Thinking Like a VC： Crypto Startup Investment
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Summary
In this episode, we talk to Chris Lehman, founder and CEO of Gromo, a real estate backed cryptocurrency startup in Boston. We talk about how he got started in the crypto space, why he s working on his project, and why he thinks investing in crypto is a good idea.
Transcript
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I hope that this talk has helped listeners who don't understand like what VCs are actually
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thinking or what's going on in the world of like people who are pricing assets or deploying
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capital, how they think about things and, and how they think about the future.
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Because I think this has been a good, like educate to give like a broader picture on
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And I think it might be something that I might do, you know, if it does well, or if people
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like it recurringly, just sort of analyze ideas in sort of a critical way that can help
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the average person understand what's actually going on with all this.
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We have a guest today who was actually a fan of the show, Chris Lehman, who reached out.
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You know, I'm a very typical profile of a lot of the fans when we meet them, which is smart
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entrepreneur, you know, Harvard grad, like working on a cool project.
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And we were talking about the project he was working on and it got me thinking, oh, sorry.
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Before I go any further, I do, I do need to point out why is Simone not with us today?
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She has pneumonia and she is pregnant, which means she can't do all the normal medications
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And so she's just been laid out, you know, in and out of the hospital recently, but you
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She's fine, but I'm able to do this, this wonderful interview.
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So, so we were talking about his project is in the crypto space.
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And I was like, well, you know what I could do what everybody does in the crypto space
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these days is there's all these shows that like shill projects in the crypto space, right?
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Like they're like, oh, this is so cool and everything like that.
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And I was like, you know what I think our audience would prefer, which is like a really
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You know, will it make the world a better place?
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Which I think is always something you're sort of thinking of when you're talking about
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Like if you had capital like me as a former VC, would I invest in it?
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And three, what is the probability of it achieving its long-term objective?
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So maybe the audience will like this, maybe the audience won't, but I'd love you to start
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And I always want to promote, you know, when I have audience members who are working on
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stuff, I always want to do what I can to promote that stuff.
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So long as I think it's, it's like broadly in line with, with what we're doing, the community
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And thanks for the kind words and hope someone feels better soon.
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Definitely wouldn't want the kid gloves treatment here on the podcast.
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But yeah, so, so I guess to start briefly before I go into the, I guess, full pitch and vision
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Gromo, which is my current project is a real estate and fintech company here in Boston, about
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three years old, and has the long-term goal of launching a real estate backed cryptocurrency.
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I expect about why that's actually a good thing or, you know, people can decide on, on
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But, you know, I think fundamentally the project is motivated by the idea that society works
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best when financial gains are coupled with actual economic productivity.
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And in a lot of ways today, society is really not geared that way in ways that cause people
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to behave in ways that, while they may be individually optimal, are societally suboptimal.
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And so we think that by fixing two of the biggest institutions in society today, money
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and housing, you, you can actually fix a lot of those incentive misalignments.
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And so the long-term goal talking, you know, decade plus out is actually having a fully
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operational scaled real estate backed cryptocurrency, but there are a lot of intermediate steps that
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we're working on today to actually scale up and scaffold sustainably to get there.
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So I want to hear your hypothesis on the three core areas that I was thinking of as an investment.
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I guess we'll start with short-term prospects as an investment and keep in mind, like this
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is, we're not trying to get people to like give money to a crypto project or something like
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this is the only accredited investor is just like at the VC stage now.
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So this is all hypothetical from the perspective of our audience, but I think it will help our
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audience who haven't experienced what it's like to work in venture capital, especially
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mission-driven venture capital, like the way they're going to think about things.
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So first let's think just as an investment, like what are your thoughts on, you know, three,
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four year time horizon, why it would do well, why it would do poorly?
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And I'll, I guess, start by clarifying one thing about the organizational structure here,
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which is that we have a pretty classic opco propco structure.
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And what that means is that we have one side of the company, which is the operating company
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That's kind of the VC funded tech company model, right?
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So we closed our series a midway through last year, raised 30 million for that.
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You know, that's VC high net worth, you know, very much the standard raise for that kind
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And that's where you expect kind of the high risk, high return, typical VC profile.
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So before you go further, I'm going to explain a few of these words to listeners, because
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I think this is just great for listeners to learn about like what's going on in the world
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Opco propco model is a model that is used by any venture capital company.
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And venture capital is a high risk investments, which makes it different from private equity,
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which is typically looking for lower risk investments.
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So on average, only one in every 13 venture capital investments makes capital, like makes
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cash positive or is really financially relevant to a firm.
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But that means that these companies that are need to do astoundingly well.
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Like they need to be like hundreds of times larger than they were when you invested in them
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And what this means from the perspective of property is property can almost never do that.
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So if a VC, when I am going to people and I am raising money, those people are called
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Those limited partners will give me money for me to deploy in this specific high risk, high
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Unfortunately, what that means is if a company is doing something that sort of like has a
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lot of real estate or otherwise capital assets associated with it, I can't invest in that
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given what I promised my LPs, the people who gave me all this money.
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And so what a company will do is it will do something called the Opco Propco model, which
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is it basically creates an umbrella under it, which is a separate company, which raises
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money that is either debt, which is often used for real estate investing, because that's
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easy to get on a real estate asset because you have sort of a hard asset.
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Or it's raising money from like typical real estate investors, which are often different
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It's something that we said classic Opco Propco model.
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The truth is, to my understanding, because I looked at doing something in the Opco Propco
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space, almost no one has successfully done an Opco Propco raise.
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Most of the Opco Propco raises that you're familiar with, the Propco, the property company,
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was actually either family money, a company they had previously worked for, or they had
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worked at the firm that ended up doing the investment, because it's actually fairly hard
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to get a real estate investor to invest in this.
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My guess is that you use some sort of like crypto investor who also invests in real estate,
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or did you get like a pure real estate investor to invest?
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So on the Series A side, you know, again, combination of VC and high net worth, on the
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real estate side, it was a pretty, I guess, eclectic array of people tending to skew again
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towards the high net worth individuals for the first fund.
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And there are a few different funds that we're currently managing, though the one that's...
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Hold on, I want to go back and talk about a few of the other words you used here, because
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we have a lot of people who watch this, and they're young, and it's really hard to learn
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You know, if you're outside of the Stanford, if you're in the Stanford-Harvard ecosystem,
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you hear this stuff, you immediately know what he's talking about when he's talking about
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Let's talk a bit about what a Series A is, and I'm going to use this to dissect a lot
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of these broader concepts so that when people come into this, they can, one, understand how
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they do this sort of thing themselves, and what's going on in this world of finance.
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So Series A is often the second or third round that a VC fund is raising.
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You typically have, if you're talking like rounds of VC, you have Angel round, you have
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Seed round, then you have Series A, B, C, D, E, et cetera, right?
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It used to be Series A was the first round, but Series A kept inflating in value.
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Right now, if somebody tells you that they've raised a Series A, typically if they're in...
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Now, keep in mind, these rounds actually mean different things in different cities.
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If you are in Boston slash New York slash Silicon Valley, Series A, I'm going to guess means
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Yeah, so that means it's probably a raise, and you can tell me if I'm wrong, between $1
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Whereas Seed rounds these days are typically between half a million to $3 million, and Angel
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rounds typically don't go above a million unless you're like a hotshot.
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So we had kind of an atypical story here in large part because my co-founder, Seth Prebatch,
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who had previously founded Level Up and then went on to run most of Grubhub, had a big exit.
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And so we basically did kind of an informal Angel slash Seed round and funded the company
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up until we got to the Series A, at which point we were at a significant enough scale
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that we were able to do a $30 million Series A.
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So that is on the high end for a Series A, but it's not like...
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And this is why, because a lot of people, they hear Series A, they're like, oh, that's
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And typically, you wouldn't be raising a Series A unless you had people who had recently
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And keep in mind that this is also important to think about, the information that you just
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heard if you were thinking about something like this as an investment.
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So that means that the company was founded by people who have had previous success in
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And another thing is if you look at their resumes, I mentioned, for example, he went to Harvard.
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That also makes it less likely that he's going to lie to you as a project like this.
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And this came up to me once with people like, why would you say that, right?
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It's because it can lead to things like if you get arrested or something, like if you're
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actually doing fraudulent work and you have a big public reputation that's tied to something
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like a Harvard or Stanford degree, you don't want to tarnish that.
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You sort of get a foot in the door with your career, with a lot of things.
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And so doing something like a rug pull, a rug pull in the crypto world means like running
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away with all the money or something like that, becomes very or much less likely.
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Also, he's raising money from traditional investors, which also makes something like
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a rug pull less likely because they're often going to put things in place that prevent him
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Now, if you go straight to like a Sam Bakman Freed style thing like FTX, you know, he got so
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big so quickly, he was able to really do whatever he wanted to.
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The crypto world doesn't work like that anymore.
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If he's raising from VCs, they're going to have a lot of financial controls on whatever
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Anyway, continue with where you were going here.
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So all of that is describing, you know, applies to some degree, both to the VC model opco
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A lot of the early investors, both in the Series A and in the initial real estate funds
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were previous investors with Seth during the level up days, during the rub hub days.
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So, you know, lots of skin in the game, both socially and professionally there.
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So while the Series A is closed and, you know, we're likely not doing a Series B until 2025,
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And that's, again, going to be, you know, really large dollar checks from, like, mostly
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We are also offering a bunch of different funds in the real estate side, where, as you
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were saying, the risk return profile is very different, right?
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You're not going to get insane to the moon returns of the sort that you get either with
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a VC investment or with some of the, you know, more meme-y volatile crypto coins out there
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that, you know, were very popular over the past few years, because it is real estate,
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And, you know, obviously there's variation within real estate.
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You know, the Sun Belt looks very different from somewhere like Boston or New York or SF.
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And being in Boston, it tends to be a, you know, much more stable market.
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But also the corollary there is you're not going to see insane growth like you might have
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seen in, say, like Miami or Houston over the past few years.
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But the real estate investment vehicle that's most applicable to probably most of your listeners
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And so REIT stands for Real Estate Investment Trust.
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It's a pretty well-established model for real estate investment.
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If you're familiar with an ETF, an exchange-traded fund, it's basically an ETF, but for real estate,
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So you have a diversified profile of real estate based on some thesis that can be very broad
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It could be, you know, broad, you know, all residential real estate in the U.S.
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It could be something much more narrow, which is where we are now that we expect to be broader
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So I'm going to take an aside here and explain why he immediately went into ETFs and REITs
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So when he first was talking to me, this was my first question, and it's going to be most
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investors' first question, which is, how is this any different from a REIT, right?
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I want to put capital in real estate in liquid, easily divisible shares.
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Right now, the standard way I would do that would be to buy into an ETF or a REIT, right?
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And my immediate question was, well, differentially, where is the value here when contrasting this
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So today, as an investor in the REIT, your performance is really not going to be massively
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affected by the fact that we are, by the fact that we're doing this on crypto rails.
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So, you know, today, basically, and I'll get more into why this is relevant later, we have
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both the REIT shares that you can own and the properties that are owned by the REIT represented
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both in blockchain formats and also in traditional financial and legal modes.
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So for the REIT shares, that means they're held by a transfer agent, which is a specific
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Like, talk about it from the perspective of your average person.
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How is this different from putting it in a REIT?
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Like, if I want to invest capital in real estate, why am I using this system instead of a REIT?
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So today, one of the big advantages that we have over a REIT is the level of transparency
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you get from the fact that we're recording all of the data about our properties on blockchain,
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publishing it on our website, and providing much more disclosure than is typical for REITs
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This is something that you might expect would be standard for REITs, but it's really-
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And this is to a large part driven by the fact that most REITs are interested in big institutional
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investors, whether those are pension funds, whether those are banks, whether those are
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other entities that are going to spend tens, hundreds of millions of dollars at a time.
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And when they do that, they're not going on the website and downloading a PDF that has
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quarterly earnings and a list of all the properties.
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They're calling someone up and they're saying, hey, can I grab an hour or two hours of your
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time, talk to some analysts, talk to some MDs or whatever, and really get the full in-the-know
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And so because that's where almost all of their money comes from, REITs tend not to put a lot
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of effort into the kind of transparency and disclosure that an individual retail investor
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So I'm going to quickly break this down, like my interpretation, right?
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If I was looking at this, I would say that's interesting and some investors may differentially
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This is the asset that you're buying tokens of, basically.
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Now, the way that that asset is treated by a portfolio manager can modify whether that
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asset is worth more or less within that portfolio than it is if it was broken up and sold on the
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So, and then he'd point out, which you might have a thesis, like individually, a thesis
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could be more transparency will either lead to more value within this asset, more value
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retention within this asset, or more predictability of value retention within this asset, or this
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asset will track the thing I think it's tracking better.
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And that last one can actually be really important, especially when you're talking about the crypto
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So a core tragedy would be, you think you've invested in one thing, something that's going
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And there was a huge thing when the crypto market crashed and a bunch of people thought
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they owned a specific type of, I forgot what it was called, a specific type of crypto stock
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that would increase in value as the stock of crypto overall decreased in value.
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But it was set up in a way where that didn't end up happening.
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And actually the opposite ended up happening if crypto was decreasing as fast as it was
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Like this is one area where you could get some sort of like marginal additional value
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However, the truth, like if you're saying like to me, the truth is an investor, the core
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value of this asset, like if I was to say, why would I put my money here?
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Like, why am I going to get any sort of differential value in this project versus just putting money
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It would be because of the branding of crypto, which is not as strong as it used to be, but
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If you are the only person and this is the only project, there are some other, at least
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to my understanding, there are some other crypto real estate projects, but there's none
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that are totally where the asset itself is really treated more like a REIT instead of
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you buying into individual real estate properties.
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So crypto as a brand can cause some individuals to be more interested in it and can cause some
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individuals to over inflate it as an asset for a few reasons.
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One is, is they may see it as like a great example of this is WeWork, right?
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So WeWork became huge as a company, but they weren't actually, am I thinking of the right
00:18:47.460
So they were doing something that a lot of like private equity, very simple companies
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And they really hadn't changed the model in any meaningful way, but they branded themselves
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And, and the other companies had branded themselves as private equity, real estate plays, private
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equity, real estate plays have one way of valuing them.
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Typically you're valuing them based on the EBITDA they have, which basically think of
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And then you apply a multiplier to that tech companies, especially venture capital tech
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companies are often valued on their top line revenue.
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So that means the total amount of revenue that they're generating, which is often, especially
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with a real estate project, like WeWork hundreds of times more than the equivalent companies
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Sometimes making a project like this particular, now there's another reason why crypto may
00:19:48.760
One is that they've created a believable story about how they're going to make the world a
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better place and how this is the line was like the goals of web three.
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And so web three people who believe in this often have sort of libertarian ideas about things
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may put more of their capital in this because, you know, they've made a bunch of capital
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Two, it could be that it's easier to transfer money or they're doing something fishy with
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their money and it's easier to keep money within crypto projects than it is to take it out
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of crypto and then redeploy it on the traditional stock market.
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Although this is increasingly becoming less of a reason to keep money in crypto as the financial
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institutions become more savvy into how money is moved around crypto.
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So the first thing I would say is, is just as a basic bet, like if I could get in on this
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round of it, right, I would say, and it's not costing me that much more than doing a traditional
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I'd say, eh, it's probably worth the marginal upside.
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Like I'm just thinking as a VC right now, but, but the longterm, that's where I have more,
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more questions, but continue with where you're going with this.
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So, so, so definitely agree with everything you've said.
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And, and, and, you know, I, I, I would agree that the value that the REIT shares gain from
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being, you know, structured off of blockchain today to the actual investors today is marginal,
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And you should be much more concerned if you're looking at those REIT shares at the actual real
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estate thesis that Grom was running off of, which I can talk at length about, and I can
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I assume we probably don't want to get too deep.
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Where, where do you see this going longterm and why do you see this having a disproportionate
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amount of value longterm or changing society longterm?
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Like, let's talk about this longterm objective here.
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So, so I, I'll go through the vision that I alluded to earlier, which is that society works
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well when more people have an ownership stake in it and when financial incentives and financial
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rewards are aligned with what people actually contribute to it.
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And so money is obviously a core part of that architecture, right?
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What money is, how it's exchanged, who controls the supply of money has a big impact on the
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sorts of people, sorts of decisions people make to earn money.
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And then aside from that, housing is most people's biggest asset in the world.
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And therefore has a pretty, the way that rules around housing work and the way in which
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ownership of housing is structured has a big impact on how people behave and make decisions
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Obviously there's a reason why it's kind of the dominant model of money today, you know,
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depending on, you know, across developed and developing world, fiat's what you do.
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But obviously there are some pretty major problems with it.
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Most prominently over the past few years is the potential for inflation and, you know,
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happy to go on any segues you want here in terms of the...
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No, I mean, I'm happy to just talk about what I think about money really quickly.
00:22:47.940
Because people have some interesting ideas about money these days or interesting ideas
00:22:52.940
You know, I'll talk to a lot of people and they'll be like, I don't want to invest my
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And that's a really bad way to think about any capital that you have.
00:23:02.820
Keeping your money in cash as an investment in whatever currency that you have decided
00:23:07.940
Now, currency markets fluctuate, but on average, it's one of the only markets in the world
00:23:12.380
that you could pretty much bet is going to go down over time.
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Now, the question is, why does it go down on average over time?
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I think a lot of people have wrong answers about this, especially when you're talking about
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They think it's like generic inflation, like inflation, i.e.
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the government's being greedy, imprinting more money than it actually needs and stuff
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I think this is an incorrect understanding of what's happening with fiat.
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It's a very unique system for trading money because it's quite different than the backed
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You know, you can have like a gold backed system, which we used to have historically, or
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you could have a real estate backed system, or you could have a system backed on any sort
00:23:49.280
For example, you have a set asset in a world where the population is increasing exponentially.
00:23:56.980
Which we've historically been living in anything that has a scarcity, divisibility, and trade
00:24:02.720
ability is going to increase in value over time and be a good store of value if you want
00:24:09.400
Now, typically as a state, you don't want the default unit of trade to be something like
00:24:17.720
At the state level, when we're talking about cash, we use the term deflationary.
00:24:22.220
But as an investor, you would say something that has good investment potential that is
00:24:28.160
Because when you have something of good investment potential, you don't trade it.
00:24:34.800
Like you're much less likely to be trading it because you see it as this valuable asset.
00:24:39.840
However, if I have cash and I know, and even my wife and I, you know, we talked about this
00:24:43.800
We've been spending cash a bit more recently now being like, well, we got to buy this stuff
00:24:48.680
before this money's worthless, given the high amount of inflation that we're seeing in our
00:24:55.240
And I think general economic degradation in society.
00:24:58.560
And so people can look at that and think that this is an accident.
00:25:01.820
The thing that makes fiat at the core level different than all other types of currency assets
00:25:09.360
is that the state can manipulate it in order to maintain a healthy economy, with the only
00:25:15.960
other asset that really has any comparability to this being state debt, which they also manipulate
00:25:22.660
those terms to maintain a healthy state economy.
00:25:25.280
And often the small amount of inflation that if the system is working well, you're getting
00:25:33.100
Historically, whenever you would have an economic crisis, you would intentionally create a slightly
00:25:38.380
higher amount of inflation because that would bring more people to work.
00:25:42.560
The more inflation you have, typically the higher employment you have and the less inflation
00:25:46.060
you have, typically the higher unemployment you have.
00:25:48.000
I'm not going to get into all the specifics of that, but a lot of people, they just learn
00:25:52.300
that like fiat degrades over time and they think that this is some government conspiracy
00:25:56.000
against them rather than like a critical part of how modern economies work.
00:26:03.480
But, you know, it is important to note the distribution, the reasons why governments do
00:26:08.740
You know, it's some combination of both of those things, right?
00:26:11.100
It helps parts of the economy run more smoothly.
00:26:15.560
But it does have important distributional impacts.
00:26:18.540
There's something called the Cantillon effect, which basically refers to the order in which newly
00:26:23.660
issued money, you know, in quantitative easing by the Fed trickles down through the economy.
00:26:28.040
The people who get that money first tend to be large financial institutions.
00:26:33.480
They're spending it at the pre-inflation price level, which means they're getting the full
00:26:37.880
benefit of new dollars, whereas by the time it circulates all the way through the economy
00:26:41.220
down to people who are lower on the socioeconomic ladder, they're getting it after the price level
00:26:45.960
has been able to adjust by the issuance of new money.
00:26:48.100
And so it effectively represents a transfer of wealth from people who are lower socioeconomic
00:26:52.700
status towards people who are higher socioeconomic status.
00:26:55.040
And, you know, you have to weigh that, of course, against some of the benefits that you
00:26:57.840
mentioned, but it is something that, you know, we think and many other people in crypto
00:27:01.800
think should be taken into account by people who are deciding where they're going to store
00:27:07.740
And if you don't want that to happen with your wealth, then you may want to consider
00:27:11.500
some other way to store it than just cash, right?
00:27:14.180
And so this is the other side of it then, too, which is people who have lower net worths
00:27:20.020
tend to keep a higher percentage of their net worth in cash because they need to
00:27:25.020
have quick access to that cash in order to cover, you know, unexpected expenses.
00:27:29.400
Whereas, you know, if your net worth is $10 million and you're, you know, say you keep
00:27:33.220
10,000 in cash or something lower than that, right, it's a tiny portion of your net worth
00:27:36.960
and yet it can still cover any unexpected expense more or less.
00:27:40.740
And so the impact of inflation broadly, even taking aside the asymmetry of the impact of
00:27:47.820
inflation impacts people more the more cash they hold.
00:27:51.980
Yeah, so I want to pull back because you're assuming that you've said something that I
00:27:57.140
The long-term goal is can we make this a standard currency with the idea being what he just said.
00:28:03.860
If we can make this a standard currency, a standard thing that people trade for things,
00:28:09.240
like instead of Bitcoin or dollars, you're trading crypto shares of real estate, right?
00:28:16.340
And this is something you couldn't do with ETFs as a structure.
00:28:18.620
Now, I could not use easily shares of an ETF as a currency.
00:28:23.600
Just financially, it's not really structured that way.
00:28:26.200
And it would be very cumbersome and have big tax implications if I tried to do that.
00:28:30.000
He's saying with our system, you could do that.
00:28:33.240
And then he's saying a benefit is if people started doing this, is that your average poor
00:28:45.660
Your average poor person is going to, if you can accomplish this, disproportionately have
00:28:51.820
more of their wealth stored in, well, so it's a question of defaults is really what you're
00:28:58.240
You know, if you do something like if you're giving someone an organ donation thing that
00:29:02.580
they're filling out when they are getting a driver's license, right?
00:29:06.020
And you have that box pre-checked and they have to uncheck it versus unchecked and pre-check
00:29:10.720
it's a difference of like 70% sign up to like 30% sign up.
00:29:15.140
What you are doing with whatever the default like tradable asset is in society is you are
00:29:22.220
making that an asset that a person is going to have disproportionately more of on hand at
00:29:31.560
One, this is a smarter investment asset to have more of your wealth concentrated in at any
00:29:37.180
time. And two, or at least a more honest asset, which is to say, even if it goes up and down
00:29:43.300
more than currency typically goes up and down, which real estate does, at least you like really
00:29:48.120
have some like tangible thing that is backing your money.
00:29:51.440
And two, that it's not being peeled off by all of these institutions that are getting the
00:29:57.640
value at different levels, like carving off bits of value at different levels.
00:30:04.400
I'm going to say, okay, suppose you made this a core asset in society right now.
00:30:09.520
Well, it was with fiat that the game, the way that people are profiting off of the system
00:30:14.940
is getting like early shares of fiat, as you're talking about with this, that the game is being
00:30:19.420
a real estate developer and making more real estate in a way that can then go to the currency.
00:30:23.600
If those real estate developers are profiting off of that, which they almost axiomatically
00:30:27.820
are going to be, otherwise they wouldn't be doing it, then they are now taking the role of the person
00:30:32.980
getting the first cut within the system. How do you see this as different? Is it because they're
00:30:40.040
Yeah. I mean, I think that you basically nailed it, right? When you expand the supply of dollars,
00:30:45.660
no actual new asset that's usable has been created aside from the exchange value of the dollars.
00:30:51.540
Whereas if you're creating new real estate, suddenly people have new places to live or to work
00:30:55.740
or to learn or whatever they're doing with it, right? And, you know, in many parts of the US,
00:31:00.160
most big metro areas, there's a pretty dire shortage of real estate. So something that
00:31:05.460
incentivizes a developer to add more real estate with the expectation that it'll then be
00:31:10.900
incorporated into the REIT and used as the backing for currency is a virtuous societal effect at this
00:31:17.140
point. And obviously, you know, we can talk about long term, how does that change with the
00:31:21.220
equilibrium? But today, and, you know, for I think the foreseeable future, next few decades,
00:31:25.440
we're still going to be in a situation where the demand for that kind of real estate significantly
00:31:32.640
Yeah. So, okay. So here, I'm going to talk a little bit about my views on a few. One is,
00:31:37.440
I think like internally, I'm going through, you know, as somebody thinking, how does this change
00:31:41.420
the future? So the core thing that you would be doing with this is you would be like, like,
00:31:46.200
how does this actually change what's happening in society, like the actions of people? Well,
00:31:51.420
because of the power of defaults, more people would hold this type of investment, real estate
00:31:57.700
investments, than hold it in today's society, which is applying an externality on the valuation
00:32:04.560
of real estate, which is causing real estate to be more valued than it would be just as a place to
00:32:11.440
live. That's the core thing that would happen here. Now, this is going to have
00:32:15.220
two effects. One effect is it will cause people to build more real estate than you currently have,
00:32:21.000
because now you're getting this other reason to build real estate. But the other negative of this
00:32:25.520
is my perception, and you can argue against me here, like this is, this is what I think would
00:32:29.360
happen, is it would lead to real estate being valued more, i.e. having a higher price than it
00:32:36.940
should have as just a place that people live, because now it has this externality attached to it.
00:32:42.160
And I would argue, and when I brought up your idea to my wife, Simone, she immediately goes,
00:32:45.880
but what about China? This is basically already the system in China. So for people who aren't
00:32:49.860
familiar in China, real estate is 70% of all investments in terms of like, like individual
00:32:56.880
household investments, which is very different from the U.S. In the U.S., we have trust that when
00:33:01.440
we put money on the stock market, it's going to grow on average. They don't have that same trust in
00:33:05.300
their local stock market in China because it's much more manipulated. So real estate, and we have a whole
00:33:10.300
other video on like what we think of the future of China and how screwed China is, you can go watch
00:33:14.100
that where we talk much more about the real estate situation in China. But they began to use real
00:33:19.420
estate as a core, almost sort of alternate token to currency. So much so that they began to build
00:33:25.740
these giant cities that no one was ever meant to live in. Right now, the overbuilding state in China,
00:33:32.300
that means if you housed every homeless person in China in one of the buildings right now,
00:33:36.040
how many could they fill? It's 200%. There are literally three buildings in China for every
00:33:41.940
household, empty buildings. And that's because real estate has begun to become this tokenized
00:33:47.160
asset. And, and that has, and, and worse, all real estate in China is much more expensive for your
00:33:53.360
average person than it is in other countries. It costs, I'd say four or five times as much as it does
00:33:58.660
in the U.S. And it's begun to leak into other markets. Now this whole system in China is about to pop
00:34:02.720
right now. That's beside the point. I'm just using China as a model of what happens when you apply
00:34:08.640
an externality to real estate in terms of like, it becomes the default investment in the society.
00:34:14.440
That's the externality we're employing here. I'm wondering how you think things would play out
00:34:18.100
differently in this scenario, or if you think that there's some hidden advantages to this I'm not
00:34:21.940
seeing. Yeah. So, so answers to a few different parts of that question. First portion is, I guess,
00:34:27.860
dealing with the pre-equilibrium state of how the existence of this currency and demand for it would
00:34:33.000
impact real estate, right? So we're talking about before it is either the default or one of the
00:34:37.760
default currencies. Essentially, you know, if people are valuing the currency more highly than the value
00:34:44.660
of the underlying real estate, right? There's some additional use value that increases the demand
00:34:49.160
past the real estate in and of itself. That essentially just feeds into the growth of the
00:34:55.720
ecosystem, right? You have more money coming in and it accelerates that rate and you can grow,
00:35:00.560
you can acquire more real estate, increase the supply of the currency to accommodate that demand.
00:35:05.100
And that all serves to push towards the long-term equilibrium, which is the second point, right?
00:35:09.820
And so once you get to the point where people are, you know, socialized on the idea of a real estate
00:35:14.660
backed currency, and it is one major, you know, default currency that people use for transactions or as a
00:35:21.220
store of wealth, whether or not you have the value of the currency exceeding the value of the underlying
00:35:28.160
real estate is basically a question of whether seniorage exists, right? So seniorage is essentially
00:35:34.160
when the issuer of a currency gains value that exceeds the cost of issuing the currency, right?
00:35:40.440
And this is something that in our equilibrium, we really hope is minimized, right? We don't think that
00:35:47.380
seniorage is broadly a desirable feature of monetary ecosystems. And we think that the healthiest
00:35:53.020
equilibrium would be one in which Groma coins are competing against a wide basket of other
00:35:58.640
currencies, whether it's, you know, fiat, traditional crypto, other asset-backed currencies, whether it's
00:36:03.200
backed by something like energy or healthcare or other core inputs to the economy, such that, you know,
00:36:07.700
if the price of Groma coins were sufficiently in excess of the value of the underlying real estate,
00:36:13.880
you would see people begin to sell the Groma coins to take advantage of that gap and put their money
00:36:19.420
into the other currencies until you had those even out. And the seniorage level of each of those
00:36:25.340
Yeah. So I want to take a bit and dissect what he's saying here. So the point he's making here is
00:36:31.160
actually the argument here, and I think it's likely right. The reason why you get this over-evaluation of
00:36:37.120
real estate in China is not because real estate is the default investment mechanism, but because it's
00:36:44.160
a mechanism that fuels the CCP, that's the governing party of China. And therefore they have a reason to
00:36:51.740
manipulate the markets to ensure that it's always growing in value outside of its core floating value.
00:36:58.780
So you cannot get this arbitrage opportunity that he's talking about. This arbitrage opportunity,
00:37:04.020
you'll see whatever you get, like one fund that's holding something pegged to a floating market.
00:37:09.840
So one of the most famous example of this, and I want to say it's called like the grayscale
00:37:13.180
trust metric. Grayscale Bitcoin trust. Yeah. Yeah. Well, yeah, but there's that word where it's
00:37:20.600
like the percent on it or something. But anyway, one of the core metrics that a lot of people look at
00:37:25.900
is how much we, so grayscale Bitcoin trust is basically like an ETF. Like we've been talking about
00:37:31.180
this concept. Think of it like a basket of Bitcoin that you buy shares in with dollars, with fiat in
00:37:38.060
the same way within his system that you are buying shares in a basket of real estate with crypto or
00:37:43.820
dollars or whatever you're buying with. Well, the grayscale Bitcoin trust, there's a percentage where
00:37:49.080
the value of the Bitcoin in that trust is either over or undervalued when contrasted with all of the
00:37:57.640
individual Bitcoins within it. And you can use this because it's almost never exactly the same.
00:38:03.140
Like people would think that this arbitrage is almost exactly the same. It's almost never exactly
00:38:06.340
the same. This can be used to determine like where you think markets are going and stuff like that.
00:38:12.420
And it's an indicator that a lot of these quant guys who are like trying to play the market pay
00:38:16.460
attention to. So yeah. Okay. I'll buy that. Another thing I'd note, which is a utility of
00:38:22.400
this that he hasn't mentioned, but is worth noting. So people who aren't familiar with the concept of a
00:38:27.840
DAO, this is like a governing system or company that runs using web three or like crypto architecture
00:38:36.340
as its engine. One of the things that his system would allow for is DAOs to use his tokens,
00:38:44.440
these Gromo tokens for rewards or various other things. IE. You might want a DAO that for specific
00:38:51.080
reasons, rewarded specific decisions are used within its internal machinery. The value of real
00:38:57.080
estate was in specific areas. An example of this. Okay. So people might be like, what the heck is he
00:39:02.620
talking about here? Suppose I created a DAO to run a charter city. And one of the factors within that DAO
00:39:10.780
was all of the, all the real estate in the charter city was sold proportionally like his is being
00:39:16.480
sold. I could create a mechanism where when it like over inflates or it's growing over a period of
00:39:23.260
time, certain types of voters within that ecosystem, their vote matters less. So for example, within this
00:39:30.240
ecosystem, I could divide voting power where you get voting power dependent on how much you're paying in
00:39:35.940
taxes, but I could divide this voting power amongst a few classes. For example, I could say that real
00:39:41.840
estate owners, their voting power is, is it considered like has one multiplier attached to it.
00:39:48.020
And people who are paying like generic income tax, their voting power has a different multiplier
00:39:53.780
attached to it. These multipliers could be changed when real estate is going up versus when real estate is
00:40:00.320
going down to motivate different investment behaviors within this new charter city. And there's
00:40:07.140
lots of reasons why having a tool like that is really valuable within a DAO. But most DAOs today are,
00:40:14.020
from my perspective, you know, having heard the Practices Guide to Governance, which is used a lot
00:40:17.760
within the DAO community, very simplistic and don't utilize mechanisms like this, but he's creating a core tool
00:40:23.560
that would allow mechanisms like this to be developed on top of it. But anyway, continue with what you're
00:40:27.300
saying. About the senior age and the China comparison? No, no, no. I want to hear, I mean,
00:40:32.960
you can say, is there anything about sort of your thesis that I missed in my summary there about why
00:40:39.480
this wouldn't cause the same effect of real estate getting an externality associated with this value?
00:40:46.220
So, yeah, I mean, on the China side, I mean, I think you alluded to this, but to provide somewhat
00:40:52.000
more detail, right, there was just massive, I guess, government interference in all kinds of markets and
00:40:57.080
as you said, there's really little faith in the reliability and stability of kind of traditional equities
00:41:02.780
markets, which led into this kind of pseudo tokenization of real estate. And that was really the only way that
00:41:08.320
people could get any yield on their savings, you know, not just equity markets, but also savings account, I think,
00:41:14.340
had caps on the amount of interest they could yield. And so this artificially forced money into real estate, and
00:41:21.080
created demand for real estate in excess of the native organic demand for living space. Whereas in the US, you know,
00:41:28.580
it's a market system, we're not going to put, you know, a mega city in the middle of, say, Nebraska, South Dakota,
00:41:33.700
we're going to put it, you know, in a decentralized fashion, where the demand is highest, where developers think they're
00:41:39.260
actually going to get people who are willing to pay the most for it based on its utility as living space. And, you know,
00:41:44.840
we've also seen, you know, China, with, you know, in the past few years, under Xi has had kind of the legs
00:41:51.240
cut out from under the real estate industry by cutting off their access to credit. You know, you also
00:41:56.620
had, I think, in the preceding years, there were actual floors on the prices of real estate in a lot
00:42:03.240
of these cities, where people were clamoring for their investments to maintain their value in excess of
00:42:09.340
the organic demand. And they would like vandalize developing offices when they were considering
00:42:14.960
cutting prices. And it's only been recently that municipalities have allowed developers to cut real
00:42:22.220
estate. So radically different situation from what we have in the US today, where, you know, it's the
00:42:27.240
opposite, right? People are asking about rent control, or, you know, other artificial price controls
00:42:31.260
to suppress the value of real estate. Yeah. And I want to talk about real estate as an asset here
00:42:37.520
more broadly, really quick, you know, for followers who have less. Right now, when we talk about this
00:42:42.740
exogenous factor that causes people within the Chinese cultural system right now to overvalue
00:42:48.560
real estate, this has bled over into a lot of markets that have a lot of Chinese immigrants or
00:42:54.040
China has easy capital to. When Chinese people come from China and are trying to hide their money
00:43:01.560
outside of China, or are trying to move their money outside of China, the first place they often
00:43:08.500
invested is real estate, because that's the asset that they're familiar with. And so this can lead to
00:43:12.980
overinflated real estate markets within environments like San Francisco, or like a lot in Canada, you know,
00:43:21.600
pretty much all of Canada is overinflated, specifically because of this Chinese money. If the Chinese bubble
00:43:27.020
pops, this overinflation is going to decrease. Now, if you're talking about being a viewer of our
00:43:33.240
channel, one of the things you're most likely thinking of is these guys are pronatalists. They
00:43:36.760
notice more than anyone, you know, the falling fertility rate issue, the falling population issue.
00:43:41.400
Why would real estate be a good store of value in a world with falling fertility rates? In fact,
00:43:47.640
why is real estate going up still at all? Like on average, real estate seems to be going up.
00:43:52.560
Well, the answer is the core reason why real estate still goes up in the US right now
00:43:57.360
is twofold. One is you have the atomization of the family unit. And so this means that houses
00:44:04.220
that previously, you know, you would have had a married couple living in with a bunch of kids,
00:44:09.060
you know, now that people aren't getting married anymore at the same rate, they're needing to buy
00:44:12.840
two separate houses. And this is a, you know, and you see this over and over again. So,
00:44:18.660
so, and this is why one of the biggest for a long time growing sectors of the real estate market,
00:44:23.660
and I actually expect that this is probably the sector that you're going to get into is
00:44:26.380
multifamily housing units. Am I right in assuming that? Yeah, yeah, yeah. That's primarily what
00:44:30.420
we're doing. Okay. So people who don't know what multifamily housing investment is, if you go to a
00:44:34.420
city and you know, those giant units where you have like 50 people, like not 50, hundreds,
00:44:38.780
hundreds of people, like, like just condos, I guess you'd call them, right? Like that's multifamily
00:44:44.140
housing. Yeah. I mean, I would say it's a bit broader than that, right? Like kind of the
00:44:47.940
archetypal multifamily housing is one of these multi hundred unit buildings, you know, whether
00:44:52.220
it's condos or rentals, I think more of them actually tend to be rentals. You know, you have
00:44:56.440
kind of large multifamily on one side, which is traditionally what real estate investors think
00:45:00.320
about when you say multifamily. What Groma actually focuses on is a different segment, which is small
00:45:04.620
multifamily. And so this is two to 20 unit buildings that typically were built, you know,
00:45:08.900
a hundred ish years ago, before real estate investment was institutionalized. And so you have a lot of,
00:45:14.520
say like triple deckers in Boston, you know, walk-ups in New York, you know, similar archetypes
00:45:18.900
in say like San Francisco, Philadelphia, et cetera. And you know, those again can either be condos or
00:45:24.760
rentals, but there's obviously a huge amount of that stock here. Yeah. And so how long this is going to
00:45:30.340
have an effect on the real estate market is for you to decide as an investor yourself. Me personally,
00:45:35.620
like if you're talking about Simone and I, you might be like, oh, he's really negative on real estate.
00:45:39.180
We have a well over 50% of our portfolio in real estate. And so we won't forever, but we do for
00:45:44.620
now. And, and another question is, is then why, why if the number of people's declining and that's
00:45:49.300
going to have an effect on real estate, why would you keep so much of your personal net worth in
00:45:52.740
real estate? And the answer then comes to, well, there aren't a lot of other fucking options right
00:45:57.340
now. If China collapses, yes, that's going to have an effect on us real estate markets, but a much,
00:46:03.460
much bigger effect that it's going to have is one going to be on the developing world. Cause if you look
00:46:07.500
at like South America, you know, anywhere you're, you're, or Africa, anywhere you're carrying
00:46:11.700
investments that's in the developing world is going to be massively hit when China pops and
00:46:16.620
China is going to pop before a population pops before the things tied to population pop in the
00:46:20.680
world. So, so that's destroys a lot of developing country stocks, which a lot of people think are
00:46:25.640
safe. They're like, oh, I'll get my money outside the U S. In fact, when China pops to the most, uh,
00:46:30.220
protected place in the world is going to be the U S. Okay. And then the question is, is it U S
00:46:34.860
companies or is it U S real estate? Well, I think U S agricultural real estate is probably the best
00:46:38.880
bet right now if you were going to make an anti-China bet. But then the other thing is that also has a
00:46:43.580
huge effect on any sort of a commodity, specifically commodities like minerals, mines, the stuff that
00:46:52.100
they are using to build these buildings, you know, whether it's copper or gold or anything like that,
00:46:58.140
anything that's used in construction is, is overinflated right now, I would argue.
00:47:02.400
And so then that means, okay, well then where are my storing assets, right? Like that doesn't leave a lot
00:47:08.460
of other options. Okay. You can't really go outside the U S you could go to Europe. The problem is, is
00:47:12.620
Europe's going to collapse so much faster than the U S like they're an absolute shit show right now, both
00:47:18.020
population rate wise, but also the way the government's reacting to all of these situations, the
00:47:22.960
Europe doesn't have a real future. As far as I see it, the one place I might invest in outside of this
00:47:28.940
is Israel. Israel is obviously going to do well. They're doing well right now and they have a high
00:47:32.800
population rate. Like if I was going to get some additional real estate myself, I'd probably get some
00:47:37.560
real estate in Israel. So yeah, those are my thoughts on real estate more broadly. I'm happy to have you
00:47:42.220
provide any counter thoughts or arguments against that.
00:47:44.940
Yeah. Super interesting points. And I think I agree directionally with most of that. I think it's also
00:47:49.120
important to clarify what the timescales are that we're talking about here. You know, when you're talking
00:47:53.360
about say the, the collapse of the Chinese asset bubble and whatever demand that's for raw materials
00:47:58.680
or real estate, that probably happens over the next decade or two, probably a shorter end of that.
00:48:04.420
Whereas if you're talking about like total or even just U S population growth, and when that stalls out,
00:48:10.100
we're talking about the 20 eighties, I think is where the projections currently are, right?
00:48:13.440
Both globally and for the U S those are when population growth turns negative. So we've got several
00:48:20.040
decades, but before that actually starts to obviously, you know, just, just to clarify for people,
00:48:26.060
they're like, why would it be so long if fertility rates are so low in the U S and this is because high
00:48:31.060
immigration and increasing rates of how long people are living. Yep. Yep. Yeah. Yeah. Great. Great points.
00:48:37.360
So, so, you know, that's important to consider when you're thinking about what is the trajectory and
00:48:43.560
projections forward of real estate value. I think what you said about kind of the retreat to, to
00:48:49.720
quality and the safest places is important to keep in mind, right. You know, not only is you're
00:48:54.000
talking about China having its own internal stability problems, but just in general, you know,
00:48:58.080
as we've seen over the past few years in the world is the U S kind of steps back from its role as kind
00:49:03.040
of maintainer of order, uh, from a security perspective in the world, um, you know, lots of
00:49:08.080
places that are, you know, have tons of immediate neighbors that don't always get along are going to
00:49:12.840
see significant decreases in their stability. Whereas the U S like, you know, yes, there's tensions on the,
00:49:17.640
on the Southern border for sure. Northern border is pretty good. Uh, and then we've got these massive
00:49:21.520
oceans that keep everyone else away. So we, we, we really have, you know, a huge amount of control
00:49:26.440
over what happens, uh, in terms of our own physical security and the, the natural resources here are
00:49:33.520
phenomenal too, right. Not only in terms of agricultural productivity, but the river systems,
00:49:37.480
you know, the oil, we have our own. So, so just, uh, you know, to, to talk about the natural resources
00:49:45.600
we have here, cause I think this is often undersold for people. There is not a single other large,
00:49:51.220
major power in the power player in the world, other than Russia that has its own oil and its own food.
00:49:59.720
Um, everyone else needs either oil or food from somebody else to survive. Yeah. Right. Yeah. Yeah.
00:50:06.760
China, massive importer, I think of both, definitely at least of both. Yeah. Yeah. Yeah. And then,
00:50:12.120
you know, after that, right. You know, is there another really me, I mean, India, I guess, probably
00:50:16.580
also importer of energy and, you know, obviously not quite Europe, big importer of energy, right?
00:50:22.260
For sure. And then obviously, you know, there's the degree to which can Europe even get sufficient
00:50:26.200
coordination to be considered a like security power in the world. But so, yeah, I mean, as other parts
00:50:31.520
of the world become less stable, even if the native fertility rate of the U S is decreasing
00:50:36.420
and is below replacement, you're still going to see significant demand for the U S because
00:50:40.360
it is stable, because it can be self-sufficient in so many ways. And also, you know, when,
00:50:45.920
when shit really hits the fan, the U S can choose to invest more in protecting at minimum
00:50:50.980
its own trade routes, uh, which, which means that any of the assets that are tied to the
00:50:55.780
U S, you know, geographically, whether it's our equities, whether it's our real estate, whether
00:51:00.280
it's the raw materials are, are, are going to be in demand. And I think that holds for the foreseeable
00:51:05.780
future. Now, you know, when, when you get into the far out future, right, once population
00:51:10.220
growth actually is negative, you then have to ask the question, okay, population growth
00:51:14.280
is negative. So that definitely is a downward impact on demand for real estate, but does
00:51:18.640
that mean economic growth is negative? And I think you see pretty different answers there,
00:51:23.060
right? You know, you could conceivably see a scenario.
00:51:26.280
We, yeah, we, we, we just don't know. And there are so many technological, I think primarily
00:51:30.560
question marks in terms of like, can decreasing network effects of humans be overcome by AI
00:51:37.640
or, you know, other technologies that allow multipliers.
00:51:41.080
Yeah. So AI would be the core way that you fix this. But then the problem is, is if AI
00:51:44.620
is the core way you fix this, then the default asset moves from being real estate to shares
00:51:49.460
of energy. That's, you know, AI food and housing or server space, which would be interesting.
00:51:54.480
And, and, and, and those are both, but both energy and processing power or server space,
00:51:59.880
you know, whatever, you know, tech adjacent input you're, you're talking about here were
00:52:05.220
things we considered when we were thinking about, you know, what is the ideal asset backing?
00:52:09.440
You know, we, we knew it had to be a core input to the economy and obviously different trajectories
00:52:13.660
coming up over the future on those things. But, uh, you know, even as demand for those things
00:52:18.360
increases, we, we do think that inputs or the, the cost of producing a lot of those things
00:52:24.940
is probably going to decrease even faster, right? You're, you're, you're going to see
00:52:28.040
massive increases in the efficiency of generating energy. And then it also transforming that energy
00:52:34.140
into the actual, you know, flops that, that machines use. Uh, and so, you know, what, while
00:52:40.220
I think those are really good bases for currency at some point in the future, just because the use
00:52:45.660
value is going to be so high, it doesn't necessarily mean that they are a good store of value, given
00:52:51.600
that the degree to which producing them becomes more efficient, decreases their actual price
00:52:58.160
on the market. Whereas with real estate, you know, large terraforming projects aside, it is
00:53:04.900
a bit scarcer, right. In terms of the actual land underneath it. Now you, obviously you want
00:53:09.220
to build up and there's, you know, lots of different levers affecting how.
00:53:13.880
I have to hop off in just a minute here, but yeah, it is, it has been great to have you on.
00:53:18.840
And I hope that this talk has helped listeners who don't understand like what VCs are actually
00:53:23.960
thinking or what's going on in the world of like people who are pricing assets or deploying capital,
00:53:29.540
how they think about things and, and how they think about the future. Because I think this has
00:53:34.100
been a good, like educate to give like a broader picture on this. And I think it might be something
00:53:38.040
that I might do, you know, if it does well, or if people like it recurringly, just sort of analyze
00:53:42.540
ideas in sort of a critical way that can help the average person understand what's actually
00:53:49.420
Yeah. Thanks, Malcolm. This has been really fun. And, and, you know, obviously really appreciate
00:53:52.840
the, the context you're adding to help you understand. Yeah.