whereas doing engineering did not preclude me, for example, becoming a journalist. That was the kind of logic at the time. And I’m sure that’s a little bit to do with the system, I think. That’s not to say I wasn’t attracted to engineering and the idea of trying to craft an elegant solution to a truly pressing problem for humanity and all the trade-offs involved in that.
And my paternal grandfather… My maternal grandfather was a biology teacher, and my paternal grandfather was a metallurgist who worked his way up through, from the stamp room at BHP Billiton through a number of different companies to forge white goods and mass production and so forth, but an engineer. And so, he definitely had inspired me a lot and sent me endless books from Australia, South Africa, Malawi, wherever he was, about cosmology and engineering and so forth. So that definitely was my general internal direction. And then I chose Cambridge because whenever I went, the sky was blue and I thought it would be great to row in light blue in the boat race versus dark blue, which seemed a little bit boring. Kind of true. And I almost ruined the boat race in the second crew a couple of times. And actually, probably did arguably quite a lot of the rowing and less of the studying through those first years.
Bilal Hafeez (00:07:41):
Lots of early starts though with rowing, I imagine.
Richard Muirhead (00:07:43):
I think a lot of early starts, and it teaches you to… You know the old saying, if you want to get something done, give it to someone who’s busy. So it teaches you some of that, I think. You can push that too far. And it teaches you about the discipline and sacrifices that’s necessary. It maybe forges you a little bit beyond being a stoic into a masochist of some description, and you maybe need to be careful of that. But I think at least being stoic is pretty good for building companies.
Bilal Hafeez (00:08:12):
Yeah. And then your first job after university, what was that?
Richard Muirhead (00:08:15):
So I was torn between… I knew I wanted to start something, that was what I wanted to do. And hats off actually to my brother Charlie and Will. Charlie actually dropped out of university, didn’t bother finishing once started. And Will finished and went straight into a company that he built. But I was the boring one who actually did go and get a job. But at that point in time, I was torn between staying actually doing a master’s or a PhD so that I could continue rowing and try and get to the Olympics basically in ’96, which I would’ve been hard-pressed to do, but not impossible, and then jumping into work. And actually, I remember I got… One of the reasons, this is one of the stupid motivations… Maybe this was a post-rationalisation, but one of the things that made me happy about letting go of rowing seriously and that whole beautiful meritocracy and beautiful sport and whatever of being out in the fresh air was the fact that there was this car, the TVR Tuscan that I remember cost maybe 25 grand. I can’t remember. But I just felt like, “Oh gosh, I could start earning money and then maybe I’d be able to own a car like at.” Because I did actually work at Lotus and McLaren as my industrial experience while I was at university. So I’d come through that little about that car side, therefore there was an interest.
So as I was going to try and navigate that decision point, I asked advice on which were the really interesting firms to join more as a backup frankly, but also to give me some business education. And I decided, banking, probably to this day, I don’t really understand what happens in banks.
Bilal Hafeez (00:09:45):
I think a lot of people in banks don’t know either.
Richard Muirhead (00:09:47):
Yeah. I genuinely don’t. And then at the time, I really, really didn’t understand exactly what goes on. It seemed a lot of fuss about not a lot in sense. And I, therefore, didn’t really apply to banks, but I thought strategy consulting sounded like a great education and a great thing to go and do. I failed to get a position at McKinsey or at Bain, but I got a position at Monitor Company, which I’d put on the list actually because Martin Sorrell had recommended it and because his son Mark Sorrell actually had been someone I knew from university. And so I had a conversation and actually taught me about how to run the boat club better. But anyway, and so he rated the firm and they’re kind of a boutique strategy firm, master strategists. They wanted to craft… And you worked in a number of different industries. And primary to their business was the telecoms industry. And so I didn’t work very much in telecoms with them although I, for example, did some consulting projects with folks like Telefónica and Siemens on the possible impact of voice over IP. There’s this new internet thing happening.
One thing I learned from that was… Well, one thing was the exponential nature of these things because at the time, there was analysis done and quite interesting good analysis done by us and other folks within Monitor. And it was a bit like, “Gosh, this is exciting, but it’s going to take significant changes in order to get the economics and quality out to where it’s going to be.”
And so in the short term, of course, everything went slower than you expected. But in the long term now, basically, everything is running over IP. And so that was one project that they were doing and it gave us an insight into telecoms. And I can remember actually telling a partner from Arthur Andersen who, I don’t mean to be cheeky about it, but perhaps shouldn’t have been so smug when he was telling me this, given their demise at the end of the dot-com boom. But he said, “Don’t treat that job as an education. You should treat it very seriously as your career and so forth.” But for me, it was an education. I wasn’t going to have a career in consulting. It taught me about something I think about some different industries, including telecoms, and how to knuckle down and be a cog in the machine. I think it’s good to have that experience, not that I wanted to stay there.
So that’s what I did for a couple of years, including a period of a year, more or less, over on the Eastern front, should we say, based out of Moscow and looking at projects expanding into Eastern Europe, which I guess taught me other things about being on the front line and dealing with limited and sometimes unpredictable resources, should we say. But that’s really the topic of another podcast altogether.
Starting Companies Versus Investing
Bilal Hafeez (00:12:26):
So you were at Monitor, but then when did you first start a business of your own?
Richard Muirhead (00:12:31):
So it was definitely during the time out at Monitor, and I think that actually was in common with a few people. They recruited quite an entrepreneurial set of people, particularly those years that I was there. Actually, the building that we’re in is as a result of some entrepreneurial Monitor people that I met at the time, creating a really super successful business that resulted in this building Scale Space. So I’d been an early use of the Mosaic browser, ’93, ’94, actually with my long-term collaborator [Dr.] Steven Waterhouse, who’s also part of Fabric now as a venture partner. And then I tracked with interest the transition of that to become Netscape. And at that time… So August 1995 was the IPO. And so in ’94 and early ’95, which is literally as I was beginning, at Monitor, had got really excited about what was going to happen and what the potential of the internet was going to bring. And I started brainstorming quite a bit with different people, but a lot primarily with my brother Charlie. And I think it’s fair to say there were ideas all over the map. Actually, in the most extreme cases, anything from a restaurant to a record label. But the center of it was, I think, in a good sense, born from the vision that media was going to be transformed by the internet.
Again, as I mentioned, our father has been in the music industry for decades. And so I was exposed to the arcane nature of that, the inefficiencies, the injustices for artists. And it just seemed there was huge potential there on the streaming audio side. But also, Charlie had been involved in lot of studio work and renting of studio equipment and saw the potential around getting video around. And so, one thing we conceived of at the time was I think we dubbed MediaNet, was a way of getting the footage and so forth around SOHO, in particular, faster and more cost-effectively using the internet. So it was a specific application of this cheaper data network. And then that broadened to, how do you build a business-ready version of this best-efforts internet?
And then we went from that to thinking, “Okay. Well, maybe we’re not going to be the service provider, but maybe we can build some of the hardware or software that’s required to make it work.” And then we went from that to going, “Well, maybe not the hardware, maybe the software.” And then we said, “Well, not the billing system, but maybe something else.” And that’s how we settled upon this totally invisible, totally catastrophically bad cocktail conversation type of business, which was a piece of middleware software that sits between the billing system and the network and makes sure everything is switched on right to make the services work, so activation software it’s called.
That was a little slice of the journey that we went through, through primarily ’95 and then ’96, and then got some angel investment. Actually, one of dad’s key clients, a record producer called Hugh Padgham, who’s the original angel. And then Hermann Hauser, who’s now very celebrated in the context of Amadeus and have been part of creating ARM, the fabulous chip company, which should really be protected through some kind of technology sovereignty in the UK but that’s, again, another broad topic. And Esther Dyson who was advisor to the president and so forth on the internet and original founding chairman of ICANN administering the internet addresses. And so, through just great connections to those people, just through knocking on doors. Then got our first venture capital in ’96, which was when I just transitioned out of being at Monitor. And we even did some collab between the company we were building and Monitor to try and help with some of the projects.
Bilal Hafeez (00:16:19):
And then when did you make the move from this entrepreneurial business or side to setting up a VC firm itself?
Richard Muirhead (00:16:27):
Sure. So that was my first proper taste of trying to build a venture-backable company. And so, of course, I was learning a lot about what that took. And I think it was quite early in the days of it being conceivable that you could do that from London, basically from Fulham. And our first office was underneath a funeral parlour on the Fulham Road. And part of that was because of the internet itself, because you could read about what the competition was, what they were up to, the science behind building these companies and access the venture. So we did that. There’s a few steps to becoming an investor. I always thought it was fascinating to be a venture capitalist. It was a bit of a dark art, particularly in the ’90s. But was company-building all the way through to 2001 and this venture Orchestream. One thing that was notable about that I think is relevant to where I’ve now ended up is that we used open-source software, which was at that point in time, pretty groundbreaking. We used open-source software in anger to manage carrier-scale, highly resilient networks and systems. And this was something that was only just becoming accepted, or even the notion that this was possibly a secure or sensible thing to do in the mid-’90s was just becoming accepted.
Anyway, we listed that company first on the London Stock Exchange and then on NASDAQ, and then acquired a NASDAQ company and then merged with another one, and then got acquired by Oracle ultimately. Again, there’s a whole series of discussions about the lessons of that. I felt I’d had at least one career completely by the age of 28, 29.
And then I came out of that, courtesy of ordering a margarita at the same time at a PC forum in Arizona at Esther Dyson’s conference. Got introduced to Jim Breyer who was the managing partner at the time of Accel Partners, who had famously then went on to write an Accel check and his own check into Facebook at the Series A at 100 hundred million and built an incredible company by any measure. And he introduced me to the team at Accel who were building now the new Accel Europe offices. And so I was lucky enough to be picked to be what is called an entrepreneur in residence. My godfather told me I should never take that title because it’s ridiculous. But it is actually, without sounding a bit funny or pretentious in terms of thinking of an artist in residence, it’s actually a bit of a challenge. Effectively, you’re given a blank sheet of paper and told to go into the corner and come back when you’ve got a billion-dollar company.
Bilal Hafeez (00:19:03):
Richard Muirhead (00:19:04):
Yeah. Totally straightforward. I didn’t quite realise it’s a little bit of… Almost a poisoned chalice, both because of that, but also because if you don’t manage to get that firm back from the get-go and all the way through, everybody else looks at you and goes, “Okay, is there something wrong with you?” But of course, actually, the calibration is extremely acute. It’s actually like, we’re not quite sure if it’s definitely a billion-dollar company.
Bilal Hafeez (00:19:27):
Richard Muirhead (00:19:29):
So did that and helped, got some insight into running a venture capital firm because I spent nine months involved in some of the LP pitches hearing about the investment committee sitting on some bits of the deal flow meetings, and helping build the network for Accel in Europe. And I have a huge debt of gratitude to Jim and to particularly, Kevin Comolli, who took me under his wing in building the firm. And we actually then ended up getting backed by Apax Partners and a great venture investor called Mike Chalfen. And that led to building a second company where there were a number of insights that again led me to where I am today. So we built a company that was very early in the cloud space, and it was very early in what’s known as DevOps today, but effectively how you very rapidly iterate software development testing and deployment and management and so forth, moving away from the strict waterfall that people had in the past. And in building that, in trying to solve quite complex knowledge-intensive problems, we tried to think about how to get individuals who had that knowledge to collaborate better. And so we both used primitives of what later became much more fashionable machine learning and AI, ontological data models, graph-based databases, semantic reasoning engines, and so forth. We used those to try and tackle the problem on one side. And then we also looked at how do you incentivise distributed people who don’t necessarily have a common set of interests or indeed a reason to get out of bed and share their information, to actually do that, to solve a problem?
Concretely, you’ve got very complex IT systems say in a bank, and with very granular information that pertains to them running every day. But someone actually has a tendency to hold onto that information and protect their fiefdom and protect that local optimum for the business versus collaborating and sharing it to move to actually a greater optimum for the business. And so I got inspired by Wikipedia, by Facebook, by actually a company called Splunk that went on to be extremely successful, who managed to have little components of… Think of it as crowdsourcing or the wisdom of crowds.
Richard Muirhead (00:21:40):
And there was a book written by Don Tapscott called Wikinomics, who actually went on to write a book about blockchain as well with his son that talked about the power of that and the emergent properties of these networks where you don’t have to dictate top-down what people do. But that actually, if you empower individuals in the right way with the right guide rails and so forth, and incentivise them in the right way, and maybe punish them in the right way as appropriate as well, then you can get incredibly powerful outcomes.
Richard Muirhead (00:22:10):
I think it was in The Economist recently saying that actually, Wikipedia is definitively a better source than many other sources that are allowed, even though Wikipedia isn’t allowed as a source. It’s a bit like open-source software, because of its nature, it’s got such a huge tax as we can inspect it. It’s definitively more secure. And finally, we’ve accepted that. Now, Wikipedia is actually a great resource. That doesn’t mean it’s always perfect.
Bilal Hafeez (00:22:37):
Richard Muirhead (00:22:37):
And so inspired by that ability of these new software platforms to coordinate lots of hyper-knowledgeable and motivated people for the collective good. So that’s a little bit of what we did at Tideway, not maybe to the degree of success that I would have quite liked, but we did sell the company to VMC Software and it’s still a very successful product for them. And so getting to the nub of maybe your question, when I came out of selling that company in 2009, I looked up and around and saw that, with the greatest respect to the venture capitalists I’d worked with, with Mike, with Kevin and others, in that decade or two that I’d been exposed to venture capital in Europe, first of all, it was still a case of there just was not enough of it in Europe by almost an order of magnitude, probably an order of magnitude at that point in time.
Europe Versus USA Venture Capital
Bilal Hafeez (00:23:27):
And just on that, why do you think Europe has always lagged the U.S. on the VC side? Just in terms of angel investing, VC, startups, that whole culture and ecosystem. Obviously, California, U.S. has always been at the vanguard. Why hasn’t Europe? London is a very global city, great universities here. Why hasn’t it?
Richard Muirhead (00:23:47):
Yeah. Look, of course, that remains literally a trillion-dollar question and one that many people and commentators try and opine on quite frequently. And there’s normally an article every now and then in the FT about it. There was one point there was actually a piece on Radio Four… I can’t remember which chancellor was talking about it, a decade or so ago. And I felt like writing a letter back to them. They were talking about this topic. And I remember then what my conclusion was, what the critical difference was and what it is now. And actually, it was a little bit inspired by my time at Monitor Company. Monitor was Michael Porter’s firm and one book he wrote was about The Competitive Advantage of Nations. And in that, you do this, you do an analysis, seven factors I think of the competitive advantage of nations. And this cluster analysis I think is what we call it. And one thing that was important in that was a hallmark. And you can think of this in the context of great corks in Portugal or great shoes in Italy, is having immediate access to local sophisticated customers who give you great feedback, who don’t just buy blindly or just not buy anything at all, but buy a bit and give you feedback on what is great and what is not great. And so you can analyse lots of things to do with education and government grants and activity and whatever. But if you force yourself to come down to one thing, I still think that some of the issues has been the lack of those sophisticated customers, local customers who are willing to take a portfolio approach certainly on the enterprise side and take some bets.
It’s literally a portfolio approach. It’s like, I can invest everything safely in terms of my purchases as an enterprise, and I’ll probably get just whatever, my 10% ROI on those investments. Or I can mix up the portfolio and I can seek that alpha and I can get to 12 or 13, but I have to take some risks to do that in the investments I make. And I witnessed that myself from trying to sell enterprise or carrier software, that our success was with… And again, gratitude to a gentleman called JP Rangaswami who’s been through Dresdner Kleinwort and BT and Salesforce, and he had exactly that portfolio approach. And so he thought consciously about taking those risks and making those bets with vendors that were innovative because he felt it would make a difference overall. And he was far from lazy, he was hyper-intellectually curious. So I think that makes a difference. And I think one thing that’s happened, obviously, with the internet and products being bought on a universal access basis globally is, of course, that’s opened up the opportunity for sophisticated customers to operate everywhere. But I think that mindset from customers has been missing in Europe quite a bit.
You can get into other questions about, which is true, but structurally, the U.S. has a more unified market. So you can get bigger easier and you can go… But I think some of that mindset in the customers and, to some degree, the mindset in the entrepreneurs that maybe feed off each other, I think if I were just forced to oversimplify, I would point to that then. And I would still probably point to it a little bit now.
What makes start-ups and their founders successful
Bilal Hafeez (00:26:53):
And then you saw this lack in Europe, you could say, and that kind of spurred you on.
Richard Muirhead (00:26:58):
I saw the lack of venture capital. I saw another gap, which was that in my 15 years of building the companies I had, it had been quite challenging to find anyone on the investor side specifically to go toe to toe with on quite technical products. So that finding venture capitalists and angels who knew the space was really challenging, so that was another gap. And then I was inspired by the fact that there were YCombinator, 500 Startups, First Round, Union Square Ventures, who were doing a few things. And then ultimately, actually, Andreessen Horowitz in particular who were doing a few things. Number one, they were dropping or opening the curtains or pulling back the tent flaps on what goes on with venture capital, making it much more transparent, blogging, talking about what was going on.
Number two, they were innovating on the model. I’m not just going to sit here and write a check and have you come to me. I’m going to be much more sleeves rolled up and I’m going to get out there and meet entrepreneurs. I’m going to get out there and help the entrepreneurs with their company building. And I’m going to actually gear up the whole company. Famously, this is the way that Andreessen Horowitz described it, that they were inspired by Michael Ovitz and CAA and the way that they gave 360 support for the artist.
Bilal Hafeez (00:28:14):
So we could sort of go back to the artistic world.
Richard Muirhead (00:28:17):
Back to the artistic world. Exactly. That they were inspired by that and said, “Well, let’s do the same thing. Let’s say that ultimately, our primary customer really is those founders who can see the future. And so, we need to do everything we can to support them and to attract them in the first place to get selected by them.” And so, I thought that the potential for innovation there in the space was exciting as well. And so, I thought, “Great.” So, I set my sights on being part of that new world, plugging the gap in terms of perhaps, should we say deep tech knowledge, plugging the gap in terms of the euros and pounds available for different founders, and embracing the opportunity to really innovate in terms of the model and build what has now become called a platform for founders. And also, to deploy more software internally within a venture firm to identify and track talent and help funnel it to projects, to identify moves between different companies or new projects on GitHub, in order to use data science to get the signal from the noise and find great projects. So, all of those types of innovations are exciting. And so, I quickly discovered that having not quite succeeded to get a job in one of the major venture firms, and I think, to be frank, I was keen to either be in a major venture firm or to build my own. That gave me further insight into the politics and the decision-making process of very small partnerships. But then realised that to build a firm, this is back in 2010, first, you had to build a track record.
So, I started writing some checks and understanding what it meant to write small angel checks, mentor companies that were exciting, backed companies like Pusher, which has now sold and did extremely well out of East London.
Bilal Hafeez (00:30:05):
What did Pusher do or does?
Richard Muirhead (00:30:07):
So Pusher used some web standards to move data around. So it was a web-compatible way of moving data between mobile and web apps. So for example, if you have a leaderboard in a game, or if you want to see the presence of someone in a chat, it was pushing that data around in real-time, and then delivering a platform to do that, to just make it easier for developers to include that in their applications.
They did really well. They never quite got to full… Maybe they got into lower orbit, but not quite to the moon or Mars. And the CEO Max did a fantastic job. And then another company Citymapper, which people may know and have used around London at least, or in other major cities, which has also done amazingly well. And then another one called Trey, which was all about automating your marketing and other key processes for companies that were very intensive in using different SaaS software. And that’s doing incredibly well, and made the shift to being predominantly headquartered in the U.S. as well. Anyway, so we started cutting some checks and building a track record and how to think about the vintages or funds to package those into and think about portfolio composition and obviously, selection and all of these different disciplines. Soon discovered also that to go and raise committed capital, that track record was great, but a lot of scrutiny was placed on the team, and they want to see that you have a cohesive team. Now, there’s a trend around what’s called solo GPs. So the people have thought, actually, if I trade off the risk between a team that has got a good collective track record where I don’t think it’s going to fall apart versus a solo GP who, yeah, sure, might be a single point of failure, but is not going to fall apart, the team’s not going to fall apart because there is no team, that some LPs have now become attracted to that. Maybe also because they’ve seen that some of those solo GPs can move faster, more nimbly, and be more attractive as co-investors, as partners to founders and entrepreneurs. So, team was exceptionally important and started to develop that, continued working with Steven Waterhouse, I had already mentioned, but also then with Anil Hansjee who’s my partner here at Fabric Ventures. We started investing together and initially under the brand Firestartr, which is the predecessor to Fabric. And then Alain Falys who’s a venture partner with us as well. And so, track record, team, and then started developing work on the thesis. And the path wasn’t totally direct. We got Firestartr up and running and was investing from other people’s money as well in a club format, in a syndicate, on a deal-by-deal basis to scale up operations, write bigger tickets. As a consequence, get into some different deals. I took a little sidebar route and went and raised a European investment fund-backed early-stage fund with the co-founders of MySQL and MariaDB, who were Swedish-speaking Finns who I’d known a little while and had a lot of time for, because they actually, I believe, helped plug some of the gap that I felt was there in Europe. They had walked a mile or many miles in the entrepreneurial fund shoes and they’d built quite a technical product. And then they were now investing and trying to apply that knowledge and share that knowledge back with founders.
So, we built that fund back in 2015/16, but all the while had been developing this thesis really because unless you have a household brand name exit behind you, for example, like Skype, or if you have considerable capital to invest yourself, LPs need some edge that you’re going to have, and so that was one reason.
What returns should one expect in VC
Bilal Hafeez (00:33:38):
Actually, when you mentioned LP, just for the benefit of our audience, can you just explain what LP and the GP is?
Richard Muirhead (00:33:44):
Sure, absolutely. Effectively, when you’re building a committed capital… A fund and venture. It’s a 10-year fund, and maybe you’ll charge 2.5% percent a year and 20% carry above some either fixed or annual hurdle rate. And to put some numbers on it, you might expect to… Historically, you want to be targeting north of 3.33 and a bit X return over the period of the fund. And it depends on IRRs and calculations and the deals and so forth. But it’s really mostly focused on that multiple. And the fund that you’re deploying from is a partnership between an entity, which is the GP itself, the actual general partnership, which is the legal entity, which is managed by general partners or partners who effectively are side by side with partners who are limited in what they’re contributing to just capital.
And so it is very much a partnership between everybody. You’ve got skin in the game, you’re sharing in the upside. And really, especially now and especially at the early stage, the economic remuneration, aside from the [inaudible 00:34:55] is not from the management fee. It’s absolutely… You’ve got between 1% and 5% of the fund is coming out of your pocket, so skin in the game, that’s pretty typical numbers for a venture. And you’ve got a 20% share of the upside past the hurdle, so you’re very much aligned on the upside. And so your internal partners are the general partners and then your investing partners are the limited partners.
Bilal Hafeez (00:35:18):
Okay. Yeah. So you were talking about the LPs that you had brought in.
Richard Muirhead (00:35:23):
Yeah. So to get them in, one thing that was useful was to have this edge, this thesis. But there was another reason for it because it did flow naturally from the activity we had before. And so I mentioned earlier that the very first software product that I helped build with my brother was based on open source. And I’d seen the sheer power of these distributed teams being able to build this software and then build communities and ecosystems of other software on top of that software in a very open way. So it was a long open movement. And then I’d also seen the power of machine learning, but I’d seen that it’s only as good as the data you can get to it. So I’d also then seen the potential of incentivising distributed actors to contribute that data effectively and to contribute their work. And so then went in, I had briefly stumbled into Bitcoin actually in 2009, sadly not done anything about it till 2013 when Steven Waterhouse, also known as Seven, had brought it back into my focus. And read then back in 2013 about all of the thinking that was going on about how the Bitcoin and the blockchain, the distributed ledger behind it were really a first application, a prototype of a new form of organisation, a decentralised and autonomously functioning organisation or a DAO.
And that really sent light bulbs going off for me, in conjunction with the algorithms that were swimming around the world at that point in time, and because of the power of these open and permissionless networks. And so those components were what fed into the thesis that we started investing behind, or I first was doing predominantly actually with OpenOcean, my partners from MySQL. And when we realised that there was a whole bunch of investments we could not make with OpenOcean, with that actual fund and the way the LPA was constructed. We came up with a plan collectively as partners to spin out of OpenOcean and back into Firestartr to create what has become Fabric. And because there were two real reasons why it wasn’t possible with OpenOcean. Number one, a lot of the opportunities here are quite early stage. And so just a little bit early in the risk appetite for OpenOcean. But also, some of the way that, ultimately, the value might accrue and you might secure your liquidity and your exit and your returns for your LPs would come through tokens, so coins or tokens, so cryptographic representations of digital scarcity that are intrinsic to these new decentralised organisations or networks that are being built.
And most LPAs (limited partner agreements) did not have the ability to invest in those backed into them. And the same was also true for OpenOcean.
What is the Open Economy and Web 3.0
Bilal Hafeez (00:38:14):
So when you say thesis, you mean the constitution or the statement of intent for the fund. That’s what you tell investors and prospective startups. Is that what you mean by thesis?
Richard Muirhead (00:38:25):
Yeah, that is. So we would summarise it now as our open economy thesis. And I guess it’s a statement of… Less a statement of intent. It’s more a statement of a vision of how we think the world could unfold. And so to maybe dig into that a little bit, normally, it’s useful to think about what’s wrong with the world at the moment, that makes it necessary to envision what might come next. I think we’re all net-net very grateful for what the digital world has brought us, much more borderless world. It supports every type of activity. And I think unless you’re a super cynic or a populist or something, if you look at the progress of humanity at large, the world is a better place and continues to get a better place on all of the normal dimensions. I’m not there [inaudible 00:39:14] war and poverty. So we’re grateful for that.
However, with the combination of these software platforms, these web software platforms that have risen to supremacy recently, Facebook, Airbnb, Amazon, and so forth, with today’s form of capitalism, you could argue we’re in a digitally turbocharged version of hypercapitalism. And that leads to a concentration of market power, economic outcomes, governance power, political power, amongst very few people, certain organisations and very few people actually within them. And when the platforms that they’re governing and from whom they’re siphoning the economics off, actually are totally interwoven with our everyday lives, everybody says ‘We know what we’re talking about’. Whether it be the addictive and possibly emotionally distressing nature of the infinite scroll, or whether it be disinformation that might spread on different social media platforms or E-commerce platforms that are optimised for too much profit. And by the way, in no sense, frankly, do I think that individuals or even the collective organisations intend to do an evil at all, but I think it’s just the nature of the software platforms being optimised to support the generation of profit. Classic following the money if you will.
And so that’s one problem. And then an opportunity is if we could move away from these software platforms that become quite monolithic and insular quite rapidly, to move away from not just open-source software, which is a bit like having blueprints available that you can readily use to build your own software openly, to actually having Live running services that you can plug into other services at will that in combination do something fantastic. So let me give you an example of that. Today, if you are a driver on Uber, you don’t really own your reputation. You don’t own your track record. It’s all inherent to that platform, which means that in the first instance, if you want to take that and use it to be a really successful driver on Lyft, you can’t do that. Is that right? Is it right for the individual from a perspective of managing their data?
And I think Europe actually has been really interesting in leading the way and protecting the rights of individuals around their data. And that’s one angle to take on it. But also, is it right or helpful that if somebody else comes along, be it Lyft or someone else who comes up with another application, some other problem? So maybe they want to find people who speak Spanish and we’ve got a stellar reputation with delivering people across town and who work in a certain part of the world. But they want to find that through an API call, but they can’t access that reputation of those drivers because it’s locked in Uber. So that’s just a small example of, if you can make those underlying services more composable, you can increase the rate of innovation. And the rate of innovation is going to lead to better outcomes for the end-users. Because what we observe in these big platforms, what we would call Web 2.0 platforms… And we refer to Web 2.0 as that legacy of Facebook and LinkedIn and so forth. And Web 3.0 or the open web, in support of the open economy.
What we see is that those platforms, although they may start ingeniously to serve the needs, in Facebook’s case, of collecting girls’ telephone numbers, and somewhat trivial but perhaps, although maybe essential, into the behemoth that is Facebook today. Over time, they cease to serve the needs of the users and start to serve the needs of the platform. Whereas if we can construct a different software architecture that, at many different layers, operates in a more decentralised way, then we can move away from that. And the core innovation at the heart of that is this notion we can think of as a revolution in ownership. It’s taking the physical concept of ownership, which we understand, into the digital realm and saying, now I can give you ownership of your identity. I can give you ownership of the data that you leave and you exhaust in the digital world day to day. And I can give you ownership of different types of digital assets that are baked into this new digital realm that you operate within.
And then from that, we can build lots of different new applications. And that probably… A lot of people think about this move to the decentralised world as being about taking away the middle-man and therefore making things more efficient, like take away Travis’ 25% on Uber or something. That’s true, I think, to some degree, but it’s actually even more about the agility that you end up with when you don’t get that concentration of market power and that brittleness in the systems that happens when everything adheres to one system and nobody else can access it. It’s the fact that there’s a constant pressure on these new systems to either serve the needs of the users or for someone to fork them and create a competitor, or to just combine some element of what they’re doing with something else to create a competitor. So it’s much more ruthlessly Darwinistic in that sense.
Bilal Hafeez (00:44:28):
And on the technology side, what’s enabled this? Well, I mean why now and not five years ago or 10 years ago or 20 years ago? What is it about now?
To point to one “why now,” you have to point to whoever he, she, or they are. Satoshi Nakamoto who herself put together a combination of different elements, game theory and cryptography and to deliver Bitcoin on the Bitcoin blockchain, and the whitepaper being from 2008. But you can see online, great histories and stories about this. That paper was a combinatorial innovation, a brilliant one, but stands on the shoulders of decades of research in cryptography and on game theory. So why now? Well, if there’s one “why now,” it’s that. And then once the floodgates were open and people saw that it was possible, there have been thousands of attempts to improve upon Bitcoin or to augment Bitcoin or to say, “We’re not improving upon Bitcoin, but I can take those principles and build something in parallel.” So an example of that would be Ethereum, which is the second-most valuable token out there, or network capitalisation out there, but it is geared towards a different set of uses from Bitcoin. Whereas Bitcoin, its strongest characteristic is, in a sense, that it doesn’t change. And you might think of it, and I’m sure many of your audience is extremely knowledgeable, but you can think of it crudely as a kind of digital gold.
Bilal Hafeez (00:45:56):
Richard Muirhead (00:45:57):
And you can get into a lot of detailed conversations about block rewards and transaction fees and how this is going to work as the whole whitepaper and the construct plays out. Again, many podcasts you can do about that. But Ethereum was designed to say, “Okay, there is some programmable capability within Bitcoin, but it wasn’t really designed with that general-purpose computing in mind. Let’s build a Turing complete language solidity that can operate on the Ethereum blockchain and people can build what’s known as smart contracts, little pieces of software that will just execute autonomously anywhere on that network.”
Bilal Hafeez (00:46:34):
Richard Muirhead (00:46:36):
So there were a bunch of people involved in that, most famous now being Vitalik Buterin who’s the biggest, I would say, spokesperson for that. That’s the biggest development community in the space. And there are lots of applications being built on that, although there are also competitors.
Centralisation versus decentralisation
Bilal Hafeez (00:46:53):
Earlier, you mentioned DAO, decentralised autonomous organisations, which I think in many ways captures a lot of the decentralisation that you’re talking about. And it’s quite an intriguing concept where, for centuries almost, we’ve had company structures which are ultimately quite top-down. You have governing principles of how a company works and there’s employees for the company. We all know what a company is. But then there’s the decentralised autonomous organisations, or the DAO, which conceptually sounds really… really very revolutionary and inspiring. But then practically speaking, you start to wonder, can it really work or not? So can you talk perhaps a bit more about that?
Richard Muirhead (00:47:35):
Yeah. Gosh. I think, quite rapidly, you can get quite philosophical or even biological about it. So I think the reason it ultimately works is you have to think about the potency of the individual. That is, call it the unit that we’re all working with. And everything comes down to the individual. And I think whether it’s a role in companies or a role in society, the motivations of the individual, which sometimes you can interpret as selfish, are actually a virtue to paraphrase Ayn Rand. And I think that we tap into that, the better we tap into that, the more powerful our organisations are. I would argue, and I think people have argued that capitalism and the joint stock operation and the firm and the theory of the firm and the optimisations that have been delivered there are a local optimum of the implementation of capitalism as a means of unlocking the potential of individuals, but it’s a local optimum. And of course, history, despite whatever Fukuyama said in ’95, is far from over. And we’re now going to see the birth of different organisations that think of them as modern mutualism or collective capitalism or cooperative capitalism within this open economy. Actually, one of our investors we respect over at Variant, Jesse Walden calls it the ownership economy. With the beginning of a shift in that direction.
And when we then think about it and go, “Well, okay, does it make sense we can progress like that?” Well, first of all, we might say, “Well, are we reverting to some kind of socialism?” No, it’s quite different from that, and certainly not centrally planned economies like that at all. But actually, we’re reverting to what is a very natural state of affairs. In a sense, we’re reverting to individuals and small teams and families and towns, villages and towns and regions who are all intermeshing in very complicated ways. And some have said, for example, that the most complex pieces of engineering that have ever been successfully shipped, and not things like the Saturn V rocket or the CERN accelerator or the space shuttle, although they’re incredibly complicated, but are actually like cities. And cities operate on this more emergent principle. Going back to the individuals, not being dictated to totally specifically what to do, but operating within guidelines. And then groups of them interacting and so forth. And you can, in that more emergent and more organic way, you can end up with incredibly sophisticated and powerful accomplishments. And so I think it’s taking some of those principles and applying them to how we’re going to see companies operate in the future governments and lots of others.
Bilal Hafeez (00:50:28):
And if we bring it back towards investing and returns and so on, you corrected me in some of our private conversations around what you do isn’t investing, it’s more company building. So first, just if you could unpack that, but then also, how do you go about looking for these amazing companies? What’s the criteria you use? I imagine it’s very different from people who invest or trade public markets where you just look at financial data and you buy Apple or you sell it. Can you just unpack the process of it?
Richard Muirhead (00:51:02):
No, yeah. Totally. I think you’re quite right. It is and must be about company building. And so really at the end of the day, what you hope to achieve… And you can never rest on these laurels. I like to say you’re only as good as your last hamburger. But you want to get to the point where the entrepreneurs out there, at the very least, put you in the shortlist of the partners they’d like to work with in building their company. And to paint the picture, you’re looking to intersect a group of 2 to 10 people probably, who have put together, hopefully, at least a deck through to something that might be just starting to get some revenue. But in the middle of that, have probably demonstrated some level of what’s called in the industry as product-market fit.
Both sides are in there because you iterate the product and your selection of which market to go after until you get that traction, and some data telling you it’s underway. As well as a synthesis like smart people building a huge market can see some data, would love to work with them. And so it is, I think a lot of that stage, about a synthesis of those elements. The founders who you think can really see into the future, they almost feel like they are from the future, who have built that elegant first product and product-market fit. Actually, it’s so elegant that sometimes it can feel toy-like or even trivial. And so something I often identify with, I like to say, it’s almost like the more trivial it is and toy-like and simplistic, the better, partly because some of the hardest things to do in building a great product is to say no. So it’s a hallmark of a team that’s been able to say no, to find the fit that the thing seems so trivial. Actually, what you shouldn’t be looking at is what is there, you should be looking at all the things that are not there. It’s a famous trope from Steve Jobs actually, who I never met, but have met Jony Ive and collaborated a little bit on a couple of things with him. And he certainly is fond of telling the story of how they said no was critical to the resurgence of Apple. Rather remarkable from, obviously, ’97 till today.
Anyway, so you’re looking for that. And in this great market with these smart people, and probably some idea of how you’re going to scale a business and build out a business model. But you can’t solve for everything. And if you spend the time and challenge everybody too much on, actually, what is the business model going to be and how you’re going to deal with, whatever, hiring your thousandth employee and do you have the experience to do that, you’re going to be focusing on the wrong things.
And also generally, or fervently, I would say I actually probably believe if you’re thinking about replacing the CEO or pivotal team members, it’s probably not the right partnership to get into. You’re really dedicated to building an organisation around that team to optimise for making them successful. That’s the way to think about it. And actually, even to the degree… And there was a TED Talk from a CEO, Mike Cannon-Brookes, CEO of Atlassian, Australian company, have done incredibly well, about the imposter syndrome that he felt in building his company. Because you get backed as the founder whilst you scale through doing things you have no idea about. But nonetheless, you’re the founder. And so you’re incredibly well-equipped to retain the focus on the true north and the vision and to inspire and energise people. And all of these things in trade-off are much more important. Assuming you can put the organisation around you than trying to replace the CEO with someone professional. Not that it doesn’t happen sometimes and sometimes successfully, but obviously, Mark Zuckerberg, Sheryl Sandberg gave us an example of building a team around that.
Cash flows in a start-up
Bilal Hafeez (00:54:44):
Okay. Yeah. One question that always comes up when you look at startups is the cash flow side of things. So they could have the product-market fit, they could have a great product, but they could just be burning cash. And you have this vision at the end of, okay, they’re going to scale and they’ll make some money. But obviously, they’re burning cash. How do you think about the financials of organisations?
Richard Muirhead (00:55:08):
First of all, that’s where we come in. If they weren’t burning cash, they wouldn’t need venture capital. And of course, seriously, that should not obviously be the reason to burn cash. However, it’s more likely that if we’re in conversation with a founder and they’re reluctant to burn cash, it’s more likely that we actually think, okay, maybe this is not a great fit than the other way around. There’s a limit to that and there’s other serious conversations, seriousness, frugality down to the details that you’re looking for. I think Sequoia famously talks about looking for people who know how to spark an inferno of demand, a kind of wildfire inferno demand, which is actually where the brand Firestartr came from. Simultaneously know how to save paper clips. That’s the kind of characteristics you’re looking for in your founders.
So I think you are looking for people though, who are brave enough to go and spend the money. You’re expecting there to be a J-curve in terms of the capital that’s required before you come out the other side.
Because it’s inherent really mostly that if there is a sufficiently large market in existence or being created, and sufficiently smart people gunning for it, and enough firms and therefore venture capital firms have got their crosshairs on it, that all things being equal, if you’re not spending money trying to secure victory in that particular space, then somebody else will be. So you’re going to be outgunned. And there’s a timeliness to seizing those market opportunities, so you do want to go and spend it. So you’re actually not looking for being cash-generative or profitable. You’re looking for that appetite for investing for future growth. Before that, you may be investing in just the capabilities of the product that is going to make it the killer product. And then investing in capabilities of the product that will give you a business model. We haven’t come on particularly to the business models of Web 3.0, the open web, which we’ve been touching upon them in the sense that we’ve got decentralised autonomous organisations, and there are whole structures where the participants in those networks ultimately benefit by ownership of the token itself. So it is that mutualism, it’s like owning a piece of virtual real estate that makes it worth your while in bringing your wares to the market on that real estate. And so that’s a whole area. And we’ve written, I think, some blog posts about it. It could be pretty interesting. But it’s never evident necessarily at the beginning what the right business model is. So if you take Google in the Web 2.0 world, they were behind in terms of their pay-per-click ad revenue quite considerably. I think only five or six. It was Overture who’d invented that model. But then they took that model and they refined it and optimised it. And then they went from being behind to being massively ahead within about 12 months. And then 12 months later, they were IPOed for many billions. I forget the exact number. But there were serious conversations going on, on Google about the level of expenditure and whatever prior to that. It’s just, I think, an interesting case study of what actually can be inherent in the way you have to think about how some of these companies might progress and the risk you have to take. And at the end of the day, I think it’s fairly well-understood probably by everybody amongst your listeners that, in a venture, you’re not just looking for a 10X return.
The way we think about it, you’re looking for… In a portfolio of 10 to, say, 30 different investments, you’re looking for a blended 25X return. So your initial check should be doing considerably more than that. By the time you’ve then followed on in two or three more rounds that the blended return is 25X or more. And actually, we see in the open web and open economy space where there are a whole set of self-reinforcing network effects going on. And then there is a whole further excitement around the potential for the token that some of the returns can be considerably higher and faster than the 25X. And so the corollary of that is that you are comfortable that, in typical numbers for seed investing, say from the Kaufman Institute, 50-60% of your investments go to zero. And actually, I would go further than that, that I think you have to be comfortable with that, you have to almost seek that in your investing, that if you’re not on each investment taking enough risk that you believe that, actually, you might be more than half wrong – put it that way, ultimately, you like it if you are not – then you’re probably not taking enough risk. And further than that, and this is something I have appreciated in making my transition from being in the founder’s hot seat to being in the venture investor’s hot seat, is that you actually want each… You’re looking as a venture investor to each individual founder to take the risk that you want them to do within the portfolio.
So they have to be happy that they’re being… There’s a merger. I think it’s Steve Blank who talked about the merger between their business model and your business model. And the exchange, the pact, I won’t call it Faustian, but the pact that’s being made is that in exchange for that capital, I’m going to take more risk than I would’ve done if I had just been operating on my own. It’s not just, I’m going to spend more money. It’s clearly got more risk attached to it, but I’m really going to take more risk. And that’s what you’re looking for in each of the founders that you’re…
Traits of successful founders
Bilal Hafeez (01:00:38):
And it’s under the founders… At some level, it’s a people business. You’re finding good people. Are there certain traits in founders… When you meet a founder, after a half an hour conversation, do you think, “Okay, this is a person that I’ll invest in,” or is it just so varied that you can’t say that?
Richard Muirhead (01:00:54):
No. I think there are traits. I think there are traits. You also have to be very careful that you don’t obviously do classic selection bias and look for things that are familiar to you from yourself or from your experience. And I’ve got examples of where we’ve tripped up in hindsight, probably on that. But I think I mentioned already that you’re looking for people in a sense who have such clarity about what the future might look like that it almost feels like they’re from the future. And what goes along with that is that they’re incredibly deep into their particular topic. So they really know that cold because you have to be able to make the judgments of what product to build and how to take it to market and so forth. I think that obviously, that attention to detail, that passion for the space they’re in comes across a lot and it’s a characteristic. I think there’s definitely a determination or resiliency you’re looking for that you want to slug it out and believe that you will get there in the end, because it inevitably tends to be a long journey. There’s a really interesting balance between confidence and openness to feedback. So folks who are super open to partnering and having conversations, not just because we believe that we are good people to listen to at all, actually, but rather that that is a great characteristic for what is effectively… Startups are not even really companies. They’re kind of vehicles for iterative experimentation, they’re vehicles for lessons to be learned.
Bilal Hafeez (01:02:19):
Richard Muirhead (01:02:19):
And so if you haven’t got a leader who is capable of taking on those lessons, but also confident enough to make decisions, then you’ve got the wrong character at the helm. And that brings me to another point we look for, which is, we’re in a people business, they’re in a people business. Probably the number one thing after timing that’s going to make a difference is what talent they can bring on board. And so if they don’t have energy and they’re not energising and they’re not charismatic enough in their own way to bring people on board, then that also is going to be tricky, I think, in terms of the development of their company.
Bilal Hafeez (01:02:56):
And then on your side, how do you attract entrepreneurs? Because obviously, there’s capital that’s looking for all of these entrepreneurs and startups. And you as a company have to attract, make sure that you’re top of their list. How do you go about doing that?
Richard Muirhead (01:03:11):
It’s no one thing. Maybe at the heart of it is to try and be founder-first, founder-friendly, founder-loyal, kind of as maybe a little bit been alluding to, to try and roll up the sleeves and do what you can to… We have a phrase, to accelerate serendipity for these founders, make connections often perversely, you might say. The founders you want to work with are the ones who need the least help. And so you also don’t want to… One mantra I’ve banded around is, know how not to fuck it up from the board by thinking you need to help and backseat drive. But the fact that you can help, not just that you know how to do that, might be the reason they join you, even if they don’t need your help.
Bilal Hafeez (01:03:51):
Richard Muirhead (01:03:52):
Yeah. And the fact that you’ve done the work to lay out the resources to help may be the reason they still want to work with you. And I think all of that is like a great restaurant, you go because some other founder said it was a great experience. So you’ve got to be very oriented towards your reputation. And I think, on behalf of our limited partners, we make returns in this fund from the outlier results. But in a given fund and certainly across funds, you build and maintain a reputation by caring for the founder when things don’t turn out so well. We’ve talked about outcomes going to zero. How you care for people’s livelihoods, lives, families, whatever, amongst those organisations and help land the plane as safely as you can, will help maintain your reputation on the downside as well. And that will mean that that founder may say, “Yep, go and work with these guys.” So I think their reputation is totally critical.
What is Web 3.0?
Bilal Hafeez (01:04:46):
And we’ve danced around, as you said, the Web 3.0 world. So can you elaborate on this? Talk about some sectors, companies that are really interesting in this space? How close are we?
Richard Muirhead (01:04:58):
Yeah. Closer than I think folks might think. First of all, there’s a couple of trillion dollars of value now in the tokens and coins that are inherent to this space, that’s certainly a number to conjure with. It goes up and down, but it’s there. Secondly, I mentioned Ethereum and on the Ethereum network, we’ve moved from just having the open web that you’re able to exchange money and value and run smart contracts in a decentralised way. Infrastructure if you will, of this new decentralised computing paradigm to Ethereum now having a very vibrant set of applications and primitives or Legos or building blocks around Decentralised Finance. And we call it Open Finance because we see a collision between those primitives and open banking and the challenger banks. And there are billions now locked up in those lending protocols and stable coins. I don’t know the latest figure off the top of my head actually, but probably call it a hundred billion. And that’s exciting that people are experimenting with that and people are providing liquidity to decentralised exchanges, which are magically using bonding curves to achieve what, until just a couple of years ago, we were struggling to do outside of centralised exchanges. And now looking to take those principles, for example, and apply them not just to fungible forms of a digital asset like a DOT and USDC trading pair, but to apply to non-fungible ones as well. So how do we create decentralised marketplaces for representations of assets that are non-fungible? Be that real estate or be that art or be that a Mbappé football card.
So I think that whole Decentralised Finance place is playing out. And again, I mentioned it before, but I think the real power of it is that these building blocks of Legos are being created and then they can be assembled into yet a more sophisticated application. And that’s why I think we’re going to see an incredible pace of innovation and that actually, fundamentally, at that frontier… This may be an overly crude way to look at it, and I’m kind of like an engineer who likes to know as much as possible about economics, but the risk-free rate of return in that space, I would say is considerably higher than the risk-free rate in the rest of the economy because it’s more liquid, it has greater access to potential projects with upside, and actually also because it’s being funded considerably through its own J-curve in multiple different ways. And so there’s all sorts of yield possible in there. And then so people are looking at how to tap into that and how to marry real-world assets with that space. So that’s an incredible sector that’s taken off.
Bilal Hafeez (01:07:38):
And just on that, on the DeFi, the yields are incredibly attractive. How consumer-friendly are these products? Because you can quite easily go to these trading platforms like Robinhood or you can go to different index providers and invest in a money market fund to earn your zero interest, but accessing these DeFi yields or these Open Finance yields…
Richard Muirhead (01:08:04):
They’re still not been there. So we have an investment in a company called Ramp that helps generally with the on-ramp of fiat into crypto. And also, when embedded into Web 3.0 applications, what you don’t want to is to have 14 steps to access a little bit more value that’s in fiat when you’re in the middle of playing a game or something, a blockchain-based game and you need a bit more value and you have to go back and do 14 steps. So Ramp is addressing very successfully, for example, some of those challenges. And then there are also people looking at the user experience of, okay, I’ve got my value over on the crypto side, but how do I get it to provide liquidity to a particular trading pair which is going to give me a yield of 20 or 30%? How do I do that? And of course, that can’t have multiple steps and they can’t have user experiences that are going to give you the heebie-jeebies and whatever. Most people are not going to do that, let alone some kind of early majority. And so there are really interesting companies building capabilities around that now. And I think it’s important to note that that ecosystem, that sector of Open Finance, Decentralised Finance on Ethereum has really kicked off. But there are also competitors; Polkadot, one of our investments rather who is competing with the future Ethereum 2.0. NEAR, another one of our investments and Polkadot, for example, there are tokens being launched on Polkadot already worth hundreds of millions. So this is also maturing rapidly. So it’s not just even about Open Finance just on Ethereum. There are other contenders.
Bilal Hafeez (01:09:30):
And Polkadot, what’s its angle?
Richard Muirhead (01:09:33):
So Polkadot’s key angle was that it said rather than… It allowed each individual what it calls a power chain to share in the security of an underlying relay chain they call it. So that means that if you want to build an application that uses a blockchain, that you don’t have to solve the chicken and egg problem of getting a lot of value on it and participants or nodes on it before it’s got sufficient scale that it’s secure. So it was better for on-ramping these new applications.
Bilal Hafeez (01:10:03):
Richard Muirhead (01:10:04):
What that delivers actually is what’s called heterogeneous sharding. It means that there’s… Effectively, you’ve taken one blockchain, and Ethereum has this problem, and you’ve sharded it into different separate blockchains across which there’s an index. And in Polkadot’s case, each shard is used for a different application. In Ethereum’s case and in other cases, people have got homogenous sharding going on where it may not be a different application. You’re just sharding it for different reasons, splitting the datasets.
And so that gives Polkadot also the ability to scale in a better way than should we call it Ethereum 1.0, but more like where Ethereum is evolving too. And Polkadot is also proof of stake, whereas Ethereum is coming off of proof of work and going to proof of stake, which everybody (which should be everybody) who cares about sustainability is also keen on. So I think that’s interesting, there’s more stuff on the infrastructure side going on, there’s more stuff on the Open Finance side going on. Open media has also taken off hugely. So another one of our investments, Axie Infinity is a game. It’s sort of a play-to-earn game in the metaverse. You have to buy a stake in it in order to breed and play with your Axies. And people are actually earning more than the minimum wage in the Philippines playing this game.
And the protocol revenue has actually gone up 500X in four months to now on a monthly basis, heading towards $400 million. So that’s obviously parabolic growth. And I think that’s exciting in itself, but also, we’re seeing similarly, exponential growth in another investment, Sorare, which is dealing with football cards and fantasy football around them, and it’s all officially licensed with the players and the leagues and the clubs and so forth.
Bilal Hafeez (01:11:50):
So that’s an example of NFT. That’s an NFT, your player…
Richard Muirhead (01:11:54):
NFTs you can buy and trade that are then combined with a game that gives them a creative value over time as well. I think it’s public knowledge they’re going to be the largest ever French tech round, a multi-billion dollar value in the near future will be announced. I think it’s out there in the public domain actually already. So that’s pretty exciting and possibly still the thin end of the wedge of many others sports and there’s a lot of things to do with that data and so forth.
Earning in a Metaverse
Bilal Hafeez (01:12:23):
And also, you mentioned metaverse. I can’t let that pass. How do you define a metaverse and is it the future?
Richard Muirhead (01:12:30):
Yeah. Very good question. Is there going to be one metaverse? Is there going to be conjoined metaverses? But what people mean by that when they say it is that… Take gaming and take the space you explore, and you might even have a multiplayer game where you can simultaneously go into an environment and you can fight each other or collaborate on some quest or whatever it is. And you may be able to buy virtual objects. Famously, on Fortnite, all of the skins that you buy are totally superficial but yet generated incredible revenue. So people ascribe incredible value to these.
Bilal Hafeez (01:13:08):
My son plays this and yeah, he spends a lot on those skins for some reason.
Richard Muirhead (01:13:12):
Happy about that. Happy enough. But in that world, at any point in time, someone centrally could decide to dismantle it and take away the value of those objects. And those objects are pure operational expenditure really. They’re not capital expenditure. They’re not objects you can trade and they’re creating value over time because they can be undermined like that. But if add to that gameplay we were describing that cryptographically enshrined digital ownership, digital scarcity we were talking about, to the environment itself and the objects within it, that is what people think of as the metaverse. It becomes something that it’s… Because it’s enshrined in cryptography and protected in that sense and because it’s then owned collectively, it effectively becomes impossible to dismantle it. So it’s no longer just a transient digital realm. It’s actually a parallel digital universe.
Bilal Hafeez (01:14:08):
So companies like Epic Games which owns Fortnite, they have to make a decision about whether they want to open this up to that or whether they keep it centralised so they can accrue all the value. But then other games will pop up, which allow this, which they may attract people. And this is how the market will develop.
Richard Muirhead (01:14:26):
Exactly. And I would argue, reprising what I’ve said already about local optimum, great optimum, it may take a while to get out of that local optimum, but there’s a much bigger opportunity out there if you have these connected universes or open platforms. And that’s not to say there’s going to be one metaverse. And the metaverse also applies at an intersection with the physical world. So I think the notion of being able to place art in physical places or different elements of augmented reality and all that is being explored by people at pace. And those people who are experimenting, particularly around gaming but also around art are being rewarded with incredibly fast growth and user adoption and real revenues and valuations in the space. So I think we’ll see that play out. We also see it… For me, actually, what’s even more interesting than people playing a game and earning money for it is the fact that, effectively, a game is just an example of knowledge workers interacting. And it always starts as a game. It always starts as a game. But that actually, ultimately, I think it’s going to be really interesting to see how those principles can be either applied to getting knowledge-intensive tasks of collaboration done that previously couldn’t be addressed. People are already using it to do data labelling for AI algorithms and so forth. Or to address existing spaces, to drive collaboration around clinical trials or diagnosis and so forth. And in a sense, gamify a lot of existing activities.
So I think that’s really interesting because it takes it into other sectors. And we see open healthcare, again, through the full life cycle of healthcare, as evidently, self-evidently ripe for the better application of thinly spread data to really important questions of life and death. And that’s what this can help harness. The reason it doesn’t happen quick, because it’s got real questions of privacy and regulation and jurisdictional constraints and so forth, so that happens.
Bilal Hafeez (01:16:33):
So it sounds like the health side is increasingly one of your focuses in the coming years.
Richard Muirhead (01:16:40):
Absolutely. And there’s one more that we have up to prepare our minds, not to necessarily restrict our think ability, which we call open learning and earning or open work. And I think there was an acceleration that happened under the pandemic of the very youngest children using digital tools for their education. But the idea, from my perspective, and I think maybe many peoples, that if the record of your education and the way that all of your tests and everything are increasingly digital and your CV is digital, the fact that that should be owned or be resident in a platform like LinkedIn that is actually owned by Microsoft, it doesn’t seem to make much sense ultimately. There has to be a fairer and better way of that. It should be owned by you. And I think even Microsoft realises this. They’ve been playing with the notion of decentralised identity resident on the Bitcoin blockchain because they understand that people would do more with the applications built around that if the login and the CV was not owned by Microsoft. And so we foresee a future where that happens and that you build from the nursery to the nursing home this resume, rich resume. Presents lots of interesting challenges of what you want to have recorded there or not recorded there. That then is totally irrefutable and programmatically interrogable. And then you can therefore put it simultaneously into multiple job markets, deep job markets of different types and get gigs probably sent to you automatically by a decentralised autonomous organisation from which you’ll get paid in a streaming cash flow.
We have a portfolio company called Superfluid who can just stream to you at no cost your crypto value per minute per block basically. And so the notion of being paid on a monthly basis in arrears via some payroll, whatever, will totally disappear and allow people to rethink the way in which they even get paid for their activity. So I think all of that, when you think about the consequences on benefits, on taxation, on government, whatever, there’s going to be a bit of innovation and there’s going to be an opportunity to come out. Hope to intersect with some founders who have seen that future much more clearly than we have, and to work with them. I think it’s super exciting.
Bilal Hafeez (01:18:52):
Absolutely. Yeah. I’m sure we could talk more and more, but I do want to round off our conversation. I always like to ask a few personal questions towards the end of our conversation. One is, what’s the best piece of investment advice you’ve ever received from anyone?
Richard Muirhead (01:19:06):
Gosh. Look, I read a book by Peter Lynch called One Up on Wall Street. It really depends if we’re talking about investment advice or kind of company building advice or co-company building advice because, in a sense, it’s quite different. What I read there, which I thought was actually neat at least, which is that if you find a product that you really love, don’t just buy the product, buy some of the shares of the company behind that product. Because if you love it, then probably a lot of other people are going to as well. And so it’s more like retail investment advice, but it’s getting back down to the brass tacks of the product itself. In terms of investing in the seed stage, that early stage in venture, we’ve touched upon it but I think it comes back down to the people. And are you going to be excited about partnering with these people to build this company? And if you’re not, for whatever reason, then go and find someone that you are excited about working with because it probably works both ways as well.
Bilal Hafeez (01:20:02):
And then the other question was on the productivity side. Presumably, you’re inundated with information, you have tons of calls coming in all the time. How do you manage your time? How do you filter information? You probably get pitched all the time. Do you have any hacks or any system that you use to try to just contain everything and filter things?
Richard Muirhead (01:20:21):
Gosh. I’m probably the last person who should be asked about this. But chaotically might be one way of describing it. I think from that chaos, you can have creativity. And I think, without being disrespectful to people’s time, I think actually, the more you can optimize for the time you spend on any given activity over the shortest timeframe, the better. Because you actually have much more information about where you should be spending your time. And then in terms of what you do. I think this is well-understood and certainly, it’s the best piece of advice I’ve absorbed. Don’t write lists. When you know something needs doing, put it in the diary to be done because if you don’t schedule the time to do it, it ain’t going to get done. We do write a little bit of lists in terms of organization. We go with the whole objective and key result. John Doerr and Intel-inspired approach. But that’s really at an annual and quarterly and monthly level, just a high-level set of lists. But the bit in-between of lots of other lists, then you get into project management and then that’s another domain. But personal productivity, that’s the kind of way which I’d operate.
Books that influenced Richard
Bilal Hafeez (01:21:25):
And the last question is, are there any books that really influenced you?
Richard Muirhead (01:21:30):
Yeah. A hard question to answer. A whole range either about biology, sociology, or about science fiction definitely. So I think two science fiction books, Stranger in a Strange Land by Robert Heinlein. And also Robert Heinlein’s Future History. The first one, because it effectively talks about a guy who comes from… A slightly messianic character who comes back from Mars and it forces humanity to think about their very nature. So I found that quite epic as a story and the introspection. And then in a different way, Future History was about a character called Harriman, who I think Elon Musk has based himself upon, and funds the first, I think, successful moon landing privately. And so he’s successful enough as a businessman that he can do that. And it was just interesting. Yeah. Future History, a vision of how things might… And people at the time would’ve said that’s ridiculous, but of course, that’s actually now happening quite a lot. I think that we touched upon the importance of the individual and self-determination and responsibility and so forth. And so I think Ayn Rand’s Atlas Shrugged is a seminal work at the “ideal” man. I have to mention Steve Fairbairn, his book about rowing. Just because it gives context, rather than talking about Harari’s Sapiens, Jared Diamond’s Third Chimpanzee, which talks about our genetic proximity to chimpanzees. If the alien was sketching out the species that actually would be part of the same genus with the chimpanzees rather than distinct. I think that’s humbling, rooting, and makes one think about all of our societal behaviours and individual behaviours from first principles, which I think has got to be a good thing.
Bilal Hafeez (01:23:19):
Yeah. No, that’s great. It’s been an excellent conversation. Now, if listeners did want to reach out to you or viewers I should say as well, wanted to reach out to you to learn about your ideas or contact you, what’s the best way for them to do that?
Richard Muirhead (01:23:31):
Sure. So Twitter is the primary way in which we share updates and thoughts and so forth. So I’m on @richardmuirhead on Twitter. And then also contactable on firstname.lastname@example.org. That’s VC as in venture capital. For people who are looking to join companies, people who are looking to start companies, whatever it may be. People who are looking to join us. And that would be amazing to hear from people.
Bilal Hafeez (01:23:57):
Okay, great. And I’ll include those links in the show notes. So with that, it’s been great speaking to you. I’m sure we could talk much, much longer, but it’s been great speaking to you.
Richard Muirhead (01:24:05):
Thank you for taking the time and giving me the opportunity.
Bilal Hafeez (01:24:07):
Thanks for listening to the episode. Please subscribe to the podcast show on Apple, Spotify, or wherever you listen to podcasts. Leave a five-star rating and a nice comment and let other people know about the show. We’d really be grateful. Also, sign up to become a member of Macro Hive at macrohive.com. We’ll be back soon, so tune in then.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
Enter your email to read this Macro Hive Exclusive
Already have a Macro Hive Prime account? Log in