It’s no surprise that Katie Haun is a major proponent of NFTs, or non-fungible tokens. The former federal prosecutor who today co-leads the powerful crypto practice of Andreessen Horowitz, has been a student of the technology since at least 2018, when a16z first backed Dapper Labs, which is now quite valuable.
At the time, Vancouver-based Dapper Labs was known for a collectible digital cat game called CryptoKitties that baffled those outside the crypto community. This year, Dapper broke out thanks to another offering on its blockchain called NBA Top Shot that allows sports fans to buy and sell collectible highlight clips — yet even that is a use case that will seem minor in the grand scheme of things, Haun suggested Thursday night at a StrictlyVC event hosted by this editor.
During our wide-ranging sit-down, she explained why she thinks NFTs’ somewhat concentrated user base is about to explode, and she shot down the idea that a relatively small number of creators who turn to NFTs for income will benefit from them. She also explained an innovation that a16z introduced that allows the heavyweight firm to nab a 20% discount on the tokens that now make up 75% of its crypto bets, and she discussed with us whether all venture firms will or should become registered investment advisers as a16z did in 2019. Excerpts from that conversation follow, edited for length. You can also check out the full interview below.
TC: On what a16z tells its investors about its various bets on NFTs, and what the unifying thread is:
Katie Haun: I think fundamentally NFTs are going to dramatically change the business model for the internet for consumers and content creators … Why is it important for consumers? [For example] right now, if you buy a “Fortnite” skin, what if the game goes under? … [Now consider that] you’re a gamer and you can take your good to another platform; you can use it anywhere. That’s really powerful for consumers. It’s putting power directly back in [their] hands.
It’s also great for content creators because they can program these tokens, these digitally scarce goods, to get financial upside in all future transactions [and cut out middlemen who take 30% today in the process]. Imagine what that does for the creator economy. [People are focused today on digital art but] I think next year at this time, we’ll be talking about music and what barriers can come down in the music world.
Haun went on to say that she’s actually quite focused on music-related NFTs right now and used singer-songwriter Billie Eilish to highlight what could be possible (and is already happening, in some cases) with musicians and NFTs:
[Eilish] was kind of discovered on the internet by a group of fans. Yet did those early adopters, her really true fans who made her famous, did they share in her stardom? Not a bit. In fact, not only did they not share in her stardom, their experience was worse as she blew up. Ticket prices went up. The lines got longer at stadiums, and concert venues are sold out for her. Now imagine if the people who discovered her and made her what she was in the early days … what if through an NFT or a smart contract they could have held something that related to Billie Eilish’s success? [It could] be that she records a song to Spotify but then creates a companion smart contract NFT that entitles fans to special access to shows forever, or to tour with her, or perhaps entitles them to future portions of her royalty streams. Now all of a sudden, these fans share in the economic upside, instead of just record labels and lawyers and middlemen.
On whether the economics will ultimately look much the same for creators as today, with a small number reaping most of the financial rewards as has happened, for example, with Twitch, where a data leak showed that 1% of streamers see half of all revenue:
It’s still very early days for these business models … [But] one thing about crypto architecture distributed systems is that you can make a living, and we’ve seen this with NFTs already. You don’t have to be Beeple and get really rich to make a living. I own a couple of NFTs [including by a] female artist who quit her job and who programs digital art that I bought on OpenSea. She has programmed a smart contract that if I sell [these NFTs] to you, she would get a portion of that sale, and if you then turned around and sold them to an audience member and maybe if it appreciated in price, she would get royalties off that sale, whereas right now she gets nothing if it’s physical art.
We talked about the widespread perception that NFTs are taking off fueled by a small subset of moneyed buyers with cash to burn, even as most Americans struggle to pay their bills. On this front Haun said that she understands why people might view NFTs as an indulgence for the rich but noted that it’s early days for the technology.
I think it’s really important with NFTs not to judge the current state of innovation by the end state of innovation. I completely understand what you’re saying. I’ve seen it myself. Yet I also see [parallels], in terms of status symbols, in the physical world, where many Americans are struggling, [while] others can afford luxury vehicles and Rolexes, so I think the digital world is no different. And like there are luxury physical goods, there are also basic goods that people want to own in the real world that aren’t ostentatious, [and] I think you’ll start to see more of those [more basic goods] developed digitally.
At some point, we switched gears to discuss a16z’s deal flow. Here, Haun suggested that two of her board seats, with Coinbase and OpenSea, enable her to see a lot of what, and who, is on the rise in the crypto world.
I think we’re very privileged to sit right at the center; we have a front row seat in the ecosystem and that’s because both Chris Dixon and myself have been on the board of Coinbase for many years now … and they have Coinbase Ventures … and there are only a few crypto projects out there that don’t pitch Coinbase Ventures. OpenSea is another board that I’m on right now and they’ve done these record volumes and they’re the largest NFT marketplace in the world and they’re also doing venture investing, so right there, just through our connections to these kind of giants in the space, we have deal flow because they’re seeing deals [and] we’re seeing deals.
Of course, crypto is very global [and at this point] we are truly global. I would say at least 50% of our investments in this last crypto fund have been international, so we have to not sit back and rest on our laurels of “Oh, we’re on the board of Coinbase and OpenSea.” We have to be really open-minded about different projects in different countries … [where many founders have] never heard of Andreessen Horowitz. I think we take that for granted just being here, but [elsewhere in the world] they’ve never heard of [us]. They don’t know our value.
It requires us to go get on a plane [in some cases]. [We’ve also] pioneered a delegate program where we delegate our stake in proof-of-stake systems to participants worldwide, whether that’s NGOs like Kiva and Mercy Corps, [or] companies like Deutsche Telekom, or whether it’s universities like Stanford and Berkeley and many other universities around the world [including] Technion University in Israel … we’re not resting on our laurels [in the expectation that] because we’ve had great deal flow, it will continue. The marketplace for crypto investors is widening for sure.
We also talked about why the firm is investing so much in tokens, including directly over the counter. We wondered if a16z gets any kind of preferred status in those deals. We also wondered what has driven the firm’s shift away from more traditional equity deals like Coinbase and OpenSea, and whether it was crypto founders themselves who began pushing back against these arrangements. Said Haun (who, by the way, noted that equity deals have not gone away entirely but that they’ve escalated in price as more VCs have begun to compete for them):
If you know an over-the-counter desk that will give me preferred rates, let me know because I haven’t found one. [No,] with over the counter, we’re just buying it spot; we get no special treatment. If anything … we’re very conscious of not moving the market where it’s a true over-the-counter [investment] and the founder of a protocol might not even know we’re an investor.
In other cases, sometimes protocols will want a particular venture capital investor, although that is changing rapidly and we need to be nimble and account for that. But what we’ve done in some of those cases, where a protocol founder really wanted us to be involved is, early on, call it three years ago in the token environment, they would give us a discount. But that became very unpopular in the crypto ecosystem. [People wondered] why should VC investors get a discount over the community?
One of the things we did [to address that concern] is [say], “Give us a lock up then. We’re 7- to 10-year patient investors; we’re not running a crypto hedge fund.” So if we want to lower price — call it a 20% discount — in exchange, we can be locked up for four years or, in some cases for years, even longer and sometimes shorter. That’s one innovation that we brought to different token deals. So we have received discounts sometimes, but the thing is that we’ve also done a lot of work for some of those protocols where we received a discount in exchange for lockup.
Though Haun has been asked this before, we also inquired about her seats on the both the boards of OpenSea and Coinbase, two companies that appear to be a collision course, given that OpenSea is an NFT marketplace and Coinbase, the cryptocurrency exchange, more recently announced plans to also create a kind of NFT marketplace. In fact, Coinbase CEO Brian Armstrong said during an earnings call last week that he thinks the market for NFTs could rival or even be larger than Coinbase’s cryptocurrency business.
We wondered how she navigated this tricky terrain, and even whether Coinbase might acquire OpenSea. She dismissed the last question with a head shake. As for the two colliding, she had this to say:
That’s a pessimistic view. I actually don’t agree that they’re on a collision course. First of all, I’ll say that what Coinbase’s plans are they haven’t even announced yet. They only announced that they’re exploring doing something in the NFT space, but we don’t even know what yet it will be.
One thing that I remember Brian Armstrong said years ago, when we started seeing competitors come into the exchange space … he said “This is actually great.” And I thought to myself, What am I missing? And he said, “This just means the pie is growing. This just validates our whole thesis. This is a huge opportunity, and others see it.”
[Similarly] the NFT space is so massive that I think there’s absolutely room for many players and I feel very fortunate to be on the boards of two really cutting-edge companies that will play in this space. I don’t agree that they’re on a collision course. Certainly, if it played out that way, if the ecosystem evolves that way, that will be something I’d have to address, as a former federal prosecutor.
As for whether more venture firms may need to become registered investment advisers if they want to be taken seriously by crypto founders, Haun declined to say so outright but she suggested it would make sense.
Look, every single crypto dedicated fund is is registered as an RIA. There are now many of them out there, and they’ve all registered as RIAs. It seems like a prudent thing to do where the regulatory status is so uncertain if you want to hold tokens.