This post was last updated on July 3rd, 2019 at 08:37 pm
Our guest today is Rick Marini.
Rick is the founder and managing partner of Protocol Ventures, a San Francisco based fund-of-funds that focuses on hedge funds investing exclusively in crypto assets.
Today’s conversation is a deep dive into Protocol Ventures and an exploration of the fund of funds model, as well as how Rick has applied that model to cryptoasset investing.
This discussion is important in that it’s the very first published interview with a founder of a cryptoasset fund of funds.
Topics Discussed In This Episode
- Rick’s background and why he decided to start the world’s first crypto asset fund of funds.
- The pros and cons of investing in a fund-of-funds.
- What traditional fund of fund managers Rick has learned from and modeled himself after.
- What the Protocol Ventures team looks like and what their day to day operations entail.
- The major categories of crypto funds and how Rick thinks about his portfolio.
- What Rick looks for in a good fund manager.
- Rick’s favorite part of the job.
- Some of the fund managers that Rick has invested in and why he believes in them.
- Why marketing is important to the success of a fund.
- Cryptoinvestor Weekly Newsletter
- Clay Collins
- Rick Marini
- Protocol Ventures
- Satoshi Nakamoto
- Bitcoin Whitepaper
- Foundry Group
- Cendana Capital
- Michael Kim
- Berkshire Hathaway
- The Forbes Midas List
- Polychain Capital
- Ari Paul
- Kyle Samani
- Multicoin Capital
- Marc Andreessen
- Bill Gurley
- Naval Ravikant
Clay Collins: My guest today is Rick Marini. Rick is the founder and managing partner of Protocol Ventures, a San Francisco-based fund-of-funds that focuses on hedge funds investing exclusively in cryptoassets. Rick currently has $10 million under management, and is raising a $100 million fund. Today’s conversation is a deep dive into Protocol Ventures, and an exploration of the fund-of-funds model, and how Rick has applied that model to cryptoasset investing. This discussion is important because it’s the very first published interview with the founder of a cryptoasset fund-of-funds.
During this episode, we discuss: One, Rick’s background and why he decided to start the world’s first cryptoasset fund-of-funds; Two, the pros and cons of investing in a fund-of-funds; Three, what traditional fund-of-funds managers Rick has learned from, and modeled himself after; Four, what the Protocol Ventures team looks like, and what their day-to-day operations entail; Five, how Rick thinks about rebalancing across his portfolio of funds, and how often he can rebalance; Six, the major categories of cryptofunds, and which of these categories Rick has invested in; Seven, Protocol Ventures offer, cost, and fee structures; Eight, what Rick looks for in a good fund manager; Nine, his favorite part of the job; And 10, whether or not he works with funds registered outside of the United States, and why. Rick also reveals some of the fund managers that he’s invested in, and why he believes in them.
Please enjoy my conversation with Rick Marini of Protocol Ventures.
Can you give us a little background about yourself and what led you to start Protocol Ventures?
Rick Marini: Sure, I’m Rick Marini. I’m the Founder and Managing Partner of Protocol Ventures. And prior to Protocol I was a serial entrepreneur in Silicon Valley for the past 20 years. I founded three different companies, raised about $58 million from top-tier VCs, and luckily had three successful exits. I’ve also been an active angel investor in about 50 companies, including Snapchat, Reddit, AngelList, and many more. And I started investing in the crypto space about four years ago in early 2014, and have been very excited about the space, and that’s what led me to found Protocol Ventures.
Clay Collins: If crypto had not been birthed into the world, do you think you would be involved in financial services? Would you be a VC, would you have a hedge fund? Obviously, you did some angel investing, but do you think you would have a hedge fund if Satoshi Nakamoto didn’t write the white paper?
Rick Marini: You know what, I don’t think I’d have a hedge fund. Obviously, I wouldn’t have a hedge fund in the crypto space. I probably would’ve gone down the path as a venture capitalist. I had already done, as I said, 50 angel investments, and had been a three-time entrepreneur. I really had the right background to be a venture capitalist. I really thought that might’ve been my path up until about a year ago, as the crypto market really took off and it became more of a passion for me than just a hobby, or something, another investment class to invest in, and really got excited about crypto over the past year, and moved away from a path of venture capitalist and onto a crypto path.
Clay Collins: Some of the crypto hedge funds that I know personally were started by folks who aspired to be venture capitalists and probably didn’t have the pedigree, or the background, or the experience to make it happen. What strikes me about you is that you absolutely could have done it with your background. And what you’re doing in a lot of ways feels like traditional venture capital. It’s about the teams, it’s about investing in people, as opposed to investing in particular protocols.
Rick Marini: Yeah, I think that’s right. There are definitely some parallels to the way that you screen teams, whether that’s maybe for an ICO, or even for the fund selection, as we are fund-of-funds, so we’re investing in other fund managers. Definitely some parallels, and as I just recently launched Protocol Ventures over the past several months it is like starting a new company in many ways for me. There are definitely some parallels to my kind of prior experience as an entrepreneur and starting companies, and raising money, as well as an angel investor, and how you assess teams that you would invest in. Definitely a bunch of parallels.
Clay Collins: As an investor who is looking to deploy capital in a variety of places, obviously you can purchase cryptoassets directly, you can invest in a fund, or you can invest in a fund-of-funds. When it comes to a fund-of-funds, what do you see the pros and cons of that option being?
Rick Marini: Yeah, you’re right. There are three different buckets that a cryptoinvestor could fall into. One would be to invest on your own, which is great, you’ve got total control of your investment decisions, but what I would say there is that you also have to worry about things like custody, which is a big deal, especially as you start to have a meaningful position. And, one of the things that’s hard on your own is access to information, and some of things that really attract me to certain hedge fund managers, and the reason why I started to move my own capital out of investing directly and into these hedge fund managers.
The second bucket would be to just do an investment in one hedge fund. The problem with that is that there’s 200 hedge funds, crypto hedge funds out there, and it’s really hard to determine which is the one for you. Many of them have a million dollar or more minimum, so for most people they can’t hit that minimum, that’s pretty high, and you don’t just want to be in one strategy or one fund thesis.
And that’s bucket three, which is what we do at Protocol Ventures as a fund-of-funds. What we’re trying to do is invest in the top 10 funds, we’re in six funds today, and really bring a diversified approach. We’re doing the research in many of those 200 hedge funds and selecting what we believe are the best hedge fund managers. We’re looking for managers that have an asymmetric understanding of block chain technology. They’re technical, they’re not just reading white papers, they’re getting to the code base.
They’ve got great networks, and informational advantages. And they’re trading around the clock, and that’s the hard part of being an individual trader is that crypto never sleeps, it trades 168 hours a week, 24/7, so in order to get the best returns, I determine that I was better off aligning with different fund managers personally. I moved money into several different funds personally, and that really was the spark for why I started Protocol Ventures is that a lot of my friends said, “Hey, can I piggyback off of the research you’re already doing as you diversify your own holdings in crypto?” And then I realized that that was an opportunity to create a fund-of-funds.
Clay Collins: When you look at analogies in, maybe, the hedge fund world or financial services, where do you look? And what more traditional fund-of-funds have you drawn inspiration from? Obviously there are people who invest out of college endowments, in a lot of ways a college endowment is a fund-of-funds, and then of course there are, like I think The Foundry Group has a fund of VC funds where they deploy capital. Where have you drawn inspiration, and is there perhaps a more traditional fund that you’ve modeled yourself after?
Rick Marini: The closest parallel for me personally is really on the venture side. And there’s a fund called Cendana Capital that Michael Kim runs and he’s a friend of mine, and before I started Protocol, I sat down with him to really just kind of tap into his experience. He’s one of the best at fund-of-funds. He focuses on early stage, kind of the Seed and Series A venture capital firms, and I think there’s a lot of parallels to what he’s doing to what I’m doing, which is there’s a lot of people that want to be in either asset class.
They may not have access. They definitely don’t have the ability to go and meet with potentially 100-plus different firms on the venture side for him, or different funds on the crypto side for me. They look to either of us for access into a market that can be hard to break into, but can be highly lucrative when things work out. Michael and Cendana has probably been the closest on the venture side to what I do with Protocol.
Clay Collins: And when you look at Michael’s business, what do you most envy about what he gets to do because he isn’t involved in crypto, and what do you think he’ll be most envious of you about?
Rick Marini: The similarities would be that we both get to work with really smart people that are managing portfolios, that have great access. Great access for him on the companies that they invest in, and for me, the managers that have great access to information and the ability to hopefully get outsized returns. The differences, though, on the venture side versus the crypto side, and one of the reasons why I chose the crypto side now instead of VC, to me comes around timing, and liquidity, and appreciation.
What I mean there is that I’ve done 50 angel deals, so I know it can take anywhere from five to 10 years before you have a meaningful exit as an angel. There is a 10-year period with illiquidity. And especially as you invest in funds, and I’ve invested in many venture funds like Accel and others, and there’s a 10-year period with zero liquidity, you’re just waiting for these companies to grow and to exit. The difference in crypto is that crypto is trading 24/7. You can get these outsized returns and get liquidity.
And by the way, in venture, if you have a 3X return over a 10-year period, you’ve done very well, you’re top quartile. In crypto, it’s a very different space in that in 2017 crypto started the year, the aggregate market cap, at about $17 billion (USD), and today, roughly one year later, you’re looking at $750 billion (USD). You’re talking about well over a 30X increase. Instead of a 3X over a 10-year period, you’re talking about 30X in one year with liquidity. So I think Michael may be jealous of the appreciation and the liquidity that crypto has right now.
Clay Collins: That’s a fantastic and well stated point. I was talking to a crypto liquidity provider the other day and he was talking about the potential to have a privileged position on several exchanges because of the service that he provides, and I imagine that when you deal with a crypto fund it is potentially a lot easier to work with you than it is an individual investor. You’re more sophisticated, you can make decisions quickly, they don’t have to reexplain custodianship to you a gajillion times.
Being a fund-of-funds are you in a privileged position in terms of things like fee structure, the ability to rebalance across funds more easily, do you have shorter lockups? Are you able to, perhaps, negotiate slightly better deals in some cases because of what you bring to the table?
Rick Marini: The answer is yes. I have been able to negotiate better pricing. All the funds that we have invested in, and we’re in six funds today, and we plan to add four more in 2018 to get to a total of 10, but all of the funds that I’m in today are a two and 20 model, 2% management fee, 20% carry, but for new investors in many of these funds, they’ve now moved to a three and 30 model.
And the reason I was able to get better pricing was, A, I got there early, so I’ve invested in many of these funds from their early days. And B, I think I also have a sophisticated approach where, as you said, I know what I’m getting into, I can be value-add to them, not distracting, and they like that. And the third thing that I bring to them is I bring real capital. Many of the investors that they may bring in write a one-time check and it’s one and done.
For me, we’re a hedge fund that raises money every month. Unlike venture, where you have a close and then you go deploy that over 10 years, we are an open fund. Protocol Ventures raises money every month, which means I then deploy that across our portfolio, our six funds going to 10. I am always a new source of capital for them. So that, to them, is a really a big deal, where I’m doing the work raising money, and then I am bringing that to them.
Clay Collins: Just like someone might cut an affiliate a deal because they are bringing deal flow to the table, and they don’t have to spend time sourcing deals and doing lead gen and all that stuff, you abstract a lot of that away and that’s worth something.
Rick Marini: Yeah, it’s worth something. I’d also add the point on access. So we talked about pricing, that we’ve got preferred pricing, which is a real benefit to our LPs, but also access. Several of the funds that we’re in are getting large. Some of them are approaching a $500 million AUM position, and I know that I’ve talked to three of the six that have all said at some point in 2018 they’re closing the doors to new investors, and that actually may be coming soon for three of them.
But I will have continued access as an existing LP to do additional investments. As we bring dollars in every month. And that’s a real benefit for the LPs in Protocol Ventures, because they’re not only getting better pricing, some of these top funds are going to close their doors to new investors, I think that’s really a big deal and something important in our position, being there early, and being a preferred partner.
Clay Collins: When it comes to rebalancing, traditionally I guess if you were one of the funds that you invested in, you’d be looking at rebalancing when you have outsized returns from, perhaps, one token and you want to balance that across your portfolio, but you’re rebalancing across funds How do you think about rebalancing and what would trigger that? A couple things I can think of is if one fund is performing extraordinarily well, you might want to allocate more capital, but you also, I imagine, might want to diversify potentially across different theses and approaches. Right, like every year when more funds pop up, you might have a quant fund and an algo fund and maybe an ICO fund, and you just kind of want to diversify more, so what triggers rebalancing for you, and how do you go about doing it, and how often can you realistically do it?
Rick Marini: We rebalance every month and the way that we do that is new capital comes in. All of the funds that we’ve invested in have a 12-month lockup, that’s pretty standard in the industry. We don’t do anything more than a 12-month lockup. Our LPs have the ability to redeem after that period. Really what we’re doing is that we’re trying to bring together a truly diversified portfolio. Some of our hedge funds have more of a buy-and-hold strategy, more like a Berkshire Hathaway. Some of them are actively traded.
Some of them have a Wall Street background, which is increasingly important as Wall Street infrastructure starts to come into the crypto market in 2018. But what we’re doing is we’ve made bets across six different funds today, with different strategies, different thesis. And then as new capital comes in every month, we then deploy that into the funds, and we do that by basically rebalancing the funds each month. It’s not taking money out of any fund, because again, there’s a 12-month lockup.
It’s really how we deploy money each month to rebalance a fund with new capital coming in. That’s going to be based on a couple things as we think about how we deploy that. One is obviously going to be performance. And it’s not necessarily how did you do last month, but you know, over a several-month period. Number two, is I’m talking to the hedge fund managers on a weekly basis, so I know where they’re making their big bets, and if their big bets are aligned with what I’m hearing in the market, what I’m thinking about the market, then I may want to put a little bit more with them. And some of the hedge funds have more of a broader approach, some of them have more of a rifle approach. You want to be able to think about that as you think about deploying capital, and how to get the best returns you can with more of a moderate amount of risk, especially in a diversified portfolio.
Clay Collins: Let’s talk about your offer for a second. What is your offer? What is your fee structure? What’s the lockup? What are the general parameters of what you provide to the market?
Rick Marini: Sure, yeah, so we are the first fund-of-funds in crypto. The main value-add is the ability to get diversified. One single LP investment comes into the fund, and then we can get you across six, going to 10, funds. And that’s important because we talked about access and pricing, but for many of these funds, their minimum is a million dollars. And for us, our minimum is 500K, but I get you diversified across several funds instead of just one, at a lower price point. Our fees are one and 10 on top of the two and 20 that the funds charge, so 1% management fee, and a 10% carry. And the lockup period for all these funds is 12 months, so I can get liquidity after 12 months, and we do quarterly redemptions.
Clay Collins: You make a really good point about the minimum requirements. For example, if I were looking to invest one million in a hedge fund, I know for certain that one of the funds that you invest in has a five million dollar minimum investment, so I wouldn’t be able to get into that fund theoretically, but I could get exposure to the gains that that fund is going to have through a $500,000 investment in your fund, and so I think that’s a great service that you provide there. What do you think are the potential downsides to working with a fund-of-funds? I realize this is a little bit like the interview question that people often get asked, like what are your weaknesses, but what are the weaknesses of a fund of funds?
Rick Marini: I think there is potentially two. One would be, obviously, fees on fees, right. Nobody likes to pay fees, nobody likes to pay taxes. But the way that I look at that is our one and 10 fee on top of whatever the funds are charging, two and 20, in some ways our fee is free, because many of these funds, if you went to them today would be three and 30, so our fee, in many ways, is free. But you know, we’re doing a lot of work here, right. We’re talking to 100 different funds. We have access to these funds.
We can definitely justify that fee. But that’s definitely something that people think about. That’d be one, and then the other would just be loss of control in that a lot of people like to do their own investing, and I think that’s fine. That’s how I started investing, as well, but then the portfolio got to a point where I said, okay, I’ve got a fair amount of capital in here, this is not just a hobby anymore, I’ve got to really think about how I can best optimize that. And as I met some of the best hedge fund managers over the last couple years in the crypto space, I realized that the top 10 managers are head and shoulders above anyone else investing in the space. And if I really want to get the best returns on my money, and I’m not just doing it as a hobby, I should really start investing in the funds. For me, if you like to do it on your own, cause you think it’s fun to do, great, continue to do that. If you’re a serious investor with real capital that wants to get the best returns, then I think a fund-of-funds makes sense.
Clay Collins: I think a lot of people started out 2017 with what seemed like a moderate amount of cash and then find themselves here at the beginning of 2018 with some incredible returns, their nest egg has ballooned into something potentially much more, and while it was feasible when they had small amounts to manage it all themselves, it’s really grown to a point where it’s pretty risky to continue doing that.
Rick Marini: I’m getting a lot of inquiries, a lot of calls and emails from folks exactly in that position that say, “Hey, I put some money into Bitcoin, I put $50,000 into Bitcoin a year ago,” and you know, Bitcoin over the past year is up 15X, right. So that 50,000 might be worth 750,000 today. And if you look at the past year, you know Bitcoin started Jan. 1 of last year, of 2017, at about 1,000 per Bitcoin, and today it’s at about 15,000 per Bitcoin. Ye talking about a 15X increase, which is pretty phenomenal.
And those people who rode that wave, they’re calling me and saying, I got a lot of money here, I need to start diversifying this, I can’t just sit in Bitcoin, ’cause Bitcoin’s come up a lot, and I know there’s other assets out there, other tokens, that could be interesting. I often talk to people about Ethereum, or Ripple, or some of the others, and I was talking to a family in the office the other day, and he said, you know, I don’t even know why we would want to invest with a professional manager.
I invested in Bitcoin a year ago, and we did phenomenal, we’re up 15X. And I said, good for you, I think that’s wonderful that you’re in this space. I think you made a great decision to buy Bitcoin. And I said, but when did you get into Ethereum? And his response was, what’s Ethereum? And I said, well, Ethereum started the year at $8, and today is at $1,000. So you’re talking about over 100X return. Now all the managers that we invested in, the six of them, they were all Ethereum holders early on. So all of them got in on kind of that Ethereum bandwagon early days, these are the reasons why you want to be aligned with the best hedge fund managers. Even though Bitcoin went up 15X and that’s phenomenal, you would’ve missed out on a 100X return in a year with liquidity, this is why it makes sense to pay fees to get the 100X return and not just get lucky with Bitcoin.
Clay Collins: You bring up something interesting, which is that you had visibility into how a number of firms were allocating money. You can say that you know that all of these funds invested in Ethereum. It kind of reminds me of UTIMCO of the University of Texas System’s investment arm, and they do something interesting, each year they publish the performance of all the funds that they’re invested in. Do you plan on publishing performance of the funds you’re investing in, or serving potentially as a clearinghouse for data on how these managers are doing?
Rick Marini: That’s a great idea. The Forbes Midas List is definitely a big thing for VCs, you know a pretty prestigious award when they’re on there. I would think that a lot of these hedge fund managers would like to have something similar, right, to be able to see how they stack up against others. In terms of publishing their actual results, that’s something that I would really want to get the approval from each of the hedge fund managers.
I mean I’ve got close relationships with all of them, we talk on basically a weekly basis, so it’s something that I want to be respectful of them, but I would love to be in a position to be able to publish that, so people could see these returns, because the returns have been phenomenal. As an example, one of the hedge funds, Neural Capital, they had made an early bet on Ethereum, and they were up 60X last year. And 60X is a huge increase, I mean they should be telling the world that, and having an equivalent of a Forbes Midas List for crypto, I think is a really interesting idea.
Clay Collins: The University of Texas System can get away with it because they’re required to publish the results of their investment arm because it’s a public entity, everyone wants their money, so they’re not going to not take their money because results are going to be published. You’re probably in a bit more of a delicate situation, but it potentially could be an opt-in thing, where like if you want to brag, I’ll include you on this list.
Rick Marini: I actually like the idea, I’m taking a note right now on the Forbes Midas List idea.
Clay Collins: Let’s talk about what is probably the most frequent question you’re asked, which is, what do you look for in a good fund and in a good fund manager? What are the attributes, the qualities that make up a person or a team that you’d want to place a bet on?
Rick Marini: We talked a little bit about it earlier in terms of the technical background, and having really, what I would call, an asymmetric understanding of block chain technology. Not just being a trader, but people that really understand the tech and jump into the code base. There’s lots of examples of that, not just as the developers, guys like Vitalik over at Ethereum, but I mean the hedge fund managers. Guys like Olaf over at Polychain or Naval at MetaStable.
I also like people that have a trading background. I think that’s important in a diversified portfolio. So I like Ari Paul over at Block Tower, as he has more of a Wall Street background. I also like people with more of a technical, kind of trader, background, and Ari Nazir over at Neural Capital is a good example of that. And then there’s Linda Xie over at Scalar, early employee at Coinbase, very respected in the crypto community. There’s various different things that I look for, but for all of them, it is the leadership position in the crypto community.
People that are well respected. People who have a real understanding of the technology. And sprinkle in some of that Wall Street background, too, as more Wall Street infrastructure comes into play. I think that these are all good reasons why you want to be in a diversified portfolio, so you’re kind of covering all of those bases, ’cause it’s impossible to have one fund to cover all of those.
Clay Collins: What general buckets do you see when you look at this space, in other words, when you look to diversify across different approaches, what are the viable approaches that you see in existence today among the funds that you consider?
Rick Marini: I can answer it a couple ways. One is I look at our portfolio in kind of three buckets. I’ve got a couple funds that I would say are more buy-and-hold, long-term, they’re led by true leaders in the space that have got great access to deal flow on the ICO side, and great pricing, but they are more kind of long-term. We’ve got a couple funds that I would say are more actively traded. They’re making concentrated bets on a couple tokens. The portfolio may have 10 to 15 cryptocurrencies, but maybe they make a concentrated bet on a given month in a certain token.
And then, the Wall Street side that we talked about like with Block Tower, where you’ve got folks that are going to really understand Bitcoin futures, and all the things that are coming on with CME and CBOE. So those are probably my three buckets, kind of a buy-and-hold more conservative approach, an actively traded, high beta, but could generate a lot of alpha, and then the Wall Street approach, which the others may not have, but again, important in a diversified portfolio.
Clay Collins: One thing that I’ve noticed as I’ve gone to more crypto events is that there are individual analysts who have gotten incredible returns, especially versus Bitcoin, that are creating their own informal funds, or quasi-formal funds, where they might be domiciled in the Cayman Islands, or it might be an on-block chain Ethereum ICO fund, where they’re not registered with the SEC, but they’re still delivering really interesting returns, they’ve got respectable people that are putting money into them. Are you open to doing those kinds of deals, or is that not a good idea just considering who your clients are? Do all your funds have to be registered in the US?
Rick Marini: We don’t invest in people or entities that look like that. There’s nothing wrong with them, but for us, we’re a 3(c)(7) registered company with the SEC. We talked about our minimum investment’s $500K, so our LPs tend to be high net worth individuals, family offices, sovereign wealth funds, and so on. We want to make sure that the people, or the entities, the funds that we’re investing in are also registered with the SEC, all the due diligence materials are there that we would need, and we’ve got a really high bar. Unfortunately for those folks that don’t check all of those boxes, we’d probably be a pass.
Clay Collins: I can imagine that makes your LPs feel comfortable.
Rick Marini: Yeah, you know when you’re a fiduciary of other people’s money, and we’re trying to raise $100 million, sometimes you may need to walk away from what could be a good return to ensure that everything is done the right way. I love the hedge fund managers that we’ve invested in. The six of them, are great, and I’ve got plenty of great folks that we could add on the roster in 2018, but I would never want to compromise the great thing that I think we’re building here to try to chase returns from one hedge fund manager that may not check all the boxes.
Clay Collins: Every once in a while I go to a conference and I meet someone who’s, usually it’s a guy in his early 20s, and he’s aggregated family and friends’ money and it’s kind of a spreadsheet fund, and often they’ve taken tens of thousands of dollars and turned it into a few million, and they’re pretty good at it. They’re quantitative in their approach, sometimes they have educations from Ivy League institutions, and they enjoy a global lifestyle, they’re living out of a suitcase, and going around the world and trading crypto in their free time. What would you encourage that person to do if they wanted to get involved? Obviously, one option would be to join one of these funds that you’ve invested in as an analyst. They could start their own. What kind of career path do you see for that kind of person?
Rick Marini: The hard thing there is that there is a difference from being a one-off trader to actually starting a fund. It’s a lot of work. The administrative tasks, the tax, the legal, the accounting, raising money, the fiduciary responsibility, the registration with the SEC and FINRA. There is a lot that goes into it that I think people don’t realize.Aat this point the number is now over 200 crypto funds exist, and many of those, and by the way, probably 150 were just started in 2017, if not more, you know many of those people were kind of a one-off trader that made a bunch of money and then thought it would be easy to scale into a fund, and aside from all the things that I just said that have to go into place, which are not very fun things to do, by the way, right.
These people want to go trade crypto, they don’t want to do all these administrative things. But besides all that, the other hard thing is to scale your funding. So getting some friends and family money is one thing, getting a couple hundred thousand dollars, but if you want to go do a real fund, and raise, five, 10, 50, 100 million, there’s a lot of time that you’re in front of potential investors, potential LPs, a lot of time spent on that, which is very distracting from what they really want to do, which is to trade crypto. It’s much more challenging when you actually start a fund, you don’t get to do all the fun stuff anymore. I think the fun stuff is actually researching and trading crypto, the other side of it is necessary to run a fund, it’s probably just not the fun stuff that they want to do.
Clay Collins: When we were talking to Kyle Samani from Multicoin Capital, he described how because of the custodianship system that they have in place it takes an entire day to trade. Right, that’s not the kind of thing that a deal junkie, or a trading junkie is probably going to do, because it’s not fun, and that’s probably the difference between investing your own money and going pro. It’s all the things that aren’t fun.
Rick Marini: Yeah, that’s right, and we love Kyle. We’ve invested in Multicoin, he’s in our portfolio, and I would consider Kyle a fairly active trader. That changes your ability when you’ve got to think about custody and you’ve got larger dollars to trade, it makes it harder. You’re not as nimble, you’re not as flexible, but if you’re going to do a fund, and you’re going to hire people, and you’ve got all that infrastructure cost, you do have to raise a fair amount of money. I think that’s probably a good lesson. For people that are listening to the podcast to think about, think through all the things that have to be done if you want to go from individual trader to truly running a fund.
Clay Collins: Speaking of which, let’s shift gears a little bit towards operations. What is the size of your team, and what does your team do on a given month?
Rick Marini: There’s five of us. I’m the Managing Partner, so I kind of do everything. But two of the folks are more focused on the fundraising, investor-relations side, and then two of the others are more on the fund-selection side. Really, as a fund manager, you’ve got many jobs, but two of the most important jobs are raising money and deploying money. I’ve got help on both sides with our team of five.
Clay Collins: That probably plays into the discussion we were having about professionalization, which is something that’s definitely occurring in this space. One could make a case that you can pick funds and give money to them by yourself, but then you’ve got regulatory overhead, legal accounting, reporting, information rights, LP communication, and all that stuff probably takes a lot of time, probably more time than actually selecting funds at the end of the day.
Rick Marini: It all takes a lot of time, and you’re right, there are certain things that you don’t think about sucking up a lot of time that do. I mean even fundraising, which is an obvious use of time, that takes a lot of time to qualify investors, to then set up meetings to do the calls or the in-person meetings, and the follow-up, and then trying to close funding and the docs, I mean lots of legal docs around this, this is all SEC and FINRA regulated, so it’s a long process to be able to do all that, and that’s just one component of running a fund. I love the space, I love what we do, but at the end of the day it is still a business, it’s not just being an individual trader and kind of going on your own.
Clay Collins: What’s the most enjoyable part of what you do?
Rick Marini: I love talking to the managers about what they’re investing in, what’s the thesis, what are they seeing next. And it could be anything from where does Bitcoin or Ethereum, or some of the larger market caps go? I probably have more fun talking to people, I’ll give you a couple examples. I was with Ari Paul recently, and we were talking about Monero, privacy coin. I was talking to Kyle from Multicoin about 0x, and why he’s a big believer in that. I was talking to Ari Nazir recently about Stellar, and we made a big bet on Stellar recently. So I love talking to these hedge fund managers about their thesis, about where the tokens are going to go, where the industry is going to go. I believe that we’re aligned with the best hedge fund managers in crypto. So for me to be able to talk to them on a weekly basis about all this is really exciting.
Clay Collins: It strikes me that one of the best expressions of belief in what the future world will look like are the investments that you make today. To able to engage with these people about how they see the world being in the future, and how to operationalize that through specific investments, it seems like those would be really enjoyable conversations.
Rick Marini: Yeah, it would be like in venture capital, like if you got to talk to Marc Andreessen, or Bill Gurley, or you know, pick the top VC and you had six of them, or maybe 10 of those that pick up the phone every time you call and you want to talk about the market, that’s a pretty cool spot to be in. And that’s what I get to do with these guys in an industry that is changing so rapidly, growing so fast, and it’s so exciting, so that to me is really rewarding. All these guys are super smart, the market’s moving quickly, and it’s fun to be able to be the connective tissue in the middle of all of them. For me to be able to think about different strategies, different thought processes that one hedge fund manager may have from another, and be kind of the guy in the middle of all that, understanding what they’re each saying, I think that puts me in a pretty good spot.
Clay Collins: And I think it could make for some really interesting content marketing. One thing that I’m hearing as I personally talk to managers is that they’re having more success through thought pieces and blogging, and long-form spelling out their ideas, and how they see they world, than they are through traditional fundraising processes. I could envision a time where you potentially put together panels of top managers and have them talk about how they see the world, but what do you see the role of content marketing being in a universe where there really is so much asymmetry, is it working pretty well for your fund managers? In other words, if they had 50 hours to spend doing traditional fundraising activities, or 50 hours to spend appearing on panels, being on podcasts, writing long-form blog posts, where do you think their time is best spent?
Rick Marini: I actually think that the marketing side of it, if you’re good at it, can be really effective. Some examples there, Naval Ravikant, who’s a good friend of mine, is incredibly smart, and he is great on Twitter. He’s got a huge following on Twitter, Naval is incredibly smart, visionary, articulate, and a lot of people follow him. And I think he’s been able to really build a big following, and real credibility, and that has benefited MetaStable.
I think Olaf is often at conferences speaking, he is incredible, he was on the cover of Forbes, I believe, maybe six months ago. And I think that really benefited Polychain. Ari Paul has been doing a lot of TV lately. He was on CNBC last week as the guy who made a Bitcoin futures bet at $50,000 a Bitcoin in a year. He made a small bet, but CNBC jumped on it and had him on, and he did a great job on CNBC, they really grilled him and he did a great job. And I think that has benefited BlockTower in that now people know who he is, and who the fund is.
I’m sure he’s getting a lot of LP calls. And then Kyle over at Multicoin is a great example of a guy who’s been doing a lot of blogging, may pick a specific token that he wants to talk about and go deep on it, and I think that he’s really been able to build a lot of credibility around himself as a thought leader in the space through his blogs. Those are all different examples of ways to be able to use content marketing, or to be able to promote yourself and your brand, which by extension, benefits your fund.
Those are all worthwhile ways to spend time. Now that said, if you’re not good at any of those, you could end up kind of spinning your wheels and not getting much benefit, but all of those guys are what I believe are top-tier hedge fund managers and leaders in the space, and that’s part of the reason why they deserve this big following, and be able to raise the funds they have.
Clay Collins: The message I’m hearing there is that it’s not about necessarily copying one of these fund managers and doing exactly what they’re doing, it’s sort of looking within yourself and finding how you best convey ideas, and then doubling down on that. For Ari, maybe that’s television. For Kyle, it’s sort of these long-form blog posts. It’s really just about finding where you shine, and going with that.
Rick Marini: You know a lot of these things are hard. Like I’ve done CNBC before on the New York Stock Exchange floor, it is hard to do. You got the lights, you got the people, you got hard questions from really smart people, like it is not an easy thing to do, and Kyle is very good. He’s articulate, he’s calm, he’s smart. It’s not an easy thing to keep poised when you’re in that kind of line of fire with the questions. You’ve got to be good at it. And he is good at that, and I think Kyle has found a great niche not being on camera, but writing blog posts. So again, different ways to do it, but I think all their funds have benefited from that.
Clay Collins: Fantastic, well you’ve been very generous with your time, Rick. Thank you for spending some time with us today. Do you have any last words before we close this out?
Rick Marini: I want to say again, Clay, thanks for having me on. This was a great discussion, this was a lot of fun for me to share about what we’re doing at Protocol Ventures, and also just to talk about the industry, an industry that I’m really excited about it, an industry growing leaps and bounds, and incredibly exciting, so obviously I love to talk about it. I think 2018’s going to be a big year for crypto, again. I think it’s a year when Wall Street comes in with both infrastructure and with real dollars coming in, retail investors coming in and let’s keep talking about this stuff. It’s really exciting, exciting times.
Clay Collins: Fantastic, thank you Rick.
Rick Marini: Alright, thank you.